Justice Dept. Goes on Credit Card Antitrust Spree

Image: Paul Vlaar

The US Department of Justice is filing an antitrust suit against American Express. The credit card provider won’t let retailers give customers discounts for using other credit cards with lower processing fees. This comes one day after Visa and MasterCard settled with the DOJ on similar allegations. The Washington Post has more:

The issue of “swipe fees” has long been a thorn in the side of the retailing industry, which complained that it has little power to inform customers of the differences in card costs. In its complaint, the Justice Department estimated that the fees cost merchants $35 billion each year – resulting in higher prices for shoppers.

The card networks “put customers and consumers in a no-win situation,” Attorney General Eric H. Holder Jr. said in a news conference. “We are sending a very clear message: We will not tolerate anti-competitive policies and practices.”

American Express has some of the highest fees and most restrictive practices in the industry, federal officials said. AmEx, based in New York, said it plans to fight the case, calling it “seriously misguided.”

The Justice Department settlement…gives merchants the ability to reduce prices for certain credit cards. Merchants that accept only Visa and MasterCard, which the department estimated included 4 million store locations, can offer the discounts immediately. But those that also accept American Express, about 7 million locations, must wait for the outcome of the civil suit because their contracts forbid discounting on any type of card.

The LA Times adds:

Merchants pay about $35 billion a year in fees to credit card companies, according to the Justice Department. It’s money that restaurant owners, retailers and others say they can ill afford in the difficult economy.

Consumers know well that credit card companies charge interest, but many are not aware of the merchant fees.

The cost of a swipe varies widely, depending on whether the customer is using a card that offers rewards. It might cost a merchant 2% of the purchase price if a customer uses a no-frills card. But if the purchase is made with a card that offers airline miles, for example, the merchant might pay as much as 5%.

The Wall St. Journal’s David Reilly explains why AmEx’s strategy makes sense for the company:

Although AmEx is the odd man out, it may be wise. Of the three, it faces the biggest threat from proposed changes. Its cards generally are pricier for merchants to accept. Allowing merchants to give customers discounts based on card type, therefore, would almost certainly undercut Amex, pressuring its margins and eroding its market share. In the second quarter, merchant fees were 65% of AmEx’s noninterest revenue and 55% of all revenue net of interest expense.

So, AmEx’s strategy makes sense. The litigation could take years, during which AmEx’s contracts stay in force. It also will get to see how the new system plays out for merchants who only accept Visa and MasterCard. Plus, AmEx could prevail in court given a strong case that it isn’t a dominant player in its market.

AmEx has chosen the lesser of two threats.

Most consumers with an AmEx, myself included, also have a Visa or MasterCard. If a merchant doesn’t accept AmEx, no big deal, I just whip out another card. I keep my AmEx because it has superior rewards and customer service to many other credit cards.

Would lower prices at my local stores stop me from using my AmEx? Maybe. But if I feel like $2 more on the AmEx results in better rewards, I’ll still use it. If, on the other hand, a merchant offers me a $5 discount on the same purchase for paying in cash, I’ll choose cash over any credit card. It all depends on the size of the discount and whether I perceive rewards or a lower price to be a better payoff.

I laud the federal government for increasing credit card transparency, as well as giving merchants more choice about the fees they pay banks. The antitrust suit, which the Bush administration started two years ago, also doesn’t allow merchants to add surcharges beyond a transaction’s cost.

One question, though: Where’s Discover in this whole legal jumble?

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Written by Drea Knufken

Drea Knufken

Currently, I create and execute content- and PR strategies for clients, including thought leadership and messaging. I also ghostwrite and produce press releases, white papers, case studies and other collateral.