Strategy

Howard Grosfield, president and CEO, Amex Bank of Canada

A top financial executive praises regulation of the Canadian banking system.

Howard Grosfield joined American Express’ U.S. operations in 2004 as vice president in the New York-based Strategic Planning Group. Born and raised in Don Mills, Ont., Grosfield is now back home after accepting the top Canadian job in 2010.

A lively May address at the Toronto Board of Trade saw Grosfield talk about how social media has changed the way business markets to, and communicates with, consumers because companies are no longer in control of the discussion. Of course, that’s not much of a revelation these days. What’s noteworthy is how Amex has chosen to deal with that new reality. Grosfield said the company is putting all of its focus on service to ensure customers feel positively engaged with the company. Part of the way it does this is by leveraging existing customer data to do things like recommend to customers other places to dine or visit, other insurance products that might be helpful and so on. To measure engagement levels Amex is working with a metric it calls “Refer to a Friend,” its own extension of a marketing metric commonly known as the “Net Promoter Score” (NPS).

Externally, Refer to a Friend assesses how willing cardholders would be to recommend Amex products after dealing with an Amex agent. Internally, spending is tracked before and after interaction with the agent so that agent’s effectiveness can be assessed and used for incentivizing and coaching. Grosfield said the results hit the bottom line; the company has over the past 18 months seen almost a doubling of its Refer to a Friend metric while card spending has risen by “significant double digits.”

In a further nod to service and quality over quantity, Grosfield said Amex has moved away from branding its logo “all over the place” to more discrete efforts. For example, its “Front of the Line” marketing gives Amex cardholders preferred access to shows or perks, up to and including a recent concert by Coldplay in Spain that was open to Amex cardholders only. At airports like Pearson International in Toronto, cardholders have access to special lounges and can even bypass regular security line-ups.

Given the current climate of economic uncertainty, Canadian Business Online went beyond the marketing and spoke with Grosfield about a variety of topics related to current events, including household debt, the company’s equity performance, why it took advantage of the 2008 bank bailout and the prospects for another financial crisis.

Canadian Business Online: By the household debt to equity ratio, Canadians now carry slightly more debt that Americans. But what matters is the quality of that debt. In that context, how is consumer credit quality in Canada compared to America?
Howard Grosfield: The general comment I would make about household debt in this country or any country is it’s cause for concern—there’s no question about that. You made the right statement, which is, it’s an interesting statistic, but it doesn’t really tell you anything about the quality of the debt. That’s the fundamental question you’ve got to answer. So you’ve got to go underneath that. And you and I both know if you’ve got a household that’s got a $153,000 mortgage that is amortized over 20 years and has a $100,000 household income, I feel pretty good about that ratio. If that same $153,000 is rent and all $153,000 is unsecured credit, lines of credit, car leases, etc., that are all short term in nature, I feel slightly differently about that because the cost to serve that debt is fundamentally different. …

And we’ve obviously fared significantly better than the U.S. I believe there are structural reasons why the Canadian market is a slightly better position.  … The U.S. peaked at [a ratio of] 160 but when you look underneath it there were a couple of things that were going on that were fundamentally different. One, in the U.S. interest rates on mortgages are tax deductible. So having lived in the U.S. for a period of time, when you went to go buy a house real estate agents would show you the price of the house and they would show you the tax rebate that you would be getting if you took out an average mortgage. So the first dialogue with a customer was to encourage him to buy something slightly more than they could afford to buy [unlike] in Canada where you can’t [get the deduction]. So difference No. 1 is people stretched a little farther in the U.S. because of this concept of interest deductibility. But as we all know you need income. So if you’re out of work you’re now in a house that’s more [expensive].

Piece No. 2 is there are a number of states that are non-recourse mortgages, so they can’t pierce through your house and go after your second mortgage and your cars. And I believe for the most part in Canada it’s full recourse. So fundamentally a Canadian individual who’s struggling with their mortgage in Canada has every last bit of incentive to work with their bank.

CBO: Canadian Business magazine recently ran a CEO Poll feature asking executives how they felt about the Visa/MasterCard duopoly; they have 92% market share and although you’ve said you aren’t in the business of competing with them in Canada, you must want a greater share of that remaining 8%. Do you have a strategy for that?
HG: Yes. For us we always talk about our business in two parts. So we have a business that competes directly with Visa and MasterCard and we have a business on the issuing side that competes with CIBC, TD, RBC and their card issuing businesses. … We obviously aspire to have a significantly larger share of the market, but what we found to a certain extent is that, from a card perspective, we’re still a spend-centric model. So when I talk about the issuing side, not the Visa and MasterCard side, it’s very much about going after individuals who want to put a significant amount of spend on the plastic for spending they’re already doing, get rewards for it, and less about how we make money off them from borrowing from us. That’s paramount. So we will always have a smaller number of customers than the issuers on Visa and MasterCard, but the amount of spend in dollars that they spend on our plastic will be in many cases two, three, five or 10 times more than the typical Visa or MasterCard customer. For us, it’s always been about quality.

Market share is certainly interesting—we want to see how fast we’re growing. So the way we would measure our market share relative to Visa and MasterCard is—and I’ve seen [the remaining market share at] between 8% and 9% of the total volume that sits on plastic—that the real number that’s not reported is, what is our market share of the high quality mass, high quality affluent, and high quality super affluent spend? And I think if you looked at those numbers, which we don’t share, they’re significantly higher. So I don’t necessarily want to play against, and have a significant amount of market share against, some of the players that are deeply focused on pushing no-fee credit cards, where they want people to carry balances. I’m happy to walk from that market share.

CBO: You’ve been with the company since 2004 and were appointed CEO in 2010. New CEOs like to put their stamp on a company and grow the business. What is the key accomplishment you want to achieve for Amex in Canada?
HG: There’s many things that I thought about but I think the fundamental thing is bringing the company and its employees back to the basics and the core around the meaning of service. A lot of what I talked about in the speech today I would argue we as a company sometimes forgot. I think the recession taught us this about the importance of the role of just delivering exceptional service and trying to figure out ways to deliver it with a means that drives greater engagement with our customers. Bringing the Canadian business back to focusing on service and experience as the core of what we wake up and do every day has been the big focus area for me. And that means pulling back … less products, greater focus, higher quality, greater customer listening, understanding what their needs are and how they’ve evolved and changed and feeding it back. So focus right back to the basics of what has made this company great.

CBO: In the years following the onset of the 2008 financial crisis, Amex’s stock fell about 80%, but has since recovered almost all of it. Given that the economy is still relatively weak, is that recovery due to fundamentals about Amex’s operations or because cheap money needs a place to go and equities are it?
HG: It’s hard to kind of figure out the dynamic and the motivations associated with the investor community. I always struggle a bit with what drives them. … I think why the stock price has done so well post-recession is that what the recession proved is that our spend-centric model, which is the model we’ve had in place since we introduced the charge card, a pay in full card, in 1958, is actually a model that can endure a significant amount of stress like we had in 2008. So it is actually road-tested. If you look at all of our competitors that were in the credit card space, their loan-losses were through the roof. Ours were unbelievably stable—higher than usual, but unbelievably stable. With our focus on going after spenders—not lenders on credit card—they pulled back on their spending but they paid their bills.

So the model showed that it could withstand enormous stress in the first recession that was largely about debt. And I think that story emerging out of the recession is starting to be more understood by the marketplace. And the investor community is recognizing that we have a very unique business model that has been extremely road tested and that as a result can not only endure difficult and challenging economic times but actually takes off when consumers come back from a confidence perspective and start spending.

CBO: Given your experience with both the Canadian and American banking systems, how do you feel about the bank bailout? Necessary or necessary evil?
HG: It’s tough. But I do believe that in the U.S. the system was freezing and very close, I think, to a complete breakdown. And there was only one solution. Which was to inject fuel to keep the skids greased so that the system could continue to run.

CBO: Would the U.S. have been better served by having a more regulated system like Canada’s?
HG: Yes. I think even Alan Greenspan has commented on the fact that he believed that in a true open and free market system, which was very different than Canada, people would behave appropriately. And he’s admitted that that theory is not right. And I think there’s no better quote or perspective than a guy like Alan Greenspan, who was really one of the architects behind deregulation and kind of opening up the markets, to now come back and say, “I was wrong.” The amazing story about Canada is we used to get criticized for how much regulation we have and look who’s laughing now. Regulation in this country was not only the right thing, but if you take a look at our banks, you take a look at our financial service system, it’s a model that worked. It survived.

CBO: Jeff Rubin, author and former chief economist at CIBC World Markets, recently said he believes another financial crisis is inevitable because nothing has changed about how the financial system is run or regulated. Do you believe this is the case or have you seen enough from the Volcker Rule, Dodd-Frank or anywhere else that tells you everything is under control?
HG: It’s very hard to comment specifically on the broader piece because if you think about American Express’ business, we’re just in the card business. We don’t get into lines of credit that are unsecured, and mortgages and all sorts of tools and derivatives—I mean all the stuff that was really the evil associated [with the crisis]. We don’t operate in any of that. … So I’m not sure that I have a sophisticated enough perspective on what the behavior was before the recession and then how that behavior’s changed.

CBO: Why did Amex feel the need in 2008 to become a bank-holding company instead of just weathering the storm on its own? Was it simply to access cheap federal loans at 1%?
HG: You mean TARP (Troubled Asset Relief Program). I don’t know because I wasn’t at the table, but my sense is TARP was largely an “all for”—it was largely a ‘we’re all going to do this together.’ And we paid it back immediately, every last penny and then interest. And the taxpayer made a wonderful return on that amount of investment. I can’t even speak for American Express at the time in terms of making those decisions, but I think generally the companies that were sitting at the table, whether they needed it or not, were probably going through the fact of ‘Wow, we’ve never navigated in such a firestorm of challenges from an economy perspective. We have no idea if it’s going to get 20 times worse, 30 times worse, or be better tomorrow.’ So I think the government was extending, to a certain extent, insurance policies, etc., and I think you’re making decisions with very little information about what the future holds because everything you’ve believed in has been thrown up in the air.

CBO: On a happier note, what would you want to tell either the corporate or consumer market in terms of what Amex is going to be about going forward in Canada?
HG: The story I always tell that gets the most surprise, because it shocks people to know, is that American Express is 159 years old in Canada. It’s 162 in the United States. Its first expansion outside the United States was Canada. … We opened our first office in Hamilton in 1853 and so the one thing that I always try and remind people is we have this wonderful heritage and history as a very proud Canadian employer, have been for 159 years and we now have 3,700 Canadian employees who wake up every day and view us very much as Canadian company. And I think it’s helping people understand … the unique role the brand will continue to play in terms of creating unique experiences that make people feel special when they use our products. And that’s for sure the kind of future where the brand is going as it evolves and as payments go through this next evolution of change, which is quite dramatic.