How can American Express afford to pay you the most generous rewards in the industry?
How can American Express afford to pay you the most generous rewards in the industry? Probably the same reason Warren Buffet owns 12% of the company.
(NerdWallet) - American Express has some of the best rewards programs out there, as you can see from their high rankings using our nerdy credit card finder tool.
To demonstrate why, let’s analyze 2 transactions at Joe’s Coffee Shop, one using your American Express card, and one using your MasterCard/Visa from one of the big issuers (Bank of America, Chase, Citibank, Capital One, Wachovia).
- You pay using American Express
- Joe’s pays a ~2.4% transaction fee to American Express, on average, to process the transaction. American Express owns the network, the card company, and the sales network to sign up new shops, so they keep the entire transaction fee.
- You pay using your local bank’s MasterCard/Visa
- Joe’s pays a ~1.4% fee, on average, to process the transaction
- This fee is split 3 ways between (i) the sales organization who signs Joe’s Coffee to use the MasterCard/Visa network, (ii) MasterCard/Visa Network, and (iii) the bank who issued you the credit card.
Not only does American Express charge a higher transaction fee, they also keep the entire fee instead of splitting it 3 ways.
The virtuous cycle goes like this – (i) American Express has the most prestigious cardholders so they can charge merchants more, (ii) American Express charges merchants more so they can offer better rewards, (iii) American Express offers better rewards so they can attract premier cardholders. At NerdWallet, we believe this is precisely why Warren Buffet owns 12% of the company. And this is also why when you pick up an American Express card, you get to enjoy extra rewards at the expense of Joe’s Coffees everywhere.
The following no fee American Express card rank well in our objective credit card finder, based on our calculation of annualized rewards and promotions minus annualized fees:
- Blue Cash pays 5% back on your grocery and gas purchases and 1.5% on everything else after you spend $6,500 in a year. Use our credit card finder to figure out where this averages out, but for above average spenders it can easily exceed 2%
- Costco True Earnings Card pays 3% back on restaurants and gas, 2% on travel, and 1% on everything else
Smart spending, and best of luck
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