Ever wondered how American Express, a giant in the financial services world, makes money every time you swipe, tap, or click with your Amex card? It's not as simple as a flat fee! Unlike Visa and Mastercard, which operate on an "open network" model where banks issue cards, American Express runs a "closed network." This means Amex is often both the card network and the issuer, giving them more control over the fees they charge. This detailed guide will break down the various ways American Express earns revenue, particularly focusing on what they make "per transaction."
Step 1: Understanding the American Express Business Model
Before diving into the specifics of transaction-based revenue, it's crucial to understand American Express's unique business model. Are you ready to unravel the layers of their earnings?
Unlike Visa or Mastercard, which primarily act as payment networks facilitating transactions between banks and merchants, American Express often functions as both the card network and the issuing bank. This integrated model gives them a different revenue structure and generally higher transaction fees for merchants.
Sub-heading: The "Closed Loop" Advantage
American Express operates what's known as a "closed-loop" network. This means they handle almost every aspect of a transaction, from issuing the card to the consumer to processing the payment with the merchant. This direct relationship with both cardholders and merchants allows them to capture a larger portion of the transaction value.
This contrasts with "open-loop" networks like Visa and Mastercard, where:
A customer uses a card issued by an issuing bank.
The transaction is processed through the card network (Visa/Mastercard).
The merchant uses a acquiring bank to accept the payment.
With Amex, they often embody the roles of the issuing bank, the network, and sometimes even the acquiring services. This integrated approach is a key factor in their profitability per transaction.
Step 2: Decoding Merchant Discount Rates (MDRs) ️
The primary way American Express makes money per transaction is through Merchant Discount Rates (MDRs), often simply called "swipe fees" or "processing fees." These are fees merchants pay to accept Amex cards.
Sub-heading: What is the Merchant Discount Rate?
When you pay with an American Express card, the merchant doesn't receive the full amount of your purchase. A percentage, plus often a fixed per-transaction fee, is deducted by American Express. This is the Merchant Discount Rate.
Unlike Visa and Mastercard, which have a more granular breakdown of interchange fees (paid to the issuing bank) and assessment fees (paid to the network), Amex's fees are typically presented as a single, higher rate to the merchant.
These rates vary significantly based on several factors, making it hard to pinpoint one exact "per transaction" number.
Sub-heading: Factors Influencing Amex Merchant Fees
The specific percentage and fixed fee Amex charges a merchant can depend on:
Merchant Category Code (MCC): Different industries have different risk profiles and transaction volumes. For instance, a restaurant might pay a different rate than a retail store or an online business.
Transaction Volume: Larger businesses with higher transaction volumes might be able to negotiate slightly lower rates than small businesses.
Transaction Type:
Card-present (swiped/dipped): Generally lower fees due to lower fraud risk.
Card-not-present (online/keyed-in): Higher fees because of increased fraud risk.
Transaction Size: Some rates might be tiered based on the transaction amount. For example, a transaction under $75 might have a lower percentage than one over $1,000.
OptBlue Program: American Express has a program called "OptBlue" for small and medium-sized businesses, allowing third-party processors to handle Amex transactions. This can sometimes lead to different pricing structures.
Sub-heading: Typical Amex Merchant Fees
While exact figures can fluctuate and are often negotiated, publicly available information suggests American Express typically charges merchants between 1.43% + $0.10 and 3.30% + $0.10 per transaction.
Let's look at some illustrative examples based on common ranges:
Retail transactions:
Under $75: ~1.60% + $0.10
Under $1,000: ~1.95% + $0.10
Over $1,000: ~2.40% + $0.10
Restaurant & Caterers:
Under $25: ~1.85% + $0.10
Under $150: ~2.45% + $0.10
Over $150: ~2.75% + $0.10
Mail Order & Internet transactions:
Under $150: ~1.70% + $0.10
Under $3,000: ~2.05% + $0.10
Over $3,000: ~2.50% + $0.10
Example: If a customer makes a $100 online purchase using an Amex card, and the merchant's rate is 2.05% + $0.10, American Express would earn approximately $(100 * 0.0205) + $0.10 = $2.05 + $0.10 = $2.15 from that single transaction.
Step 3: Beyond the Merchant Fee – Other Revenue Streams
While MDRs are a major source of transaction-related income, American Express also generates revenue from other avenues that are either directly or indirectly linked to transactions.
Sub-heading: Cardmember Fees (Annual Fees)
Many American Express cards, particularly their premium offerings, come with annual fees. While not per-transaction, these fees are a significant and consistent revenue stream, and cardholders often justify them through the transaction-based rewards and benefits they receive (e.g., lounge access, travel credits, bonus points on spending).
These fees can range from relatively low amounts (e.g., $95 for some entry-level cards) to several hundred dollars (e.g., $695 for The Platinum Card®).
Sub-heading: Interest Income on Balances
American Express, as an issuing bank, earns substantial income from interest charged on outstanding card balances. When cardmembers carry a balance month-to-month, they incur interest charges, which directly contribute to Amex's profitability. This is a major revenue driver for any credit card issuer.
Sub-heading: Foreign Transaction Fees
When an Amex card is used for a purchase in a foreign currency or processed through a foreign bank, American Express may levy a foreign transaction fee.
This fee is typically a percentage of the transaction amount, often around 2.7%.
Many premium Amex cards waive this fee as a benefit to travelers, but it remains a revenue source for other card products.
Sub-heading: Cash Advance Fees
If a cardmember uses their American Express card to get a cash advance, Amex charges a cash advance fee. This is typically a percentage of the amount withdrawn (e.g., 3.5% of the cash advance amount, with a minimum fee). Interest on cash advances often begins accruing immediately.
Sub-heading: Late Payment and Other Penalty Fees
While not a desired revenue stream, American Express does generate income from late payment fees, returned payment fees, and other penalty fees when cardmembers do not adhere to their cardmember agreements. These are designed to encourage timely payments but do contribute to overall revenue.
Step 4: The Big Picture – Amex's Overall Revenue Strategy
It's important to understand that American Express's profitability isn't solely dependent on the fees from a single transaction. Their entire ecosystem is designed to encourage higher spending, deeper engagement, and loyalty from their cardmembers, which in turn generates more revenue across all their streams.
They attract high-spending customers with premium rewards and benefits, knowing these customers will generate significant transaction volume (and thus, merchant fees) and potentially carry balances or utilize other fee-generating services.
Frequently Asked Questions (FAQs)
How to Calculate American Express Merchant Fees?
To calculate Amex merchant fees, multiply the transaction amount by the applicable percentage rate and then add the fixed per-transaction fee. For example, for a $50 transaction with a 1.95% + $0.10 rate, the fee would be $(50 * 0.0195) + $0.10 = $0.975 + $0.10 = $1.075.
How to Find Specific American Express Merchant Rates?
Merchants should refer to their specific American Express Merchant Reference Guide or their processing agreement for the exact rates applicable to their business type and transaction volume. These rates are not uniform across all businesses.
How to Avoid American Express Merchant Fees?
Merchants generally cannot avoid American Express merchant fees if they want to accept Amex cards. These fees are how Amex generates revenue for facilitating transactions. Some businesses choose not to accept Amex due to these higher fees, but that means losing potential customers.
How to Understand Why Amex Fees are Higher Than Visa/Mastercard?
American Express fees are typically higher because of their "closed-loop" network model. They bear more of the costs associated with issuing the card, managing the network, and providing customer service directly, whereas Visa and Mastercard primarily charge network fees and interchange fees go to the issuing banks.
How to Reduce American Express Processing Costs?
Merchants can potentially reduce Amex processing costs by increasing their transaction volume (which might lead to better negotiated rates), optimizing their payment processing setup (e.g., ensuring card-present transactions where possible), or by working with third-party processors participating in the Amex OptBlue program.
How to Distinguish Between Interchange and Assessment Fees with Amex?
Unlike Visa and Mastercard, American Express usually bundles its fees into a single "Merchant Discount Rate" for merchants, rather than separately listing interchange and assessment fees. The merchant sees one combined percentage and fixed fee.
How to Know if a Card Has a Foreign Transaction Fee?
You can check your card's terms and conditions or the American Express website for your specific card product. Many premium Amex travel cards explicitly state they have no foreign transaction fees.
How to Determine if American Express Makes Money from Annual Fees?
Yes, American Express makes significant revenue from annual fees charged to cardmembers, especially on their higher-tier cards like The Platinum Card or Centurion Card.
How to Understand Amex's Profit from Interest?
American Express earns interest income when cardholders carry a balance on their credit cards past the due date. This is a major component of their overall revenue, just like any other credit card issuer.
How to See the Overall Financial Performance of American Express?
To see the full financial picture, including all revenue streams, you would need to review American Express's quarterly and annual financial reports (10-K and 10-Q filings) with the U.S. Securities and Exchange Commission (SEC).
