The Financial Times reports on American Express lowering the fees they’re charging merchants in order to drive greater acceptance for their cards. Several readers sent me this link asking for my take, including whether “lower fees would mean less rewards?”
At a presentation for investors in New York last week, the company said the global average of the fees it charges merchants — known as its discount rate — would decline five or six basis points this year, to about 2.37 per cent.
…A fall of six points this year would be the steepest since at least 1998, company filings show.
In 2013 American Express was accepted in 2.4 million fewer locations than Visa/Mastercard (~ 27%). They’ve reduced the gap to 1.3 million (~ 13%). And they believe they’ll ultimately drive revenue growth with greater acceptance and lower margins.
It’s these margins that fund rewards. A card issuer returns a portion of the money they make on each transaction to the consumer in order to incentive use of their cards. Lower margins means there’s less available to fund rewards. But it’s not that simple.
- Amex’s rewards expense is lower than competitors like Capital One and Bank of America which skew more towards cash back and travel rebates.
- Amex charge cards earn the higher interchange but don’t earn on the APR (interest, because consumers pay back off cards each billing cycle).
- Amex credit cards have a higher rewards expense — their Delta, Starwood, and Hilton co-brands are credit cards — but earn both American Express’ higher interchange and earn on the revolve
- However Amex does less revolve business on their credit cards than other banks do, in part their customers skew higher income but it’s also that people just don’t understand they can revolve with Amex
I suspect this initially just comes out of American Express margins. Competition is so fierce right now they can’t really cut back on rewards. Chase for instance is apparently spending the entire interchange on rewards with some products and they only make money now on APR.
Ultimately this is one step in the longer process where interchange falls through competition. Eventually I believe new technologies (or in the next presidential administration, from regulation, if a Democrat wins) drive down interchange further. And that’s why over time we won’t see rewards that are as generous as they are today, or profits for airline loyalty programs as robust as they are today, though this is years off in to the future.