Merchants Lose: Impact of American Express/MBNA Deal

Amex is in the fortunate position of having built an extensive merchant network that pays it a higher merchant discount than is the case today for competing bank card products. In the early days, Amex didn't have accounts that revolved -- and didn't benefit, as a result, from revolving interest income -- unlike bank credit card issuers where over half their revenue comes from interest income.

Now, however, Amex is leveraging its higher cost merchant acceptance network to incent card issuers to issue American Express cards so that consumers will use them at merchant locations rather than Visa or MasterCard. The assumption has to be that Amex is passing along to the new partner issuers an interchange income fee which is higher than that available from either Visa or MasterCard. That provides the basic incentive for an issuer to want to align with either Visa or MasterCard.

So, given the zero sum nature of this world, it's the merchants that lose. They'll be paying more in terms of merchant discount fees as more of their acceptance volume becomes Amex-based. In parallel, this will put pressure on MasterCard and Visa to raise their interchange rates so that they can compete with Amex for card issuance. If Visa/MasterCard merchant discounts go up as result, merchants lose a second time.

Others in the payment card food chain are affected as well. For example, Amex transactions are much less profitable for acquirers -- so as volume moves from Visa/MasterCard to Amex, they also lose. And, of course, either Visa or MasterCard also loses service fees from both their merchant acquiring and card issuing bank members on any Amex transactions. Isn't competition wonderful?