American Express - Killing You Softly with Fees?

Yes I ranted regarding all of the direct mail that American Express generates as the Junk Mail King and begged them to try email out.  Well, I've been receiving weekly emails from them now, but all of them come from their Rewards group which I think is perfect.  Besides getting on board with this email thing, using email/web for Rewards program is key because you don't have to print up pages and pages of junk to describe all of the redemption options.  However, just like their sign and travel options and hosts of other fees, you MUST READ THE FINE PRINT on Amex's offers.  Case in point, take a look at this offer I received this morning.

The email looks very enticing and tells you that you can pay your business taxes online using American Express.   Basically the pitch is "hey pay your taxes with your Amex card and get get rewards points that you can use to get valuable prizes."  It also direct you to "officially" approved websites to make payments.  These websites of course have that schlocky US Government looking graphics and titles like official payments or 1040.  Its enough to fool anyone except for those footnotes.

The first footnote at the top which I'm sure the Amex lawyers insisted on putting above the fold says "These tax payment companies charge a convenience fee of approximately 2.49%. This fee may be tax-deductible. Check with your tax advisor".    Well, I did at the end of tax season and my accountant told me, why would you want to pay that fee.  So, as a service to you readers, I checked over with the IRS official site and here's what I found regarding the fee: "Credit card service providers charge a fee for their service.  This fee can be deducted as a business expense, when paid or incurred by the business."  Ok, so the fee is charged by these "official" looking companies that can assist with your tax payments.

So, here's what we know.  1) Use your Amex card to pay your taxes and get whacked with a 2.49% fee  2) The IRS says  you can deduct this as a business expense 3) According to American Express you can get an $100 Amex Gift card for 20,000 points.  4) Depending on your card you earn 1 point for every $1 spent; there are other options but that's the base card. 5) I'll come back to that earning points thing because it is very confusing.

Let's do some math.  In order to get 20K points you need to charge at a maximum $20,000.  If you paid $20K in taxes using this offer it costs you $498.  However, you may get some tax benefit since you can claim this is a business expense, so lets knock 30% off that $498 to get some tax savings.  Therefore charging $20K in taxes costs you $349 and that gets you $100 in cash from Amex.  Woot, that's some losing proposition and that's on the low end assuming you get 30% in tax savings.

Now to be fair to Amex since I used the lowest points earning option lets see what your break even points earning option you would need to pay for these fees.  I personally can't figure out the levels because the pages on their websites are confusing, so let's stick with the math. 

Let's keep the tax benefit the same at 30%.  So, in order to break even on the $100 you need to have a cost of $143 charged on your Amex card for the service ($143*.7=$100.1).  To get a charge on your Amex card of $143 you need to have paid $5,743 ($143/.0249) in taxes, but in order to get the 20,000 points on that $5,743 charged you need to earn 3.48 points per dollar charged (20,000/5743).

What am I missing here?  Unless you know for sure that you are earning at least 3.5 points per dollar charged, this is a lose, lose scenario for you just like my accountant told me a few months back.  Are you earning 3.5 points per dollar spent?  Do you even know what you are earning or can you even figure it out?  Looks to me for the convenience of not writing out a check you are getting hit over the head in fees.  Seriously, did I make a mistake?  Is this wrong?  I'll be more than happy to correct this post, but it looks to me like this is not a good offer at all.  Some things are just better the old fashioned way - PAPER and CHECKS; that is until that fee comes down!

PardonMyFrench,

Eric

Comments

[Interrobanger]

There's another aspect to those reward programs, and that's where the money actually comes from. They come from interchange fees paid directly by merchants, and indirectly by consumers. It's an issue I'm quite familiar with -- I work on behalf of the website UnfairCreditCardFees.com drawing attention to the consequences it has for both merchants and consumers.

One of the problems is that merchants are not allowed to break out the fee at the register, such as offering a cash discount or a credit surcharge (same difference, really). This means the cost of interchange gets built into all goods across a store. There are some exceptions where a store sells exclusively one type of good -- gas or liquor -- but this isn't an option for most retailers.

So everyone pays the interchange fee, even people who live on a fixed income. And yet, relatively few people can afford the rewards card. So you end up in a reverse-Robin Hood scenario. Bottom line, you're right -- the fees are too high. I wouldn't go so far as back to paper and checks, especially because so few stores accept them. I have a debit card, and it works fine without all the fees.

[PardonMyFrench]

Thanks. That was a very thoughtful reply. I had totally forgotten about those fees so your comment was very welcome.

Eric

[Interrobanger]

Eric, thanks. I should perhaps clarify one thing -- I was a little un-careful in my phrasing on the point about cash discounts/credit surcharges.

There are a lot of things the credit card agreements forbid merchants from doing -- telling customers about the fee, for one thing. And they also keep the thousands of pages of rules that govern that agreement secret as well. But I erred in saying that retailers "are not allowed" to offer a cash discount.

While there aren't rules specifically forbidding it, doing so would be cost-prohibitive, and is effectively impossible. For example, different cards have different interchange fees, so let's say you buy a six-pack of your favorite frostiest beverage at the store. Now the interchange fee charged to the merchant will depend on if you're using signature debit (pin number) or signing for it -- and it will depend again on what kind of card it is -- gold or platinum? That will carry a higher fee. So here you have multiple interchange points for the same item. Now, carry that across the tens of thousands of other items also on sale at this grocery store.

So, another aspect of these fees that frustrates merchants is that there is no simple way to account for them -- it's worth it to the banks, because they're the ones making the money. But it's too difficult for retailers to spend time figuring out what they would offer as a cash discount. And that's why the interchange prices get built into the price of all goods, for everyone, whether you use a card or stick to cash.

And I betcha the banks like it that way, too -- that way, the customer is none the wiser.