AMEX business model

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Typical credit card business model
When a consumer makes a purchase using a credit or charge card, a small portion of the price is paid as a fee (known as the merchant discount), with the merchant keeping the remainder. There are typically three parties who split this fee amongst themselves:

Acquiring bank: the bank which processes credit card transactions for a merchant, including crediting the merchant's account for the net value charged to a credit card.
Issuing bank: the bank which issues the consumer's credit card. This is the bank a consumer is responsible for repaying after making a credit card purchase. The issuer's share of the merchant discount is known as the interchange fee.
Network: the link between acquiring banks and issuing banks. These banks have relationships with a network, rather than with each other, for fulfilling card purchases. This allows a card issued by a community bank in Peru to be used at a shop in Sri Lanka, for instance, without requiring the banks to have a direct relationship with each other. The two largest networks in the world are Visa and MasterCard.
The average merchant discount in the United States is 1.9%. Of this, approximately 0.1% goes to the acquirer, 1.7% to the issuer, and 0.09% to the network.[18]

Most Prime and Superprime card issuers use the majority of their interchange revenue to fund loyalty programs like frequent flyer points and cash back, and hence their profit from card spending is small relative to the interest they earn from card lending.

[edit] How American Express differs
American Express typically plays the role of all three parties above, keeping the entire merchant discount. In recent years Amex has begun authorizing other banks to either acquire or issue on Amex's behalf, primarily in countries where Amex would otherwise have little or no presence.

Amex also has historically charged a higher merchant discount than Visa or MasterCard. The size of the premium can differ significantly: in the US, Amex charges 66 basis points more (2.56% vs 1.9%) than rivals Visa and MasterCard,[18][19] while in Australia Amex charges more than twice as much as Visa or MasterCard due to Australian interchange regulations.

Amex uses this higher discount revenue to invest in rewards programs which provide a higher payout than competing programs. These more substantial rewards programs, in addition to a premium brand and a reputation for superior customer service, allows Amex to attract a disproportionate share of affluent consumers. Amex then uses its strength with affluent consumers to justify charging a higher merchant discount rate, implying that if a merchant does not accept Amex cards he will lose affluent customers. This business model creates a self-reinforcing loop.[3]

Due to what Amex calls its "spend-centric strategy", card spending and fees are responsible for 70% of Amex's card profit, vs. 10-40% for other issuers. Amex also tends to make more money from annual fees than other issuers do.[3]

One tension in Amex's business model is acceptance, a volume vs. margin trade-off. Because Amex charges a higher merchant discount fee, it is not as widely accepted as Visa or MasterCard. Amex's business model depends on having a higher discount fee, however, making it difficult to lower it. The company has to strike a balance, keeping its fee low enough to attract sufficient merchants, but high enough to fund rich rewards and drive its business model. In countries where Amex charges a small premium, like the US, it has near-parity acceptance, but its card rewards are not significantly more substantial than those of its competitors. In countries where it charges a large premium, its cards often have a much higher rewards payout than competing cards.

http://en.wikipedia.org/wiki/American_Express

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