Why Does American Express Cost So Much?

Before we answer the question, let’s flesh it out a bit. The real question here is: Why does it cost merchants more to process American Express credit card transactions than it does to process MasterCard and Visa transactions? The answer is simple. American Express operates on a different business model. Now… let’s flesh out the answer.

The American Express Business Model

Unlike MasterCard and Visa, both large credit card brands that are distributed through issuing banks, American Express issues their cards directly to the end user. With MC and Visa, the bank that issued the card takes on any financial risks from a credit card transaction, regardless of the card brand, while the card brand associations make their money from charging a processing fee called an interchange fee. This fee is eventually covered by the merchant, along with a number of other processing fees charged by their credit card processor.

American Express acts as its own card brand and bank, so the debt from any charges made on their card brand is due directly to them. By using their own network for processing credit card transactions, the only fees they receive are from the merchant for the use of their processing network. On the surface of things, it would seem that American Express fees should be less. However, even though American Express cuts out the middle man, their internal processing network costs a lot to maintain and the company does need to offset those costs. But that’s not considered the number one reason for why AmEx processing fees are higher than they are for MasterCard and Visa.

So Why Does American Express Have Higher Processing Fees?

The American Express business model is based on the rewards they offer for using their card brand to pay for purchases. And because they believe they attract a more affluent customer, they claim their cardholders make more purchases and buy higher priced items. The cost of these perks have to be covered somehow. American Express justifies charging merchants a higher processing fee to cover the benefits they offer to their cardholders because of their claim that they attract more affluent cardholders who charge more higher priced items. No, you’re not imagining it…and no we haven’t mistakenly copied over a sentence. Read on and, hopefully, this will all make more sense!

Basically, other credit card brands make their money in a direct line: a charge is processed, it’s approved, the issuing bank pays a fee to the brand association for being allowed to process that brand’s card, and then the brand association is out of the loop (unless, of course, there’s a chargeback dispute, and then the card brand charge more fees to cover those costs). Remember, we’re only describing here how the brand association makes its money… not where the money comes from. Because in the end the merchant is the one who actually pays this fee as a cost of being able to accept credit cards.

American Express works on a circular model, where every part of their process supports the next part. They call their model the “Spend Centric Model” and it works basically like this:

American Express offers a wide array of awards and perks for using their card brand…

…these premium perks attract a more affluent customer base…

…this level of customer base has a higher spending average…

…which leads to better sales for the merchant, who in turn pays a premium rate so American Express can afford to offer these quality perks.

Based on this description of their business model, it does seem that you pay higher transaction fees to American Express to subsidize their rewards program. But have you looked carefully at your monthly credit card processing statement lately? If you have, you’ll notice you can actually pay a higher processing fee for credit card transactions using a MasterCard or Visa rewards card. And more and more savvy shoppers prefer to use their rewards card for…well, for the rewards! So when you process other rewards cards, you may not be paying that much less in fees then you would to accept the American Express card.

We could quote a lot of figures for MasterCard and Visa processing fees versus American Express rates. But these figures change and if you want the up-to-date numbers to compare, you can find them with a quick search or ask your credit card processor.

But that’s not the question we’re answering here. The question is not how much more does it cost to accept the American Express card brand at your place of business, but why does it cost more? American Express charges higher processing fees and claims the giveback to the merchant is more discriminating customers who spend more money. It’s left to you to decide if it’s worth the extra cost.