There’s much buzz in the blogosphere (e.g. here, here, and here) about the latest from American Express. They have offered certain of their customers $300 if they will close and pay off their credit card accounts by April 30. (Are there other businesses that will pay me not to do business with them? I could use the money.)
What is going on here? Amex is letting the accounting tail wag the business dog. They feel pressure to reduce their book of consumer debt. Investors are very worried about financial companies that are overly leveraged with too many (possibly bad) loans to consumers. Bribing some customers to beat it addresses this problem because it will reduce both the total that Amex is owed and the total that its customers could borrow. Amex may also be targeting customers with low credit scores or other characteristics of which investors are particularly leery.
Does this make good business sense? Not even close. Imagine separating credit card customers into two categories. Group A is made up of those willing and able to pay off their balance in 60 days in exchange for $300. Those in Group B are either uninterested or unable. Everything else being equal, with which group would you rather continue to do business? Amex has concocted a scheme that efficiently and expensively drops the customers it need not worry about and keeps the ones that might have trouble paying what they owe. Brilliant.
Does this mean that the people who run Amex are idiots? Not necessarily. They are probably acting rationally and making what are, from their point of view, sound economic decisions. Wall Street wants them to improve their balance sheet and will pay them to do this, in the form of a higher stock price and lower borrowing costs. From this, the managers of Amex can do the math and work out that paying some customers, even relatively good ones, to get lost is profitable. The fact that this ought not to be the case, that the markets should not be rewarding Amex for doing something that actually harms itself, does not enter into the calculation.
This scheme may not be the ideal implementation of the lose customers to improve balance sheet strategy, e.g. I have trouble believing that offering everybody the same $300 is optimal, but it’s not a sign that the folks at Amex have lost their marbles. It is, however, a sign of the times. We currently live in a world where the appearance of improving a balance sheet outweighs the substance of shrinking a business.