Good afternoon. Glad to see everyone. Performance, including the strong metrics we generated and the elements of our business model that made it such a successful year. I'll then spend some time reviewing the outcomes from some of our current and future growth drivers. Our strong core operating performance as well as the results we're seeing from some of our key moderate to longer term growth investments.
Finally, I'll share my perspective on the short term environment and how our business model could potentially respond to a continued slow growth global economy. Now one important driver of our performance over this time will be the appropriate management of our expense base. We looked at this topic in-depth last February and took a number of important actions in this area during 2012. As such, I've asked Steve Squeri to give you an update on our progress against the goals we laid out as well as to reinforce how we planned on using our expense flexibility to help fund our growth investments. We'll then leave time as always for any questions you may have on these or any other topics.
So let me get right to our financial results. I believe 2012 was a solid year for our financial performance. Despite continued weak economic conditions, we grew revenues by 6% on an FX adjusted basis. Our EPS was as you know impacted by 3 items in the 4th quarter: our restructuring reserve, our membership rewards estimation enhancement and a charge for card member reimbursements. Excluding these three items, our adjusted EPS was $4.40 against last year's EPS of $4.09 and our adjusted return on average equity was 26%.
Our financial performance was driven by the continued strength of our business metrics. Our billings growth weakened somewhat over the last three quarters of the year, but remain relatively strong the environment. Cards in force continued to grow steadily, reflecting the continued strength of our brand, our increasing global relevance and our commitment to providing premium value and service to our card members. Our loans grew consistently during the year with our focus on premium lending serving to drive not just balances, but billings as well. And our premium lending strategy also contributed to our credit metrics remaining at historic lows, while also being the best in the industry.
In looking at some of our metrics in-depth, up first is billings by region. U. S. Growth has moderated somewhat with the largest impact being seen from corporate spend. We did see upticks in Europe, Japan and Asia at the end of the year.
GNS continues to make good gains both through the signing of new partnerships such as our recent launch with Scotiabank, one of the largest banks in Canada, as well as by increasing our share of spend within existing partners. Our sales efforts in GNS continue to see success as evidenced by our recently announced issuing partnership with Barclays in the U. K. Along with several new signings that are on track for announcement later this quarter and next. Despite some moderation of billings growth in the U.
S, we continue to see our share of credit spend increase through the Q3. A slowing of debit spend across the industry led to a share increase for us when looking at credit and debit combined. Against this base, we rose to 15.5% of share through the 3rd quarter. Our billings base continues to be the largest by far against our major issuing peers, almost 2 point 5 times larger than that of Chase and Citi, and our growth rate remained relatively strong. Our spend based model means we're not overly dependent on loans to grow revenues, but we generated in a row.
Slow growth in balances has led to an aggressive ramp up in competitors' use of 0% balance transfer offers since the financial crisis. 73 percent of non American Express industry mailings in 2012 included a 0% balance transfer offer, some extending as long as 18 months. This approach does not appear to target the affluent prospects some competitors claim to be after. Now it's estimated that total revolving credit in the U. S.
Grew by only 1% last year. As the large lending players spend substantial marketing dollars to compete for a 0% yield, the revenue growth has continued to decline. While Capital One's core results are hard to interpret because of acquisitions, The other 3 large U. S. Bank issuers continued to see lower managed revenues for the 3rd year in a row.
Credit reserve releases continued to help the industry's bottom line in 2012, but it's clear that this page has now been turned. With little or no help from the balance sheet and core revenues declining, it's hard for me to see how the top line or bottom line performance of the major card issuers has substantial growth potential over the short to moderate term. As I mentioned earlier, our write off rates continue to be the best in the industry. Our credit remains well controlled and our risk management capabilities provide us with a core advantage as we continue to advance our premium lending strategy. Our operating expenses were also well controlled in 2012, coming in at 3% and on an adjusted basis, including FX impacts compared to our 6% revenue growth.
Steve will take you through our operating expense performance in a few minutes, so I'll leave the details to him. Despite a slight slowdown in our revenues, we were able to maintain our investment levels in 2010 and are committed to investing in growth this year as well. We believe the leverage we gain from our OpEx base will support our objective of maintaining our marketing and promotion at approximately 9% of managed revenues, though the ratio in any given quarter could be higher or lower. Here are just a couple of points related to M and P and the competitive environment overall. As you can see across the industry, investments in direct mail have been cut back over the last year.
Now granted there's been a shift of acquisition sourcing over the last several years with a greater number of new cards coming from online channels across the industry and for and for us, but direct mail continues to be a major acquisition channel for most large players. To me, this industry data is indicative of a trend that a lower level of credit reserve releases will put even more pressure on investment levels at our LinCentric competitors. As you've seen, we continue to invest in our core businesses at substantial levels. Investments because given the level of competition in the marketplace and certainly within the premium card space, we want to continue to gain ground. Given differing reporting norms, we don't know with clarity the card segment investment levels of our major issuing peers.
As our own investments are split between marketing and operating expense, we assume theirs are as well. We looked at year over year trends for operating and marketing expense for some of our competitors. And while Capital One and Discover had the impact of acquisitions in their numbers, the growth rates for the other three issuers shows that their overall operating expense and marketing levels are all either down or flat year over year. So while the competition in the premium card arena remains quite healthy, it doesn't sizable ramp up in investments by these 3 large issuers, unless another business or service area within their card segment is being significantly reduced. Now I'm comfortable with our investment levels and our growth plans and I believe we can appropriately compete against anyone to grow our position in the affluent space.
Growth is of course our focus as a leadership team. Profitable growth is what our investors look for and it is certainly what drives our thinking and actions in leading this company. As I establish our growth plans, I always consider our moderate to long term horizon. What growth opportunities are in our pipeline? What trends are evolving in the marketplace?
What capabilities will be needed 3 or 5 or 10 years from now. But I also recognize that we must generate acceptable results across a shorter time horizon. There likely is no long term scenario for any company without some short term success, without some track record to point to, without assets that can be leveraged for greater scale. Now short term results can be achieved without strong top line performance. Cutting back on investments or relying on reserve benefits from credit improvements to generate earnings when revenue growth is slow is not a sustainable solution.
Sustainable growth requires revenue generation. It requires competitive products that meet specific customer needs. It requires creative thinking and innovation. It requires an ongoing investment commitment. In a slow growth economy, revenue generation is more challenging, but as we've shown in the past, it can be done.
Now I thought it would be helpful today to spend some time on our key sources of revenue to provide you with a perspective on what's driving our revenue today and what will contribute to our revenue growth over the moderate to long term. So let me start with our current revenue mix. For full year 2012, discount revenue made up 56% of our revenue base. Other non interest income was 29% and net interest income was 15%. As you can see, the major shift from where we were 5 years ago is our lower reliance on lending and therefore net interest income.
The mix here has gone from 19% of total revenues in 2,007 to 15% today. As I've mentioned to you before, this percentage is significantly lower than many of our issuing peers who still rely on lending for anywhere from 65% to 85% of revenues based on their reporting practices. So against today's mix, where do I see our growth potential? First, let's look at discount revenue. Discount revenue is our largest revenue category.
Discount revenue is generated from our core card businesses, each of which continues to have strong growth potential. Within the U. S, I believe opportunities remain to increase volume with affluent consumers and small businesses. As plastic penetration deepens outside the U. S.
And in B2B spend categories, our proprietary consumer and G and S businesses along with corporate payments stand to also make volume gains. As online spending continues to expand, card volumes overall will make further gains and so will our products, helped by our brand attributes of security and trust, which we believe resonates strongly in the online payment space. Spending on our prepaid and served products will also contribute to this revenue category, though the revenue per dollar of spend is less than that earned on our credit and charge products. And by continually building our value to merchants, Even in a very competitive environment, we believe we'll continue to support our premium discount rate. Other non interest income is where many of our newer businesses fall as well as longer term revenue sources such as card fees.
Our card fee revenue line grew by a healthy 6% in the Q4 of 2012, helped by our growth in proprietary cards and also by higher fee levels. In many countries, we've added substantially to our product value over time and as a result have been able to change we've been able to charge more for this value, while also maintaining relatively stable card member retention rates. This revenue category also includes non discount revenue fees earned through our G and S partners. In a number of our G and S relationships, we earn royalties on spending and also provide consultation and product solutions in the areas of rewards, For example, our growth across Von Prive, our flash sale partnership, our certified merchant fraud prevention business and LoyaltyEdge, our white label rewards business. While these businesses are not substantial in size relative to our core businesses, they do contribute to revenue growth.
For example, the revenues earned by a Certify were up over 50% in 2012. Our prepaid and served products along with our loyalty partner business also contribute to these revenues and I'll speak more about each of these in a few moments. The final category is net interest income, which includes the spread revenue earned from our lending products as well as the float revenue earned from our prepaid products. As we continue to make good gains within premium lending, we would expect this revenue category to grow accordingly. So yes, I certainly believe our revenue growth potential remains strong for our core businesses as well as our newer businesses.
So now let me back this up with our results. Our discount revenue gains continue to be driven by our high spending card base. Looking at network results for us, Visa and Mastercard, You can see that our proprietary cards have spending that is on average 4 times the level of Visa and 5 times that of Mastercard. And because we continue to invest in attracting and retaining high spending card members, our position has not really changed over time. As you can see, we've expanded our dollar gap since 2007.
These last 5 years have seen intense competition in the global marketplace as you know. And we've kept our edge by focusing on what counts, providing high spending card numbers with greater value and premium servicing that earns their loyalty. Our net promoter scores continue to rise across our U. S. Base, indicating to us that we're meeting the needs of our existing card members, while also attracting new higher spending members into our franchise.
Bringing together these high spending card members and our merchant customers remains a continuing focus of our business and a core element of the value we provide. Now we know that some questions have been raised about the potential impact of a tax increase, particularly given the affluent card members within our premium U. S. Base. So we went back to look at our spend growth after the Clinton era increases of 1993.
Now granted, a lot has changed since 1993 in the card industry and for American Express. Looking back at this time, even after the higher rates went into effect for the upper income brackets in 1993, our billings continued to grow at a healthy level from 1993 to 1995. As we've said for many years, economic growth overall is good for billings and slower billings are more closely tied to economic weakness than they are to other factors including tax rates. Our revenue potential is also helped by the diversification we've achieved within our billings base over the last five years. G and S, international and everyday spending now make up a greater share of our billings and I believe this trend will continue.
With greater plastic penetration opportunities available outside of the U. S. And broad merchant penetration opportunities within smaller retail establishments, we continue to have growth potential across these core businesses. Our international performance including our consumer, G and S, merchant and corporate businesses continues to generate solid results even against the backdrop of a weak global environment. We're seeing good volume growth in Japan, Asia, Latin America and we saw a 4th quarter uptick in our European billings growth rate.
As Ed Gilligan shared with you at our last meeting, our potential here is significant and will also be helped by our expansion of loyalty partner, which I'll speak about in a few minutes. Our card member acquisition efforts remain robust and we continue to bring on high spending prospects across our charge, co brand and proprietary lending products. In 2012, we grew our new accounts acquired by 5% and the 1st year spending of those new card members is expected to grow by 9%. This is now the 3rd year in a row we've grown the 1st year spend of new card members, which demonstrates not just the real and perceived value of our core products, but also the success of the segmentation and risk investments we've made over the last several years. Our small business products also show good growth potential.
Our U. S. Small business product Open has generated a 13% CAGR on billings over the last 2 years. Outside estimates had spend on small business cards in the U. S.
Growing by 8% in 20102011 indicating that we outgrow our peers even with very intense competition. International Small Business also has a great deal of revenue potential. Small business spend outside the U. S. Is still largely made up of cash and checks, so there is penetration opportunity to tap here.
Corporate payments continues to penetrate new large and mid sized accounts. While corporate spending has slowed as a result of weaker economic conditions, we continue to sign new clients and in 2012 3 years. This outcome has been helped by our strategic focus on specific industries. For example, we've made the acquisition of healthcare clients a priority and clients in this industry grew their charge volume by over 100% in 2012. We also got a number of opportunities within online commerce with online spending continuing to offer up substantial potential.
Online spend continues to grow faster than overall offline spend, driven largely by online retail, international and B2B volumes. In 2012, we grew our online spend base by 15% to over $152,000,000,000 As I've noted before, this remains a conservative number as we don't include some offline merchants who also have online billings within their submitted numbers. These volumes keep us just ahead of PayPal as the largest biller of online spending. I believe our expansion into prepaid will also serve to grow this number. Customers without access to debit or credit products have largely been shut out of online spending.
With a consumer friendly prepaid product available such as Bluebird or our reloadable prepaid card, we believe we can make further gains in online spending. Helping our online commerce efforts has been the progress we've made within a number of our digital investments. In terms of both servicing and fulfillment, we're steadily driving our online capabilities. In 2012, our card members redeemed 100 and 55,000,000,000 reward points online, up 12% from 2011. Across our entire card base, 80% of our customer payments are now received electronically.
Our mobile app has now been downloaded by 5,000,000 customers and card members registered their cards for digital marketing offers over 3,000,000 times in 2012. These card achievements along with continued enhancements to our serve capabilities and functionality represent a continued advancement of our digital footprint and keeps us as a recognized leader in the digital space. So these results represent the revenue potential and the continued Star CoreCard products. We've done well across our base whether looking at geography, segment or product. We've invested in these businesses and have seen good returns in terms of revenue growth, profitability and brand position.
I believe the revenues and profits generated from these businesses will continue to fuel the company's overall growth over the foreseeable future, while also generating investment capacity to put against moderate to longer term growth opportunities. So let me spend a couple of minutes now on 2 of those moderate term growth opportunities, Bluebird and Loyalty Partner. Bluebird falls under our enterprise growth group led by Dan Schulman. Along with our prepaid products, Dan has responsibility for a number of our fee based businesses and our serve digital payment platform. Our serve platform runs our serve prepaid digital account product as well as Bluebird and the mobile top up processing we provide for Lian Liyan in China.
Over the last 2 years, Dan and his team have worked to develop strong value propositions as well as design distribution gaining traction. Over the last year, the customer base across enterprise growth has grown from 600,000 to approximately 3,100,000 with the strong quarter over quarter growth rates you see here. While customer acquisition is critical, so too is activation. We don't just want customers, we want engaged customers and we're starting to see that as well. Customers engage by putting funds onto our products and platform be it their serve account or their Bluebird card or the volumes processed on SERV through our partnership with Lian Leanne.
During the year, we've seen these volumes climb with almost 6 $100,000,000 put on our served platform and prepaid products in the Q4 alone. Our 4th quarter numbers were driven by the early success of Bluebird, our next generation prepaid payment product. Bluebird capitalizes on the value attributes of the Walmart brand and the distribution breadth of their store network, issued and backed by the service benefits platform and the brand of American Express. Bluebird is a product that leverages our platform, which provides offline, online and mobile capabilities for customers to manage their funds. It offers multiple options for adding funds, using funds and controlling and reporting activity.
The response from consumer and financial groups including the financial media has been very positive with a focus on the attractiveness of the product to the unbanked, underbanked and unhappily bank segments and how the product is likely to intensify competition in the industry. But I said it's still very early days for Bluebird, but here are a couple of points we can share. As of January, we had over 575,000 accounts on which customers had put $275,000,000 in funds. Approximately 85 percent of Bluebird enrollees are new to American Express and 45% of purchasers are under the age of 35, positive signs of the expanding footprint of our franchise. And so far, about 30% of the funds put on Bluebird are now coming through ago.
This is a sign that customers see the product as a key component of their financial options. This is also supported by the fact that a good proportion of spend volumes are used for electronic bill pay indicating to us that these enrollees see Bluebird as an alternative to traditional banking products. Another point to note is that we're also seeing broad based spending on Bluebird with the majority occurring at merchants outside of Walmart, an indication that purchasers are not viewing Bluebird simply as a store card, but as a broader payment solution. We've certainly been pleased with our progress so far as has Walmart and we've been running ahead of our internal projections. In terms of economics, Bluebird is an attractive product offering sustainable low risk revenues and a lower expense and capital profile relative to our traditional products.
On the revenue side, we earned discount revenue though at a lower rate than our traditional card products, float revenue and some customer fee revenue. Our value proposition was specifically designed to be far less customer fee dependent than many, if not most products in this category. On the expense side, we benefit from owning and operating our own payment network, which gives us a largely fixed operating expense base. We also have lower overall provision costs as compared to our traditional card products, no rewards expense. And the lower customer acquisition costs we gain by utilizing Walmart's 4,000 plus network of U.
S. Stores. Now we need to generate substantial scale here to achieve the full benefit of our investments, but we're certainly encouraged by what we're seeing. I firmly believe that our next generation reloadable prepaid products including Bluebird offer us significant growth potential.
They fill
a clear need in the marketplace and offer strong customer value. They open up new customer segments for us in the U. S. And in key markets around the world. They are fulfilled through lower cost acquisition channels and they leverage an infrastructure that is already up and running.
We still have to ramp up our scale over the short term, but the size of this opportunity along with the economics we bring to the table give me over the moderate term. Another business we see as a revenue driver for us is loyalty partner. As you remember, loyalty partner is a closed loop loyalty and rewards business that we acquired in early called Payback. Enrolled customers earn rewards by spending at participating coalition merchants. To ensure that a wide range of spending can be accommodated, the coalition usually includes major categories of merchants such as a supermarket, telecom provider, drugstore and gas station chain.
Loyalty partner provides a platform for the rewards interaction between the consumers and merchants. Merchants provide SKU level data to loyalty partner so that they can more effectively target offers to new or existing shoppers on behalf of all Coalition partners. From October 2011 to October 2012, Loyalty Partners customer base grew by 36% to approximately 47,000,000 enrollees. The largest growth came in India, which more than doubled its enrollee base and in Mexico where a fully digital program was launched in the Q3. By the end of the year, largely due to our early success in Mexico, we had reached 50,000,000 international customers.
Payback currently operates in 4 countries and is the largest coalition loyalty program in each of those markets providing customers with exceptional relevance, reach and value. In terms of economic drivers, loyalty partner generates several types of fee revenues, including performance marketing revenues from merchants and revenues from affiliates looking to market to a broader customer base. On the expense side, we benefit from merchant funded rewards and no customer credit exposure. One key to the longer term success of this business is the engagement of customers. Merchants are paying fees to loyalty partner to ultimately improve the performance of their marketing spend, to improve their customer acquisition efforts and to gain greater revenue from new and existing customers.
We'll only earn their marketing dollars if we can show results and here's one example of this. Now we've invested heavily in building a digital infrastructure to house our merchant partner offers. By targeting the right offers to the right collectors, we can and do bring engaged customers to these merchants. For example, in Germany, by using social media, mobile apps, in store kiosks and e mail marketing, we put over 250,000,000 merchant offers in front of our customers. Of those, 50,000,000 were activated and ultimately almost 3.5% were redeemed.
Now to put this into context for a supermarket, a restaurant or supplier such as Procter and Gamble, their coupon redemption rates are far less. Industry numbers can vary by source, but here's one estimate for 2011, that marketers issued over 305,000,000,000 coupons, both online and hard copy, of which only $3,300,000,000 or 1.1 percent were redeemed. This makes loyalty partners targeted offer channel 3 times more efficient for merchants. The loyalty partners through loyalty partners performance marketing capabilities, there is a huge opportunity for us to help merchants make their spending more efficient. We have the merchant relationships, We have customer relationships and we've shown that we know how to bring these 2 together.
Loyalty Partner can help our traditional card business reach new card member segments through co branded products linked to the program. As loyalty partner expands into more countries and more customer segments, the revenue growth potential here becomes even greater. We are realizing some of that potential now. But as our ramp up continues over the next several years, we believe our revenue build will accelerate. As an example, while loyalty partner generated reasonable revenue growth for 2012.
Their growth as they exited the 4th quarter was above 20% helped by the launches in Mexico and India. Now they still have a relatively small base of revenues, but the upside here is substantial. The potential of Bluebird and loyalty partner are two reasons why I believe our fee revenue base will continue to grow. As you know, in 2010, I set a target for our organization that by the end of 2014, we would be on a run rate to generate $3,000,000,000 in fee revenues across our businesses. This objective included revenues from our existing fee businesses such as sales of travel insurance and foreign exchange along with new businesses that would drive new categories of revenues.
Coming out of the financial crisis, my goal was to focus our business on revenues that did not require high levels of capital. I wanted us to diversify our base and emphasize revenues that had minimal credit risk, were less volatile and more recurring. When I laid out our goal, I looked at our existing fee and also at about 10 to 15 new projects that were at various stages of investment. I didn't expect that all of these projects would ultimately contribute to our goal, but I was comfortable with our pipeline. Since that time, of course, the marketplace has changed and accordingly, so have a number of our priorities.
The recovery of the global economy has been slower than most of us had envisioned and a number of trends have certainly changed trajectory. For example, 3 years ago, I thought that digital payments at point of sale and their corresponding e wallets would see a ramp up of consumer adoption. But as we all know today, this adoption has been far slower than expected. We continue to make progress against a number of businesses I mentioned earlier, Bonn Prive, a certified and loyalty partner, for example. These businesses along with our existing fee businesses generated good revenue growth in 2012.
In total, they were up approximately 15% generating $1,500,000,000 in revenue. I didn't envision a steady build against our $3,000,000,000 goal. I expected that our fee revenue growth would accelerate in the out years, but as our priorities have shifted over the last few years, so have our revenue drivers. Loyalty partner and our next generation stored value products are 2 important contributors to this goal. And as I just showed you, their potential is substantial.
But the ramp up from launch to customer acquisition to revenue generation is more back ended. Based on our 2012 performance and our current assumptions, I believe our goal to exit 2014 with a $3,000,000,000 run rate remains reasonable, though we're taking a different path than I thought 2.5 years ago. Because of the overall flexibility of our business needs, I continue to believe that we're well positioned to deal with a range of economic conditions. It's always easier to do well in better times, but to me the true test of a company's strength is how well they do in times of weaker growth. Do they stay focused on growth or do they go on defense?
Do they take short term actions to meet a bottom line objective, but at the expense of their moderate to longer term growth? As all of you know, I take a longer term view when it comes to leading this company. I think it comes with the territory when you're heading up a company that is 160 3 years old. I do of course focus on our quarterly performance, but the greatest amount of my time is spent looking out over a 3, 5 or 10 year horizon. How are we positioned to sustainably grow revenues?
How do we appropriately maintain our capital strength? What investment capacity do we need to sustain our growth and how do we fund these investments over time? Given this longer term outlook, I remain comfortable with targets that are on average and over time and specifically with our stated financial targets. As you know, our company objectives are to generate on average and over time revenue growth of 8% or more, EPS growth of 12% to 15% and an ROE of at least 25%. Now I believe these targets remain appropriate for our business model and appropriate for generating sustainable value for our shareholders.
In some quarters and some years, we'll be above these numbers and in some will be below. For example, in looking at our financial performance over the last 2 years, grown by 7% just below target. Our adjusted earnings per share was 14% the higher end of our targeted range and our adjusted ROE was 27% above our 25% objective. So while we were just short of our revenue objective, we were still able to generate EPS growth and returns within or above our targeted levels. Now when looking at this performance, it's also important to consider the P and L benefits we had.
At the start of this 3 year period, benefits that have since moderated. For example, in 2010, we had the benefit of $2,300,000,000 in credit reserve releases and $800,000,000 of settlement payments
dollars of settlement payments from Visa and Mastercard.
But by 2012, our settlement payments had fully ended and our credit reserve release came to only 400,000,000 This represented a significant grow over challenge, but we met it through the strong results of our core businesses. To me this performance reinforces the appropriateness of our objectives. They will continue to guide our actions and our investments and our entire organization remains committed to them. As I said in weaker times, all companies face a headwind in generating growth and revenue. Now I've led through a range of economic cycles, whether it was the post-nineeleven downturn or the financial crisis in 2,000 and 82,009.
And I know the challenges that companies face at these times. The global economic conditions that currently exist, weak growth over a sustained period present their own challenges. We're facing low single digit growth and economists have no real expectation that these conditions will change over the next year or 2. So given this current environment, what do I consider as I look out on our own performance? What actions might we take under current economic conditions?
First, I look at the key driver of our business model, card billings. Based on almost 20 years of history, Excluding the crisis of 2,008 and 2,009, we have seen correlation in the U. S. Between GDP growth and our billings growth rate. This relationship generally holds with the ups and downs of the U.
S. Economy. Of course, any individual year may differ. But over time, our billings growth rate has been approximately 4.5 times that of real GDP growth. If this historical relationship held and if real GDP growth was 2%, we would expect to see billings growth in the 9% range.
This relationship would be one of the key drivers of our revenue growth assumption in a weak economic environment. I then consider our expense to revenue ratio. What kind of operating leverage do we have? What ratio have we been running at? And if we were able to take any expense actions over the short term, what ratio could we expect?
I then look at another important asset that we have, our strong capital position. As you know, we have a very strong balance sheet and currently generate capital in excess of what we need to support our business growth. Our on average and overtime objective is to return 50% of the capital we generate to shareholders through dividends and share repurchases. But we also have the option of paying out more or less in any given year. So this too is a variable we can consider.
When we put all of these assumptions on the table, we can then consider our financial possibilities under a slow growth economic environment. As I share some of this thinking with you today, you should note that this is essentially a math exercise based on our historical trends and current position. It's not intended to be a forecast for a business plan, rather it's an exercise to show how our financial results might play out based on certain assumptions. In our first scenario, for example, we've assumed a revenue growth of 5%, the reported rate we generated last year. We then assume that operating expenses grow by 1% within the commitment we've made of keeping our growth rate at 3% or less.
This adds 7 percentage points to our EPS growth rate. We then assume that marketing and promotion grows with revenue consistent with our objective to keep our investment levels up and maintain M and P at about 9% of revenue. If we assume reward costs generally grow with billings, this expense growth would slightly outpace revenues. In combination, these two items would reduce our EPS growth by 200 basis points. Credit of course has a significant impact on our earnings.
In this scenario, we assume there is a modest 10 basis points increase in our write off rate across all portfolios, lowering EPS growth by 3%. Now let's look at our capital position. If we assume that we pay out approximately 80% of total capital generated through share buybacks and our regular dividends assuming of course the approval of our primary regulators, this would add 500 basis points to our EPS growth rate. In total then by using our operating leverage and strong capital position, this scenario would have us in an EPS growth rate of 12% within our targeted range even with 5% revenue growth. Let's look at another potential scenario.
This scenario also assumes a 5% revenue growth, but OpEx growth now comes in at 2% growth instead of 1%. This adds 500 basis points to our EPS growth instead of 700. We'll then assume that M and P, rewards and credit are the same as in the first scenario. If our capital payout is at 65% instead of 80 below our targeted range. A third scenario, below our targeted range.
A third scenario assumes that revenues grow somewhat better at 7%, the growth rate we generated from 2010 to 2012. With higher revenue growth, we assume slightly higher OpEx of 3%, a higher rate than in the first two scenarios, but still fulfilling our commitment. This then gives us a 7 point lift to our EPS growth rate. We then keep our three assumptions the same M and P growing with revenues, rewards growing with billings and arrives and write off rates of 10 basis points. If we assume a payout of 90% of total capital generated similar to what we paid out during 2012, then EPS in this potential scenario would be 15% at the high end of our targeted range.
We would again be able to meet our EPS growth objective even with revenue growth below our target of 8%, but we would get there a somewhat different way. Now these scenarios are not meant to represent an actual calendar year. They're an exercise based on our business model. They show linkages between our metrics, revenues and earnings as played out against the assumption of a slow growth environment. They show the actions at our disposal to potentially counter the effects of the environment, the flexibility within our operating expense base and how we could leverage our strong capital generation to return more capital to shareholders.
They don't represent our expected results for 2013 or 2014. They're not a projection. We know for example that 2013 includes a credit reserve release grow over that's not accounted for here. And there will no doubt be other ins and outs in both this year and next that will also impact our actual EPS performance. While these specific scenarios don't include an 8% revenue growth assumption, in my view, it isn't completely off the table.
We've made significant investments over the last few years. We're acquiring new customers and launching new products. But I do recognize the significant challenge we have in achieving this target within the current slow growth environment. These scenarios are meant to show that our on average and over time financial targets remain relevant even against the backdrop of a slow growth economy. They're meant to show that we do have the flexibility to generate good EPS growth by relying on the strength of our core businesses and very importantly without cutting back on our investment levels and putting our moderate term growth at risk.
The flexibility of our business model is never more important than when the global economy faces challenges. I believe the flexibility we have within our revenue drivers, our operating expense base and our capital position puts us in a stronger position than a number of our peers when it comes to generating solid EPS growth even in the midst of an extended slow growth environment. Now since operating expenses are such a significant variable in driving our financial performance, I thought it would be useful to have Steve Squeri update you on the progress we've made in this area over the last year and why we believe our restructuring plans will help us achieve our commitment going forward. Steve?
Thanks, Ken, and good afternoon. I'm going to spend some time giving you an update on our operating this chart, our total adjusted expense to managed revenue ratio increased from 2,008 to 2011 as we reinvested the benefits from lower provision and the Visa Mastercard payments into business building initiatives. These investments helped us achieve top tier spending growth among major issuers and strengthened our position in digital commerce. As we stated last year, our goal is
to move our
expense ratio towards historical levels over time. And we made progress on this goal in 2012. Since operating expense control is an important part of this objective, I'll talk about how we performed in 2012 and the rationale behind the restructuring charge we took in the Q4. The operating expense detail on this page is exactly as I showed it to you last February. As a reminder, it's been adjusted for the Visa Mastercard settlement payments and reflects foreign exchange rates in effect at the end of 2011.
On this adjusted basis, our operating expenses grew at a compounded annual growth rate or CAGR of 7% between 2,009 2011, as we restored some of the OpEx cuts we made during the recession and began investing more aggressively in growth initiatives. We've now updated this chart for 2012, making the same adjustments as well as removing the 4th with salaries and benefits and professional services very well controlled. While S and B expenses were up only 1 last year versus 2011, they accounted for approximately half of our overall operating expense base and had grown at a CAGR of 9% between 2,009 2011. Given the size of this OpEx category, this is where we're targeting most of our restructuring efforts. As we did last February, we've broken down total OpEx into the categories seen here.
As previously stated, we do not intend to report on them on an ongoing basis, but thought that given the restructuring charge, it was once again important to do so at this meeting. As you can see on this chart, we've divided operating expenses into 4 the Global Services Group, Technology Development Spending, Adjusted Other OpEx and Investment OpEx. S and B is embedded in every one of these categories. A key point is that not all S and B expense is created equal. S and B that directly drives growth such as sales force and marketing has a different payback than S and B that provides support services to the business.
Reducing S and B and support functions through process improvement, technology innovation, consolidation and globalization helps to improve service and creates operating leverage for the company. We've updated this chart with 2012 data and I'll touch on each of these categories, starting with the bottom category investment OpEx, which grew by a total of 14% last year on top of the 29% CAGR from 2,009 to 20 11. As I discussed last February, our investment OpEx growth targets are flexible and are based on business opportunities as well as regulatory requirements. Our 2012 investment expenses were driven by initiatives such as the expansion of loyalty partner in Mexico and India, sales force expansions and the continued investments in the online and mobile payment space. Also in this category are regulatory and control infrastructure expenses, which includes internal audit, operational risk, compliance, global banking and Basel II expenses.
These grew at 15% in 2012 on top of the 27% CAGR from 2,009 to 2011. So as you can see, control and compliance remains a top priority for the company. Adjusted other OpEx, which includes most of our business and staff group functions grew at 3% in 2011 versus the 6% CAGR in the previous 3 years. The next category is technology development spending. As I mentioned last year, we've been investing aggressively in technology development over the past several years.
As you can see, spending in this area increased at an 18% CAGR between 2,009 2011. In 2012, we slowed growth to 3% even as we continue to in delivering new capabilities such as Bluebird, the expansion of our digital closed loop with the Xbox and Twitter launches and numerous internal platform enhancements. We continue to believe that going forward a more modest increase over our current levels of investment in tight development will be sufficient to power our future growth initiatives and to ensure our basic platforms are consistently enhanced. The last category is Global Services OpEx, which includes all other technology costs such as data processing and telecommunications, as well as costs associated with customer service, collections and our business services unit. Expenses in this category went down 2% in 2012 versus 2011, which was better than our target of flat to 2% growth.
We accomplished this by transforming key processes and infrastructure to become efficient, while continuing to improve customer service. And I'll speak more about this in a few minutes. Here are the targets we set last February for each of the OpEx categories I just spoke to. As we said, our overall objective is to move our total expense to revenue ratio towards historical levels. An important part of accomplishing this goal will be to manage OpEx so that it grows slower than revenues.
And that is exactly what we committed to last February when we established targets for the various components of OpEx over a 2 to 3 year horizon. As you may recall, we did not take a one size fits all approach across the board. We targeted slower growth in most areas, while allowing for higher growth in some areas based on business opportunities and regulatory requirements. Now let's recap how we performed against these targets in year 1. While revenue growth in 20 12 was 6% on an FX adjusted basis, total adjusted operating expenses grew by 3%, which excludes than revenues.
Global Services, Technology Development and other OpEx all grew less than revenue, while growth in investment OpEx and control and compliance exceeded revenue growth. Next, I'm going to cover our restructuring initiatives. As you're aware, a few weeks ago, we announced a $400,000,000 restructuring charge, $287,000,000 after tax taken in the Q4 of 2012. The restructuring charge will consist largely of severance payments related to the elimination of an estimated 5,400 jobs. Overall staffing levels by year end are expected to be 4% to 6% less than last year as a result of new jobs the company expects to add.
Last February, we committed to operating expense growth that is slower than revenue growth, which as you saw we delivered in 2012. As part of our recent earnings announcements, we took it a step further and committed to an annual progress within the 1st year to contain OpEx growth without a restructuring charge, why are we taking one now? The rationale is 2 fold. 1st, it is the logical outcome of what we've been doing over the past few years to increase efficiency while improving internal processes. 2nd, it's in anticipation of how we will continue to evolve our businesses to adjust to changing customer expectations and behaviors that are driven by the ongoing digital transformation as well as the future productivity improvements we expect to realize.
Most importantly, we're taking these actions from a position of strength and are doing so proactively. We're not waiting until we are forced to cut expenses, but rather cutting them now and moving forward on our terms to the next era of growth. While the decision to eliminate positions is never an easy one, the actions we're taking now will help us efficiency and absorb increasing volumes. Now let me provide a bit more detail as to what we're planning to do. A significant majority, just over 80% of the impacts will take place in 3 areas: the Global Services Group, our travel businesses both corporate and consumer and within our staff group functions and within our staff group functions such as finance and human resources.
While OpEx in these areas was well controlled in 2012, together these groups make up approximately 60% of our overall S and B expense. Reducing these large expense areas will help us generate savings that we can use to fund investment opportunities or to improve the bottom line. The remaining impacts The remaining impacts less than 20% are spread across the other business units as a result of consolidating functions, optimizing our client management and increasing spans of control. Overall, the reductions are spread in proportion across the U. S.
And international markets as well as seniority levels. Now I'll outline the reinitiatives in the 3 areas with the largest impacts starting with Global Services. As I told you last February, the creation of Global Services, which is comprised of the groups you see here, has enabled us to reduce cost, cost, absorb incremental business volumes and build new capabilities through increased investment. Capitalizing on our global scale and leveraging best practices from around the world, we've globalized processes such as telephone servicing, fraud operations, collections and disputes. Operating a global servicing network is a powerful tool to drive efficiency and effectiveness.
For example, we've created specific language hubs and now service after hour calls from our Australian customers in Phoenix. In addition, as more customers move to online servicing, we've responded by introducing several new digital capabilities. For instance, we accept card member dispute requests online and today nearly 30% of all disputes for our U. S. Consumer and small business card members are resolved online.
As a result of process globalization as well as the increase in online servicing, we've been expanding some facilities and closing others in anticipation of our future needs, the largest of which was our Greensboro service center closed in 2011. We've reduced the number of locations supporting our key servicing functions by 19% as we've created hubs for like functions. All of our efforts have led to improvements across key performance metrics in our telephone servicing function globally. Call handling time decreased by 13 seconds in the past year. With millions of calls, this adds up to significant savings.
Likewise, 1st call resolution increased over 82% globally in 2012, reducing the amount of follow-up calls. The restructuring actions we're taking now are a continuation of our journey creating a global servicing and collections network that will meet our customers' needs in the future. The evolution of our servicing and collections network is just one of many examples of what we're doing in Global Services to help the company grow and become more efficient. We've undertaken similar initiatives in our technology organization, which have enabled us to lower our processing costs. We've also continued to reduce our overall real estate footprint and improve our procurement practices.
This gives you a sense of the business volume growth we've been able to absorb over the past 3 years. While card transactions were 26% higher and cards in force were 16% higher in 2012 versus 2,009, global services expenses were 5% lower over the same time period. But we don't measure success by cost reduction alone. Not only are we more efficient, but our customers are more satisfied. Customer satisfaction as measured by our voice of the customer metric recommend to a friend continues to improve.
In fact, we reached a record level in the U. S. In 2012, which is 32% higher than in 2,009. We also continue to be recognized as a service leader as evidenced by our 6th consecutive J. D.
Power satisfaction in the United States. Let me next move on to our travel businesses. The travel industry as a whole has been transformed over the past several years as a result of a number of factors, including supplier consolidation, shifting customer preferences for online transactions and the entrance of new competitors. Across both our corporate and consumer travel businesses, we've been making investments in new capabilities over the past several years to better meet the changing needs of our customers, improve efficiency and reduce cost. After a comprehensive review, we've identified the need to restructure the business model in Global Business Travel to reduce cost structure and to continue to invest in capabilities.
Taking a page from the Global Services handbook, we want to be more aggressive in optimizing our global travel servicing network, improving our product offerings and servicing capabilities as well as realigning our sales and client management teams to better meet the needs of our clients. To create an optimal travel servicing network, we must appropriately address the varying types, complexity and value of transactions. There are different types of travel transactions from the initial booking to itinerary changes to cancellations. The complexity and value of a trip can also vary greatly. Higher value, more complex itineraries typically require more personal service.
However, for some types of transactions, our clients' preferences have shifted from high touch personal service to automated servicing. Similar efforts are underway in our consumer travel business. Here too, we're investing in process efficiency and new technology as well as identifying ways to transform the business model by globalizing our approach to travel servicing. Together, these actions will enable us to serve clients better, while driving growth and efficiency in our travel businesses and to do so with fewer people. The 3rd area most heavily impacted by these restructuring efforts is our staff group functions such as finance, human resources, communications and legal.
Comprehensive reviews were conducted by the respective leadership teams to determine how to become more efficient without compromising control environment. The reductions in these functions are being made as a result of 3 drivers. The first driver is the investments we're making in new standardized tools and processes. As in other areas of our business, we've been investing aggressively in technology development, which has enabled us to reduce the amount of manual touch points across a number of internal processes, enabling us to reduce staffing levels while strengthening controls. 2nd, staff group leaders are reprioritizing their work to focus on those core activities that drive the highest value while eliminating others.
Finally, we're implementing a number of structural efficiencies such as increasing spans of control, consolidating similar functions, eliminating duplicative efforts and migrating roles into centers of excellence. By our own admission, setting a target of having our operating expense growth be less than our revenue growth was not a super ambitious one. However, our objective at that point was to set a target that would contain OpEx growth while providing flexibility for investments. Having said that, our adjusted OpEx performance in 2012 of 3% year over year growth was better than our target and better than the 7% CAGR of the previous 3 years. We're now moving to a more ambitious annual OpEx growth target of less than 3% for the next 2 years.
We believe that this target challenges us to exceed our OpEx performance in 2012, while still providing flexibility for investments. Obviously, circumstances can change and we will adapt as necessary. That being said, we have a comprehensive, deliberate plan in place and a high level of confidence that we can achieve these OpEx targets in a number of macroeconomic environments. Even if we have a stronger growth As a result of my remarks today, I hope you have a better understanding of why we are confident in our ability to achieve our operating expense targets, while continuing to invest for growth. Thank you.
Thanks, Steve. Dan and Ed. And Dan, what time did we say? 4:30 something. Rick Sutrino was telling me some of you might be aware the Visa earnings are coming out.
Some of you might have an interest. We obviously are willing to take questions. We'll try to run the formal part of this to probably around 4:30 or a little bit after, but we'll stick around for those of you who want to continue to ask questions and talk to us outside. All right. Just one in the back and then I'll come right there.
When you go through the scenarios of revenue growth in the 5% to 7% and the big buyback toggle, when we switch from a payout world to actually managing to a capital ratio, I mean, how much of that is just waiting for regulators to get comfortable with that? How much of it is your own view of the outlook of capital requirements growth potential etcetera? I mean it just seems like given where your capital ratios are even the numbers you're talking about while they're very high are still fairly conservative?
Yes. So I think 12% range for Tier 1 common is a high ratio certainly compared to many of our competitors. We're still in the process of doing our work as it relates to Basel II. Some of our competitors are further along there. And we have a view of let that play out.
Let us enter parallel run assess what impacts those calculations will have on our capital before we think about bringing them to lower levels. Actually what we have set in the as a target is really 10%. We kept it higher until we actually get through the Basel II process.
Yes, right here and then I'll swing it around.
Thanks. A couple of questions. One is on the marketing expense. You talked about the goal to keep the expense growth of 3% or less. Obviously, that doesn't include the marketing expense.
So could you give us a little bit of a sense as to how you're thinking about driving the business? And in the environment, especially when you mentioned that your competitors are expecting are going to be pulling back on some of their investment spend, does that tie into?
Yes. As I said, our plan is to keep marketing and promotion expense at 9% of revenues. So we've been roughly at that level. It may vary sometimes quarter by quarter, but we think that's an appropriate level for us to be at. I think what also is critical and I emphasize as I went through all the scenarios that all of those contemplate a relatively high investment level that we're making.
So what we're not doing is trying to pull down our investment dollars to make a short term number. What's very important about the scenarios that I went through every single scenario maintains a high investment level, but demonstrates the flexibility that we have from a capital generation standpoint and an OpEx standpoint. I don't know Dan if you want to add anything to that.
I think that's right. I think we think at that 9% level we have sufficient investments to help continue to drive the business and that's really why we said it. Sure.
Okay. Just the competitors pulling back potentially gives you an opportunity potentially to raise that a little bit, but 9%
is where you stay. Okay. Well, certainly we saw in 201020 11, we invested at higher levels. They didn't recover from the crisis as quickly as we did. And in 20102011, we took 2 50 basis points of share in the U.
S. So if they pull back, we're ready to invest and help the business momentum that we're shooting for.
Yeah. What I would really look at is the guideposts. I think what we've demonstrated from an opportunistic standpoint is that when we've seen opportunities to invest because we believe there's growth in the marketplace or we believe that competitors are taking actions that give us opportunity, I think we've jumped right on those. So that's going to be our continued philosophy as we go forward.
And 2 other questions. 1 is on surcharging. Surcharging was in the Visa, Mastercard world enabled to start I think late in January. And looking through some of the contracts that you have with merchants, it looks like since, merchants are going to be able to surcharge on brands, does that could potentially open up the door for them to surcharge on all brands including Amex? Could you just give us a sense as to how you're reading those contracts?
And what if anything you've seen so far?
Yes. I think I'll make just a few top level and then hand it over to Ed. But we've really not seen any evidence of surcharging. In fact, there have been a number of statements of merchants small, medium and large that they don't think surcharging is a good idea. It certainly is not consumer friendly.
As you know there are around 10 states that don't allow surcharging and there are a number of states that are talking about putting in laws that will not allow surcharging. Ed, you want to make an overall comment?
No, I think we're watching the market closely as Ken said. We don't see a lot of evidence. Very few are said they're considering it. Many more have said they won't do it. And we're not part of the Visa Mastercard settlement.
So I don't really want to talk about what they're doing. We watch the market. We make sure our merchant pricing reflects the value that we deliver to merchants. We're very comfortable with that. We have really enhanced the value we've driven to merchants over the last few years and doing marketing with them and do a lot more than just card acceptance agreements.
So our relationships are separate. We feel good about our pricing position and but we're watching closely to see what merchants do. Generally though, I think everyone agrees surcharging is anti consumer and I we just haven't seen a lot of evidence of that yet.
Okay. And then just lastly, you talked about the tax changes and the response you had from your customer set back in the day in the 90s. Could you give us Long time ago. Yes. Slightly different.
But could you give us a sense as to have you seen any kind of payment spending pattern change since the beginning of the year given the tax law that was changed in December and maybe give us take the opportunity to give us how the spending has been year to date? Yes.
The reality is I'm not going to give any projection on January. But I'll stick with what I said earlier is that we have not seen historically a correlation strong correlation with the tax rate changes and the impact on spending. The far greater driver is GDP growth and the condition of the economy.
Okay. And no comment
swing back.
Yes. Again, two questions. Just first on the U. S. Buildings multiplier.
I guess, how has that relationship evolved over time that 4.5 times multiplier? And given how high your share is now in the U. S, do you feel that you could continue to generate at that type of pace? And I guess the second one, on the fee income initiatives, so you're at $1,500,000,000 Can you just talk a little bit more what gives you confidence that you could see you should see an
acceleration over
the next 2 years? Let me answer the second one first and then I'll go to the first one and open that up. I think the reality is what gives me confidence is the progress that we've really made. If you think back to when I gave the target in 2010, we had only acquired Revolution Money. Loyalty Partner, as I said, we acquired in 2011.
We didn't have Bluebird. That wasn't even an idea. Then some of the other initiatives LoyaltyEdge, certify that we've done, some of the progress we've made on our other we you would see as you would in a mature business, we go up a few percent each month. I actually thought it was going to be far more backloaded. What's been encouraging to me is the progress that we've made in loyalty partner that has certainly performed well against the expectations that we have had for it and the growth opportunities.
And Bluebird, I think has performed very well and the other served products that we have put on the platform. So at the end of the day, we take what we say seriously. And we've said in the past that was a target. As I look at when I set the target, I had a set of initiatives in the pipeline. And my view was that we had an important and I would absolutely acknowledge, I would say I certainly wasn't the only one alone, but I'll certainly take accountability for it.
When we talk at point of sale of digital wallets and what was going to happen there, people thought, I thought that the growth would be more. What's very fortunate is that we have initiatives like Loyalty Partner and Bluebird that have really taken off. So those are the reasons why I have confidence and maintained as I did in my formal remarks that we think the target is a reasonable target and that's what we're focused on achieving that target. As far as on the billing side, I think that there are still a number of substantial growth opportunities as we look at the U. S.
Market. What's important about our franchise and I'll let Ed talk about some of the specifics, but there's no one else that has the diversified payments portfolio that we have. Consumer, we're a leader with the premium segment, small business, corporate card. So the range of opportunities we have and the levers that we have in our business to drive growth and the fact that the penetration of plastic still has a lot of room to grow. If we look at what's happened with online billings, I mean, we've been very pleased with what we've seen there.
Ed? So just building on that, we feel good about our growth prospects in the U. S. And around the world. In August of last year, we talked about the number of different ways we're growing.
Premium consumer spending in the U. S. And in key international markets and their associated premium lending still has a very good runway for In fact, last year we shared that McKinsey had done a payment study and predicted 8% spending growth when you look at affluent U. S. Consumers and small businesses.
So they were projecting that over the next 3 years. That's just one data point. But we're not the only ones who believe that this is still a growth market and that we can grow by having superior value propositions, by winning a higher share of our existing customers' wallet, by expanding merchant coverage, by reducing the number of customers who leave the franchise and by continuing to invest in acquiring new customers. We showed the number or Ken showed in his presentation that we track the amount of spending from 1st year customers was up 9% last year globally. We feel very good about that.
So as long as we have money to invest and to speak to that marketing investment, we have made the tough call I think to reduce salaries and benefits rather than reducing marketing, which would have been easier, but would impact our top line growth and we chose not to do that. We chose to continue to invest because we have a wealth of growth opportunities consumer, small business, corporate, pre paid, B2B, merchant value, loyalty, online spend that make us that give us a lot of encouragement about the future growth.
The only thing I'd just say on the 4.5 times real GDP is that 4.5 is an average over a long period So there were years where it's 100 basis points or more lower and there are times when it's 100 basis points or more higher. And since we've been taking share, we haven't seen a change in that relationship.
So the point overall I would make is we've all focused appropriately on the intense competitive environment. And the reality is we've performed incredibly well in this environment. And we think we're getting stronger. We don't think we're getting weaker. And we see some real opportunities from a marketplace standpoint and we see opportunities from a competitive standpoint.
I'll take one here and then one more and then we'll switch over to the other side.
Yes.
All right, Great. Thank you. I appreciate the scenario analysis. I guess it's on a related topic my question, but can you talk about being really comfortable with the organic growth opportunity of the core businesses you guys are in. But I was just wondering if there's opportunities on the M and A side kind of accelerate elsewhere.
You mentioned loyalty. I don't know where else debit. I don't there's a whole host of other options, but maybe Serve, you kind of talked about some of the parts of digital spending that's been underwhelming. But just specifically on serve, maybe you and Dan can talk about its progress to date relative to maybe a couple of years ago when you guys thought up the idea? And then I've got one more follow-up.
Okay. Just start with the headline on the first one that you
had, the first one. I would say are
you still comfortable with the organic growth? Yes. On that front, we clearly would consider acquisitions. I think what if you look back in history, certified loyalty partner, I think the point that we've made is that certainly I've said this over the last 12 years that what we don't see is a transforming deal because we have we think terrific opportunities as we look across our portfolio of businesses. And so people used to ask me 15 years ago, well, would you buy a bank?
I don't think so, a fully diversified bank. But the reality is that bolt on acquisitions around the world are opportunities that we would consider. So that's something we obviously constantly examine and we would consider opportunities that would accelerate our growth that would make strategic sense that we can implement. But want to make sure that it reinforces capabilities that we have or assets that we have within our franchise. And I think what's very important as you look at the Certify, if you look at loyalty part, they are leveraging.
They're bringing some new assets and capabilities. But
as
far as serve, I'm going to let Dan talk about that to give him an opportunity.
If you think about serve platform, we bought it in the middle of 2010. Really 2011 was about hardening the platform. It was reasonably rudimentary capabilities. We've expanded that dramatically. I mean the difference between the platform a year ago and the platform now is night and day difference.
That capabilities with and charge and credit side of payments. With the platform that we've built right now with multiple load options that can go after cash, that can go after checks, that can go after direct deposit. As Ken mentioned, you're seeing that increase pretty dramatically on the platform. And then multiple offloading electronic bill pay, merchant spend, etcetera. We've actually devised now a capability and a platform that allows us to go after spend that we've never been able to think about checking type alternatives to debit, cash spend and segments of the market we've never been able to address before whether that be lower or middle income, whether that be unbanked or underbanked populations at 75,000,000 here in the U.
S. And so we're actually tremendously excited about that opportunity. It's an extraordinarily large opportunity for us. And so we had to get the platform in place before we started to scale. But if you look at the partners we have now with Serv, we've got the largest online gaming company in the world.
We have the largest retailer in the U. S. With Walmart. And as Ken showed in his presentation, the acceleration of our results is pretty dramatic, especially coming out of the second half of the year. We are putting on over 10,000 customers a day a day onto these platform type of products.
And the load volume almost doubled from Q3 to Q4. So we're seeing early signs of success in that. And now what we just need to keep doing is executing against that, continuing to harden the platform, and continuing to bring on scale and the results come from that.
The other point that I would make Dan is the fact that in many respects the way we put our strategy together in the platform we're technology agnostic. So we're not dependent on NFC taking off. We've got a lot of flexibility in what I believe particularly when you're going through dramatic change in the marketplace is you want optionality. To deal with a range of technologies and to really act quickly. And as I said, again against the question on the fee services target, we didn't have Bluebird, but the reality is if we had not acquired Revolution Money and that platform, we would not have been able to launch Bluebird in the way that we did.
So the functionality is absolutely critical and not being tied to a trend that has to happen in the marketplace. So we're not constrained by well digital wallets haven't taken off. The reality is if digital wallets take off, we've got the functionality, we've got the capabilities, we'll be prepared. But we're going to have to wait for that to happen because we've got other products that are generating that growth.
The truth is we actually have digital wallets, right? But what we have that others didn't have at least initially they're thinking about it is we had you could offload at point of sale either through a card swipe through NFC or through QR codes. So we kept our optionality open and point of sale is moving much less slowly or is not moving as quickly towards NFC as we all anticipated. But really if you think about Bluebird, Bluebird is actually a cross platform. It can be a mobile wallet.
It can be a card swipe or it can be payment at your PC. So it goes across all of those different platforms. It's just that NFC hasn't taken off as quickly.
So I'm going to take this gentleman here and we'll move back to the right, okay?
Sure. I'm going to try to dig down a little bit more on the marketing and promotion spending at 9%, because looking at the customer acquisitions and what's going on with your competitors, it does seem like there needs there could be less spending there. But can you help us understand what else is in the marketing and promotion side besides customer acquisition? Or maybe what ranks as far as big buckets of spending there? I think customer acquisition, branding, anything with merchants just help us understand what's where the money
is being spent. Why don't you talk about that
Ed? And Dan?
Yes. There's think of it based perhaps in 3 buckets. The first one is customer acquisition. It is the largest investment we make that and it's a big chunk of it is in marketing promotion. There are pieces that are in OpEx and other expense lines.
But the biggest part of our the biggest investment we make is customer acquisition and it's mostly in marketing. We also have our brand building, whether it's television advertising or promotions that we do. Anything we're doing to promote the brand is in there across all the different channels we use. And then there's communications and marketing to
Okay.
Okay. Right here and then we'll go over here.
Thanks. Ken, you talked about the multiplier effects and along those lines as a follow-up relative to some of the scenario analysis that you showed and the revenue growth there, how do you think about bridging the gap between the build business growth and the revenue growth particularly given the growth you're seeing in other segments like GNS? As we look forward to the future, is that differential going to grow or how do you think about that?
I think the reality is again we've got a lot of options for growth. We're seeing growth and we believe continued growth in our proprietary business. We're excited about the growth of G and S and the economics complement each other in our proprietary business and in G and S. Clearly, prepaid, reloadable prepaid is a broad category. We see as opportunities for good growth for us fee services.
So I think the balance that we have what I think is critical is we're not dependent on a single lever. I mean the reality is you look at the growth which I gave of small business, 13% billings growth. We think there's a lot of runway for growth in that category. So I think that what's important is that we have a diversity of growth opportunities and it's not an issue that we're going to favor in a static way one category over another. What we want to make sure is we're recognizing the opportunities.
So on one level as we've gone through before, if you look at the economics alone are proprietary, you'd say all I want are proprietary cards. But the reality is we get very good economics from G and S cards and we can balance that off and that's part of the resource allocation process that we follow.
Thank you. The comments you made about the business getting stronger, I interpreted those comments as definitely applying to the U. S. Would be interested to hear your thoughts as to what extent those comments apply to the emerging markets. And in that context, any long range thoughts that you can provide about how to get stronger in the emerging markets would be helpful.
Good. Let me just make some general comments and I'll hand it over to Ed. We have Doug Buckminster who also runs our international businesses. My comment covered the entire franchise. So I actually believe we're getting stronger in international.
I think a number of the initiatives both in our core business card business and I'll have Ed talk about that. We're seeing good growth. Loyalty partner all the action is outside the U. S. And we're seeing good growth there.
I think in the emerging markets again because of the portfolio that we have, you've got to look at not just consumer, you've got to look at corporate, you've got to look at G and S. And one of the things I think we did at the last meeting was talk a little bit about how we're balancing off the growth that we have in G and S and the growth that we have in proprietary in our international markets. But Ed why don't you comment and then I think it'd be useful also for Doug to comment a little bit.
Great. So when we think of emerging markets, we think more than just BRIC. So there's a number of other markets that are in there now, so expand the definition. In some of those markets we have an incredibly strong presence like Mexico that's growing well, where it's the largest single market after the United States in terms of profit contribution. It's been we've been in that market for 160 years.
I think we just celebrated our 160th anniversary last year. And it's in some ways it's one that we're most excited about with Loyalty Partner. We put on millions of collectors in the last couple of months of the year as we launched loyalty partner there. So we have very strong card franchise, very strong brand recognition, a very premium business, consumer and corporate and now we brought in loyalty partner. There's a number of other markets.
All those emerging markets we have and they're in different states. I did show a chart I think in August that said we're and most of those eight markets were growing at or above the market level in terms of billings growth, but they're in different stages of evolution. We've been going at China for many years. As you may know, China UnionPay is the network in China. So it's really we're capturing the outbound spend of Chinese when they leave.
That China continues to be more of a marathon than a sprint and we're revising our strategy there are ways there are ways we're revitalizing our business in Brazil as we speak. There's markets like Turkey where we were not very active, but have increased our presence and now our billings growth is accelerating there. So each market is a story unto itself. But I feel all the times we talk about premium consumer and merchant value, loyalty partner, these are all global plays. It's not just the U.
S, it's just the U. S. Certainly is our largest scale market. But you'll see increasing growth coming from outside the U. S.
Doug Buckminster, who's Head of International?
Hi. So I would say Ken and Ned covered a lot of it. I'd say a couple of things. One, what I love about GNS and the international consumer business coexisting is it gives us a flexibility in the way we approach different markets. There are markets outside the U.
S. Where credit underwriting and direct marketing infrastructure is very weak. And when bank partners and that physical distribution, their ability to underwrite is absolutely critical to doing business. So whether it's Brazil, whether it's Indonesia, some of these emerging economies, they're going to be very important over the next 10 years to our business. A partnered approach is very important.
I think loyalty partner is a great of often
would
competitive. I'll give you one example of the synergies between them. That is our GNS partners not only acquire cards on our network, they acquire merchants on our network as well. And they have been instrumental to growing merchant acceptance outside the U. S, which benefits both GNS and proprietary issued cards alike.
I'll just make one other point and using China as an example, which as Ed said is a marathon. But I think we've been able to put together a good economic construct with our bank partners in China, because we're also focused on spending that takes place outside of China. So the economics are more attractive, but we're also growing our presence in China. What we're also doing with Dan though is one of the first markets that we moved the serve platform to was China and the joint venture with Lian Lian. So what's critical again is that when you look at the range of businesses that we have, India loyalty partner is giving us the ability really to get scale very quickly.
So I think what we've got is a coherent strategy that's playing off some of the assets. Some of them driven by what we've done organically and some of them have been driven by acquisitions.
Yes, Brad? I also wanted to talk about G and S. You mentioned Barclays and also that you may have some additional partnership signings this quarter and this year. When this first really started to get hot back in 2004, we thought a lot more would be happening in the U. S.
I'm just curious if any of those new announcements are going to be U. S. Based, if you see there's opportunity for S. Is that where you expect it to be? And what's the long term view in terms of total billings out of G and S?
Yes. Again, I'm not going to give a long term projection and I also want Ed and Doug to have an opportunity. But what I would say is that the what we've been able to do with G and S over the last 10 years and the milestones we've crossed, I think has been outstanding. So we've really been able to build that business substantially. We've covered that.
It might be useful Ed to go through a few points of the growth of G and S over that time period. But I won't comment on future signings, but I would say that I'm pleased. And I believe every market represents an opportunity. Obviously, we've grown in international well. We'll continue to do that.
But I also think the U. S. Presents some opportunities. So I'll just leave it at that.
What more can I add to that Brad? Other than it's G and S has been the fastest growing business unit for the past decade. It's we're very pleased. More than 80% of the volume is outside the U. S.
It's always been an international play. Doug gave a very good rationale why it gives us optionality in markets we wouldn't have been able to enter as a proprietary card issuer where we don't have enough assets to win. We created GNS and we were able to now have it constitute 18% of our billings. The U. S.
Is a complicated market. It's complicated one because we have a large share of spending today. It's complicated in that. The key partners we had in 2004, 2005, 2006 were Citi and BofA. We have a number of other banks, but those are the 2 big partners.
They have been somewhat distracted over the past couple of years. But I still think when we look forward, we feel that we can grow in the we can continue to grow in the U. S. And expanding the number of partnerships we have. But this is something we've been working on for a long time.
And I think Doug answered well that GNS has been an incredible important complement to our business outside the U. S. Both with spending and with merchant acceptance. So it's working very well.
And also I had a clarification question on your efficiency target, the 67% efficiency target. 7% efficiency target. Is your expectation that you'll get there in the next 2 years that's why you set a 2 year goal of the less than 3% OpEx growth? Or is that 67% in the further out years?
So we haven't said we're going
to get there. We're going to
head in that direction. No, we've made substantial progress over time. But again, I think we're still at the point of saying we're going to head towards that number and we'll see how it plays out over
the next couple of years.
And would you extend the 3% limit on OpEx growth beyond 2014 then if it's not achieved by that time?
So I think we would have to look and see what the environment is and what other business objectives we have and how OpEx is just one piece of the whole puzzle. So I think we'll wait until we get there and then assess that.
Yes. The only thing I would add, Brad, is with targets when we set them we do take them seriously. So that the focus would be we've set a target for 2 years and that's going to be our objective. And I think to Dan's point what is important then is to look at the growth opportunities, to look at the economics that we want going forward. And what I thought was important was to give people a sense given the uncertainty of the last 2 years at least to state in operating expenses, here's what our target is going to be over the next 2 years.
And I thought that would be helpful for people in demonstrating flexibility. In the same way that as we went through the scenarios, the objective there again not a projection was to say we've got some different options that we have. And very importantly, we want to do it in a way that allows us to achieve appropriate performance in a timeframe working through different economic cycles. But the reality is that what we do know is cycles change. But most people would say the next 2 years are going to be slower growth.
So here are some options that we have to handle that. But the other point I wanted to make was the investments. We're still going to invest in the business. So what we're not going to do is cut back to make a short term number. We'll make the appropriate adjustments.
2 1009 to give another example, extreme case, we actually cut back on marketing. And what did I say at that time? That's not sustainable. We can do it for a period of time in the short term, but it's not sustainable and we're not going to keep on that strategy. So what we've given you is here's how we're managing through a cycle that may last that may last for 24 months.
It could last longer. If it lasts longer, then we'll have to look at other scenarios. But that's part of what I got to focus on and the team focuses on.
Yes.
Thanks. I had a question for Dan Schulman. Mastercard recently revealed that they're introducing this digital wallet, the I'll read. It's called the Staged Digital Wallet Operator Annual Network Access Fee. It's one of these payments acronyms.
That's an easy one.
That's an easy one. That rolls off the tongue. Great marketing. I was going to ask,
would has Amex contemplated a digital wallet fee as well? And generally, do you think the optics of digital support merchant discount rates? Are they going higher or lower in a card not present world?
So I think you're seeing a lot of different players whether it be traditional or non traditional start to think through their digital wallet strategy. And we've said this and it's still absolutely true. This is the very early innings of this play out with digital wallets right now. We're beginning to get some very nice traction in the back half of the year kind of on our digital platform right now. We have looked very hard at the different fee structures that are out there.
We've looked at the embedded infrastructure that we have. As Ken mentioned, we have a kind of fixed infrastructure that we can leverage. We have a lot of assets that we can leverage that are very different than other players out there right now. So I wouldn't expect that fee structures are necessarily going to mimic each other because each of us come to the market with different assets and different profiles. If you look at some of the kind of newer players that have come into reloadable prepaid, they've got very different infrastructures and therefore have to have very different fee structure If you look at a NetSpend or a Green Dot, they charge on their kind of what they're beginning to try and call wallets.
They're charging monthly fees that can be 4.95 dollars to $9.95 and we don't have to do that. So we'll look at where we provide value and what the right fee structure is for that. One of the things that we're finding on Bluebird is that there are 2 real things that we provide for a customer. First of all, we're not trying to change their behavior. We're not trying to convince them to tap a phone as opposed to swipe a card, because we're agnostic to any of those forms at POS.
But what we are trying to do is help them do things that they already do much more efficiently and conveniently without all the fees. So I actually spent 4 hours yesterday afternoon going to cash checking locations, Pay O Matic, a bunch of other places where probably not many of you in the room have gone to recently. And the hassle and friction with getting access to your own money, giving trying to cash a check, trying to send a money order to somebody else and waiting in line for 50 minutes to pay a bill because you don't have a checking account. That convenience factor is something I think we probably underestimate where right from your mobile phone right now, because on a mobile platform, you can send somebody a payment in minutes, convenient, easy, no waiting in line, no trudging to a place to pay that. And we're also doing it in a way with lower fees than the traditional industry structure has for cash checking and that kind of thing.
So I think you're number of fees and fee structures for digital wallets depending on who the player is out there and what assets they bring. And it's still very early innings. So we'll see who gets scale, who doesn't get scale, what they do with that. But we're I would say very pleased with the momentum that we have as we exit.
Yes. The only thing I would say is one looks at what I call pure digital wallets to put it simply. I don't hear anyone talk about what's the benefit for the consumer. What I hear is everyone saying I can get information or I can charge fees or I'm upset about the costs here or whatever. But the way it works and is that ultimately in the digital wallet very simply is someone going to pick the digital wallet because the value proposition of that digital wallet is going to be better than any individual card.
So one of the points for the industry is, are there going to be 30 or 40 digital wallets out there that are connected to a card because the card has the primacy or this wallet is going to offer a value a value proposition that's going to change the behavior of the consumer. I don't see a lot of focus on that. What I hear is people who are offering the digital wallet saying here's what I will get out of it. It's important to understand what the consumer will get out of it. So what we don't know at this point is this a technology looking for a solution and there is not a well articulated value proposition that gets the customer excited.
That's what has not happened yet. Yes.
Yes. Thanks. Ken, I believe you said Bluebird will need to achieve scale for you to be able to achieve the full benefits. Can you elaborate on what you mean by those full benefits? And also whether there's a spend volume that you need to get before it becomes a meaningful contributor to earnings?
The reality is again I'm not going to give a projection or a number. But as with any new business, you've got to get scale. And we need it's great that we've got 575,000 customers on Bluebird. It's performing well relative to our internal projections, but we're going to need millions of customers and for it to be meaningful to the company. And I wouldn't be interested frankly in pursuing a product that wasn't going to be at sufficient scale.
So that's the point. The Bluebird can't be a niche product as Dan understands. It's got to be big. And so that's what I'm talking about is this is a product that has to accelerate in growth for us to generate the market presence and the economics that are attractive. The early signs are encouraging and that's satisfying to us.
But where I'm not satisfied is we're not where I want to be ultimately. And that means that we'll have to have substantial scale. And that's the same tact that we've taken with all the new products that we've introduced.
Just to add to that, Ken and I constantly challenge each other with how big can this opportunity be out there because it is a very large market segment that you're going after. So for Bluebird, it truly is a unique differentiated innovative product that's going after a very large segment of the market. Whether it's unbanked or underbanked that's 75,000,000 U. S. Adults.
If you go after unbanked or unhappily banked that could be anywhere between 75,000,000 and 100,000,000 U. S. Adults. So the opportunity or the market size is large. We're obviously pleased with the way that it started off, but you just want to continue to grow that going forward.
And Walmart has the same objectives as we do. We both intend for it to be a major Yes.
I think we all like to do things small as you know. So this is a big focus for
us. I also have a question on loyalty partner. What percentage of those customers have an AmEx charge or a credit? Is there an opportunity there to penetrate that and also to expand your acceptance?
Yes. I talked about that a
little bit, but Ed why don't you cover that?
Well, we talked we had we hit 50,000,000 collectors by the end of last year and that had grown substantially. Very few have American Express cards. It's a key part of our strategy going forward. By the the biggest chunk of the business of what we bought was in Germany and we just launched an American Express co brand with Payback into the German coalition at the end of the year. In Mexico, when we launched the coalition, we launched it with American Express co brand, but it's just getting started.
And did we talk about India? There's also a card play in India as well, a co brand card play in India. So that would not show up in the Coalition Loyalty Business Unit, but it will show up in the core business and it will be a big part of the card growth in international in 2013.
Yes. And I think the important part to think about this is loyalty partner as a standalone is a very attractive business. Performance marketing is a very attractive growth area. We have cross sell opportunities with the card business, but that's not going to justify or we don't need the economics of cross selling card to really have loyalty partner perform well. We think that is an attractive opportunity.
We think it represents a growth opportunity. But what I like about again the optionality is we didn't say if we acquire a loyalty partner unless we cross sell at this level, it's not going to work. We said this is a terrific business on its own with some important synergies that we can leverage with our CoreCard business. All right. So I'm going to take 2 more.
So we'll take one here and one here.
Thanks. Can you touch on regulatory risk briefly, specifically the CFPB? I know in some of the bank earnings calls, there was some discussion around that. I mean, are you sort of is that risk kind of steady? Or do you see more of an accelerating discussion around the CFPB from a card perspective?
I think the reality is we're in a heightened regulatory environment. And I think anyone you talk to would say that we're in a heightened regulatory environment. I think what's important is our approach inside the company has not been frankly to fight the regulators. It's been to say we want to be better as a company. We mentality into the way we are running the company.
But certainly, the regulatory environment overall has been heightened and I think it's going to stay
that way for a while. Yes.
Yes. I understand that you've built some integration with Apple's Passbook, the mobile wallet application that's more of a cloud based solution. And then, I know that there's an MX app for Android. Have you built any direct integration with Google Wallet? And what is sort of the what are some of the opportunities and risks of having to integrate with a 3rd party for mobile payments?
Ed has been a real driver of this. So let me have him cover it.
So to your your point,
we've done a lot integrating what's unique about the Amex value proposition in a number of different platforms. 2 years ago, we launched our first deal. So I think it's 2 years ago this month with Foursquare. Then we went to Facebook, then Twitter just about a year ago. We went to Foursquare in the U.
K. Last year, integrating the card into those platforms, not exchanging any personally identifiable information, connecting through anonymous tokens, but being able to do coupon less offers, frictionless commerce on these platforms. PaaS was a great experience for us. I think we built the Pass in 3 weeks. That was very different than even Apple imagined Pass to be.
They imagined Pass to be a barcode that it would be on your phone to give you physical access to United Airlines boarding pass, a Fandango movie ticket, a Starbucks gift card, we did something very different. We built it in 3 weeks leveraging the technology, our closed loop technology. It's worked very well. It's actually changed the conversation with Apple in very positive ways. We used to just be the cost of card acceptance in their supply chain and they can be rough on their supply chain elements.
But we are now deep into conversation with their developers because they see that we can move quickly and they understand our business model that like them they have a closed kind of ecosystem. They own the hardware software. They care deeply about the customer experience and we're a closed loop with issuing acquiring a network and we care deeply about the customer experience. So I think we've made good progress. There's a lot of deals we have done.
We did Xbox at the end of the year, same thing, connecting our value proposition into their platform. You will see more from us in the near future doing I think cutting edge technology using technology in cutting edge way to bring our business model to life and moving the company from just a payments provider to an enabler of commerce. The deal we haven't talked about because we haven't done it is a Google deal. There's a couple of different wallets that Google has. They have a wallet for online that's always been there, mostly for small businesses to buy AdWords.
They're a big merchant of ours. That business works incredibly well. There's a wallet in the Android store to buy apps. The Amex card's accepted there. It works very well.
Then they launched an NFC wallet in a test with Mastercard prepaid. We had concerns about that. So it's a pilot. It's very small. And then there was word about yet another wallet coming that would be a card base at the point of sale.
We don't have to talk about that because we haven't launched it. But in the summer, we had a lot of discussions at the FCM about we weren't going to do a deal with Google because the way they had constructed their wallet for the point of sale was not clear or transparent to our customers. It wasn't clear who the merchant was. Is Google Wallet the merchant? Or was it really a Mastercard prepaid or some other prepaid account that was coming in between our customer and the merchant.
So that's a deal we didn't do. We continually need to talk to them. But if you notice they haven't they seem to have changed and slowed down their plans and are rethinking what they're doing. We continue to talk about them, but we would be concerned about an intermediary where it's not clear to our customers what they're getting into And heightened regulatory environment or not, which it certainly is, we don't think it's a good idea to confuse customers where it's not quite sure who the merchant is. And would they get their reward points?
Would they get their bonus points? If they think if they are using it at a drugstore, but the merchant of record is Google, that's a problem. So we haven't done that deal. But I think Google is rethinking their approach. I don't think they're going away.
I think they're going to come back at it. They're trying to get information from what you search for online to what you spend offline. That's how they think about it. They're not necessarily thinking to Ken's point about the customer experience. They're thinking about what they need and what they'd like to get is your offline spend information.
But from our point of view, we care deeply about clarity, transparency, fairness to customers and we just haven't found the connection with them yet. But on the other front, you'll see more from Amex coming in the near future about us doing industry leading technology deals to bring commerce to life on other platforms.
Yeah. The key thing that I would say at the end of the day, we've got a real clear criteria about what we want to do for our customers and what the value proposition needs be. We've built tremendous credibility with a number of digital providers who would say irrespective of any industry we're one of the best companies to work with that were very innovative that were quick to market. We've learned a lot about partnerships over the years. So G and S is an area where we have done a very, very good job.
Loyalty partner is another where we're working with partners our merchant business. So I think that what's critical is we're building on a lot of the skills that we've had over the last 30, 40 years leveraging the closed loop. But what's also happened is that in the last 5 to 8 years, the credibility that American Express has built with digital companies has been substantial. And I think it also plays off the attributes that we have and an increasing recognition that we have those attributes. And we operate both online and offline.
That's important. So I think that's it. Again, many of us will be outside the room and we thank you for coming.