With its Monday decision upholding American Express Co.’s anti-steering rules, the U.S. Supreme Court unleashed a tide of press speculation about just how payment card pricing, rewards, and network rules will be affected. At this point, however, only a few things are clear.
The first is that AmEx chief executive Kenneth I. Chenault, who retired in February, gambled and won when he decided to fight the U.S. Department of Justice and 17 states (18 originally, until Hawaii withdrew as a plaintiff) when they sued Visa Inc., Mastercard Inc., and AmEx in 2010 over their rules banning merchants from steering cardholders to cheaper forms of payment. Visa and Mastercard quickly settled with the plaintiffs and modified their rules. But Chenault said such rules were essential to AmEx’s business model and chose the risky, expensive, and time-consuming option of a court fight.
“This was a long battle, but well worth the fight because important issues were at stake: consumer choice, fair market competition, and the ability to deliver innovative products and services to our customers, both consumers and merchants,” Chenault’s successor, AmEx chairman and CEO Stephen J. Squeri, said in a lengthier statement than the one the company issued Monday following the release of the Supreme Court’s 5-4 decision saying AmEx’s rules do not violate federal antitrust law. Quoting from the Supreme Court’s decision, Squeri said, “‘… AmEx’s business model has stimulated competitive innovations in the credit card market, increasing the volume of transactions, and improving the quality of the services.’”
What’s also clear is that the opinion written by Justice Clarence Thomas and joined by the four other members of the Supreme Court’s conservative majority recognized the two-sided nature of the payment card market, a market in which both merchants and consumers are essential. “Unlike traditional markets, two-sided platforms exhibit ‘indirect network effects,’ which exist where the value of the platform to one group depends on how many members of another group participate,” Thomas wrote. “Two-sided platforms must take these effects into account before making a change in price on either side, or they risk creating a feedback loop of declining demand. Thus, striking the optimal balance of the prices charged on each side of the platform is essential for two-sided platforms to maximize the value of their services and to compete with their rivals.”
Payments consultant Eric Grover of Minden, Nev.-based Intrepid Ventures says in an email to Digital Transactions News that “I was heartened by Justice Thomas’s holistic analysis of the two-sided credit-card-network market, value, and competition, and recognition that cardholder value, including rewards and the right not to be pressured at the point of sale by merchants to use Visa or Mastercard, matter. Regulators abroad who’ve reduced interchange fees have focused on costs—dastardly ‘swipe fees’—at one step in the value chain: the merchant, and claimed cost reductions there were a net societal gain, notwithstanding increased fees and diminished benefits for cardholders.”
AmEx says it is gradually lowering its merchant pricing, but traditionally its discount rates, dubbed “swipe fees” by retailer trade groups, have been higher than those for Visa, AmEx, or Discover card purchases. AmEx uses much of its merchant-generated revenues to fund rewards on its cards. A ruling by the Supreme Court that AmEx’s anti-steering rules violated antitrust law was seen by some observers as a possible trigger to a network pricing war as AmEx tried to retain price-sensitive merchants. That potentially would have affected perks on other networks’ cards, since some revenues to bank card issuers also come from merchants.
“This ruling is a big win for American Express and has ramifications for the whole industry,” senior industry analyst Matt Schulz at Austin, Texas-based comparison service CreditCards.com says by email. “Swipe fees are the engine that powers the whole credit card rewards game. If those fees had taken a hit, which was a real possibility if the ruling had gone against AmEx, it would’ve been great news for merchants’ bottom line, but would almost certainly would have marked the end of the golden era of credit card rewards.”
Thomas McCrohan, a payments analyst with Mizuho Securities in New York, said in a research note that the majority decision found no evidence supporting the plaintiffs’ argument that consumers pay higher retail prices because of anti-steering rules. He also said that in its recognition of the card market’s two-sided nature, the decision also is a potential victory for the larger Visa and Mastercard networks.
“By viewing the two-sided credit card market as a single market, the court is putting a legal burden on merchants to prove negative indirect network effects resulting on the fees they pay to accept higher-priced credit cards,” he said.
Merchant groups, however, strongly disagreed with the Supreme Court majority. “By denying merchants the right to simply ask for another card or offer an incentive for using a preferred card, the Supreme Court has undermined the principle of free markets where one company should not be allowed to dictate the practices of an entire industry in order to protect its business model,” Stephanie Martz, senior vice president and general counsel of the Washington, D.C.-based National Retail Federation, said in a statement.