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If you thought American Express' loss Thursday of a big antitrust case would help its rivals, think again. Visa, MasterCard, and even card-issuing banks could be hurt by the race to lower merchant fees that the ruling will set off.
February 19 -
A court-imposed deadline for American Express to negotiate a fix to its merchant rules with the Department of Justice is about three weeks away. Odds of a deal are said to be low, heightening uncertainty and fueling debate about how the showdown will affect the future of the credit card business.
February 26 -
Costco has picked Visa as its new payment card network and Citigroup as the new issuer of its cobranded credit cards.
March 2 -
American Express will certainly suffer when its 16-year cobranding deal with Costco ends in 2016, but its executives will spend the next year building up the card brand's digital payment products to create enough opportunities to ease the company's short-term pain and guarantee its long-term health.
February 12
American Express and the Department of Justice are still far apart on how to reform a longstanding practice at the card company that was recently ruled illegal, court filings show.
A federal judge had ordered the two sides to seek a compromise on how to change Amex's rules against merchant "steering." That is when retailers offer customers incentives to use particular card brands (usually ones with lower processing fees). Amex's ban on the practice was deemed anticompetitive by the judge last month.
Instead of a deal, Amex and the DOJ each filed separate reform proposals Monday that show wide disagreement on key issues, making it likely that the court will eventually have to impose reforms.
Justice officials want Amex to give merchants wide latitude to steer customers to preferred cards. Amex argues that steering should only be permitted to lower-cost cards, and it wants to be allowed to terminate merchants that steer.
Amex argues that the government's proposed changes are overly broad, and "will disable the company from effectively competing against the dominant networks," according to its court filing.
The company on Wednesday reiterated its intention to appeal. "We continue to believe that the Department of Justice's arguments are flawed and believe we should prevail on appeal," a company spokesman wrote in an email.
Federal prosecutors argue that Amex's stance amounts to a refusal to accept the judge's ruling.
Amex's proposal "would perpetuate its suppression of competition" and "would empower it effectively to re-impose restrictions that the court has found unlawful," the DOJ filing said.
"Amex asks the court, plaintiffs and merchants simply to trust it to abstain from anticompetitive practices that it fought aggressively to maintain, and which are thoroughly embedded in the company's practices," the department wrote.
How this fight is resolved could have broad resonance in the card industry,
Amex resisted the government's efforts to permit steering long after its competitors gave up the fight. Visa and MasterCard were sued along with Amex in 2010, but they settled with the Department of Justice the next year and agreed to permit steering.
Amex refused to settle. Because it charges merchants higher rates, on average, than Visa, MasterCard or Discover, it could lose market share if retailers are allowed to encourage the use of cheaper cards. During trial testimony last summer, Amex Chief Executive Kenneth Chenault said the company "could not survive" if merchants were permitted to steer to lower-priced cards.
After nearly five years of litigation, Amex lost its gamble in February, when Judge Nicholas Garaufis of the U.S. District Court for New York's southern district ruled that contractual provisions against steering violate antitrust laws.
But rather than imposing a reform, Garaufis ordered Amex and DOJ officials to negotiate, giving them 30 days to jointly come to a solution that would comply with antitrust law without unnecessarily harming Amex's brand.
Garaufis wrote in February that he "is confident there exists a middle ground that strikes the appropriate balance between American Express' legitimate interests as a going concern and the public interest."
However, immediately after the decision, Amex announced that it would appeal the decision,
Amex's proposal would allow steering only to cards with lower merchant fees for each particular transaction. The Department of Justice argues that this would be a huge practical barrier, requiring merchants to make complex cost calculations before they can steer. Amex also wants to be allowed to cease doing business with merchants that steer, a proposal the department opposes.
The two sides also differ on how to enforce the reforms. The DOJ proposed that Amex be required to report a range of information on its merchant contracts to the government and assign a chief compliance officer to implement the reforms. Amex called these "onerous, unprecedented and wholly unwarranted compliance obligations."
The antitrust ruling came at a difficult time for Amex, which announced earlier this year that it will
