American Express Lowering Fees to Merchants, Will This Mean Lower Rewards?

The Financial Times reports on American Express lowering the fees they’re charging merchants in order to drive greater acceptance for their cards. Several readers sent me this link asking for my take, including whether “lower fees would mean less rewards?”

At a presentation for investors in New York last week, the company said the global average of the fees it charges merchants — known as its discount rate — would decline five or six basis points this year, to about 2.37 per cent.

…A fall of six points this year would be the steepest since at least 1998, company filings show.

In 2013 American Express was accepted in 2.4 million fewer locations than Visa/Mastercard (~ 27%). They’ve reduced the gap to 1.3 million (~ 13%). And they believe they’ll ultimately drive revenue growth with greater acceptance and lower margins.

It’s these margins that fund rewards. A card issuer returns a portion of the money they make on each transaction to the consumer in order to incentive use of their cards. Lower margins means there’s less available to fund rewards. But it’s not that simple.

  • Amex’s rewards expense is lower than competitors like Capital One and Bank of America which skew more towards cash back and travel rebates.

  • Amex charge cards earn the higher interchange but don’t earn on the APR (interest, because consumers pay back off cards each billing cycle).

  • Amex credit cards have a higher rewards expense — their Delta, Starwood, and Hilton co-brands are credit cards — but earn both American Express’ higher interchange and earn on the revolve

  • However Amex does less revolve business on their credit cards than other banks do, in part their customers skew higher income but it’s also that people just don’t understand they can revolve with Amex

I suspect this initially just comes out of American Express margins. Competition is so fierce right now they can’t really cut back on rewards. Chase for instance is apparently spending the entire interchange on rewards with some products and they only make money now on APR.

Ultimately this is one step in the longer process where interchange falls through competition. Eventually I believe new technologies (or in the next presidential administration, from regulation, if a Democrat wins) drive down interchange further. And that’s why over time we won’t see rewards that are as generous as they are today, or profits for airline loyalty programs as robust as they are today, though this is years off in to the future.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. I don’t think this will translate to lower rewards because more merchants will start accepting AMEX which will generate more revenue. Plus AMEX tends to have the highest membership fees compared to other cards.

  2. It’s already affected the company and their co branded partners that want nothing to do with them
    Amex Customer service is at its lowest level in the history of the company
    Many of their foreign call centers struggle with English and rush their words to babble even with their most premium 500 dollar annual fee cards
    It takes numerous calls to file a dispute accurately and they have become incredibly stingy and vindictive to recover from the simplest of failures that they created
    You need a lawyer to have a conversation as they record every last word you say on the phone with irritating beeps and then play it back misinterpreting what you say

    Yes it will affect rewards completely over time but mostly because they will run their customers out the door that are educated and wealthy who know better
    That’s good news for Chase & Citibank who seem like Heroes compared to the incompetent executive management at American Exoress
    I’ve cut up the vast majority of their cards
    They are imho in shambles compared to the once outstanding
    world class company they use to be
    It’s sad and a disgrace
    I do like what they have done with the Centurion Lounges but that alone can’t solve what is bringing the company down along with their arrogance and hatred for customers at the top
    This isn’t the company I signed up for decades ago and was a proud cardholder for many years
    I’ve moved on as the competition continues to feast on their lunch

  3. Second almost all of what Dwondermeant wrote. From a CSR standpoint, I don’t think I’ve seen a worse downward spiral over the last 15-20 years than with AmEx. To be fair, they’re basically where every other low-cost type company is today, but it was a joy back in the day to call with any issue, and get a competent, American-based CSR who had authority and WANTED to actually help!

    The days of relying on their reputation as an “aspirational” brand are not only well over, but not the type of thing younger card holders want anyway. Chase is eating their lunch not only for people who have had Amex and experienced the degradation, but also people who look at Amex and see no value in applying for one of their cards.

    I expect the downward spiral of cost-cutting and customer-blaming to continue unless they overturn most of their current leadership

  4. For small business and individuals that use Square, there is currently no difference on the fees charged by AmEx, VISA, and MasterCard.

  5. There are tons of local stores in my city that won’t accept AmEx cards because Amex charges them more than Mastercard & Visa. I would love for that to change!

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