Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / Why Amex Can Charge Premium Merchant Fees
Transcript
- Lucas: So if you're a merchant in the United States and a customer pays with a Visa credit card, you lose about 1.9 percent of that transaction to fees. If they pay with American Express, you lose roughly 2.8 percent. That's a ninety-basis-point premium — and it's been that wide for decades. Luna: And merchants have complained about it forever. But Amex keeps charging it. How do they get away with that? Lucas: That's the perfect question for this show. Because Amex's pricing power isn't about having a better product in a vacuum — it's about a structural advantage built into the network itself. Specifically, the closed-loop model. Luna: Right — Visa and Mastercard are open loops. They're essentially technology platforms that sit between hundreds of issuing banks and acquiring banks, and they don't take direct credit risk. Amex is both the issuer and the acquirer. Lucas: Exactly. When you use a Visa card issued by Chase, Visa collects a small network fee, but the bulk of the interchange goes to Chase. The merchant's bank gets a cut. Everyone's pulling in different directions. Amex, by contrast, keeps the entire merchant discount fee because it owns both sides — the cardholder relationship and the merchant relationship. Luna: So they can price the total transaction higher because they internalise all the economics. But that alone doesn't explain why merchants accept it. If I'm a small retailer, I can just say 'we don't take Amex.' Some do. Lucas: And that's the second pillar of their pricing power: Amex cardholders spend more. According to a 2024 study by the Nilson Report, the average Amex cardholder charges about $25,000 per year — versus around $8,000 for Visa and $7,000 for Mastercard. Merchants who decline Amex risk losing their highest-value customers. Luna: So it's not just that the fee is high — it's that the customer is worth more. And Amex has cultivated that demographic deliberately through premium card offerings, the Centurion lounges, the concierge service, the travel credits. Lucas: Right. The Platinum Card carries a $695 annual fee, and the Centurion card — the invite-only black card — is reportedly $5,000 just for initiation, plus $2,500 annually. Those fees create an expectation of exclusivity, and that exclusivity translates into merchant acceptance. A high-end restaurant doesn't want to tell a Centurion holder that they can't pay with their card. Luna: But that's a self-reinforcing cycle. Amex can charge high merchant fees because they attract affluent customers, and they attract affluent customers because the high fees fund the premium benefits. The question is, what happens if the cycle breaks? Lucas: That's exactly what regulators have been testing. In Australia, the Reserve Bank capped interchange fees at 0.8 percent for credit cards back in 2016. Amex initially argued it shouldn't apply to them because they're a three-party scheme, not a four-party scheme like Visa. But the cap still squeezed their pricing. They had to lower merchant fees in Australia, and their market share there has declined from about 17 percent of card spending in 2015 to roughly 12 percent today. Luna: So the closed-loop model lost some of its advantage when regulators treated it the same as open loop. Similar story in Europe after the Interchange Fee Regulation capped consumer credit interchange at 0.3 percent. Lucas: Yes, and in both markets, Amex's response has been to lean even harder into premium benefits. They've added more travel credits, more lounge access, more statement credits for Uber and Saks. The strategy is to make the card so valuable to the holder that merchants still want to accept it, even at a lower fee. But it's a margin squeeze. Luna: And in the US, there's no such cap. So Amex essentially operates two pricing models: a high-fee, high-rewards model domestically, and a lower-fee, still-high-rewards model in regulated markets. That's sophisticated price discrimination. Lucas: It is, and it works because the product is different enough across geographies. But the third source of Amex's pricing power — and this one is often overlooked — is the switching cost for merchants. If you've built your payment acceptance infrastructure around Amex's proprietary processing, it's not trivial to drop them. Luna: Explain that. Merchants use the same point of sale terminals for all cards, don't they? Lucas: For the most part, yes. But Amex offers integrated marketing programs, data analytics, and co-branded card partnerships that tie into merchant systems. Think of the Delta SkyMiles Amex — Delta gets access to cardholder data and marketing co-op dollars. If Delta dropped Amex, they'd lose that data stream and have to renegotiate their entire loyalty program economics. So the switching cost is real, especially for large merchants. Luna: So it's not just that customers are sticky — merchants are sticky too. That's a double moat. Lucas: Exactly. And that's why Amex's discount revenue hit roughly $45 billion in 2025, according to their annual filing, with a net margin on that revenue around 25 percent. That's extraordinarily high for a payments company. Visa's operating margin is higher — around 65 percent — but Visa doesn't take balance sheet risk. Amex does. They have to fund the float between when they pay the merchant and when the cardholder pays them. Luna: Right, there's a credit risk dimension. Amex is essentially a bank that charges premium fees for premium customers. And their net charge-off rate has historically been lower than industry average, partly because their cardholders are wealthier. Lucas: That's the fourth pillar, actually — adverse selection in reverse. Most credit card issuers worry about attracting risky borrowers. Amex's whole brand is designed to attract low-risk, high-spend customers. Their net promoter score in 2025 was 71, compared to 44 for the average bank. That loyalty lets them raise annual fees and still retain members. Luna: So are there any threats that could actually break this pricing power? Lucas: The biggest one is regulation in the US. The Credit Card Competition Act has been introduced in Congress, and while it hasn't passed, it would force large banks to offer at least two network options for processing, which could erode Amex's exclusivity. The other threat is fintech — companies like Stripe and Square have made it easier for merchants to surcharge or steer customers toward cheaper payment methods. Luna: Steering is interesting. Some merchants now show a pop-up saying 'Pay with Amex? There's a 3 percent fee.' That undermines the premium experience. Lucas: It does, and Amex has fought that aggressively — they've sued merchants over surcharging. But the legal landscape is shifting. In 2023, a US appeals court ruled that merchants have a First Amendment right to tell customers about card fees. So the no-surcharge rules are weakening. Luna: If that becomes widespread, Amex's pricing model would need to adapt. They might have to lower merchant fees to stay competitive, which would pressure the rewards budget, which could reduce cardholder spend — and the cycle could reverse. Lucas: That's the nightmare scenario for them. But so far, Amex has navigated every regulatory challenge by doubling down on the premium positioning. They have a brand that people pay for — literally. And that brand is the ultimate source of pricing power. Luna: Speaking of paying for things we value — if conversations like this one have been useful to you, the reason we can do them ad-free is listener support. It's a small thing, but if you want to keep this kind of analysis coming, you can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it genuinely helps. And it's what lets us spend the time digging into cases like Amex instead of chasing ad revenue. So thanks to anyone who chips in. Luna: Alright, back to pricing power. One thing I want to circle back to — Amex's travel and entertainment focus. They've always positioned themselves as the card for experiences. Do you think that focus is a key part of their pricing power, or is it just marketing? Lucas: I think it's structurally important. Travel and entertainment are high-discretionary categories where the cardholder is already in a spending mood. If you're booking a $5,000 flight, you're not obsessing over the merchant fee. And Amex gets a cut of that transaction. Plus, the travel ecosystem — lounges, hotel credits, airline partnerships — creates that switching cost we talked about. Once you've accumulated miles and status, leaving Amex feels like losing progress. Luna: So the pricing power is really a bundle: closed-loop economics, affluent customer base, merchant switching costs, and a travel rewards ecosystem that creates psychological lock-in. Lucas: Exactly. And what's impressive is that Amex has maintained that bundle for over a century. The first Amex charge card launched in 1958, and the basic value proposition — pay a fee, get prestige and service — hasn't changed. The pricing has just gotten more sophisticated. Luna: One last question: if you were a competitor — say a fintech trying to build a premium card — what would you take from the Amex playbook? Lucas: I'd focus on the closed-loop advantage. The reason Amex can charge what it does is that it controls both sides of the transaction. Any new entrant that relies on Visa or Mastercard rails is immediately giving up margin to the networks. So if I were building a premium card, I'd try to replicate the closed loop — maybe by issuing through a single bank and keeping the merchant relationship in-house. But that's capital-intensive. Amex's real moat might be that no one has the patience to build what they built over 175 years. Luna: And that, in a nutshell, is pricing power that doesn't come from a feature — it comes from a structure. Lucas: Exactly.