Judge: Merchants can steer you to lower-cost card

Consumers may gain from American Express' loss in antitrust case


Merchants will be able to offer their own rewards -- such as perks or lower prices -- to customers who use one credit card network instead of another, under a federal-court decision Thursday in New York.

The decision goes against American Express and its "anti-steering" policy, which forbids the 3.4 million merchants that accept AmEx cards from giving preferences to customers who use another network.

The AmEx policy results in higher costs that "are passed on to all customers -- AmEx cardholders and noncardholders alike -- in the form of higher retail prices," U.S. District Court Judge Nicholas Garaufis said in his ruling.

Judge: Merchants can steer you to lower-cost card

The U.S. Justice Department brought the case in 2010, saying that card networks' anti-steering policies violated antitrust law. Merchants should be able to pass on the savings from lower-cost networks to customers, the government argued.

AmEx announced it will appeal the ruling, saying it will hurt competition by "further entrenching the two dominant payment networks, Visa and MasterCard."

If upheld, the ruling could potentially undermine credit card rewards, which card issuers generally pay for through the transaction fees they charge merchants.

The decision does not go into effect right away. Garaufis will issue a separate remedial order after determining how to remedy the anti-competitive practices.

Retailers applauded the ruling. "Allowing retailers to ask consumers to use a less expensive card will result in lower prices for consumers," a statement from the Merchants Payments Coalition said.

Among the things prevented by anti-steering policies are "offering a 10 percent discount off the posted purchase price, free shipping, free checked bags, gift cards, or any other monetary incentive for using their Discover card," the ruling said. Discover refused to comment on the decision.

But it isn't clear how many retailers will charge less for using a cheaper network. A different lawsuit in 2013 gave retailers the right to slap surcharges on credit cards to help cover transaction costs, but few stores have bothered.

Practical difficulties
Charging different prices for different cards "is difficult to implement," said Philip Philliou, head of the payments industry consultant Philliou Partners LLC. "It's an unnecessary conversation between the store clerk and the customer -- that's the last thing a merchant wants at the point of sale."

Madeline Aufseeser, senior analyst at Aite Group, agreed. Merchants want to keep their checkout lines moving and their customers happy, she said. "At the end of the day, consumers want to pay the way they want to pay."

In the long run, however, the end of anti-steering could have more profound consequences, court papers suggest. For example, the policy has kept out upstart networks that might shoulder their way into the business by offering merchants low-cost transactions, the decision said.

The difference in network costs is slight overall, according to court papers. American Express transactions cost 3 basis points more than MasterCard, on average, and 8 basis points more than Visa, based on 2013 data. A basis point is one-hundredth of a percent, but those points add up -- the four major networks, including Discover, had volume of $2.4 trillion in transactions. So for each $1 billion in credit and charge card transactions, the AmEx premium amounts to $300,000 over MasterCard and $800,000 more than Visa. The average premium is adjusted for the different mix of cards on the networks.

The cost gap between networks used to be higher, but has narrowed as a result of MasterCard and Visa raising their costs for merchants, Garaufus said in his ruling. The anti-steering policy allowed the major networks to set swipe fees without fear of being undercut by each other.

American Express stock fell 1.9 percent Thursday, with Wall Street traders viewing the ruling as another negative in a string of losses for the company. AmEx has also lost co-branded card partnerships with JetBlue Airways and Costco.

AmEx argued in court that the company provides higher levels of service for merchants, and that no substantive difference remains between the major card networks' transaction costs.   

"[T]he pricing schemes of the dominant networks are so complex even the most sophisticated merchants cannot determine the price they pay to accept a particular card," AmEx says on its website, "making it difficult to know which cards are cheaper than others."

See related: Settlement allows retailers to surcharge for credit card use; will they?

Published: February 19, 2015

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