Why Amex is fighting Justice's bad deal for credit card holders

By Kenneth I. Chenault
Friday, October 8, 2010

This week, the Justice Department sued Visa, MasterCard and my company, American Express, alleging that our rules prevent consumers from getting a lower price when they shop. Visa and MasterCard quickly settled and agreed to follow a complex set of remedies developed by government attorneys. We chose to fight. Let me explain why.

The government remedy does nothing for consumers. And, whatever its intention, the Justice Department is heading down a path that eventually leads to less competition, not more.

Merchants accept plastic because they know many customers often want to use credit, charge or debit cards at the checkout counter. Card acceptance brings higher sales, prevents fraud or counterfeiting, and protects against losses when a customer doesn't pay his or her bill. In return, merchants agree to welcome cards at the point of sale and to pay a fee, which is typically between 2 and 3 percent of the purchase price.

Perversely, the government's remedy would allow merchants that sign a contract and post decals to show which credit cards they accept to then ignore the contract's ban on discrimination by pressuring their customers to use a different card when they pay.

In theory, you might be offered a small discount for putting up with the inconvenience. But this will not lead to lower prices overall for consumers. Merchant associations, even those that support the Justice Department, won't commit to lower prices. Nothing in the government's lawsuit requires them to do so. As it is, merchants are already allowed to offer a discount or incentive to customers who pay by cash, checks or debit cards. Very few do.

The net result of this "bait and switch" is an unhappy customer who was pushed to use a backup card that didn't provide the customer service, buyer protection, benefits or rewards that he or she prefers. Only in Washington could that be called a consumer benefit.

Antitrust laws were designed to promote competition. But in this case, the government lawyers who enforce those laws are doing just the opposite by offering a solution that favors the two dominant networks. Here's how.

Earlier court rulings found that Visa and MasterCard have market power that allows them to unfairly dominate the payment industry. Given the sheer size of their customer base, most merchants do business with them because they have to. Only a small percentage of their card holders also carry an American Express or Discover product.

By contrast, American Express is a network of choice and the smallest in terms of merchant acceptance. Merchants don't have to do business with us, but those that do appreciate our overall service and value, including more business from higher-spending customers who carry our cards. In return, we require that they not discriminate against our card. Unlike the dominant networks, virtually all American Express customers carry another card in their wallet. American Express customers don't have to use our card, but they choose to do so. Their choice recognizes the superior value and service we provide.

Compare the two different business models, and you'll see the flaw in the government's thinking. It is difficult to steer Visa or MasterCard holders to American Express because those consumers don't carry our card. By contrast, it's possible to pressure our customers toward one of the backup products they carry deeper in their wallet.

If the government is allowed to do away with the protections we build into our merchant contracts, the net result would be more business for the two dominant networks.

Visa and MasterCard already control 70 percent of the market. When dominant parties gain even more market share, no one will be able to negotiate freely or fairly with them. The inevitable result would be higher costs for merchants and less value for consumers. That's the real cost of government intervention.

The Justice Department is supporting bad policy and disguising it with vague promises of consumer benefit. We think their case is weak and we intend to fight it.

It's never easy to take on a long, costly battle with the government, but what's at stake are some important issues: consumer choice, free market competition and the ability to deliver superior products and services to our customers. This is a fight worth fighting.

The writer is chairman and chief executive officer of American Express Co.

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