Credit card case before Supreme Court could change rewards game

Case may mean discounts for using a specific card; also, it could hurt rewards

Fred O. Williams
Senior Reporter
Expert on consumer credit laws and regulations.

Supreme Court

Consumers could get discounts at the register for using one credit card over another, under a case argued Monday before the U.S. Supreme Court.

However, that choice could undercut card rewards, which are funded by the fees merchants pay.

The case, Ohio versus American Express, challenges the card company’s “anti-steering” rules. The rules prevent merchants from offering you incentives to use cards that carry lower fees.

Merchants say the rule violates antitrust law by preventing them from telling customers true information about costs – the hidden fees for using a given card network.

American Express says that ignores the reality of the card market, where it must provide incentives to two sets of customers – merchants and cardholders. Without the rule, AmEx said it risks being elbowed aside by larger card networks, reducing competition.

Justices skeptical about anti-steering rule's benefits for consumers

In questions to attorneys, some justices sounded skeptical that blocking merchants from giving discounts at the register is necessarily helping consumers.

Justice Elena Kagan questioned how the anti-steering rule plays out when she buys a cup of coffee. “What I really care about is if the local coffee shop can pass on lower fees to me,” she said to AmEx attorney Evan Chesler.

“You’re making my choice for me," between rewards or a discount, Justice Sonia Sotomayor told Chesler. "There are card users who may never use their rewards.”

Chesler responded that transaction volume on cards has increased as a result of rewards, demonstrating that the current environment has benefited the market as a whole.

Justice Neil Gorsuch voiced support for that point.

“There’s no evidence of restricted output in this case,” he said during a question to Ohio state solicitor Eric Murphy. “Do you have any evidence that consumers pay more when you consider rewards?” he asked, “because I don’t think you do.”

Murphy argued that the burden is on AmEx to show that its anti-competitive rules have an overall benefit to consumers when rewards are factored in.

How change in anti-steering rules could change the credit cards game

  • Merchants give incentives to use cards with lower swipe fees.
  • Card networks cut their swipe fees to protect transaction volume.
  • Falling swipe fee income reduces money for cardholder rewards.

Court decision could reshape consumers’ approach to cards

The court’s decision – expected by July if not sooner – could reshape the way credit cards work. If the anti-steering rules are thrown out, merchants could offer you discounts or other incentives to use cards with lower transaction fees. Swipe fees generate more than $50 billion a year for credit card networks, according to the Justice Department.

However, if card users shift away from higher-cost cards, that would cut the transaction fees that currently pay for rewards such as points, airline miles and cash back.

“This case concerns virtually every dollar that Americans spend on consumer goods and services,” the U.S. Public Interest Research Group said in its court filing against the AmEx anti-steering rules. Since merchants’ transaction costs are built into prices, even people who use cash and debit cards could benefit from a reduction of the fees merchants pay.

The case began in 2010 when the U.S. Justice Department and several states charged that the anti-steering rules imposed by the three largest card networks – Visa, AmEx and Mastercard – violated antitrust laws.

Visa and Mastercard settled, leaving AmEx defending the rules. A federal court initially agreed that the rules stifled competition, but the 2nd Circuit Court of Appeals in New York reversed that decision.

The lower court failed to look at the effects on consumers and how their card use shapes the market by expanding total transaction volume. “Merchant pricing is only one half the pertinent equation,” the appeals court said.

Retailers, merchants rallied against American Express

The card company’s argument gets little traction with companies paying the swipe fees – from Walmart and Target to airlines such as Southwest to groups of convenience stores. These are among the businesses weighing in against AmEx in advisory, friend-of-the-court briefs.

Southwest said it paid about $353 million in credit card fees in 2011, $112 million of that to AmEx.

“The record reflects that AmEx consistently has far and away the highest cost of payment compared to its competitors,” the airline said in court papers. But the card company’s anti-steering rule insulates it from competition by stopping Southwest from sending more business to its lower-cost rivals.

“Insulated from such normal market forces, the prices for credit card services, and those of AmEx in particular, have risen dramatically even as the cost of providing such services has decreased,” Southwest argued.

According to court papers, AmEx is the second largest card transaction network in the U.S., with 26.4 percent of transactions, after Visa’s 45 percent, as of 2013. Mastercard and Discover followed with 23.3 percent and 5.3 percent, respectively.

Merchants asking for better swipe-fee conditions

Walmart, in its filing with other retailers, said AmEx is able to impose its anti-steering rules only “because merchants have no other choice.” Declining to take the card at all will mean a loss of business, even though competitors’ cards cost about half as much to process.

“As a result, AmEx and its competitors are able consistently to increase their prices unencumbered by market pressure to keep prices down,” Walmart’s court filing states. Customers, focused only on rewards, remain oblivious about the costs.

"The record reflects that AmEx consistently has far and away the highest cost of payment compared to its competitors."

Discover argues anti-steering rules have hindered expansion efforts

Discover, the smallest network, said the anti-steering rules kept it for competing for a larger share of the market. In 1999, it mounted an effort to attract merchants, highlighting its low-cost swipe fees.

Discover thought it could recover the discounts through higher transaction volume. But the push failed to generate more market share because of competitors’ anti-steering rules, and Discover dropped the effort.

“The effect of anti-steering is that we’ll only have high-cost, high-reward products,” Kagan said during oral argument. When lower-cost competitors are shut out, “That sounds to me like a market that is not working the way it should.”

Lower swipe fees would hurt cardholders, AmEx argues

American Express in its filings played down its influence in the card market. Most of its cardholders already have a Visa or Mastercard card in their wallets, it said, making the company vulnerable. And one-third of merchants that take some credit cards choose not to accept Amex.

A reduction in fees merchants pay could hurt consumers by reducing their benefits and by decreasing competition, if Visa and Mastercard add to their already large market share.

“American Express offers consumers what they want,” Chesler said in Monday’s hearing. “Transaction volume has increased accordingly.”

See related: Card surcharge ban laws take another blow in California court


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Updated: 10-23-2018