How Can American Express Afford to Pay the Most Generous Credit Card Rewards?
Article by Stephanie Neruda
American Express has some of the best rewards programs out there, from Membership Awards to Starwoods Points, to simple cash back.To demonstrate why, let’s analyze two 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).
Scenario 1: You pay using AmexJoe’s pays a ~2.4% transaction fee to Amex, 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.Scenario 2: You pay using your local bank’s MasterCard/VisaJoe’s pays a ~1.4% fee, on average, to process the transactionThis fee is split 3 ways between: (i) the sales organization who signs Joe’s Coffee to use the MasterCard/Visa network, (ii) the 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. We believe this is precisely the reason 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.We ran some numbers and found that the following no fee American Express cards rank well, based on our calculation of annualized rewards and promotions, minus any annualized fees:The Amex Blue Cash pays 5% back on your grocery and gas purchases and 1.5% on everything else after you spend ,500 in a year. For above average spenders, this can easily exceed an overall 2% reward rate.The Amex Costco True Earnings Card pays 3% back on restaurants and gas, 2% on travel, and 1% on everything else.The Amex Blue Sky is effectively a 1.33% cash back card. You get 1 point for every you spend, and you can offset travel expenses on your credit card statement at a rate of 7,500 points per 0. This is one of the highest base rewards rates available that we know of.Smart spending, and best of luck
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NerdWallet is a credit card comparison site, and seeks to become the best source for unbiased credit card information. The company was founded by financial industry veterans in the wake of the financial crisis in August 2009, and launched in March 2010. NerdWallet is privately held, and is based in New York, NY.
