Retailers’ Interchange Suits May Help AmEx More Than Merchants

Merchant litigation against bank card interchange may end up benefiting bank card network competitors like American Express Co. more than retailers, a Wall Street analyst who has followed the interchange controversy cautioned this week. If successful in forcing Visa USA and MasterCard International and their members to cut interchange rates, the litigation could shift market share to AmEx as bank issuers seek the higher income offered by the travel-and-entertainment giant, said Kenneth A. Posner, managing director for specialty and mortgage finance at Morgan Stanley, during an address to supermarket executives. AmEx has had some success lately in recruiting banks to issue its cards, a strategy the bank card companies have admitted lies behind their moves to raise interchange. Various merchants and merchant associations have filed some 47 suits against the bank card associations and some banks over interchange since last summer, a welter of cases now being consolidated in a federal court (Digital Transactions News, Feb. 1). “An unintended consequence of this litigation is that it may not help you all that much,” Posner told the grocers, a group that has been especially active in going to court to seek relief on interchange, the fee structure set by the bank card networks that determines how much acquirers pay issuers for each transaction. Acquirers pass the fee on to merchants as part of the discount rate merchants pay for card acceptance. According to Morgan Stanley estimates, AmEx's average merchant discount fee is 2.5%, of which about 2.25% is available as interchange. This compares to a 2% interchange rate for Visa and MasterCard premium cards and 1.75% on standard bank cards. Posner warned that AmEx is already taking business from the banks, earning 23% of industry interchange to place not far behind MasterCard. “You all need to understand American Express's market share is rising,” he said. “They're the No. 3 network and perhaps soon to be the No. 2 network.” Indeed, competition from AmEx?coupled with consumers' attraction to comparatively cheap funding from cash-out mortgage refinancing, which has sapped banks' income from card interest and forced them to focus on interchange?is propping up merchant fees, Posner said. Dismissing such alternatives as negotiation and alternative, merchant-controlled networks, Posner suggested one strategy for interchange-weary retailers could be to narrow the focus of their litigation to banks' ban on card surcharges. Current association rules prevent merchants from passing on interchange to consumers by charging more for goods bought with cards, a barrier that especially rankles many retailers as so-called premium rewards cards carrying higher interchange rates gain popularity. Posner said a successful court case against no-surcharge rules would free merchants to pass on such incremental costs to users of premium cards. This, he says, would serve as a check on interchange and make credit card costs transparent to consumers. “We're all aware of what it costs to get cash out of an ATM but we're not aware of the costs with credit cards, and that's the problem,” he told the grocers, who were convened this week at an electronic payments conference in San Diego sponsored by the Food Marketing Institute.