Why Does American Express Charge More

Let’s elaborate on the query a little more before we respond.The actual quastion here is: Why do American Express credit card transactions cost merchants more to process than MasterCard and Visa transactions? There is an easy solution. American Express has a unique business structure. Let’s now elaborate on the response.

The American Express Business Model

Unlike the well-known credit card companies MasterCard and Visa, which are distributed by issuing banks, American Express issues its cards directly to the customer. In the case of MC and Visa, the bank that issued the card assumes all financial risks associated with a credit card transaction, regardless of the card brand, while the card brand associations earn money by levying an interchange fee, which is a processing fee. Along with a number of other processing fees levied by their credit card processor, the merchant ultimately pays this cost.

American Express functions as its own bank and card brand, so any debt resulting from charges made using their card brand is payable to them directly. When processing credit card transactions through their own network, the only costs they pay are those charged by the merchant for the usage of their processing network. It would seem that American Express fees should be lower on the surface. Even though American Express eliminates the middleman, the firm still needs to cover the costs of maintaining its internal processing network. However, that isn’t thought to be the main cause of AmEx processing fees being greater than those for MasterCard and Visa.

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So Why Does American Express Have Higher Processing Fees?

The incentives that American Express provides for utilising their card brand to make purchases form the foundation of their business strategy. And they assert that their cardholders make more purchases and buy more expensive things because they think they draw a more prosperous clientele. These benefits must be paid for in some way. American Express argues that because they draw more wealthy customers who charge more expensive things, they may justify charging merchants a higher processing fee in order to pay for the services they provide to their cardholders. You’re not dreaming, either. And no, we did not inadvertently copy another sentence. Continue reading to see if anything makes 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.

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Every step in American Express’s procedure is supported by the one before it, according to a circular model they use.
They refer to it as the “Spend Centric Model,” and it functions essentially as follows:

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 boosts sales for the retailer, who in turn pays a higher rate so American Express can afford to provide these top-notch benefits.

According to this explanation of their business strategy, it does appear that you pay American Express greater transaction fees to support their rewards programme. But recently, have you given your monthly credit card processing statement a close inspection? If so, you may have noticed that using a MasterCard or Visa rewards card can result in higher processing fees for credit card transactions. And more and more informed consumers like to use their rewards card for, well, the benefits! Therefore, you might not be saving all that much money by processing other rewards cards instead of the American Express card.

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There are many numbers that we may use to compare the processing costs for MasterCard, Visa, and American Express. However, these numbers fluctuate, so if you want the most recent figures to compare, you can find them online or by asking your credit card processor.

The question we’re addressing here, though, is not that one. The real question is why it costs more to take the American Express card brand at your place of business rather than how much more it costs. The giveback to the merchant, according to American Express, is said to be more discerning clients who spend more money. It’s up to you to decide if the added expense is justified.

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