Riddle me this: Why do certain stores not accept Amex?
It’s the classic story - you are about to make a big purchase and whilst walking your smug self down to the till, you witness a huge sign which screams, ‘WE DO NOT ACCEPT AMEX - SORRY NOT SORRY’. If you ask the assistant behind the till, ‘why is this the case?’, they simply shrug their shoulders and look down at their watch praying for their next cigarette break. So why do many retailers forbid the use of Amex at their tills? I have done a bit of digging, so here is the unofficial consensus.
On the 10th September 1963, the BBC stated American Express had officially arrived on British soil. It said holders of their cards would be able to use them at nearly 3,000 hotels, restaurants, shops and car-hire agencies. Today, the bulk of our everyday financial transactions happens via banks, however, these powerhouse institutions cannot simply issue credit cards without a helping hand. Often, they need the assistance of payment processing networks like Visa and MasterCard. These middlemen process and facilitate payments, earning revenue from the frequency of transactions. American express are unique - they issue credit cards and process all payments themselves. Operating within this 'closed loop network' means they see payment transactions from cardholders, but also from the businesses that accept its cards and who they open merchant accounts for.
The reason why many companies choose not to accept Amex boils down to ‘processing fees’. This may sound counter-intuitive, however, a merchant has to make a monetary sacrifice in order to offer us the ease of paying by credit card. This sacrifice is the cost of processing a company's credit card transactions. This reportedly accounts for 65% of Amex's revenues. Many card issuers charge an estimated 2-3% processing fee, however, Amex reportedly hits businesses with an approximate 3.5% of the cost of goods. Notably, this can depend on factors such as the merchant’s size, type of business and frequency of transactions - fast food joints reportedly attract a higher fee vs supermarkets.
Let’s go through an example - Meet Mikey McTavish. Mikey is a lovely man from Essex and is feeling the pain due to his wife being on his case about doing the garden. He pops down to his local DIY store, chooses a top of the range lawn mower, whips out his Amex and walks out chuffed. Visa's clients are largely banks, who are the 'issuers' giving us credit cards with the Visa logo at the bottom. If Mikey were to use his Barclays credit card powered by Visa, information of his purchase would be sent via Visa's network to the DIY store's bank (the acquirer). This is an 'open loop' system, requiring more parties involved in every transaction. Amex is the issuer AND the acquirer, both financing the transaction and processing the payment. Ultimately, it allows Amex to dictate processing fees at levels which they deem appropriate (translation - what the market can stomach).
If I was running an e-commerce business where profit margins are everything, would I want Amex eating away my gains? Nope. So, why doesn’t Amex simply reduce their fees to generate more business? Well, Amex has a very different business model in relation to traditional credit card issuers who earn the bulk of their revenues from the the interest you pay on balances. Amex relies on cardholder annual fees and swipe fees paid by merchants. The money generated is recycled into keeping their target market happy, with loyalty rewards (e.g cashback and avios) and exclusive perks incentivising further spending. Amex care about earning cash on the total amount spent per customer, whilst the likes of Visa and Mastercard are all about the volume of transactions. Arguably Amex have diversified their spend-centric model over the years, with their Platinum Cashback Every Credit Card and British Airways American Express Credit Card currently offering zero in annual fees.
The benefits for Amex cardholders seem to be in abundance with reward schemes, online fraud protection and inclusive insurance benefits not even scraping the surface. However, what's really in it for merchants and online retailers? It goes back to Amex's 'closed-loop network' and given their presence in the entire payments chain, they believe the visibility enables them to provide a premium service to businesses. In the past, Amex have claimed to provide merchants data on cardholder spending, whilst offer analytics services and specific marketing expertise. This combined with opening yourself up to a wider target market could be worth the sting.