What it means
Most card payments involve four parties: the bank that issued the card, the network that routes the transaction, the acquirer that serves the merchant, and the merchant. American Express has traditionally combined the issuing and network roles in one company, an arrangement often called a closed-loop model, which gives it direct control of pricing and of the data on both sides.
That structure shows up on the merchant's statement. The merchant discount rate, the percentage deducted from each sale, is usually higher than on the widely issued networks, so a business accepting the card has to judge whether the extra cost is covered by the extra sales it brings in.
On the customer side the historic product is the charge card, which must be settled in full each month rather than carried as a revolving balance. A charge card imposes discipline on cash flow, while a credit card offers flexibility at the cost of interest.
For a business spending on the card, the real benefit is often timing. A purchase made on day one of a statement cycle, with payment due around 25 days after the cycle closes, can sit unpaid for close to 50 days, which is free short-term funding if the balance is cleared on time.
One point of confusion is worth naming. In older documents and some market commentary, Amex is shorthand for the American Stock Exchange rather than the card company, so the context has to be checked before assuming which is meant.
In practice
Real-world examples.
Example
A restaurant stops accepting the card to save on fees and loses a corporate lunch contract whose bookers pay on company cards. It reinstates acceptance the following quarter after calculating that the lost margin was four times the fee saving.
Example
A building supplies merchant pays its own raw material invoices on a company card at the start of the statement cycle. The 48-day gap between payment and settlement removes the need for a seasonal overdraft.
Example
A professional services firm issues cards to 30 consultants with per-category spending limits. Expense reports fall from an average of nine days late to two days, because the card feed posts directly into the accounting system.
Formula
Calculation
Cost of card acceptance = (Card sales x Merchant discount rate) + (Number of transactions x Fixed fee per transaction)
A boutique hotel takes $50,000 of card sales across 400 transactions in a month on a card with a merchant discount rate of 2.90% and a fixed fee of $0.10 per transaction. The percentage element is $50,000 x 0.029 = $1,450 and the fixed element is 400 x $0.10 = $40, so the total cost is $1,450 + $40 = $1,490. On an alternative network charging 1.80% the all-in cost would be ($50,000 x 0.018) + $40 = $900 + $40 = $940, making the more expensive card $1,490 - $940 = $550 dearer in the month. If accepting it brings in more than $550 of gross margin from guests who would otherwise book elsewhere, acceptance pays for itself.Case study
Seen in the real world.
Calder Street Kitchen is an illustrative, fictional restaurant group with three sites and $4,800,000 of annual sales, around 15% of which arrived on higher-fee cards. The owners calculated the annual fee cost at roughly $21,000 and decided to refuse those cards at all three sites.
Covers fell at the city-centre site, which served the corporate lunch market and whose bookers used company cards. Over the following six months that site lost an illustrative $140,000 of sales at a 60% gross margin, which is $84,000 of margin given up to save $21,000 of fees.
The group reinstated acceptance at the city site, kept the restriction at the two suburban sites where card mix was different, and started reporting fee cost per site alongside sales. The lesson in this fictional story is that acceptance is a margin decision, not a cost-line decision.
Watch out
Common mistakes.
- Treating the merchant discount rate as a cost to be cut without measuring the sales that would walk out of the door if the card is refused.
- Confusing a charge card with a credit card, and planning cash flow as if a balance can be carried when the full amount falls due each month.
- Using the card's payment gap as working capital funding while occasionally paying late, which attracts fees far larger than the benefit.
Questions
People also ask.
What does Amex stand for?
It is the common shorthand for American Express, and in older market documents it can also mean the American Stock Exchange.
Why are American Express merchant fees higher?
Because the company has historically issued the card and run the network itself, funding richer cardholder rewards out of the merchant fee.
Should a small business accept it?
Accept it when the gross margin on the sales it brings in exceeds the extra fee, which is a calculation worth doing per location rather than a blanket policy.
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