A small business owner wants to stop accepting American Express, reasoning that other credit cards and debit cards are cheaper. But he needs to weigh the costs against the fact that AmEx cardholders are loyal and high-spending
Dear Your Business Credit,
Do American Express cardholders typically have a Visa or MasterCard card, too? I am going to stop taking AmEx cards because of the high cost, but want to be sure my customers have an alternative. Use of debit cards has spiked and the costs are very reasonable. — William
Customers’ payment preferences are evolving constantly, so it’s important to periodically examine whether the options you’re offering are the right ones. It helps to look at the numbers and weigh the costs.
I could not locate any research on whether American Express cardholders typically hold a Visa or MasterCard, too. But the average American cardholder held 3.7 credit cards in 2009, according to a paper by the Federal Reserve Bank of Boston. Another Fed study found that nearly 33 percent of American families held four or more cards in 2010. That means it’s likely that many of your customers will have options other than AmEx, but it’s important to pay attention to their habits at your particular business over several months. If a very large percentage use AmEx, you may want to proceed slowly on dropping the card.
Think also about whether your customers are big spenders or average Joes. In general, far fewer Americans have AmEx cards than Visa or MasterCard, but each AmEx customer spends a lot more on that card.
- American Express has 52 million cards in circulation in the U.S., compared to MasterCard’s 178 million and Visa’s 277 million (Discover does not report card circulation).
- Spend per customer is around $15,000 a year for AmEx versus $2,000 for Visa and MasterCard, according to Forbes.
It is possible that, even if you offer other options, AmEx loyalists will grumble. American Express scores high on customer satisfaction — it’s topped the J.D. Power and Associates ratings for seven years in a row.That said, you did mention that many consumers are now using debit cards, which may be just the alternative your customers need. Whether they’re cheaper for you depends on the value of your typical transaction, and on how much banks charge you for debit card transactions. Banks have been charging merchants 21 cents per transaction. But a federal court in late July overturned the rule that allowed that fee, suggesting it should be capped at 12 cents per transaction. In comparison, credit card swipe fees average 2 percent, according to the National Retail Federation.
As you note, debit card use is on the rise. It increased 39 percent in the five years leading up to 2012, while use of online payment options rose by 30 percent, according to 2012 research by American Express. At the same time, the use of credit cards has declined a bit. The Federal Reserve found in its 2010 research that 68 percent of families had credit cards, down from 72.9 percent in 2007.
Often, consumers’ use of debit cards depends on the type of business they are patronizing, so looking at payment trends in your field may help you predict if your customers will switch over to them. The 2010 ComScore Online Credit Card Report found that more consumers prefer buying groceries and making drugstore purchases with debit cards than credit cards. However, for business expenses, travel, gas and automotive, merchandise and entertainment, more consumers liked to use credit cards. If you’re in an industry such as travel, where customers feel better about making purchases on a credit card, it may put you at a disadvantage to weed out any major credit card.
The age of your customers may also make a difference in how they react to the absence of a particular credit card. Research by credit score provider FICO found that Millennials are more likely than other generations to be credit-cardless — so if you have a lot of young customers, they may not care much if you have dropped any one card.
In contrast, the smallest percentage of cardless customers is among people over 60. A 2011 study by the Federal Reserve Bank of Boston looked at 2008 data and concluded that credit card usage was highest for older, wealthier and more educated consumers.
American Express is a market leader in winning wealthy customers, so if that’s your target market, you may want to talk with some of your best customers about what they would do if you drop AmEx. It all comes down to keeping your customers happy — and, while research can guide you, they know best what payment methods they prefer.