Michael Steinberg at Click Broker writes on American Express and the factors affecting the recent shortfall in earnings.
American Express Faces Customer Behavioral Changes
American Express likes to tout the high credit quality of their customers. In one breath they cite average FICO scores, and then they say they approve accounts based on their own proprietary scoring system. Whatever system they used, they have not been able to accurately predict customer payment behavior under stress. I believe the problems originated a few years ago when American Express starting heavily promoting “pay over time” to aspirational customers.
American Express thought customers with multiple properties and multiple mortgages would have to be well organized and predictable payers of their obligations. And best of all, these customers were heavy spenders. When these customers came under stress, they simply stopped paying. 30 day delinquencies rolled over to 60 days, and 60 day to 90 days. When early delinquencies cannot be cured, there is little hope of any recovery. American Express calls this roll over and it shows no sign of abating.
Just as the aspirational customers are less able to spend, the truly affluent are choosing to be less ostentatious or at least cut back on some discretionary spending. Remember that JP Morgan kept his new yacht under wraps until the Depression was over.
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