As consumers, we’ve come to expect that most major credit cards will be accepted by retailers at the checkout. However, many times consumers are frustrated to find that American Express is not accepted, even when Visa, Mastercard, and Discover are. Why would a store like H&M not accept American Express? Let’s dive into the topic a little bit deeper for some understanding.
American Express was founded in 1850 as one of the components of the Dow Jones Industrial Average. The company’s cards make up about a fourth of the total credit card transactions in the U.S., the highest volume of any one card issuer.[1] Why, then, are merchants refusing to accept cards issued from such a rock solid company?
In order to answer this question, we must take a look at company’s business model.
A business has two choices: keep its price low and look to high volume to make a profit, or sell at a higher price and rely on higher margins for its profit. American Express has chosen the latter approach and focuses on more affluent consumers in its business model.
Here’s how American Express differs from its competitors, Visa and Mastercard.
While the other two cards involve three parties in their transactions (acquiring bank, issuing bank, and network between the two), American Express plays the role of all three parties and keeps the entire merchant discount for itself.
American Express also charges a higher merchant discount than either Visa or Mastercard, 2.89% as opposed to about 2% for the latter cards.[2] American Express uses this additional revenue to invest in rewards programs with higher payouts than the other cards. Rewards programs allow American Express to attract a larger share of affluent consumers, who also make more credit purchases than lower-earning consumers.
The few pennies that the merchants pay probably do not keep them from accepting American Express. Merchants realize that the few pennies spent to retain this brand of consumer might be well spent, except for one other problem: chargebacks.
Affluent consumers also like American Express’s customer service, which may be the real crux of the problem in getting merchants to accept American Express.
American Express customer service is one of the best in the market – when a chargeback occurs, American Express will most likely side with the consumer.[3] This is how American Express attracts their target market of affluent consumers. But for the merchant, this bias presents a dilemma. Because they are nearly always on the losing end, merchants have no incentive to accept American Express. Fraud is harder to control, with some customers simply purchasing products and charging them back.
Thus, the real issue with American Express is its lack of loyalty to its merchants – it is fine to reward the consumer, but the merchant is also part of the equation. Many merchants would be glad to take American Express, as its affluent cardholders often spend up to twice as much as other customers, but merchants are unable to absorb the cost of chargebacks.
Having recently introduced the ability to use American Express to pay utility bills at ChargeSmart, we’re curious to hear what you think. Do you mind not being able to use American Express at some stores, or is it no big deal for you? Let us know in the comments!
[1] http://en.wikipedia.org/wiki/American_Express. Retrieved September 14, 2011
[2] ibid
[3] http://www.merchanttalk.com/?p=67. Retrieved September 14, 2011
