US Court Says American Express Can Prevent Merchants from Steering Clients to “Cheaper” Credit Cards

american-expressOn Monday, a US federal appeals court ruled that American Express can be allowed to stop merchants who accept their cards from encouraging customers to use rival cards (that charge lower transaction fees). Since this was in the appeals court that means it overturns an earlier decision (in this case, a 2015 ruling) which claimed that restrictions violated federal antitrust laws.

This decision, of course, is a massive victory for the elite credit card company. American Express aims to ensure customers—whom they charge higher-than-average fees—will not encounter any barriers to the use of their card. This new ruling, then, means that American Express can continue its practice of enforcing various provisions within its contracts with merchants, provisions which, in fact prohibit merchants from encouraging customers to use credit cards other than American Express.

Of course, credit card costs are mostly unknown to consumers but they work like this: retailers pay a fee every time a customer processes a credit or debit card transaction. American Express happens to charge a higher swipe fee than Visa or MasterCard. Some consumer advocates, then, argue that retailers then pass these costs, unfairly, to shoppers (via higher goods prices).

But its not like swipe fees, in general, are new to controversy. As a matter of fact, these swipe fees have been a major source of contention between card issuers and merchants for many years. Merchants, of course, claim that card networks—essentially electronic highways between stores and banks—overcharge; the networks argue that the fees help to cover losses due to fraud as well as security costs and other various business-related costs.

And apparently, US Circuit Judge Richard Wesley agrees with American Express. In a written opinion, he says, “Though merchants may desire lower fees, those fees are necessary to maintaining cardholder satisfaction.”
Accordingly, Keefe, Bruyette, & Woods analyst Sanjay Sakhrani comments, “Today’s ruling is a positive for AmEx as it seems that investors were concerned about the negative impact of potential steering and the ability for the networks to create an environment where merchants would want to steer more frequently.”

And all three panel-judges agreed, commenting: “If a particular merchant finds that the cost of AmEx fees outweighs the benefit it gains by accepting AmEx cards, then the merchant can choose to not accept AmEx cards. Indeed, many merchants have already made and continue to make this choice.”

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