American Express sent changes in terms for accepting the American Express credit card, dated October 2010. “If you issue a credit, we will not refund the Discount or any other fees or assessments previously applied on the corresponding charge.”

Let’s use the example that the merchant is paying 3.5% for accepting American Express. That’s the discount fee. On a $100 charge, the merchant pays a $3.50 discount fee. If the customer requests a refund, the merchant is now still out the $3.50 fee.

Effective July, 2011, the merchant can choose an alternative to the above. Instead of paying 3.5% in my example, you could pay 3.9%. Then whenever you have refunds, you’ll get the discount refunded too.

You’ll need to do some math with respect to your refund volume to see whether it makes sense to pay more on every order.

EXAMPLE:

$100,000 in sales

At 3.5% the merchant pays $3500 in fees.

At 3.9%, which includes the 40 basis points upcharge to receive Discount refunds, the merchant pays $3900 in fees.

If returns are 1% of orders = $1,000 gross sales, merchant is refunded $1000 X 4.1% or $41 in discounts. Since the merchant paid $400 extra, this is a bad deal.

If 10% of sales are returns (credits)= $10,000, the discount refunded is $390.

If your American Express discount is even lower than 3.5% you can see that you’d have to have a very high return rate to make opting in for 40 basis extra on every charge you accept.