Merchant discount rates and interchange fees remain central to the economics of card acceptance, influencing both merchant costs and payment network competition. While traditional four-party card networks rely on interchange fees between issuers and acquirers, three-party networks operate under a different pricing model that bundles payment processing costs into a merchant discount fee. As regulators around the world continue to scrutinize payment costs, card networks are adapting their pricing strategies to remain competitive while preserving the value of their payment ecosystems.
As regulators in many markets, including Australia, Canada, Europe and the United Kingdom, have driven down interchange by up to 80% on MasterCard and Visa transactions, American Express and Discover have been relatively unscathed. Instead of interchange, American Express and Discover charge a small business merchant discount for acceptance in their three party model.
This is somewhat of a good news/bad news issue. American Express gets paid more, but in some markets, the private network is less competitive as a result.
Amex is now cutting its rates to remain competitive, rather than to respond to regulatory mandates.
• American Express is cutting the fees it charges small businesses by up to 1 percentage point under an aggressive expansion plan aimed at doubling its Australian footprint in two years.
• As it navigates major shifts in the payment landscape and competition with other providers, the credit card giant is eyeing its biggest roll-out in Australia since it arrived here in 1954.
• The move is aimed at getting more small businesses to accept Amex payments, which typically cost business owners more, leading many shops to impose higher credit card surcharges on Amex payments or to not accept them at all.
The change will likely work but a concern is will it open up Pandora’s Box for American Express. MasterCard and Visa already contend with 30 basis point caps in Europe and the UK.
• According to the Reserve Bank (of Australia), Amex charges average merchant service fees of 1.58 per cent of a transaction’s value, compared with 0.78 per cent for MasterCard and Visa, and 1.8 per for Diners Club.
• As part of the plan, the credit card firm has recently signed a deal with the Commonwealth Bank that will allow small businesses to accept Amex for the same price as taking MasterCard or Visa payments, up to a certain amount of turnover.
• The change comes after banks have recently cut the value of the loyalty schemes attached to bank-issued Amex cards in response to regulations designed to lower payment costs. Cards directly issued by Amex are not affected by these changes.
Interchange, or small business merchant discount?
…a rose by any other name.
The evolving regulatory landscape continues to reshape how payment networks compete for merchant acceptance. Whether through interchange fees or merchant discount rates, pricing remains a key factor in balancing merchant costs, consumer rewards, and network profitability. As competition intensifies and regulatory pressure grows, payment providers will need to carefully adjust their pricing strategies while maintaining the value proposition that attracts both merchants and cardholders.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
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