Credit Card Processing

Amex’s OptBlue Backfires for Small Businesses

by Ben Dwyer

A sneaky thing is going on with the cost businesses pay to accept American Express cards. Changes have made it cheaper than ever to accept Amex, but business’ credit card processing statements aren’t reflecting the cost reduction.

How is it possible that American Express cards costs cost less than ever to accept, but businesses aren’t paying less? The answer is pretty simple: credit card processors are pocketing the difference.

Amex Introduces “OptBlue”

In early 2015, American Express decided to tackle two big problems: a reputation among businesses as the “expensive” credit card to accept, and lackluster sales support from credit card processing companies.

Essentially, businesses didn’t want to take American Express because it was too expensive, and processors weren’t interested in selling it because they didn’t make any money if they did. The end result was declining card usage and revenue for American Express.

American Express’s solution to both problems was to roll out a new pricing model. This new pricing model solved the high price of acceptance for businesses by bringing the cost to process an Amex transaction in line with cost to process a Mastercard or Visa transaction. It solved processors’ disinterest in selling Amex by allowing them to make money by adding a fee to the base rate charged by Amex.

American Express named its new pricing model “OptBlue” — as in, “opt for American Express” (known for its blue logo/blue card) now that it doesn’t cost so much to accept.

The General Concept

OptBlue functions a lot like Amex pricing of the past in the way that there are base rates and fees that generate revenue for American Express. The big difference is that the base rates and fees of OptBlue are less than with previous Amex pricing.

American Express cut its rates to allow processors to add a markup while still keeping the final rate low enough to reduce acceptance cost for businesses.

By allowing processors to add a markup, Amex hoped that processors would have more incentive to encourage businesses to take its cards. The idea was that lower pricing would please businesses and make it an easier sell for processors, as those processors would be able to make some money by adding their own fee.

Amex was positioning itself for the long game. It was cutting its rates in the short-term in exchange for increased processing volume. Essentially, it restructured its pricing for a smaller piece of a larger pie, as opposed to a larger piece of a smaller pie.

The theory was sound, but reality hasn’t been so cooperative.

The Plan Backfires – Sort of

Whether it was an unintended consequence, or American Express completely dropped the ball on OptBlue’s marketing, OptBlue hasn’t had the intended impact on business’ cost to accept Amex.

Years after its introduction, businesses are still largely unaware of the now not-so-new pricing model. In turn, many are still paying the same high costs to accept Amex.

You may be wondering where the money is going if Amex rates are lower but businesses are still paying through the nose to accept its cards.

The answer is in the second objective of OptBlue, which is to allow processors to make money. Where OptBlue has failed businesses, it has paid processors in spades.

Perception Works Against Amex

People already think that it’s expensive to accept American Express. Therefore, many likely aren’t aware that a new, lower cost pricing structure is in play.

This puts processors in an interesting position to make a choice: They can apply a reasonable markup to OptBlue pricing and allow businesses to pay less to accept American Express, or they can apply a large markup to OptBlue so business’ cost to accept Amex remains unchanged. After all, businesses unaware of the new Amex pricing won’t know the difference. Ultimately, the business pays the same amount, but now the processor takes money that used to go to American Express.

Many processors have chosen the second option.

The Real Cost of OptBlue Oversight

Businesses using a processor that has decided to apply a markup that eclipses the benefit of lower base rates will pay a pretty hefty price.

From what we’ve seen, the average “OptBlue oversight markup” (as we’re calling it here at CardFellow) is coming in around 1.20-1.80%. Remember, that’s not the total rate – that’s just the processor’s piece of the action. The rate Amex charges is added to that markup.

For example, if the OptBlue rate (Amex’s piece of the pie) for a transaction is 1.95%, and the processor’s markup is 1.50%, the business’s total cost is 3.45%. That’s about in line with what a business would expect to pay for American Express, except now that number is almost 50% markup to the processor. Because that’s what businesses are used to, they don’t see anything out of the ordinary.

Apply those numbers to annual sales volume and the impact is very significant. For example, a markup of 1.50% amounts to a cost of $600 for a business that processes $40,000 a year in Amex volume. It’s not chump change.

Exceptions, Disclaimers, and Protections for the Innocent

A few important notes:

On Amex:

  • We’re giving Amex the benefit of the doubt, but we could be wrong.
    It’s possible that our interpretation of American Express’s goal for OptBlue to lower acceptance cost for businesses is completely inaccurate. Amex may have no problem incentivizing processors to sell its acceptance to business if it predicted processors would be able to sneak through markups in the range of 1.20-1.80%, especially if it also predicted that businesses wouldn’t know the difference. Perhaps that’s why it didn’t do much marketing to spread the word about OptBlue. It’s possible that Amex just wanted to get processors to sell businesses on taking American Express, and isn’t interested at all in lowering Amex costs for the business.

Notes about Processors

  • Not all processors are running wild with OptBlue.
    Like everything with credit card processing, it’s a per-case situation. Not all processors are charging exorbitant markups up OptBlue. The point is that you need to look out for your business’s charges. If you’re not sure what to look for, create a free profile at CardFellow and we’ll help

High Amex Volume Businesses

  • Large volume businesses are exempt from the headaches.
    Similarly, OptBlue doesn’t apply if you process more than $1 million/year in American Express cards. (Over that point, you need a direct account with Amex and can likely negotiate fees.)

But for anything else, OptBlue should likely be available to you, and you may already be on it. So if your Amex fees are out of whack compared to your Visa/MC fees, it might be worth doing a little digging.

A great place to start is by creating a free profile to compare processors here at CardFellow. Our software now includes itemized cost estimates and markups for American Express OptBlue, so you can see what pricing you’re eligible for compared to what you’re actually paying.

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