On July 7, Judge Nicholas Garaufis of the U.S. District Court for the Easter District of New York will begin hearing arguments in the case, which the Department of Justice (DOJ) filed in October 2010. The trial is expected to last up to 10 weeks, with a ruling expected early next year.
In its case, the DOJ is challenging Amex rules that prevent merchants from imposing extra
fees for Amex cards and offering consumers discounts, rewards and information about card costs to lure them into choosing a form of payment that is less expensive to accept. As a result, consumers are paying more for the purchases, the antitrust enforcer contends – according to PYMNTS.
At the time the DOJ filed the lawsuit, it also announced settlements with Visa and MasterCard on similar allegations. As a result of the networks’ deals, both bankcard brands agreed to allow merchants to impose surcharges and to offer discounts, incentives and information to consumers to encourage the use of less-costly payment methods. Amex refused on the contention that its business model is much different from those of the bankcard brands.
Unlike Visa and MasterCard, which sets interchange rates that merchants end of paying for accepting their cards (though large retailers often negotiate cheaper rates), Amex doesn’t apply interchange fees. Instead, as both the issuer and acquirer, it negotiates the discount fees it assesses individually with each merchant.
Subsequently, merchants are free to accept or decline Amex acceptance based on those negotiations. Some 3 million merchants that accept payment cards have said no to Amex acceptance.
What the DOJ must argue to win its case is that Amex has sufficient market power to force merchants into accepting its terms, including the restrictions on discounts and other brand rules that are at the heart of the litigation. That might be difficult to do, and it’s uncertain what strategy the DOJ has in store to push its case. Perhaps in certain markets, such as travel and entertainment, Amex acceptance is relatively common. But on a broader market scale, that’s not the case.
Thousands of banks issue Visa and MasterCard debit and credit cards, while just nine US banks issue Amex cards. Moreover, while US financial institutions issue nearly a half-billion credit and charge cards, only about 50 million Amex cards are on issue. Add debit cards into the mix, and the Visa and MasterCard card totals approach 1 billion. Amex doesn’t issue debit cards, though it has ventured into the prepaid card market with Serve.
Visa and MasterCard share a combined 80% of US card spend approximately, compared with less than 15% for Amex. On top of that, while virtually every Amex cardholder has a Visa or MasterCard in his wallet or purse, the likelihood that a Visa or MasterCard cardholder also has an Amex card is much lower.
Amex traditionally has argued that it can negotiate higher merchant fees because its cards attract wealthier clientele who generally spend more. In turn, Amex uses the revenue it generates to create attractive cardholder rewards designed to encourage more spending. That’s the Amex business model and its core strategy for growth.
So if the DOJ wins its case, and it allows merchants to steer customers to lower-cost alternatives, such as debit cards or cash, it would strike at the heart of Amex’s method of doing business, and Amex would have to compete on price instead of product differentiation. That, Amex fears, could force it to act more like Discover, which has struggled to grow its share of the card market.
Discover chose to compete on price and it hasn’t been able to gain much more than a 5% market share, despite its cards being accepted virtually everywhere Visa and MasterCard are. Amex fears forcing it to do the same would limit its ability to compete as effectively as it can under its current strategy.