The Supremes – the nine men and women wielding decades of jurisprudence, not the three-woman Diana Ross-helmed Motown staple wielding dance moves and high notes – will take the stage beginning next month to consider a case that may shake the foundations of the credit card industry, and the many businesses who run businesses that are two or multi-sided markets.
Briefs were filed at the end of last week that provide both sides of this two-sided story. It is expected that the highest court in the land will bring their review next month – February – and have their decision this summer.
The case has become an unusual confluence meetup of varied interests tied to how American Express conducts its business and how consumers and merchants interact with credit card companies … and all manner of companies across all manner of two-sided market verticals.
The case centers on the legality of Amex’s actions to bar retailers that offer consumers discounts if they use cards that have lower fees than what Amex charges the merchant, or if they educate those consumers on that fee structure in an attempt to persuade them to use a different, aka cheaper, card.
Though Mastercard and Visa have dropped similar practices, tied to a settlement with the Justice Department struck in 2010, Amex has held onto those rules. They have been sued by 11 states and the Department of Justice.
In early 2015, a U.S. District Court judge ruled that the Amex practices violated federal antitrust laws.
In September 2016, a three-judge panel of Second Circuit Court of Appeals reversed the earlier ruling, letting Amex’s business practices stand, noting the absence of wrongdoing. The appeals court ruling said that if merchants did not like the terms offered by Amex, then they could opt out of taking the card, thus sidestepping swipe fees. Amex, for its part, has maintained that the ruling “protects a consumer’s right to choose how they pay, prevents our card members from being discriminated against and promotes competition in the payments industry.”
Following that ruling, the States asked the Supreme Court to hear the case. And to everyone’s surprise, in October of 2016 of last year, the Supreme Court said it would. That came after the DOJ – the plaintiff in this case – advised the Supreme Court not to take it.
So, the lines are now drawn – again.
Last month, retail associations filed a joint amicus brief in the case. That brief was filed on behalf of the entities Retail Litigation Center, the National Retail Federation, the National Association of Convenience Stores, the National Association of Shell Marketers and others, including Walmart and Home Depot.
The consortium stated that “The undisputed result is that merchants pay higher fees than they would have to in a competitive environment,” and thus charge consumers higher prices, the brief argues, stating further that “all of a merchant's customers bear that resulting burden – even if they pay by cash, check or using government benefits, such as 'food stamps.'"
The two-sided market hallmark of the credit card market, with its multiple customer bases, gets some reinforcement here, as evidenced by the appeals court ruling that takes into account that Amex serves two audiences concurrently. Those two audiences are, of course, merchants and cardholders. Transactions with one side – where, in this case, consumers are given rewards (and rewards points) by Amex to use those cards at merchants – benefits the other side: in this case, the merchant who gets business from consumers who wish to use those cards at those merchants and pays a transaction fee to Amex each time that card is used.
And as PYMNTS has reported consistently, two-sided markets are the foundations upon which many businesses, including payments, have been built for centuries. The common characteristic – whether the business is a shopping mall, a video game console maker, a search engine, a publisher or a social network – is that one side gets services for free because the other side is willing to pay to reach that audience.
A ruling against Amex could shake the foundation of businesses as far-flung as Simon Malls to Airbnb, whose business models are all built on consumers getting access to their platforms – shopping malls and houses or condos to rent – because stores and property owners are willing to pay fees to those platforms for access to those consumers.
The Second Court held that the district court (which had initially struck down the Amex practices) had “erred in excluding the market for cardholders from its relevant market definition.” In addition, said the appeals court, Amex does not have market power simply by dint of being able to raise prices, as those increases are used, at least partially (and Amex argues, significantly) to boost cardholder rewards.
In other words, Amex is taking from one audience to give to another. In the appeal, and in reversing the earlier ruling against Amex, the circuit court maintained that “in order to succeed, a credit card network must find an effective method for balancing the prices on the two sides of the market.” That is a balancing act, as cardholders and merchants each have their own interests, often at odds. Merchants want lower network fees, while cardholders demand more services.
Yet the Justice Department’s argument has been that the appeals court should have examined simply how Amex has had an impact on merchants – and not both markets (again, merchants and customers).
In terms of official legal arguments, Amex was thought to be going it relatively alone, as the deadline for amicus briefs arguing Amex’s side of the equation passed last week, but then there was a flurry of briefs filed just before the deadline (more on that in a minute).
If the rules are taken off the table, some posit that relatively lower-priced cards get a boost – Discover, for one, becomes a big winner. The district court ruling (which, again, was against the Amex practices) stated that a previous merchant discount campaign by Discover, which sought to alert merchants to Amex price increases, had been stifled in the face of the Amex practices. The Discover initiative would have part of a fair ad-free market, said the ruling.
Discover wrote in its own amicus brief that “such competition, in turn, would result in a boon to consumers in [the] form of more rewards and lower prices.” On the Amex side, last week economists Gregory Sidak and Robert Willig said in their own brief, published in support of Amex, that NDPs have not distorted the competition of this two-sided market, and in fact do “not eliminate the incentives of rival credit card networks to offer competitive lower prices to merchants.”
In their own brief filed last week, David S. Evans, chairman of Global Economics Group, and Prof. Richard Schmalensee argued that focusing on only one side of the two-sided market (in the case of Amex, the merchant side) would in effect be a “rigid approach” that would ignore business reality, apply to all platforms (beyond the credit card industry) and stifle true competition and innovation.
One other brief, filed by more than a dozen economics and antitrust scholars, said that if the Supreme Court were to reverse the Second Circuit’s ruling, it could “undermine the goals of antitrust laws … institutionaliz[ing] a nebulous legal framework” that would “condemn procompetitive conduct” and hamper output market-wide, which is a goal of these markets.
For the credit card industry, and well beyond its confines, it’s high court, high drama.
There was regulatory news on other fronts too, as you might guess, and it went beyond the scope of bitcoin and how cryptocurrencies might be regulated on a world stage. To recap that development, regulators are looking at “answers” to volatile trading and risk to be decided at the G20 summit slated for March.
Separately, Reuters reported that a study by the Competition Bureau in Canada has found that growth in FinTech in that country is being dragged down by onerous regulations and high costs.
The United States
In the States, Mastercard said that issuers in the EU must offer biometric identification to account holders by April of 2019. Also, in North America, the Consumer Financial Protection Bureau has extended its deadline for the prepaid card rule, now to go into effect in April 2019 rather than this year. Prepaid cards at that point will have protections similar to debit cards, introducing rules governing limited liability and overdraft fees.
On the former, the “bold move” was one intended to move issuers toward a form of authentication that is not only more secure, but more appealing to consumers. On the latter, it’s likely a bit of a kick the can down the road to give a new director the opportunity to reconsider the rule entirely.