AMEX Loses Antitrust Lawsuit. What Does That Mean For Consumers?
After a lawsuit filed over 4 years ago by the US justice department, the ruling came down this morning that American Express had lost in court.
The crux of the lawsuit was that the DOJ thought the major credit card issuers (American Express, VISA and MasterCard) were restricting merchants and discouraging competition with such rules as prohibiting merchants from offering incentives to customers to pay with a debit card or credit card that would result in lower fees for the merchant.
American Express isn’t as large as VISA and MasterCard (combined, those two issue about 10 times the amount of cards AMEX does). Additionally, VISA and MasterCard are heavy in the debit card business, a disadvantage for AMEX, who focuses on high-end customers and card products that carry merchant fees at the higher end of the spectrum.
Back in 2010, both VISA and MasterCard reached a settlement with the government to loosen those merchant restrictions as it related to paying with cards that carry smaller fees. Note, this is different from merchants offering a discount for paying with cash, something they already have the ability to do in certain circumstances.
Because merchant agreements with American Express still specifically forbid them from promoting other cards, there really hasn’t been much in the way of movement towards a model where customers are offered discounts for using cheaper cards. It’s a very nuanced world for merchants, where they literally can have dozens of different percentages for the various reward cards offered by the big players, with some just as high as American Express in the 3-4% range.
American Express, predictably, is appealing the decision. What’s interesting is that I haven’t been able to discern whether the existing clauses in the merchant agreements will be valid during the appeals process.
Why Should This Concern You?
Your local merchant offers you a 1% discount (or a free toaster) to purchase something from them with a credit card that charges lower fees to the merchant. You like the free toaster and oblige. You and the merchant are both happy today. The credit card company (AMEX, VISA, MasterCard) makes less money. This continues over time and the credit card companies have to figure out where to make up the losses from lower fees. Potentially, they make the decision to offer less rewards to cardholders. That’s where we lose in the long run, less rewarding benefits on our favorite credit cards.
Getting a discount, rebate or bonus for paying with a different credit card can be rewarding for many consumers. But, it may eliminate the ability to leverage points and miles to significantly larger returns.
This isn’t the entire story, there’s still more to tell. I’ll be interested to see how this develops.
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And there are lots of nuances for merchants to consider. If I establish a policy that drives my high end customers to another merchant, a slight difference in fees paid to a credit card company won’t make up for the lost business unless margins are really, really small. It will indeed be interesting to see how it plays out.
DaveS, there are SO many layers to this. I can’t imagine that it was a good thing for the merchants that DOJ intervened. My guess is that Stripe, Square, et al would disrupt the market over time. 4 years after the lawsuit, the clock is still ticking on impact from this lawsuit.
So weird. My worlds collide. I used to work on this matter…and obviously I am a points and miles fiend.
Heather, what part did you work on?
I represented Amex.
Wow, that would have been fun! To be a fly on the wall in some of those hearings/discussions.
It was super interesting. But more importantly it was such a real world matter. A lot of business litigation is so cerebral; this was something you could feel and touch. Everyone goes to a supermarket and makes a choice of payment and stores steer customers everyday. It was such an accessible case.
Heather, I agree that this does cross over into the real world. I don’t think I really want to see a more regulated world in merchant processing, but I am curious what it would look like.