It used to be that the merchant who favored credit cards like American Express was like the restaurant with a jacket-and-tie policy, or the business class section of an airplane: A sign of exclusivity.
Times have changed. As consumers are more conscious and practical about their money, what used to seem exclusive is now just exclusionary everywhere else. Nobody likes to receive their bill after dinner only to discover that their Discover card has been rejected — not due to a lack of funds on your end, but because the business won’t accept the card.
“Why is Discover not accepted everywhere?”
It’s a common fact that Visa and MasterCard dominate the market when it comes to retailers accepting them as methods of payment. So why all the shunning of cards like AmEx and Discover? The short of it is that it comes down to credit card processing fees, and how both cards position themselves against their plastic competitors.
Why is American Express Not Accepted Everywhere?
American Express was founded in 1850 through the Dow Jones Industrial Average and is the oldest of the “Big Four” credit cards (Visa, MasterCard, AmEx and Discover). By comparison, the Discover card is the baby of the family, started just 28 years ago as an offer from none other than Sears.
Discover and American Express have poised themselves as the aforementioned more exclusive credit cards on the market today. Technically, it’s not a matter of retailers rejecting them as a form of payment, rather that AmEx and Discover are different because merchants choose to accept them.
Here’s how it works:
Visa and MasterCard do not issue credit cards. But I own one of each, you say.
That’s because both Visa and MasterCard are credit card processors, not card issuers, according to Miranda Marquit of Bargaineering. Think of them as a financial go-between.
“Visa and MasterCard make their money from processing transactions,” Marquit said. “They receive money each time you swipe your card, and [might] also receive other fees from merchants that use their payment processing networks to accept credit cards.”
According to Justin Warren of blog Charge Smart, Visa and MasterCard involve a total of three different parties when transacting money:
- Acquiring banks
- Issuing banks
- The network between both
Every time your Visa or MasterCard is swiped, the charge is submitted through the retailer’s bank, which must request approval from your bank — the card issuer — to verify that you’ve not reached your credit limit.
Visa and MasterCard also reach a wider audience. They work with a variety of banks that offer Visa and MasterCard-branded debit cards and checking accounts. American Express and Discover, on the other hand, do not. They market and issue their cards directly to the cardholder and poise themselves to a higher customer cache, operating on what Ben Dwyer of Card Fellow calls a “closed loop network.”
Warren of Charge Smart said that AmEx “focuses on more affluent consumers in its business model” and places more emphasis on customer service, points, rewards and variety. According to Warren, the company offers up to 22 different personal cards in its product line.
Photo credit: Quora
Getting Behind Credit Card Processing
Due to their more specific, affluent target audiences, American Express and Discover also charge higher merchant credit card processing fees, which explains why some businesses opt out in to accepting them at their cash registers.
Whereas Visa and MasterCard, according to the Charge Smart blog, impose merchants a per-transaction rate of about 2 percent, the typical American Express transaction fee is a bit higher — about 2.89 percent. The added revenue for cards like AmEx and Discover goes into investing toward things like premium rewards and other card perks.
According to Warren, where AmEx or Discover might arguably sit uneasily with merchants is in the area of chargebacks and refunds. Discover, for one, is very generous in its return policy at the potential cost of the merchant.
“You can return your Discover card purchase within 90 days — regardless of the original store’s policy — and we’ll refund the cost of the item up to $500,” notes the card’s website. This allegiance to the customer and not the merchant could alienate the latter, since fraud becomes harder to control.
Choosing and Charging Wisely
The rationale behind picking the right credit card extends well beyond how exclusive a card is or its perceived reputation. (Black cards don’t always equate to a superior product.) Annual fees on cards like American Express make “exorbitant” the most understated word of the year — the AmEx Platinum card comes with a $450 fee!
If you’re looking for perks like travel rewards, then selecting a Visa or MasterCard could be a good choice. These card companies also provide a wide range of cards for people with various financial priorities.
Like any good financial boy scout will tell you, the best piece of advice is — come prepared. If you’re the proud holder of an American Express or Discover card in your wallet, enjoy your perks. But pack your Visa or MasterCard just in case, or you might be stuck with two unusable cards, and a bill you’re not able to pay … even if you can afford to.