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AmEx’s Battle With the Feds Could Mean Lower Costs for Credit-Card Users

The American Express Co. logo, along with those of Visa Inc. and Mastercard Inc., are displayed in a shop window in New York, NY
Scott Eells—Bloomberg via Getty Images

American Express is facing off against the Justice Department today in a court battle that could shape the future of the credit card industry.

The suit, which concerns the fees merchants pay every time a customers uses plastic, is the culmination of a four-year war between federal authorities and the New York-based credit card giant. Its outcome won’t just affect the way American Express does business, but will likely impact consumers at the checkout counter as well.

Currently at stake is AmEx’s “take it or leave it” policy. Every time a customer pays with a credit card, the merchant must pay a processing fee, generally between 2% and 3% of the total purchase. American Express — which, according to the government, charges the highest merchant fees of any card network — forbids its merchant partners from offering customers incentives to use cards that are cheaper for the vender to accept.

The Department of Justice argues that the policy is anti-competitive because AmEx—which accounts for 26% of all money transacted through credit cards in the U.S.—is too important for most businesses to drop. It also claims customers, even those who use a different card, end up paying for AmEx’s higher rates because merchants compensate by increasing prices.

American Express, of course, disagrees. The company says it is too small to have an anti-competitive effect on the market. Court documents show that there were 53.6 million AmEx cards in circulation in 2013, compared to 178 million MasterCards and 254 million U.S.-issued Visa cards. It also argues these higher fees are necessary to provide merchants with services like fraud reduction programs, financing and marketing, and data analytics.

This is the latest battle in a four-year-old war over credit-card company business practices. In 2010, the Justice Department filed a lawsuit against MasterCard, Visa, and American Express for various merchant restrictions that the department found ultimately result in consumers paying more for their purchases. Visa and MasterCard quickly settled, later agreeing to a record-high $5.7 billion antitrust settlement with U.S. merchants over alleged fee fixing. But AmEx held out. In 2013, it reached a separate peace with merchants, allowing them for the first time to add a surcharge to AmEx purchases as long as they added the same charge to all credit-card transactions — the “take it or leave it” policy. But the settlement failed to satisfy the Justice Department, which now seeks to force AmEx into the same deal it cut with Visa and MasterCard.

For AmEx, the stakes are high. Merchant fees make up 65% of the company’s revenues, and it depends on high processing rates to offer its customers benefits like discounts and frequent-flyer miles. A loss would allow merchants to offer customers incentives for using a competitor’s card, and could cut into AmeEx’s profits by pushing the company to lower its merchant fees.

For consumers, a D.O.J. victory could potentially mean lower prices. Many businesses have historically priced in credit-card processing fees by raising the cost of their goods by 1% to 3%. Past settlements have allowed merchants to pass on these fees directly to credit card users, theoretically sparing cash and debit customers from having to share in the cost of accepting credit cards. However, many have questioned whether merchants are actually passing their savings onto consumers.

If American Express loses, merchants would be allowed to offer additional discounts to credit-card users with cards that charge lower fees. This won’t pacify those who say customers are paying the same prices as before plus new credit-card processing fees, but it does mean certain credit-card users might pay less than others.

Don’t expect AmEx to give up. The company may “need those rules in place to remain competitive with Visa and MasterCard,” Darren Bush, an antitrust law expert at University of Houston Law Center, told Bloomberg. “They’re willing to put more on the line.”

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