American Express Merchant Credit regulations update

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.


$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.

american express merchant discount fee refunds

interchange and merchant discount fees explained

Interchange and Merchant Discount fees can be illustrated by a typical 4-party transaction involving the purchase of an item using a typical VISA/MasterCard type general-purpose credit card issued by a bank. When a Cardholder purchases a $100 item from a Merchant using a typical VISA/MasterCard type credit card, the Merchant passes on the $100 charge to its Merchant/Acquiring Bank in exchange for $98.00, pursuant to the Merchant’s contract with the Merchant/Acquiring Bank. The Merchant/Acquiring Bank submits the $100 charge into the VISA/MasterCard system and receives $98.50 from the customer’s credit card Issuing Bank (less a small processing VISA/MasterCard fee) in accordance with the VISA/MasterCard rules. The Issuing Bank eventually receives $100 from the Cardholder when the credit card charge is paid. Under this scenario, the Merchant/Acquiring Bank keeps a net Merchant Discount fee of $.50 ($98.50 – $98.00), while the Issuing Bank receives an Interchange” fee of $1.50 ($100 – $98.50). These fees combined are sometimes referred to as a Merchant Discount fee. In some instances, the structure of the transaction changes slightly, but the ultimate economic effect is the same. In addition, the same entity may act as both the Issuing Bank and the Merchant/Acquiring Bank in the same transaction.

The above is the IRS description of the merchant fees process. I think it may be easier for some merchants to understand this explanation so thought I’d pass it on. In this scenario, 75% of the merchant fees paid end up with the card issuing bank. It’s higher than that for the size businesses I generally deal with, more like 95-98%, but you get the point. Merchants need to manage payment processing costs, by controlling the big chunk of money that ends up with the card issuing bank.

What is interchange management?

Link to IRS article at top. Information Document Request for Interchange and Merchant Discount Fees – Banks.