A new agreement reached Monday between the U.S. Department of Justice and credit giants Visa and MasterCard resolved a two-year long antitrust probe concerning card issuers who barred merchants (i.e. retailers, restaurants, etc.) from offering discounts to customers who used credit cards with lower merchant fees. Up until the settlement, merchants could sometimes expect to pay up to 5% on the value of each purchase in credit card processing fees. Cards with rewards such as airline miles typically cost merchants more, and merchants who accept a company’s cards must accept all of them no matter how high the processing fee. The L.A. Times reports that these fees cost merchants an estimated $35 billion annually, a hefty price tag when small businesses, retailers, restaurants, etc. are struggling to stay afloat. The U.S. Justice Department saw these rules as anticompetitive.
American Express chose not to join the settlement with the U.S. Justice Department. According to the Wall Street Journal, American Express typically charges a higher processing fee than rivals MasterCard and Visa. American Express believes that it's policies shouldn't be deemed anti-competitive, given the company's smaller market share. There is a chance that the government could now file a civil suit against the company. (FYI: Visa accounts for 43% of all credit card spending, MasterCard 27%, and American Express 24%... I don't think the company has much of an argument.)
This new regulation on card companies can be tallied right next to the many other federal credit card laws that have hit the industry. Many hope that since the settlement allows merchants to offer lower prices to consumers who use cards with lower processing fees, consumers and businesses alike will save. But it is difficult to assess the impact on the industry. Both the LA Times and Wall Street Journal contend that it will be difficult to sway some card users from using their high-reward cards. Visa and MasterCard have not yet voiced too much concern. It will be interesting to see how much merchants take advantage of the new regulations and if consumers are swayed to use their plain-jane, low processing fee cards over that of their high reward card options.
Sources:
http://www.latimes.com/business/la-fi-1005-credit-cards-20101005,0,1126646.story
http://online.wsj.com/article/SB10001424052748704380504575530512939089380.html
I agree with you. American Express can hardly complain of a "smaller market share" if it has almost as much business as MasterCard. It will be interesting to see if the government decides to take action against American Express. That could shake things up in the credit card market.
ReplyDelete