Why American Express Pushes for Greater Merchant Acceptance
In this post, I will explain how American Express's business model differs from Visa and Mastercard's. I will discuss how that version, despite being highly profitable, caused it to fall behind. Finally, I'll analyze the programs that allowed Amex to attained parity.
Alright, see our merchandise:
...attaining parity with Visa and Mastercard is surprising.
Expensive
To understand precisely how far behind American Express was, think about the condition of credit card approval in 2016. In that year, the complete purchase volume for Visa and Mastercard transactions was approximately 3 times larger than American Express, according to The Nilson Report, 2017. The typical merchant fee for Visa and Mastercard was about a quarter of a percent more affordable than Amex.
To put it differently, in 2016 merchants paid a premium of 24 basis points, normally, to be given a great deal less purchase volume.
| 2016 Merchant Card Volume and Charges | ||
|---|---|---|
| Sort | Buy Volume (Billions) | Merchant Fee, Typical |
| Visa and Mastercard Credit | $2,242.02 | 2.12percent |
| American Express | $695.44 | 2.36percent |
Open Loop vs. Closed
Visa and Mastercard function in an open-loop system. They are responsible for processing transactions but not for issuing credit, that's the obligation of the banks and financial institutions that issue the cards.
American Express operates at a closed-loop: It issues credit and processes its own transactions without the backing of big financial institutions.
Amex earns interest from the cash that flows through its system -- more money equals more attention. Visa and Mastercard, on the other hand, don't earn interest; the issuing banks do. The majority of Visa's and Mastercard's income comes from transaction fees, known as"interchange." Thus Visa and Mastercard are more interested in the amount of transactions, not interest.
To be certain, Amex is also interested in transactions. To compensate for lesser purchase volume, and also to generate revenue even if their cardholders paid their bills on time (avoiding interest rates ), Amex charged higher fees to merchants.
Therefore, if Amex's prices were much higher and its entire volume considerably lower, why would any merchant accept American Express cards?
The solution is straightforward: Merchants tend to see American Express cardholders as more wealthy and larger spenders. The data appears to support this reputation. Recent Forbes and Nilson reports assert that Amex cardholders spend three times greater than non-Amex holders, and the average transaction amount is close to 2 times bigger.
Thus, to attract more affluent customers, some merchants are prepared to pay higher processing fees. (Merchants that don't appeal to wealthy clients are less interested.)
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Why Parity?
It is clear how American Express maintained a profitable business while falling far behind Mastercard and Visa concerning merchant acceptance. It did not much bother Amex as recently as 2016. Its high fees and closed-loop processing and credit system were important profit centers.
So, what happened? Why did American Express become worried about parity?
In the last few decades, Visa and Mastercard issuers began to make credit card products aimed at American Express's more wealthy cardholders. Issuers offered rewards, generous cash-back schemes, travel points, exclusive offers, and several other loyalty programs. Industry giants set their sights on Amex's profitable market share.
Visa and Mastercard issuers began to make credit card products which were aimed at American Express's more wealthy cardholders.
Suddenly, merchant-acceptance prices and merchant fees became a priority for American Express.
OptBlue
American Express recently started paying merchants to take its cards, based on media reports, which claimed the payments reached $450,000 each merchant. But Amex admits paying just signup bonuses and to 133 merchants since 2018. Amex asserts the incentives were approximately $10,000 each.
However, American Express's biggest factor in attaining parity has been its OptBlue program. Launched in 2014, OptBlue altered the way merchants interact with American Express.
Before OptBlue, merchants wanting to take American Express needed to open another merchant account from Amex and committed solely to Amex transactions. Not only were Amex's prices high, but the paperwork, logistics, accounting, and reconciliation proved too much for many companies.
With OptBlue, however, merchants could instruct their current payment processors to repay OptBlue funds to the exact same merchant account as Visa, Mastercard, and Discover. Deposits for this unified merchant account arrive in precisely the exact same manner and on exactly the exact same schedule. And there are no more reconciliation and accounting nightmares since OptBlue payment processors may issue merged statements for all of the card brands.
Lower Fees
Moreover, payment processors that support OptBlue can negotiate volume discounts directly with American Express, thereby allowing the chips to pass the discounts for their merchants. Rather than Amex arbitrarily charging higher transaction fees, many merchants started to benefit from pricing like the cheaper Mastercard and Visa fees.
Data extracted from a 2018 Nilson Report demonstrates that the average merchant fees for Visa and Mastercard were 2.26 percent and 2.3 percent for American Express.
Amex's believes its OptBlue program as a success. It achieved its objective of bringing American Express approval equal to Visa and Mastercard.
See also:
https://www.connectpos.com/top-bigcommerce-wholesale-apps/
https://www.connectpos.com/how-to-set-up-point-of-sale-systems/
https://www.connectpos.com/point-of-sale-advantages/
https://www.connectpos.com/why-retailers-need-centralized-pos-system/
https://www.connectpos.com/intergrate-magento-with-physical-stores/
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