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DOJ sues American Express

By Leslie McFadden ·
Tuesday, October 5, 2010
Posted: 4 pm ET

Yesterday the U.S. Department of Justice, along with seven states attorneys general, filed a civil antitrust lawsuit against American Express over rules it has in place that prevent merchants that accept its cards from offering incentives to consumers for paying with cards that have lower processing fees. The DOJ also said that it had reached a proposed settlement with Visa and MasterCard over its discounting restrictions.

"These three companies run the largest three credit card networks in the United States. Every time a consumer uses one of their credit cards to buy something from a merchant, that merchant pays a fee -- a fee that is passed on to consumers through higher prices," Attorney General Eric Holder said at a press conference yesterday.

Merchant agreements with these credit card companies currently prevent merchants from offering a discount or incentive for using a cheaper card, such as a debit card or credit card without a rewards program. Consumers wind up paying the same retail prices regardless of the cost of the transaction to the merchant.

The proposed settlement with Visa and MasterCard would lift those restrictions. "If you use a preferred, lower-cost credit card, an airline could offer you more miles or a merchant could provide you with a rebate," Holder said.

American Express has no intentions of settling, Vice Chairman Ed Gilligan said yesterday during a conference call with media and investors. "We deliver high-spending premium customers to our merchants in the U.S. and around the world. And if merchants steer them to Visa and MasterCard, that would be damaging to us."

Visa and MasterCard already control more than 70 percent of the market and have 10 times as many cards as American Express, pointed out Kenneth I. Chenault, American Express chairman and chief executive officer.

"The sheer number of Visa and MasterCard credit cards, and the fact that most of their customers do not carry an American Express product, makes it virtually impossible for merchants to steer customers away from the dominant networks, even if they have the right to do so," he said.

Changes to Visa and MasterCard's rules go into effect "as soon as MasterCard and Visa either do this voluntarily or as soon as the court approves the settlement," David Boies, chairman of Boies, Schiller & Flexner LLP, said during the call. His firm has been hired to serve as legal counsel for the lawsuit.

"You're going to see what benefit, if any, there is to consumers. You're going to see what harm there is, and we know there will be some harm, to consumers. So you're going to see something, some real-life experience from this as this case goes on, because this is going to go into effect immediately with respect to more than 75 (percent) of the market."

Weigh in: How do you feel about the idea of merchants having the ability to steer your payment choices? Would you prefer to get discounts for paying with lower-cost cards or would you see it a penalty against higher-cost rewards cards?

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Debra James
October 14, 2010 at 2:19 pm

A merchant has to pay between 1%-5% per transaction to the banks for interchange fees to accept credit cards, and they also have to pay $.20-$.50 in transaction fees to the credit card company. Many smaller merchants or those that don't have a great credit rating may have to use third-party processors that can charge up to 15% per transaction.

Offering customers the option to pay less with cash vs. credit cards has been tried before, and after a while died out. The biggest example I can remember is when ARCO gas stations tried it in the 80s, and by the 90s it was phased out. The cost and risk of handling large sums of cash is often times too great for many companies. I am sure their business insurance would go up because the probability of loss would rise significantly. I don't believe that the discount given for cash would equal to the same amount as the removed credit card fee, because the merchant would have an increased costs for handling the cash. In some instances, it probably would be cheaper for the merchant to accept a credit card instead of cash.

Discounted cash prices may be favorable for small or medium priced items, but cash payment probably will not be the preferred method for high-end goods. I say this primarily because credit cards offer benefits like: extended warranties, price matching, and travel insurance; an easy way to handle purchase disputes; relatively quickly processed refunds. I know that I don't want to have to wait two weeks or more for Store X to send me a refund check for the $2500 TV I had to return. All the while I am wondering if it will get lost in the mail, or have to take time to deposit it in the bank and still worry if it will be good. Nor do I want to wait for who knows how long for the refund on a vacation that was canceled by airline/hotel/cruise line/travel agency/me.

Nothing is free, and there may be costs associated with getting your own cash. Some banks are starting to charge for in-branch transactions, or you may incur a fee for making more withdrawals than allowed from your savings account, or you may have to use time and money to drive to you branch to get the cash, or pay for a cashier's check, or pay an ATM fee, etc.

Another point is that cash is only good for in person transactions, and still cannot be used for online or catalog purchases. So, it will be the smaller local merchant who is mostly likely to offer discounted cash pricing and would benefit the most from having the flexibility to do so. For many of them the profit margin is so slim that 1%-5% can mean the difference of continuing their business.

The U.S. Congress currently has a couple of initiatives in the pipeline, the Credit Card Fair Fee Act of 2009 and the Credit Card Interchange Fees Act. The Bill process is long and arduous, and there is no indication when these bills will be presented for Congressional vote.

Although many people dislike the fees they are necessary to keep many business going and employing folks. Putting too many restrictions on how fees are applied will ultimately cost jobs.

October 06, 2010 at 9:23 am

A place where I get a haircut. They charge $10 if cash or $10.50 if credit.

October 05, 2010 at 10:46 pm

Best thing that has ever happened. Why should I get charged 3% -5% on everything in the retail market if I use cash. A $2K television is an extra $100 just for the transaction. That's highway robbery. Instead they should mark the TV as $1,900 cash or $2,000 on credit. Do this and see how many folks put their credit cards away. These companies are making way too much money on transaction costs. The fact that most of our currency transaction are electronic instead of cash has created a monopoly for these three companies to get rich. The USG should heavily regulate transaction costs since the EFT's are essentially currency, and since the BPE has less paper money to print, the USG should bear the transaction costs themselves and get the big three out of the taxing business. (yes they're taxing you via transaction costs.)

Scott Butler
October 05, 2010 at 7:03 pm

How can anyone believe that a 1% - 3% processing fee is crippling merchants. That's $1 - $3 on a $100 purchase. For that fee the merchant is absolved of all risk. The credit card company is the one on the hook. If the customer doesn't pay the bill it's the credit card company that loses. Also if you believe that the merchants will pass along this reduction in their costs then I bet you believe in the tooth fairy too.