AmEx Takes a Leaf from Discover’s Acquiring Strategy?with a Twist

Taking a cue from Discover Financial Services, travel-and-entertainment card leader American Express Co. on Monday said that it had enlisted processor First Data Corp. to book new small and mid-size merchants. But unlike Discover's recent pacts with First Data and other big merchant processors that involved sales of Discover-owned merchant accounts to the partners, AmEx will own the merchant accounts and have control over pricing. Neither company would discuss revenue components of the deal. For AmEx, which charges the highest discount rates of the four major card networks, the partnership makes AmEx acceptance easier for merchants, perhaps not on pricing but certainly operationally. Instead of receiving separate AmEx statements and having a separate number to call for help, merchants will get consolidated statements for their Visa, MasterCard, AmEx and possibly even Discover transactions from one processor, and they'll get customer service from that same processor. “We now have a new choice for small businesses to accept American Express?very easy and convenient,” says Bryan O'Malley, vice president, small-merchant acquisition for New York City-based AmEx. Transactions from the small merchants will be processed on First Data's platforms, bringing added scale to the No. 1 processor's system. All of First Data's many merchant sales channels will be able to offer AmEx acceptance once the pact goes live in the second quarter, according to Laurie Wandzilak, senior vice president of product and business development at Greenwood Village, Colo.-based First Data. AmEx owned First Data from 1980 to 1992 and has had continuing business relationships with the processor, including a merchant-referral program from First Data-affiliated independent sales organizations. Wandzilak calls today's announcement the next step in the companies' “natural relationship.” In Discover's merchant contracts with First Data and others, Discover sets wholesale pricing to the acquirer, effectively an interchange rate. The acquirer, however, adds its own mark-up and is the entity that sets pricing with the merchant, making the Discover model similar to Visa and MasterCard pricing structures. But for AmEx, retaining control over retail pricing is important to maintaining the high revenues it generates from merchants, according to Adil Moussa, an analyst with Boston-based Aite Group LLC. Those revenue streams in turn help fund AmEx's rich cardholder benefits as well as joint advertising programs with merchants, he says. “I don't think they're going to give anybody the leeway to set prices or discount rates like Discover has,” he says. “Their discount rate is what really allows the other side, their issuing side, the ability to give all those rewards and perks and all kinds of different services.” Says O'Malley: “We believe having that relationship with our merchants allows us to add greater value to our merchants and our cardmembers.” AmEx stopped reporting the size of its merchant base in the 1990s, when Visa USA was hammering away in commercials with its “… and they don't take American Express” slogan. Since then, AmEx has expanded far beyond its upscale T&E base into grocery stores, gas stations, and other so-called “everyday” merchant segments, but AmEx still doesn't match the 6-million-plus U.S. locations that take Visa and MasterCard. Having First Data on its side, however, no doubt will help narrow that gap because about two-thirds of U.S. merchants connect to the First Data system though direct, ISO, or bank relationships. Moussa expects AmEx to enlist more merchant acquirers in deals similar to First Data's. “It really makes sense for them to do this just like Discover has,” he says. “That's the only way they're going to increase their market share and market volume.” AmEx, however, won't confirm that. “I can't comment on any forward-looking plans,” O'Malley says.