On Thursday, a district court ruled that American Express broke the U.S. antitrust laws by prohibiting merchants from asking their customers to use other brands of credit cards that would involve lower credit card processing fees. American express called the ruling wrong and plans to appeal.
The decision was the second major blow for AmEx this year, after the failed negotiations with Costco on renewing their 16-year exclusivity deal. Following the ruling American Express’ shares dropped $1.38 amid an early-year stock decline of 16 percent.
American Express argued that its contested policies made the company more competitive against MasterCard and Visa, while helping it maintain its third place on the largest payment networks list.
Judge Nicholas Garaufis, who ruled against AmEx Thursday, said that the company’s policies had actually harmed competition and merchants, while keeping its customers unaware of the high processing costs an AmEx credit card involves.
The judge also argued that merchants were especially affected by AmEx nondisclosure terms since they had no other choice than accept higher credit card processing costs and reflect those costs in higher prices or additional pressure on the suppliers of goods to lower prices.
“Every day merchants make their vendors compete for their business and, hopefully, drive down prices. That type of competition does not exist at all in the payment industry,”
explained Jeffrey Shinder, an attorney who represents merchants in another case involving American Express.
Merchants complained about the high fees needed to process AmEx credit cards which were long time hidden from the average consumer, but were a huge burden on their businesses. These fees are directly paid by merchants, or indirectly by the consumers whenever merchants decide to raise prices.
Card or debit cards’ processing fees are charged by banks and payment networks for every transaction involving plastic as a means of payment. However, debit cards are less costly to process than credit cards, but consumers are pushed by payment networks to use their cards by offering them reward points, discounts, or cash back. For instance, AmEx also offers extra airline miles when rewarding its customers.
American Express barred merchants from encouraging consumers to use other brands’ credit cards by displaying signs such as “We Prefer Visa” or offering potential discounts for using a specific credit card.
Visa and MasterCard used to have similar policies, but settled with the Justice Department in 2010 and dropped the practices. AmEx refused to settle so the issue went to trial last summer.
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