Amex's small-biz strategy remedying its big-biz loss

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Though the loss of the Costco Warehouse account to Visa and Citigroup in 2015 is no longer called out in the American Express' earnings calls, the incident validated a change within the company that is showing results.

Amex says it added more than 1.5 million new U.S. merchant locations last year alone. Merchant locations accepting Amex rose to 9 million in 2017 from 6.4 million in 2013, when it introduced the OptBlue acquiring program to provide pricing flexibility to smaller merchants.

This is particularly striking in the wake of a recent Supreme Court ruling stating that Amex's steering policies did not violate antitrust laws. Though it would seem Amex has a solid legal footing for the practices merchants objected to, the market spoke louder than the courts.

"We have changed a lot of policies, and we had a reputation that we only favored our cardholders and not the merchants," said Ed Jay, executive vice president of U.S. small merchants for American Express.

To add new merchants, Amex expanded OptBlue, which launched in 2013. The program allows acquirers to adjust pricing when dealing directly with merchants, as opposed to sticking only to the pricing that American Express' top brass had set as the standard.

"There were a number of things getting in the way of businesses feeling 100% comfortable accepting American Express and welcoming our card members into their stores," Jay said. "One of the biggest changes we moved to, was really how we onboarded these merchants."

OptBlue was a way for Amex to align with merchants' expectations for how they accept credit card payments. Basically, Amex applies a wholesale rate to the processors, and the processor sets the rate the merchant pays. Currently, 18 processors are live on the OptBlue program in the U.S.

"Before that change, if a merchant wanted Amex, they had to come directly to Amex, sign with us and get paid at the speed we would pay you," Jay said. "It was different from how they worked with Visa, Mastercard and Discover."

This year, Amex introduced OptBlue pricing for "emerging market" industries, including education, child care services, government categories, insurance and direct marketing/subscription merchants.

Amex's strategy is not just focused on adding new merchants in new categories; it's also working to keep the ones it has.

To that end, Amex changed a policy about how it handles transaction disputes, as well as automating capabilities to find proof whether card members made purchases at disputed locations, Jay said.

"In 2017 alone, we had 700,000 fewer disputes going back to merchants," Jay said. "If you are a merchant and not even hearing about a dispute because of these changes, that is a good change for merchants."

For the past few years, Amex has offered a consumer service platform called Merchant Recommendations, which it has expanded as its small-business client list grows. This program provides cardholders with information about merchant locations that match their past purchasing history.

"If you are a card member, you get updates on places you like to shop at, as well as some new places," Jay said. "It's a network of matching buyers and sellers together, because being a small business in a city, it can be hard to get the attention of consumers and build traction."

In creating that network, Amex is able to promote its newly diverse merchant sectors.

In 2017, Amex acquirers added 115,000 clothing stores, 105,000 restaurants, 105,000 construction supply locations, 63,000 salons and spas, 48,000 medical supply companies and 8,000 dry cleaners.

Amex has often talked about closing the merchant gap and having parity with Mastercard and Visa for acceptance, and it has "achieved that goal in a lot of ways," said Brian Riley, director of card services for Mercator Advisory Group.

"American Express went that route with their Blue card, as more of a revolving card and one that addresses a different population," Riley said. "It's a card you would use for everyday spend."

It has also helped that Amex was one of the first card brands to single out small businesses with its Small Business Saturday advocacy program, Riley added. Amex's activity in prepaid also helped expand the reach of its brand.

"Even though it didn't work as well, the Bluebird prepaid card with Walmart was another example that American Express wanted to dig deeper into the consumer barrel," Riley said. "They have been able to move forward with other programs."

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