Justice Dept. sues Amex, reaches deal with Visa and Mastercard over credit card 'swipe fees'

Oct. 4 (Bloomberg) -- David Boies, chairman of Boies Schiller & Flexner LLP, talks about the U.S. Justice Department's antitrust lawsuit against American Express Co. American Express vowed to fight the lawsuit while Visa Inc. and MasterCard Inc. reached a settlement with the government. AmEx is hiring Boies to handle its defense. Boies talks with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)
By Ylan Q. Mui
Washington Post Staff Writer
Monday, October 4, 2010; 8:04 PM

The Justice Department announced Tuesday that it had filed an antitrust suit against American Express for preventing retailers from offering customers discounts for using rival credit cards with lower processing fees.

Federal officials added that they had reached a proposed agreement with Visa and Mastercard over the matter.

The issue of "swipe fees" has long been a thorn in the side of the retailing industry, which complained that it has little power to inform customers of the differences in card costs. In its complaint, the Justice Department estimated that the fees cost merchants $35 billion each year - resulting in higher prices for shoppers.

The card networks "put customers and consumers in a no-win situation," Attorney General Eric H. Holder Jr. said in a news conference. "We are sending a very clear message: We will not tolerate anti-competitive policies and practices."

American Express has some of the highest fees and most restrictive practices in the industry, federal officials said. AmEx, based in New York, said it plans to fight the case, calling it "seriously misguided."

"Our merchant contracts are pro-competitive and pro-consumer," said Louise M. Parent, American Express executive vice president and general counsel.

Retailers must pay a fee of about 2 percent of the purchase price each time a customer swipes a card. That money is an important source of revenue for the banks that issue cards as well as the networks, such as Visa and Mastercard, that process the transactions. Though card companies argue that consumers spend more when they use plastic - a boon to retailers - merchants say they have little control over the fees they must pay.

"Merchants, small and large, welcome today's news," said John Emling, senior vice president of government affairs for the Retail Industry Leaders Association, a trade group. "The fact is credit and debit networks operate within a broken market where a few dominant firms set fees and dictate terms with impunity."

Congress took up the issue over the summer as part of the financial regulatory overhaul legislation. It voted to allow retailers to give discounts to shoppers who pay with debit cards or cash, and directed the Federal Reserve to determine whether the swipe fees on debit cards are reasonable.

The Justice Department settlement also gives merchants the ability to reduce prices for certain credit cards. Merchants that accept only Visa and Mastercard, which the department estimated included 4 million store locations, can offer the discounts immediately. But those that also accept American Express, about 7 million locations, must wait for the outcome of the civil suit because their contracts forbid discounting on any type of card.

"There is no reason for these prohibitions," said Christine A. Varney, assistant U.S. attorney general for the antitrust division. "They stifle competition."

American Express said its business model is different from Visa and Mastercard because it issues its own credit cards and negotiates directly with retailers to set the swipe fees. Those fees help pay for the services and rewards that allow the firm to cater to its higher-income clients, which retailers are anxious to attract, American Express said.

But David Balto, an antitrust lawyer and former federal regulator, said Justice should have no trouble proving that American Express has been forcing merchants to pay excessive fees. And those costs, he said, are ultimately passed to customers in higher prices.

"The case is rock solid," Balto said. "AmEx made a serious mistake by refusing to settle, and it's going to end up costing them later on."

Staff writer Jia Lynn Yang contributed to this report.

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