Based on the marketing and prices of Visa and Mastercard, it would not be surprising if you assume that American Express is insignificant, or even if you neglect it. But the matter of fact is that most businesses still accept American Express in the US. There is no doubt that adding Amex as a payment option in a merchant’s store has been both tedious in setting up and financially. Many merchants feel more comfortable giving up on the market share that uses American Express cards based on the lesser number. But the number is not insignificant either.
Differences of Amex
American Express’s functioning is very different from the models used by other credit card associations. Even though it does fall under the category of credit card processing, the way it operates can be termed better as a charge card. There is a predefined grace period’ in which customers have to pay for the card’s purchases. Furthermore, customers cannot let unpaid dues stay on the menu. Also, no interest has to be paid on the outstanding balance as it doesn’t exist. Another notable difference is that American Express has the role of both the issuing bank of the card and its association. This is notably different from other cards, where a bank signs up with a credit card association. They issue a card bearing the name of the association. This structure is known as a closed network structure.
This closed system allows them to take complete control of their cards. This will enable them to have processing fees as high as they want or as the market allows. But even then, it cannot be termed as a market monopoly as it has to coordinate with large players in the direct payment processing industry, such as Fiserv. These arrangements don’t allow American Express rates to go unchecked, even though they are still higher than other associations. Amex’s pricing can be related directly to its popularity. A significant part of the payment industry prefers Amex based on the rewards and commercial cards processed much easier with Amex.
The cost of American Express
The most major hurdle in all merchants readily accepting Amex as a payment method was that it was too expensive to maintain. Tiny business owners felt overwhelmed by it as it seemed to seep all their profits. American Express has been in the process of improving its services, especially for smaller businesses. It has come up with a more affordable and more comfortable method of payment. For example, for certain types of companies, travel, restaurants, and entertainment, American Express is very popular. And for businesses that operate in these sectors, having Amex as a payment option can be integral to its efficiency. American Express currently offers two different ways of accepting their cards; OptBlue and direct agreement.
In the OptBlue method, the target of American Express is smaller businesses. In this method, American Express provides merchant service providers with wholesale rates through which they can process payments of Amex. The merchant services providers then add on their fees of providing payment processing to merchants, making it very similar to that of Visa and Mastercard for the merchant. Merchants can sign up with a third-party payment processor to quickly access Amex payments and at a more affordable rate than that of their direct agreement. There is, however, no standardization on the payment processors, and they can choose their model of pricing on top of it. There are mainly two different methods by which processors charge merchants. They are an interchange-plus pricing model and a tiered pricing model. Therefore choosing a processor is a whole other story.
OptBlue is perfect for smaller businesses, but the direct agreement is the only choice for larger companies. The explicit deal applies to a business if their annual payments of Amex exceed one million dollars. Amex can do this as it is a closed system with absolute control over its services. This is a second, separate merchant account, and you will have to pay the standard rates of Amex instead of the ones you were paying through the processor. Some processors can help you out by using the same equipment and software to process Amex payments.
Is it Expensive for Merchants?
You will often come across stores or businesses that do not accept American Express cards, even in the US. The only reason is that the costs that American Express charges are way higher than that of its competition, namely Visa, Mastercard, and Discovery.
This is not entirely unreasonable at the end of the merchant. When you look at it from the merchant’s perspective, the card-issuing associations charge different fees for different types of transactions, and some charge even more. These fees add to the cost of running the business, and the prices have to be cut out of the profit, basically the merchant’s livelihood. So keeping out a payment method because it results in an even lesser gain, or other words, increased costs, is understandable at the end of the merchant.
If we look at it in terms of percentages, it might not seem like much of a difference per transaction. Other card issuers are known to charge between 1.5% and 2.5% to process the payments involving their credit cards. But in the case of American Express, these rates range from 2.5% to 3.5%. This difference seems of negligible significance when a single payment is taken under consideration. But we are talking about businesses that can grow above one million dollars in yearly fees. Even this minor difference can translate to thousands of dollars in lost revenue for a business accepting American Express cards.
Therefore, the bottom line is, regardless of OptBlue or direct agreement with American Express, the payment processing fees of Amex are significantly greater than that of other card associations. American Express used to charge differently for CP and CNP transactions. Lately, they removed that discrepancy. Also, there have been talks about American Express thinking of lowering their costs. This is based on the lack of market share and increased competition, causing them to lose revenue in the long run. Until now, all we know is that Visa and Mastercard are more reasonable for merchants to cater to their business. So, yes, American Express is more expensive for merchants.