- July 7, 2011
- Posted by: anand
- Category: Analysis, Education, General, Published Articles
About four years ago, Discover and American Express started updating their business model by letting acquirers add its cards to the payment options they offer to merchants. Traditionally, acquirers or payment processors could only offer Visa and MasterCard processing, and merchants had separate agreements with Discover and AmEx. Therefore, merchants became accustomed to getting three sets of merchant statements, with three difference customer service phone numbers, and three different funding time frames.
The shift to single source acquiring/processing started in 2006 when Discover and AmEx announced plans to increase merchant acceptance of their cards, specifically amongst small to mid-sized merchants (SMBs). By “outsourcing” the authorization and settlement services to acquirers, AmEx and Discover were able to leverage the sales infrastructure of acquirers and ISOs with their ability to reach small businesses. This strategy has been very effective as it has increased the AmEx and Discover card acceptance among SMBs
In general, here are the benefits for merchants of having AmEx and Discover charges processed through the same company that processes Visa and MasterCard charges:
- Same processing company performs all merchant set up, processing, settlement, funding, customer support, and reporting for Visa, MasterCard, AmEx, and Discover, thereby providing merchants with one processing relationship for all major card brands.
- All Mastercard, Visa, Discover and AmEx funds are deposited at the same time. This streamlines reconciliation with bank accounts since AmEx used to deposit in 3-5 days and Visa, MC and Discover would deposit in 1-3 days. This is a HUGE benefit.
- The discount fees can be deducted one time at the end of the month, therefore making it easier to reconcile daily bank deposits.
- Eliminates the separate $5.00-$9.00 monthly statement charges from Discover and AmEx
There are however some unique differences with AmEx and Discover acquiring, as this service is not available to all merchants.
AmEx calls their acquiring program OnePoint and it has the following guidelines and limitations:
- OnePoint is only available to merchants who process less than $500K in annual AmEx sales. Merchants processing more than $500K in annual AmEx sales must have a direct agreement with American Express Merchant Services.
- Certain MCCs do not qualify for OnePoint (i.e. government, debt collection, direct marketing, etc. ). Find a complete list of prohibited industries here.
AmEx has set up a uniform pricing based on MCCs (Merchant Category Codes) that must be used by all acquirers/processors/ISOs. In some cases, the discount rate is lower than the discount rate a merchant could obtain directly from AmEx but there is a per item fee added. On average, OnePoint does not offer better pricing than enrolling directly with AmEx. In fact, OnePoint can be more expensive for certain merchants, especially for merchants who have retail operations and also accept credit cards over the phone or Internet. For instance, a small retailer calling American Express Merchant Services (800-528-5200) directly can receive a rate of 2.92% + $0.10 and OnePoint offers a rate of 2.89% + $0.10. The OnePoint rate seems slightly better but ends up being higher because the same merchant would pay a 0.30% surcharge for keyed or card not present transactions. However, the AmEx direct rate of 2.92% + $0.10 applies even to keyed transactions. Despite the small differences in pricing, OnePoint may be a better choice for many merchants because it offers consolidated reporting, settlement, and customer service. These are significant time savers for busy small to mid-sized businesses. Click here to see a complete price list for OnePoint.
As payment analysts, one thing we like about AmEx pricing for merchant services (whether OnePoint or AmEx direct) is that they offer a single rate for all of their cards (or two rates for retail merchants using OnePoint). AmEx is the only card where a merchant knows his processing fee before swiping a card.
Merchants processing less than $500K in annual AmEx sales have the option to enroll in OnePoint through their processor or have a relationship directly with AmEx. For most merchants who qualify for OnePoint, they should enroll in the program as it greatly simplifies AmEx card acceptance.
As the smallest card network with 5-6% U.S. credit card market share, Discover has taken a slightly different approach in “outsourcing” their acquiring business. Discover has sold majority of its small to mid-sized merchant portfolios/contracts to acquirers processing those merchant’s Visa and MasterCard transactions. So for 90%+ of the merchants in the U.S., Discover is like Visa and MasterCard. Discover is a card network with its own set of interchange fees, assessments, and dues. Discover’s interchange rates are very comparable to Visa’s and MasterCard’s published interchange rates. Click here to see Discover’s qualification guidelines.
A key difference between AmEx and Discover acquiring programs is that the former network owns the merchant contracts under the OnePoint program, and the latter network does not own the merchant contracts under its acquiring program with exception of “retained” accounts.
There are over 1,000 large merchants that Discover has selected to “retain” and maintain a direct relationship…companies like Amazon, Starbucks, and PayPal. These large merchants have a direct negotiated contract and rates with Discover. These large merchants are excluded from the Discover acquiring program unless there is a special agreement reached between the merchant and Discover. In select cases, Discover will release a merchant from their Discover contract and allow for the Discover settlement to be handled by the acquirer. There are benefits to the Discover acquiring program like consolidated reporting, consolidated funding of Discover transactions, and a single team for customer service. For large merchants, these benefits have to be weighed against the differential in interchange fees in moving from Discover direct to Discover acquiring.
In summary, AmEx and Discover acquiring are really good solutions for the majority of SMBs in the marketplace. It simplifies AmEx and Discover card acceptance and reduces the accounting and reconciliation overhead.