Judge Rules AMEX Violated Antitrust Laws - Will Consumers Benefit?

Credit CardsA federal judge in New York ruled that American Express had violated US antitrust laws by telling retailers that they weren’t allowed to both accept AMEX cards and try to “steer” customers toward using cards from other companies.

The case was brought by the United States of America and by 17 US states against AMEX, Visa, and MasterCard. The two other credit card companies entered into consent decrees with the government before trial.

“Steering” Consumers

The complaint charged that each company’s “anti-steering” rules (also called Non-Discrimination Provisions (“NDPs”)) were anticompetitive restraints of trade in violation of section 1 of the Sherman Antitrust Act.

According to the court,

Steering is both pro-competitive and ubiquitous. Merchants routinely attempt to influence customers’ purchasing decisions, whether by placing a particular brand of cereal at eye level rather than on a bottom shelf, discounting last year’s fashion inventory, or offering promotions such as “buy one, get one free.” This dynamic, however, is absent in the credit card industry. Under American Express’s NDPs, a merchant may not attempt to induce or “steer” a customer to use the merchant’s preferred card network by, for example, offering a 10% discount for using a Visa card, free shipping for using a Discover card, or a free night at a hotel for using an American Express card.

AMEX, the number two credit card company behind Visa, had argued that it was simply trying to “level the playing field.” In his 150 page opinion, the judge rejected that argument.

AMEX charges high transaction fees to retailers, mainly because most of its customers pay off their credit card balances every month and thus AMEX doesn’t earn as much in interest as other credit card companies do.

Already, three million retailers in the US don’t accept AMEX cards; about 3.4 million merchants do. AMEX claims that its users tend to be richer than the users of other cards and thus spend more when shopping.

A Two-Sided Market

As discussed in Forbes, the case involves what economists call a “two-sided” market. In such a market, consumers and retailers both benefit from the network that brings them together. In this case, the network is created by the credit card company that provides a conduit from the consumer’s bank account to the point of sale at the store.

Retailers and consumers also share the costs associated with each card, and those costs can vary from card to card. For example, some cards charge less as a transaction fee for the retailer, and some cards charge higher interest rates or annual fees to consumers.

There are also secondary benefits to consumers in addition to convenience. For example, some credit card companies offer cashback rebates, frequent flyer miles, or other perks.

Will Consumers Benefit?

US government attorneys had argued that consumers would benefit if retailers were allowed to encourage buyers to pay with a card other than AMEX.

Will the court’s decision actually benefit consumers? Retailers apparently think so.

The Merchants Payment Coalition issued a press release stating that the court’s ruling was “one step forward to lower card fees for consumers” – as well as for merchants.

The judge has not yet announced a proposed remedy for AMEX’s antitrust violation.

In the wake of the court’s decision, AMEX immediately lost $1.5 billion in market value. The company announced that it would appeal the court’s decision.

If you have questions about antitrust law, either as a merchant or as a consumer, you may wish to consult an antitrust attorney.

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