Amex Loses Big on Interchange Dispute, Merchants Rejoice

The following article by Andrew Deichler appears in this month’s AFP Payments newsletters.  Our CEO is quoted is this article.

Treasury and finance professionals won big when a judge ruled that American Express could not prevent retailers from trying to steer customers toward using credit cards that carry lower interchange fees. The court determined that Amex’s anti-steering rules harm competition.

The ruling is the latest development in a battle that has been going on since 2010, when the Department of Justice filed an antitrust lawsuit against the Big Three credit card companies for prohibit merchants who accept their cards from offering discounts and rewards to consumers for using other payment options. While Visa and MasterCard immediately reached a settlement with the DOJ, Amex opted to fight it out in court.

Amex’s central argument for having the rules in place is that they allow the company to maintain market share among its larger (and cheaper) competitors, Visa and MasterCard. But U.S. District Court Judge Nicholas Garaufis, who made last week’s ruling, said the rules are a violation of U.S. antitrust law and “constitute an unlawful restraint on trade.” Garaufis added, however, rules that block merchants from rejecting or disparaging Amex at the point-of-sale could remain in place.

Deputy Assistant Attorney General for the Antitrust Division Leslie C. Overton lauded the judge’s decision, claiming that Amex’s rules could ultimately result in merchants raising costs for consumers to compensate for higher interchange fees.

Retailers also voiced their approval. The Merchants Payments Coalition called the ruling “one step forward to bringing badly needed competition and transparency to the entire credit card industry.” The trade group added that allowing retailers to persuade customers to use less expensive cards will result in lower prices for customers and a fairer market for merchants as a whole.

Liz Garner, vice president of the Merchant Advisory Group and a recent speaker at the AFP Annual Conference, also applauded the decision. She noted that while the merchant community continues to believe several card network acceptance rules and practices are anticompetitive, the long-term outcome will likely be very beneficial to both merchants and consumers. “For the court to find that the ‘challenged restraints have impaired the competitive process in the network services market, rendering low-price business models untenable, stunting innovation, and resulting in higher prices for merchants and their consumers,’ is an important acknowledgement that the old way of doing business in the credit card marketplace is unsustainable as the United States transitions to digitized financial services for electronic and mobile commerce,” she told AFP.

One retail treasurer told AFP that while the decision is a victory for merchants, how big that victory truly is remains to be seen. “There are still practical barriers to steering in some highly competitive segments,” he said. “But, it does theoretically offer a check and balance in the runaway interchange fees that merchants face.”

Garaufis asked both Amex and the DOJ to submit a proposed remedy to resolve the dispute, but Amex is appealing. “Today’s decision means merchants would be able to steer customers to use Visa and MasterCard, while it would be virtually impossible to steer away from them,” the company said in a statement.

Anand Goel, CEO of Optimized Payments Consulting, noted that Amex has no choice but to appeal because giving merchants the ability to steer consumer payments gives them more power, and will invariability drive Amex’s discount rate lower. “This is a big economic issue for Amex but I think they will lose in the end,” he said. “Amex can no longer claim they are the David and Visa/MasterCard are the Goliath as Amex processed more card volume than MasterCard in 2014, and Amex narrowed the acceptance gap in the SMB market with the OptBlue program. The DOJ case has merit and will eventually win as Amex’s antisteering rules do prohibit competition among the card networks.”

For retail treasurers, the question now becomes just how much steering they are really willing to do at the point of sale. While there are already some clear examples of steering at play, such as gas stations offering discounts to customers who use cash, this is an area that has largely been untapped by merchants. All that could change with Amex’s steering prohibitions removed. “It is not hard to imagine the local dry cleaner or dentist office steering, even if the large chain merchants are reluctant to do it at first,” the retailer treasurer said. “But over time, even that might change.”

Unfortunately for merchants who want to test those waters, Amex’s decision to appeal will keep them from doing so for at least a little while longer

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