We're All Subsidizing People Who Use American Express

The US Supreme Court decided that retailers can't encourage customers to use cards other than American Express, even though its fees are higher.

Credit card companies don't just make money off you by charging annual fees and interest — they also charge fees to the merchants selling you stuff. In fact, American Express, whose merchant rates are higher than rates from competitors like Visa and Mastercard, makes most of its money from these fees. And this, friends, led to a lawsuit that just went all the way to the top: to the Supreme Court of the United States.

The issue: Merchants pay a percentage of each charge to credit card companies. When American Express forms contracts with retailers, the credit card company prohibits retailers from encouraging shoppers to use other cards that charge lower fees. For instance, merchants who accept Amex card payments can't offer shoppers different prices depending on how they pay, even if the transaction fee is higher when they swipe an Amex. Retailers hate this because it's expensive.

According to the Brookings Institution, "Use a typical Visa or Mastercard branded credit card and the merchant will probably pay fees ranging in the 2 to 3.5% range. Leave home with an American Express and the merchant will pay even more, approaching 3 to 5%, depending on how much you charge." In the end, the merchant may pay out about 10% of what you pay them just for fees involved in the transaction, according to Brookings.

It all adds up. Last year, Amex made nearly $33.5 billion in revenue, of which $19.2 billion came from merchant fees.

Amex said in an email to BuzzFeed News that it has been lowering its fees, and that it now charges merchants, on average, a fee of 2.37% of per transaction. As for premium credit cards, a spokesperson said, "A merchant accepting Visa’s and Mastercard’s premium cards may actually pay more than they do for American Express when factoring in interchange, network and acquirer fees."

Data from the Nilson Report, which covers the card and mobile payment industry, puts Amex's average credit card fee at 2.33% versus 2.17% for Visa and MasterCard; Discover, at 2.09%, was the lowest.

Of course, merchants can choose not to accept Amex cards at all — plenty of smaller businesses don't. But then the merchants lose out on the business of customers who want to pay with their Amex, often to get points for rewards.

When they do take Amex, as Justice Stephen Breyer wrote, "Merchants generally spread the costs of credit-card acceptance across all their customers."

According to Brookings' economic studies fellow Aaron Klein, this means that merchants often end up charging the same price to all customers to offset the costs of pricier Amex cards, and this also affects customers who pay in cash. "Customers who use cheaper forms of payment are in effect subsidizing AmEx card holders," he wrote. "While it is only a few percentage points of each transaction, this subsidy adds up."

In 2010, the Obama administration and 11 states sued Amex, Visa, and Mastercard, saying that policies that prohibit merchants from steering customers to use certain cards are anti-competitive. Visa and Mastercard settled, but Amex went on to defend the practice.

This week, the Supreme Court decided that Amex's terms were just fine. This has implications for broader antitrust issues in the US, as it makes it harder for law enforcement to prove that a company is thwarting competition.

Amex offers better rewards, and that has spurred innovation and — more importantly — competition in the world of credit card rewards, according to the court. "Amex’s business model spurred Visa and Mastercard to offer new premium card categories with higher rewards," Justice Clarence Thomas said.

And Amex's provisions "do not prevent Visa, MasterCard, or Discover from competing against Amex by offering lower merchant fees or promoting their broader merchant acceptance," Thomas wrote.

As for the high merchant fees, the court said, "To maintain the loyalty of its cardholders, Amex must continually invest in its rewards program. But to fund those investments, Amex must charge merchants higher fees than its rivals."

In a statement on Monday, Amex said, "As the Supreme Court stated today, '...Amex’s business model has stimulated competitive innovations in the credit-card market, increasing the volume of transactions and improving the quality of the services.'"

In his dissent, Justice Breyer said that the overall credit card industry could still grow even if credit card companies allowed merchants to steer customers to lower-fee cards. He also said that rather than prohibiting its retailer partners from doing so, Amex could be more competitive by lowering its fees or offering more appealing rewards than other credit card companies offer.


Updated to include statement from American Express and data from the Nilson Report.

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