Here's Why American Express Can Charge More Than Visa or MasterCard
As anyone who owns or manages a retail business knows all too well, American Express charges merchants significantly higher fees than Visa or MasterCard.
The actual rates vary depending on several factors, but American Express charges retailers around 3% of each sale, while Visa and MasterCard charge around 2% on average.
Quite frankly, this is why you are more likely to go into a store that doesn't take your Amex card than any of the other major issuers. Still, the majority of retailers gladly accept American Express cards despite the higher cost to them. Why does American Express charge so much, and why do the retailers put up with it?
Why are the fees so high?
While there are a few reasons for this, it's mostly because American Express relies on fee income for more of its revenue than the others do.
American Express has a somewhat different business model than other card issuers. Instead of aiming to make the majority of its income from interest, Amex makes its money from swipe fees charged to merchants and annual fees charged to its customers.
The company makes some interest income, but many of its core products are designed to generate no interest whatsoever. For example, the longtime flagship American Express Platinum card requires cardholders to pay the entire balance in full each month, but charges customers a $450 annual fee for the privilege of membership.
Why do businesses deal with the high fees?
American Express has a customer base that's very attractive to merchants. They have affluent consumer cardholders, and have a leading market share in the lucrative business credit card market.
In fact, according to the company's website, American Express' cardholders average 60% higher incomes than non-Amex customers, and are more likely to charge everyday purchases than pay cash. The average American Express customer charges 53% of all personal spending on their card. Those without Amex cards charge just 34%.
American Express customers also tend to spend more, as a lot of the company's reward programs are based on spending threshold incentives. For instance, holders of Amex's Delta-branded cards can get out of the airline spending requirement for "elite" status if they charge $25,000 to their cards in a year.
What it means for American Express
The ability to charge high fees gives American Express a big advantage, especially since they are transitioning from an in-house card issuing model to issuing cards through banks, similarly to Visa and MasterCard.
American Express and Wells Fargo recently announced two new credit card products, a move which could be huge for both companies. It opens American Express' products up to Wells Fargo's 70 million banking customers, less than a third of which currently have a credit card product with the bank.
As the master of cross-selling banking products, Wells Fargo will undoubtedly push its new Amex cards on the nearly 50 million account holders without Wells-issued credit cards. American Express' U.S. cardholder base is currently around 50 million, so this has the potential to drastically grow Amex's market share, not to mention provide a boost to Wells Fargo's already thriving credit card business.
If this joint venture is successful, you can bet it will be the first of several for American Express, who will essentially be doing the same thing as Visa and MasterCard, but collecting about 50% more in fee income to do it.
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The article Here's Why American Express Can Charge More Than Visa or MasterCard originally appeared on Fool.com.Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends American Express. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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