American Express is getting accustomed to being thrilled by big ideas that turn big profits.
The Optima card, the first American Express credit card offering consumers the chance to charge purchases at below-market interest rates, is a year old and, by all accounts, a highly profitable success.When Chairman Louis Gersten was asked how the Optima card was performing, he said, "We're thrilled by the results.
"But just remember, we budget thrilled," he said, meaning that the company has little patience for projects that give average results.
The company best known for the no-interest green card is celebrating its 30th anniversary this year and posting among its best profits ever, confounding predictions that its market was saturated and prospects flat.
Skeptics had doubted American Express could turn a profit with Optima. But in recent interviews with Reuters, American Express officials said Optima has in its first year blossomed into a high-profit, low-cost addition to the company's house of cards.
While the company will not give specifics, Ed Cooperman, president of the consumer credit card division, said, "We are very, very pleased with what we're seeing."
Industry analysts say they believe Optima is earning more than $10 million a month and that its startup costs were more than offset by the $17 million in annual fees paid by customers who signed up for the card during the first year.
American Express Co. said all of its operations netted a total profit of $280.8 million in the quarter ended June 30, in contrast to a $600,000 loss in the 1987 period when its American Express Bank joined other major banks in setting aside large reserves in case its Latin American loans soured.
Optima was introduced 13 months ago "on a very low key, low profile basis," Cooperman said. "We designed it as a credit revolving product to meet the needs specifically of a unique category of American Express card members and it has done just that.
"We accomplished everything we expected to," he said.
The introduction set off loud protests from banks that back competing products such as MasterCard and Visa. "Optima vindicates our long-held view of Amex as a competitor," Bill Binns, of Richmond, Va.'s Signet Banking Corp. said in a June interview with the American Banker. In a comment typical of banker criticism, he said, "Optima cherry-picks our best customers."
But Cooperman said the protests actually helped Optima, which carries a $15 annual fee, is offered only to American Express cardholders and has a variable interest rate, currently 14.25 percent.
"We haven't advertised this product but because of the bank criticism, the demand for the product grew. The unaided awareness after the bank hullabaloo was like four times higher than we were expecting to start with. Our competitors created an environment of tremendous demand," he said.
Bruce Brittain of Atlanta-based Brittain Associates, said Optima was particularly profitable because the people who signed up for it use it.
"People do use it in place of the bank cards they are carrying," said Brittain, who conducts studies of credit card usage for the major companies, including American Express.
"It's not a big enough player yet to really tweak the banks, but they are winning the battle of which card the consumer pulls out of his billfold, which is really where the battle is fought," Brittain said.
At least 2.4 million people now carry Optima cards.
Spencer Nilson of the California-based Nilson Report newsletter on credit cards estimated the average balance of the Optima cardholders at $1,700.
While American Express will grant an Optima card to any of its cardholders who qualify, the company solicits business for Optima only from people "who match a very sophisticated model," Cooperman said.
"You have to be an American Express member, you have to be someone who probably has a propensity to revolve and you have to be perfect in terms of your credit history," Cooperman said. He would give no other details of the model.
"From an advertising perspective this really isn't the kind of product that lends itself to dramatic mass media advertising," he said.
American Express, which spent $877 million in 1987 on advertisement and promotion, is considering expanding its Optima markets in other countries. It introduced the card in Canada two months ago and has already surpassed its six-month targets, said Nancy Muller, vice president for worldwide communications.
"The initial response was significantly above our card objectives for 1988. The number of cards in two months is double what we had projected to obtain in six months," she said.
Cooperman said American Express, which launched its green card in the United States and Canada on Oct. 1, 1958, and now has more than 28.2 million cards outstanding, is still looking for big ideas.
"You get an idea, call us up. We'll make a deal," he said. "Optima has proven to have been a good idea. It is doing terrific.
"But again, we always expect terrific."