A Consumer’s Guide to Merchant Fees and Why the American Express Supreme Court Case Matters to You
Image: iStockphoto/mkurtbas

Credit card merchant fees are the charges that you, as the consumer, rarely ever hear about.

Basically, these fees are what credit card networks (AmEx, Visa, MasterCard, Discover) charge businesses whenever one of their cards is used at the point of sale. Whenever you swipe or insert your card, a ton of things happen – the store communicates with a bank, a credit card network and other intermediaries.

Along that chain of communication is a series of charges – everyone wants a cut of the business your credit card creates. These charges are collectively known as “merchant fees.” And guess what? The business you’re shopping at is incorporating all these little nickel-and-dime charges into your prices.

Now, it would make sense that stores would want customers to use cards that have lower fees. And that is what a lot of stores try to do.

In fact, that’s why consumers with American Express cards tend to run into situations where businesses don’t accept American Express. Why? Because American Express charges, on average, higher merchant fees than competitors.

American Express’ High Merchant Fees and Contract Wording Have Led to Supreme Court Case

There are some businesses out there who signed contracts with American Express in order to get AmEx in their stores.

Within those contracts, there was some wording that forbade retailers from suggesting that customers use non-AmEx cards.

That legal wording is what led eleven states to file a lawsuit against American Express. The court case failed in circuit courts, but the states kept pushing and now the Supreme Court of the United States will hear the case.

Here’s what a brief in the American Express court case says; it’s written by the legal team from Southwest Airlines, one of the companies fighting against American Express:

“Exceedingly few consumers are aware that different credit cards cost merchants different amounts to process – fees range between 1-4% per transaction – and that these hidden fees result in higher retail prices to all consumers as well as massive subsidies form lower-cost credit card users to higher-cost credit card uses.”

The American Express Supreme Court case is the perfect platform from which we, as consumers, can understand how using our credit cards affects businesses where we buy our stuff, and how the forthcoming court case could influence how we pay for things in the future.

The Basics of What a Credit Card Merchant Fee Is

We’re going to use American Express as an example of merchant fees because they’re at the center of the court case.

The following chart of American Express’ merchant fees comes from CardFellow, a company who helps businesses find ways to reduce costs on credit card processing. The chart shows something important – fees change based on the kind of business you run:

  • Restaurants: 3.5%
  • Lodging: 3.5%
  • Mail order and internet: 3.5%
  • Restaurant: 3.5% and a $0.05 transaction fee
  • Telecommunications: 3.5%
  • Independent gas stations: 3.25%
  • Retail: 2.89% and a $0.10 transaction fee
  • Nearly everyone else: 2.89% and a $0.15 transaction fee

Here’s how this works. Let’s say you get a hotel room for $100. You use your American Express Blue Delta SkyMiles to pay for it. The hotel is going to get $96.50 and American Express gets $3.50.

Now, according to Card Fellow, this $3 charge is what made American Express somewhat of a limited network in restaurants, retail stores, and other locations.

Retailers weren’t willing to pay such high merchant fees when there were other credit card networks out there who charged less.

In response to that, CardFellow Marketing Manager Ellen Cunningham told us, American Express launched a new pricing structure called “Opt Blue” that was supposedly cheaper.

However, American Express still carries the reputation that they’re the most expensive credit card network on the market, a reputation that, according to numbers we’ll present later, seems warranted.

The Arguments for and Against American Express’ Merchant Fees

Cunningham went on to say that these ongoing perceptions of AmEx bring up the main argument of retailers fighting against American Express before the Supreme Court: that customers should know AmEx is costing the business, which ends up costing the customer.

“The argument is that American Express’ contracts are not allowing consumers to know that it costs more for the business to accept American Express,” Cunningham said.

Now, on the other side of the argument is an equally sensible position: Consumers have a choice.

When you walk into a store – Target, for example – you aren’t forced to use AmEx. You are free to choose between Visa, MasterCard, Discover, and AmEx.

A Deeper Look Into How Merchant Fees Affect You

Both of these arguments are pretty fair. Retailers don’t like having to raise their prices to cover credit card fees and credit card companies shouldn’t have to pay the price for contracts that retailers willingly signed.

But think about it from the consumer’s perspective. You head to Target to buy some Halloween costumes for your kids.

As you look at those Disney costumes for your daughter or Marvel costumes for your son, you take mental notes about the prices.

Here’s what you probably don’t realize, according to retailers who want to push customers to non-AmEx cards, though. Those prices are where they are at in part because Target is incorporating merchant fees.

So, if they were able to somehow lower what they have to fork over in fees, they could lower prices on their merchandise.

At this point, you’re probably wondering how expensive credit card merchant fees are, right? I mean, how much of an impact could 1% or 2% have on that Princess Sofia costume your daughter has been begging you for?

Well, on an item-by-item basis, not much. But on a national basis, the differences are pretty insane. Here’s a chart of the average merchant fees charged in the U.S. in 2016, courtesy of The Nilson Report. American Express’ fees include the new Opt Blue plan, which offers lower rates than the merchant fees we listed earlier:

Credit card network Fees (billions) Purchases (billions) Average fee %
Visa/MasterCard $47.53 $2,242 2.12%
AmEx $16.41 $695 2.36%
Discover $2.48 $121 2.04%

On average, American Express’ merchant fees are 0.24% higher than Visa and MasterCard and 0.32% higher than Discover.

If American Express had Visa and MasterCard’s average fee, then businesses could pass on a savings of $1.67 billion to consumers. If AmEx adopted Discover’s average fee of 2.04%, then business owners could potentially pass on $2.23 billion in savings to customers.

That’s in a perfect world, though, in which American Express lowered their fees and businesses actually passed along the savings to customers and didn’t pocket some of it.

Why Are American Express’ Merchant Fees Higher Than Visa and MasterCard?

This is probably the most important question in this discussion. The answer is actually a lot simpler than you think.

American Express is a unique company because they are a one-stop shop for issuing credit cards and, as a credit card network (like Visa, MasterCard and Discover), they also charge merchant fees.

Chase, for example, is a bank who issues Visa credit cards. Barclays is a bank that offers MasterCard credit cards. American Express skips the whole bank thing; they give you your card directly.

So, Ellen Cunningham told us, AmEx structures their fees a little differently. But there’s another reason AmEx’s fees are higher: credit card rewards.

Many of the top credit card rewards sites aside from HighYa say the Membership Rewards points you earn from AmEx rewards cards are more valuable than rewards points from Chase, Discover, Barclays and other credit card issuers.

For example, you can transfer your Membership Rewards points to the Starwood Preferred Guest hotel loyalty program. Those points can then be used to book Starwood hotels, most of which are more expensive than hotels from Hyatt, Marriott, IHG, Choice, Carlson and other competitors.

Yet the number of Membership Rewards points you have to use to book those rooms is less than many of its competitors. Fewer points to book more expensive rooms result in great value for consumers.

But, those points come at a cost for American Express and that’s part of the reason their fees are higher.

This is a tough situation for consumers. Credit card rewards can be pretty incredible and can make a credit card far more valuable than you think. Many times that value only costs you a modest annual fee.

However, in the big picture of merchants, credit cards, and consumers, those rewards are costing consumers billions.

American Express charges higher merchant fees to, in part, pay for those valuable rewards they’re handing out. Businesses then incorporate those merchant fees into their pricing. Consumers pay more.

So, while you could be getting insane value out of your American Express Platinum card’s rewards plan by cashing in on your Membership Rewards while paying off your card every month, you still end up paying for those rewards in the form of higher prices where you shop.

What’s Ahead for the American Express Lawsuit

Eleven states are involved in the court case against American Express. On top of that, various companies have filed briefs, which are basically arguments on behalf of or against American Express.

We quoted one of those briefs earlier in this article. That quote was from Southwest Airlines, whose attorneys characterized American Express’ merchant fees as “hidden”.

We found that word interesting because it implied American Express wasn’t being transparent with their merchant fees. But here’s the deal – American Express wasn’t willfully hiding anything. Credit card merchant fees aren’t the kind of thing that retailers advertise when you go to the cash register.

And, in a certain sense, why would they? The company isn’t paying for those fees out of their own pocket; they’re passing the cost on to the consumer.

Retailers would argue that, while the fees are high, they’re more frustrated about the fact that American Express’ contracts prohibit them from steering customers to other credit cards.

For example, a retailer like Target could offer you special discounts if you pay with Visa or MasterCard.

“American Express’s agreements with retailers contain an ‘anti-steering’ provision that bars them from doing anything to encourage the use of competing cards, such as offering discounts,” Bloomberg reporter Greg Stohr wrote.

Will Consumers Win If American Express Loses?

Seems kind of shady that American Express would bar companies from encouraging customers to use Visa, MasterCard or Discover, right? This line of thinking would definitely side with the states involved in the case.

And, the hope is that a court case in favor of the states would allow businesses to steer customers to other cards and, therefore, pass the savings on to the consumer.

But that’s not a guaranteed outcome if American Express loses, Ellen Cunningham said. Merchant fees are really complex, and just because a company can steer customers away from American Express doesn’t mean they’ll lower prices or that, in the end, consumers will choose not to use American Express.

Will Retailers Pass Savings On to You? Maybe Not

Regarding that first point – savings – Cunningham said that merchant fees are pretty complex because credit card networks charge varying interest rates depending on any number of factors, factors which can change from transaction to transaction.

 “The thing with transaction costs is that they aren't static So, if a customer uses a Visa card, the business doesn't know, ‘Okay, this Visa transaction is going to cost 2%,’” Cunningham said. “The actual amount the business is charged will vary depending on a ton of factors, including what type of card within the card brand is used.  A Visa rewards card has different pricing than a non-rewards Visa, which is different than a Visa debit card ‘run as credit’, which is different than Visa PIN debit transaction.”

And because companies can’t pin down an exact amount of money they save by not processing American Express transactions, they can’t accurately calculate a saving to pass on to the customer.

“If the business tried to pass along savings at the individual customer level, they would have to guess at what the cost for the transaction would be using the Visa/MC, the cost for the transaction using Amex, and then provide the customer with the difference,” she said. “But if they're wrong, they could give the customer a greater amount than the actual difference. So, that wouldn't be a smart decision.”

Will Consumers Use American Express Even If AmEx Loses? Maybe

This is an interesting question. Why on earth would a consumer want to use a credit card they know may be involved in higher prices for goods and services?

Well, it all comes down to rewards. American Express’ lucrative travel rewards, hotel rewards, and airline rewards credit cards offer tremendous value.

And even though a consumer may know, as the result of this court case, that the merchant is passing along to them AmEx merchant fees, they still might use their card to rack up points and reach certain spending incentives.

In fact, Cunningham said, the savings a business might be able to give you for using Visa, for example, instead of American Express, might not be greater than the rewards you’d get for using your AmEx.

Cunningham pointed out the American Express Blue Cash Preferred card as an example.

If American Express does lose the Supreme Court case and your local grocery store decides to give you a 1% discount for using Visa, that 1% is still less than the 3% in cash rewards you’d get from using your American Express Blue Cash Preferred to buy the groceries.

Some Final Thoughts About Merchant Fees and the American Express Supreme Court Case

While we’d like to say that there’s a tidy solution for merchant fees and the AmEx court case, we can’t really do that.

In a perfect world, AmEx would release companies from the non-steering clause in their contracts, retailers would save money and then lower prices.

But, as industry expert Ellen Cunningham pointed out, that’s a lot harder to do than it sounds and, in the end, retailers probably wouldn’t pass the savings along to the customer.

In that sense, there’s really no winning scenario for the consumer. You’re paying the same prices you always were even though the retailer wins out.

But, as we noted, American Express rewards fans may not even care either way. The very reason why companies’ merchant fees are high is the same reason why cardholders will probably continue to swipe: rewards.

Among the most popular American Express rewards cards is the Starwood Preferred Guest card, the hotel rewards card we mentioned earlier.

Other favorites in the American Express stable are the American Express Platinum and the Gold Delta SkyMiles. The AmEx Blue Delta SkyMiles was launched in 2017 – it’s an airline rewards card with no annual fee and lower-level benefits on par with what you’d get from the United TravelBank from Chase.

Any one of these AmEx cards provides the rewards we’ve mentioned multiple times in this article. Clicking on the links we provided will take you to our in-depth review of each card. Read through them and consider whether or not their rewards structures are right for you.

J.R. Duren

J.R. Duren is a personal finance reporter who examines credit cards, credit scores, and various bank products. J.R. is a three-time winner at the Florida Press Club’s Excellence in Journalism contest. He is a member of the Society of Professional Journalists and his insight has been featured on Investopedia, GOBankingRates, H&R Block and Huffington Post.