American Express 2015 Annual Report Download - page 26

travel and entertainment sectors in 2001 and 60 percent came from retail and other sectors. In 2015, only 26 percent
of U.S. billings came from the travel and entertainment sectors. This shift resulted, in part, from the growth, over time,
in the types of merchants that began to accept payment cards in response to consumers’ increased desire to use
these cards for more of their purchases, our focus on expanding card acceptance to meet Card Members’ needs, and
increased competition for travel and entertainment sector spending.
Globally, acceptance of general-purpose cards continues to increase and we continue to grow merchant acceptance
of American Express cards around the world, as well as refine our approach to calculating merchant coverage. We
estimate that, as of the end of 2015, our merchant network in the United States could accommodate more than 90
percent of general-purpose card spending. Our international spend coverage is more limited, although we continue to
expand our merchant network in locations outside the United States. We estimate that our international merchant
network as a whole could accommodate approximately 80 percent of general-purpose card spending. These
percentages are based on comparing spending on all networks’ general-purpose credit and charge cards at merchants
that accept American Express cards with total general-purpose credit and charge spending at all merchants.
Discount Revenue
We earn “discount” revenue from fees charged to merchants for accepting our cards as payment for goods or
services sold. The merchant discount, or discount rate, is a fee charged to the merchant for accepting our cards and is
generally expressed as a percentage of the charge amount. In some instances, an additional flat transaction fee is
assessed as part of the merchant discount. The merchant discount is generally deducted from the amount of the
payment that the merchant acquirer (in most cases, one of our subsidiaries) pays to a merchant for charges
submitted. A merchant acquirer is the entity that contracts for American Express card acceptance with the merchant,
accepts transactions from the merchant, pays the merchant for these transactions and submits the transactions to
the American Express network, which in turn submits the transactions to the appropriate card issuer. When a Card
Member presents our card for payment, the merchant creates a record of charge for the transaction and submits it to
the merchant acquirer for payment. To the extent that we are the merchant acquirer, we record the merchant discount
as discount revenue at the time we receive the transaction. We may also charge additional fees to merchants, such as
a variable fee for “non-swiped” card transactions or for transactions using cards issued outside the United States and
used at merchants located in the United States.
Where we act as the merchant acquirer and the card presented at a merchant is issued by a third-party bank or
financial institution, such as in the case of our GNS partners, we will make financial settlement to the merchant and
receive the discount revenue. In our role as the operator of the card network, we will also receive financial settlement
from the GNS card issuer, which in turn receives an issuer rate that is individually negotiated between the issuer and
us (i.e., the amount the GNS card issuer receives for a transaction on our network with a card they issue — usually
expressed as a percentage of the charge amount). The difference between the merchant discount received by us from
the merchant (which is directly agreed between a merchant and us and is not based on the issuer rate) and the issuer
rate received by the GNS card issuer generates a return to us. In cases where American Express is the card issuer and
the merchant acquirer is a third party (which can be the case in a country in which an IO partner is the local merchant
acquirer or in the United States under our OptBlue program with certain third-party merchant acquirers), we receive a
network rate in our settlement with the merchant acquirer, which is individually negotiated between us and the
merchant acquirer and is recorded by us as discount revenue. In contrast with networks such as those operated by
Visa and MasterCard, there are no collectively set interchange rates on the American Express network, issuer rates do
not serve as a basis for merchant discount rates and no fees are agreed or due between third-party bank or financial
institution participants on the network.
We work hard to persuade merchants to choose to accept our payment products in addition to those of our
competitors. As such, we compete on our ability to innovate and deliver meaningful value to merchants to justify the
cost of acceptance. The merchant discount we charge reflects the value we deliver to the merchant and the
investments we make in providing that value. We deliver greater value to merchants as compared to our competitors
in a variety of ways, including through higher spending by our Card Members relative to users of cards issued on
competing card networks, our product and network features and functionality, our marketing expertise and programs,
information services, fraud prevention services, our dedicated client management group, and other investments that
enhance the merchant value propositions associated with American Express card acceptance.
The merchant discount varies with, among other factors, the industry in which the merchant does business, the
merchant’s charge volume, the timing and method of payment to the merchant, the method of submission of charges and,
in certain instances, the geographic scope of the card acceptance agreement signed with us (e.g., local or global) and the
charge amount. In the United States and Canada, we charge a different discount rate for our prepaid cards. We may also
charge a different discount rate for our corporate purchasing cards if the merchant meets certain requirements.
While we believe merchants that accept our cards understand our merchant discount pricing in relation to the
value provided, we do encounter merchants that accept our cards, but tell their customers that they prefer to accept
another type of payment or otherwise seek to suppress use of the card. Our Card Members value the ability to use
their cards where and when they want to, and we, therefore, take steps to meet our Card Members’ expectations and
to protect the American Express brand, subject to local legal requirements, such as Dodd-Frank in the United States.
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