Credit Card Rewards: Need to Fund the Rewards Some How

19. March 2018.

Four days ago, I was going to put a $346 repair bill on my American Express card but stopped then the auto repair shop had a printed sign that said “American Express Cards, add 5%”. I ended up using my Citi AAdvantage Mastercard.

American Express is a top credit card issuer but it has faced some recent challenges. As the new CEO takes over from industry legend Ken Chenault, there is an opportunity to reposition the brand to better compete with Chase and Citi, their uptown rivals.

  • Stephen Squeri, American Express’s new CEO, announced the company plans to reduce fees that it charges merchants anytime they accept an AmEx card.

  • The plan, put simply, is that lower fees may attract more businesses to start accepting American Express cards. However, the cardmember rewards—the points and cash back that cardholders collect—are fueled by the revenue generated by merchant fees.

  • If AmEx’s plan doesn’t lead to higher fee revenue, its cards may soon become a lot less rewarding

But does the cache of American Express work in today’s commoditized world?

  • Historically, American Express charged merchants high fees that helped to fund premium perks and establish an air of exclusivity around its brand.

  • Because AmEx was making more money with each swipe of its cards, fewer merchants were willing to accept cards donning the blue centurion logo. Currently, Visa and Mastercard are accepted at 3 million more merchants, chiefly because they are more affordable.

The business model does need change.

  • More recently, American Express has also come under legal scrutiny over its fees.

  • The U.S. Supreme Court will determine whether AmEx’s merchant fees are in violation of S. antitrust laws.

  • Currently, American Express forbids merchants that accept AmEx from steering customers to use low-fee alternatives.

  • It’s unclear whether the new changes to its fee policy are a response to these legal hurdles.

Amex is a terrific brand, though they do need to do some engineering to stay on point against their bank card rivals.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

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