As anticipated, the U.S. Department of Justice last week in kicking off what could be an eight-week trial accused American Express Co. of using market power to restrict competition in the payment card market.
It also called on an exec from Discover Financial Services, which like Amex has struggled to gain market share against Visa and MasterCard, to help push its point home.
In the trial, which began July 7 before Judge Nicholas Garaufis of the U.S. District Court for the Easter District of New York, the DOJ is challenging Amex rules that prevent merchants from imposing extra fees for Amex cards and offering consumers discounts, rewards and information about card costs to lure them into choosing a form of payment that is less expensive to accept.
Amex contends its business model can charge higher rates by bringing high-value, high-paying customers to merchants. Enabling merchants to charge for Amex acceptance or letting them to steer customers to lower-priced payment options would essentially kill that strategy, and the company’s core business model, the network contends. And if merchants don’t like the arrangement, Amex says, they’re free to not accept Amex cards.
That argument traditionally hasn’t worked for Visa and MasterCard because consumers have come to expect merchants to accept cards carrying those brands, giving retailers little option but to accept them. At the time the DOJ filed the lawsuit, it also announced settlements with Visa and MasterCard where both bankcard brands agreed to allow merchants to impose surcharges and to offer discounts, incentives and information to consumers to encourage the use of less-costly payment methods.
Amex refused on the contention that its business model is much different from those of the bankcard brands, and that it lacks sufficient market power to influence choice. However, in his testimony before the court last week, Roger Hochschild, Discover’s chief financial officer, said Amex’s rules stifle competition because they won’t let merchants steer customers to lower-cost cards, including Discover’s.
Companies that have such policies may use their increased revenue to create customer loyalty and build market power, “in a sense, taking the merchants’ money and using it against them,” he said.
Visa and MasterCard share about a combined 80 percent of U.S. card spend, compared with less than 15 percent for Amex and about 5 percent for Discover. Some 3 million more merchant accept Discover cards than do Amex cards.
However, among large merchants, especially in the travel-and-entertainment markets, Amex acceptance is virtually ubiquitous. Conversely, Discover’s issue isn’t so much around acceptance as much as its ability to get more cards and card use in the market, so it has a vested interest in merchants having the option to steer customers to other cards.
Also during the testimony, Hochschild conceded in cross-examination that Discover has its own non-discrimination policy, which he said the network is reviewing and might change based on the outcome of the DOJ’s case against Amex. Discover, however, rarely enforces it when merchants attempt to steer customers to other cards, he said.