Amex wins in US merchant fee dispute

ANDREW CHUNG
June 26, 2018
Reuters

The US Supreme Court has sided with American Express and against 11 states, ruling that the company’s policy of forbidding merchants from encouraging customers to use rival credit cards with lower fees does not violate federal antitrust law.

Handing American Express an important legal victory that validated a key component of its business model, the justices upheld a lower court decision that had cleared the company of unlawfully stifling competition through so-called anti-steering provisions in its contracts with merchants. 

The decision handed down on Monday was 5-4, with the court’s conservative justices in the majority and liberals dissenting. Major retailers panned it as bad for consumers.

Shares of American Express were up 2 per cent after the ruling in midday trading. Shares of rivals Visa Inc and Mastercard Inc both fell, with Visa down 2.6 per cent and Mastercard off 2.5 per cent.

So-called swipe fees paid to credit card companies each time a consumer uses a card for a purchase are a major expense for merchants who annually pay more than $US50 billion ($A67 billion) to process such transactions.

The business model of American Express depends primarily on merchant fees, while competitors like Visa and MasterCard derive most of their revenues from interest on unpaid balances. American Express has said these fees fund the additional benefits it offers its cardholders compared to its rivals. 

New York-based American Express charges merchants higher fees relative to the other credit card networks, and generates more revenue, according to legal papers filed by the states.

The case involved an appeal by the 11 states – Iowa, Connecticut, Idaho, Illinois, Maryland, Michigan, Montana, Ohio, Rhode Island, Utah and Vermont – of a 2016 ruling by the New York-based 2nd US Circuit Court of Appeals that favoured American Express. 

The states, backed by President Donald Trump’s administration, had argued that anti-steering provisions kept fees artificially high, leading to higher retail prices even for people who do not use credit cards.

The Retail Industry Leaders Association, which represents major retailers including Walmart Inc, Home Depot and Target Corp, said the decision will allow American Express to prevent consumers from understanding rising credit card fees. 

“Today’s decision is a loss for American consumers,” the group’s general counsel Deborah White said. “Competition in the credit card space is sorely lacking.” 

As a result of advertising campaigns in the 1980s by Visa and MasterCard aimed at convincing merchants and consumers to use cards with lower fees, American Express tightened contract provisions with merchants to stop what it called discrimination against its cards. 

American Express, which accounts for about 26 per cent of all US credit card transactions, said in legal papers that merchant fees and anti-steering measures are essential to compete with Visa and MasterCard, which are offered by most banks and are so ubiquitous that it is almost “inevitable” that a bank customer will be issued one of those cards.