The US Justice Department yesterday began action against American Express, Visa and MasterCard, accusing them of violating antitrust laws and citing rules that prevented merchants from encouraging consumers to use cheaper credit cards.
Simultaneously, the Justice Department settled with Visa and MasterCard, which agreed to allow merchants to offer discounts to consumers who use less expensive types of credit or debit cards. The companies said the settlement, subject to court approval, did not involve any payment.
The legal action has the potential to cut into a significant source of profits for American Express and threatens to reshape the competitive landscape of the card processing business.
Shares of American Express, which charges merchants more on average for processing credit card transactions than its rivals, closed down 6.5 per cent at $39.05.
American Express said the lawsuit would hurt consumers by limiting their ability to use their Amex card.
"We have no intention of settling the case," Kenneth Chenault, chairman and chief executive officer of American Express, said in a statement.
American Express executives and lawyers declined repeatedly on a conference call with investors and reporters to quantify the potential impact of losing the lawsuit, or to say how much it would have cost the company in revenue to settle the case.
"I think, with reason, AmEx thinks the negative impact would be material," consultant Eric Grover, who previously worked at Visa, said in an email.
Attorney general Eric Holder said at a press conference yesterday that credit card companies "put merchants and consumers in a no-win situation. Accept our card, pay our fees and don't even think about trying to get a discount."
Merchants pay fees to banks and processing networks like Visa and MasterCard every time a customer pays for something by using a credit or debit card. These so-called interchange fees usually amount to between 1 to 3 per cent of each total bill.
American Express, which lends directly to consumers and processes credit card transactions, charges merchants a higher percentage on average. Amex said on the conference call that merchants get more business from American Express cardholders in exchange for the higher fees because its wealthy customers tend to spend more than the average credit card user.
Visa, MasterCard and American Express and their affiliated banks collected more than $35 billion in fees from US merchants in 2009, according to the lawsuit.
American Express cardholders charged $419.8 billion worth of purchases in 2009, while MasterCard cardholders charged $476.9 billion and Visa card holders charged $764.2 billion.
Christine Varney, head of the Justice Department's antitrust division, said the government would try to resolve the case as quickly as possible.
But American Express vice chairman Edward Gilligan told the conference call: "We anticipate that this process will take several years before it is resolved."
Reuters