American Express Will Shave Its Discount Rates To Grow Merchant Acceptance

In an effort to make its cards more financially attractive to merchants, American Express Co. plans to cut its worldwide discount rate by potentially up to three times the level it had previously predicted for 2018.

AmEx, generally the costliest of the major card brands for merchants to accept, typically cuts its average discount rate slightly each year in the face of network competition for acceptance in both the U.S. and abroad. In earlier guidance, the New York City-based card issuer and network had predicted its average worldwide discount rate would fall 2 to 3 basis points (0.02 to 0.03 percentage points) this year. But in a March 7 Investor Day presentation, the company upped the predicted reductions to 5 to 6 basis points.

According to the Financial Times, the cuts will be AmEx’s biggest in 20 years. The London-based newspaper estimated they could cost AmEx as much as $585 million this year.

The biggest driver of the cuts will be individually negotiated discount rates with merchants in countries where acceptance costs are unregulated, according to the presentation. The reductions are one component of a multi-faceted growth initiative now overseen by new AmEx chairman and chief executive Stephen J. Squeri, the successor to long-time CEO Kenneth I. Chenault, who retired last month.

AmEx’s average worldwide discount rate was 2.43% of the sale in 2017, down from 2.45% in 2016, according to the company’s latest earnings report. Specific discount rates vary widely based on a particular merchant’s AmEx volume, industry, the type of transaction, and whether the merchant is in a regulated or unregulated country.

Discount revenues from card charges at AmEx-accepting merchants are the company’s single biggest source of income, totaling $19.2 billion in 2017, up 3% from 2016’s $18.7 billion. AmEx’s revenues took a hit in 2016 when the company lost its exclusive U.S. credit card acceptance deal and cobranded card with Costco Wholesale Corp., the world’s second-largest retailer, to Visa Inc. and Citigroup Inc.

“We’re making some conscious trade-offs in the discount rate as we continue our focus on growing merchant coverage,” Squeri said at the Investor Day event, according to an AmEx-supplied transcript. “The result, more places for our cardmembers to use our products, which means more revenues from both spending and lending.”

AmEx for years has been trying to narrow the gap between the size of its merchant base and that of the Visa and Mastercard networks, which have about 10 million locations worldwide. Chenault’s goal was to get it to parity in 2019, but it’s still about 1.5 million locations short, according to the Financial Times.

A big component of the merchant-acquisition drive is OptBlue, which enlists bank card merchant acquirers to sign small businesses, and then service the accounts. OptBlue reeled in 1 million new merchants for AmEx in 2016. Last week, the Canadian Federation of Independent Business announced that JPMorgan Chase & Co.’s acquiring unit in Canada was offering the CFIB’s 110,000 members access to OptBlue under a program that it said could cut AmEx acceptance costs by as much as 50%.

AmEx’s growth plan goes far beyond expanding its merchant base and includes cobranded cards and enhanced cardholder rewards, an emphasis on digital offerings, more focus on commercial payments, and other components. The presentation says 16% of worldwide billed business in 2017 came from cobranded cards, with half of that on the Delta Air Lines card. The Hilton hotel chain, which for years had split its cobranded credit card business between AmEx and Citi, recently assigned the entire program to AmEx.