Small Business

Small-Biz Talks: How American Express is Helping Small Businesses with Payments

Today, it seems like there are a million ways to accept payments from customers. We chatted with American Express's Executive Vice President of US Small Merchants, Ed Jay, about the ongoing changes and how American Express is continuing to help small businesses.

Small-business owners know how important payment methods are. The more flexible businesses are in the payment methods they accept, the better the customer experience. However, there are still numerous businesses that only accept cash or limit credit cards networks they accept. Why? Heavy processing fees can eat away at already-slim margins for many business owners.

We had the opportunity to sit down with Ed Jay, Executive Vice President of US Small Merchants at American Express, about how payments are changing relative to small businesses.

American Express has been an interesting player in the small-business payments space, since it is typically seen as the most expensive for businesses to accept, given high processing fees. However, American Express has made great strides to change that and to change its reputation. They've even launched a dedicated program called OptBlue to help facilitate those changes. Read below for more information on how American Express and the payments space is changing for small businesses.

This interview has been condensed and edited for clarity. If you're a small-business owner interested in sharing your funding story, tweet us at @ValuePenguin.

There are some businesses that accept credit cards but not American Express. Why is that?

Throughout the history of American Express, we have traditionally been more well-known for being accepted at larger businesses such as travel, lodging and airlines. Over many years we’ve expanded our credit card acceptance into other areas like general retail, grocery stores and more. We are the founder of Small Business Saturday, and started that entire campaign for small businesses. We’ve had this focus on small merchants, and there’s been a number of changes that have led to a significant improvement in the number of businesses accepting American Express. We launched a program called OptBlue in the U.S. at the end of 2013. In the past if you wanted to accept American Express, you'd have separate contracts, pricing, and statements specifically for American Express.

The biggest change with the OptBlue program is the way we work with small businesses. Now we allow the processors and acquirers—in this case, First Data, Global Payments, and several others—to set the price for American Express acceptance, all the transactions come on one statement, and allowed the speed at which people get paid to be the same as for the other networks. We essentially took all the friction out of the process, and that had a significant impact on the ease at which small businesses can sign up for American Express. But it also improved the competition. If a merchant doesn’t like the pricing that they’re getting now, there are other processors who may offer them different pricing, so merchants feel like they have more choice in terms of how they decide to accept American Express versus the way it was done before.

A program like OptBlue, where it sounds like it’s more of an end-to-end solution for these merchants—is that something that competitors like MasterCard and Visa were already doing before?

They were doing it that way before but we really wanted to change this to provide a better experience for our small merchants. If you’re a small business and you decide to take credit cards, the question you get asked from your processor is, “Would you like to accept credit cards?” And with OptBlue, the answer is inclusive of Visa, MasterCard, American Express and Discover. Before it would have been two questions: “Do you want to accept Visa or MasterCard or Discover, and if you do, here’s the contract for that” and “Do you want to accept American Express?” Now those partners and those providers can offer a fully integrated solution, which has made a big impact for us and our small merchants.

You mentioned all those different processors—essentially, the middlemen that exist every time a card is swiped. I understand that OptBlue brings transparency and it makes it easier for merchants to sign up, but does it reduce the number of middlemen that a payment has to go through?

It has introduced more competition into the market, which is ultimately better for the small merchant. Before we made this change, American Express would set the rate for American Express acceptance. In the new model, the processor and the acquirer set the pricing for American Express. The end result for a merchant is, they will find different pricing structures, different pricing options, and they have a lot more flexibility to choose the one that works for them. Some providers may be more aggressive with price, some may be less aggressive. It’s really up to them...

In one of your studies, only 34% of small businesses are updating payment methods that they accept, but over 50% of surveyed businesses believe that they lost customers because they didn’t offer enough payment options. How do you drive this issue further up the priority chain if a lot of businesses already accept that it is a problem, but only 34% of them are taking action?

Our experience has been that it takes time for merchants to understand the changes they should be making, and how it impacts their business. Fifty three percent of small business owners have lost a customer due to not accepting their preferred payment method. People may have witnessed that they lost a customer, or they didn’t get one; but sometimes they have to see it a few times before they do anything about it. It’s normal for us to see that lag between someone saying, “I lost a sale last year” and “that’s because I didn’t support one payment method.” Fast-forward six months, and they might realize: “Last year it was only one, but last month I lost two.” When they start seeing those kinds of changes, many more places begin accepting American Express. We know many small businesses prioritize marketing and advertising over other things like updating their payment methods. They feel like that is going to be the biggest key for them. American Express is unique in our approach to marketing under the OptBlue program. That’s an area where we are truly unique, and we’ve been doing it for years now, with Small Business Saturday and our merchant recommendations. I’ll put you on the spot a little bit: are you an American Express Card Member?

I am, actually.

Good! If you use the American Express app, you’ve probably seen various offers to spend at merchants, or a feature called Recommendations. If you’re on the website checking your account, you’ll see the same thing. Recommendations is something that we’ve developed over many years now, and it’s getting a lot of scale. Think of it as: We take merchants onboard, they accept American Express, and through their relationships with us, they chose to accept American Express, and we will recommend the merchants using a sophisticated algorithm.

In your scenario, it would look at your spend history and say: Justin likes spending at these kinds of places, here are a number of new businesses we want to recommend to Justin. For a small business, that is invaluable; to have a company like American Express promoting a small business to our Card Members is truly unique. Last year, we made recommendations to over 15 million consumers, and we recommended over 3 million merchants to those individuals. That’s something that small businesses are looking for. When we go back to why we are able to grow our acceptance so quickly, it is not just about only accepting a new payment method, it’s about the fact that we are big promoters and recommenders of small businesses to consumers.

How do you envision tackling the issue of some small businesses only accepting cash for small purchases, say $10 or less?

OptBlue has created more competition in the market, and that competition is really allowing small merchants to have different companies that they can use for acceptance with different pricing structures. For example, some companies have one flat rate for all cards, any size of transaction. For a small business, they can make that decision, and they might be less likely to have a minimum, because there’s no difference between a $3 transaction and a $30 transaction in terms of the fees they would pay. Other companies have different kinds of price structures. It’s up to merchants and the processing partners they choose.

As technology advances, more consumers are expecting vendors to accept all sorts of payment options like Apple Pay, different credit cards, etc. Why are merchants still holding out from accepting everything?

If you’re a new business today, and you want to conduct commerce, I think very few companies are going to be cash-only the technology has evolved. It’s much simpler to accept card payments today; it’s also much more cost-effective now than it may have been in the past. In the old days, you may have had to buy a complicated point-of-sale machine; now there are different kinds of companies out there; between what Square does, or what the traditional processors do, I think the cost of accepting credit cards has come down and it’s less cumbersome as technology offers them a way to run their businesses.

Payments study fact sheet published by American Express

What we’re seeing—and you see it reflected in the survey—is the usage of credit cards, certainly in the United States has expanded, and likewise American Express acceptance has expanded. It’s harder for those companies not to lose business, because people want to use their cards now. Some businesses have been successful to date without accepting credit cards, but more of them are seeing that going forward in the future, the benefits of not having to manage the fraud and the cash, and those other pieces are becoming a lot more important now, and it’s much easier to adopt credit cards now than it was many years ago. So I think a lot of them are rethinking that. I would be surprised if a new business that’s starting today didn’t accept cards as a default consideration.

Justin Song

Justin is a Sr. Research Analyst at ValuePenguin, focusing on small business lending. He was a corporate strategy associate at IBM.