The Department of Justice recently filed a lawsuit against Visa, MasterCard, and American Express. Their beef? Credit card networks give merchants “take it or leave it” terms when they agree to accept credit card payments. These terms prevent retailers from charging different prices for credit card use versus other forms of payment, and in exchange they get the right to accept credit cards.
The DOJ suit argues that this practice is anti-competitive, and if you read between the lines, the DOJ believes that this practice is causing artificially high network usage fees, which means a greater burden and merchants and higher prices for consumers.
As you may have read, MasterCard and Visa quickly settled the suit and amended their rules, whereas American Express is fighting back. So until the Amex suit is reconciled, merchants that accept all 3 types of cards cannot steer shoppers towards one payment form or another, while those who currently accept only Visa and MasterCard have been given the freedom to do as they please.
1. Will this have any impact on my wallet?
Probably not, for three reasons:
- It is impractical for merchants to charge different prices on each type of credit card, given that there are thousands of cards out there.
- The litigation is largely redundant, since the recently passed Durbin Amendment contained a provision that allows merchants to charge credit card users more.
- American Express is likely to win the antitrust lawsuit anyway.
So first of all, there are a ton of credit cards out there. Our website compares over 600 credit card offers, and we’ve identified thousands more, so common sense might suggest that it’s impractical for stores to train cashiers to differentiate between a Visa Classic card and a Visa Signature card, and have them charge varying amounts.
Second, the difference between the cheapest average discount rate at Discover and the most expensive average discount rate at American Express is only 0.7%. Common sense might tell you that merchants probably won’t want to alienate affluent customers who carry rewards cards in order to squeeze them for 7 cents on a $10 transaction. The Durbin Amendment already gave retailers a huge victory over banks, by allowing merchants to charge credit card users more than cash users. It’s unlikely merchants will get much more granular beyond that. [Editor's note: This paragraph was corrected to reflect the actual difference in discount rates between Discover and American Express.]
Lastly, American Express has 24% market share of US credit card spend volume. This low market share leads many financial analysts to believe that the DOJ does not have an antitrust case against the company at all, especially when you consider that Visa/MC have ~70% share. Amex is also not widely accepted because merchants can realistically opt out of the American Express network, making it tough to argue that they wield any abusive monopoly power (only 4.5m merchants accept Amex, versus over 7 million for Discover and about 8 million for Visa/MasterCard).
2. Premium rewards card could suffer, but it’s not likely to happen
The big loser in the event that “steering” becomes widely practiced is American Express, and American Express cardholders like those holding Blue Cash and other premium cash back credit cards, simply because Amex charges merchants the highest fees on average, and have the best rewards as a result. Merchants know that most Amex holders have a Visa or MasterCard as a backup, so discriminatory pricing by merchants could reshape consumer behavior, and also hurt Amex during discount rate renegotiations.
Visa and MasterCard aren’t impacted as much, because they are paid by the card issuing banks rather than by the retailers. Higher interchange rates on premium rewards cards allow the issuing banks to pay those rewards, but don’t necessarily flow through to Visa or MasterCard, which is probably why they were so quick to settle.
American Express CEO Ken Chenault outlines in great detail why he believes “merchant steering” will disproportionately hurt his company. What his explanation doesn’t cover, however, is why the litigation could even be bad for people who don’t hold rewards cards. Quite frankly, it’s kind of silly training cashiers to steer customers towards non-rewards cards or PIN debit cards while customers wait in line.
As Discover (who is not involved in a DoJ suit) recently pointed out, merchants will not want to deal with this, so we probably won’t see broad-based price differences between various credit cards any time soon. Happy rewards cardholders shouldn’t be sweating it too much just yet.
3. Is the DOJ just suing credit card companies for political reasons?
Given that the Durbin amendment, which became effective on July 21, 2010, gives merchants the right to charge different prices depending on whether or not you pay with a credit card, you may be scratching your head as to why the Justice Department is trying to push through an antitrust lawsuit that probably won’t have much impact.
While Attorney Generals are appointed by the President, they still need to be confirmed by the Senate. Which means they’re just as susceptible to political grandstanding as anyone else. I’ll leave you with the following quote:
“With today’s lawsuit we are sending a clear message: We will not tolerate anticompetitive practices,” said Attorney General Eric Holder. “We want to put more money in consumers’ pockets, and by eliminating credit card companies’ anticompetitive rules, we will accomplish that.”
– Tim Chen is the CEO of NerdWallet, a credit-card search website.