American Express Co. Chief Executive Officer Kenneth I. Chenault defended company rules that bar merchants from asking customers to use cards with lower processing costs as a needed measure to protect its brand.

Chenault, 63, testified yesterday at a trial in Brooklyn, New York, over U.S. Justice Department claims that the rules violate antitrust law. The New York-based card company has said its rules promote rather than stifle competition by allowing it to offer generous rewards and differentiate itself from rivals with larger market share, Visa Inc. (V) and MasterCard Inc. (MA)

"The most important attribute of our brand is trust, and the cornerstone of that trust is welcome acceptance," Chenault told U.S. District Judge Nicholas Garaufis, who will decide the case without a jury. When merchants ask customers to use another card, "what that says to the customers is 'This card is a piece of crap. I don't like it.'"

Merchants have long complained the fees they are charged to process credit card payments are too high. Largely hidden from consumers, the fees total about $50 billion a year in the U.S., according to the government, and are used in part to fund rewards programs.

The Justice Department, joined by 17 states, sued all three major card brands in 2010 over rules that prevented stores, restaurants and other merchants from asking customers to use competing cards with lower costs. AmEx continued to fight the case after Visa and MasterCard settled.

Fewer Wallets

Foster City, California-based Visa and Purchase, New York-based MasterCard together have about 1 billion cards in the U.S., compared with about 55 million American Express cards, according to AmEx. While it's found in fewer wallets, American Express, with a market value of $95 billion, lags only behind Visa at $133 billion. MasterCard has a market value of $90 billion.

While some merchants opt to go without accepting American Express because of the higher costs, almost all of the country's 100 largest merchants take the card, according to the government.

American Express was focused on the travel and entertainment sector before it began expanding to the general market around the 1990s, Chenault said. The change enabled it to succeed at becoming a major player in the payments industry while industry-specific card brands, such as Diners Club, became "irrelevant," he said.

Chenault, who joined the company as a director of strategic planning in 1981, told the judge that AmEx struggled to expand because of "chokeholds" imposed by its competitors, including a campaign by Visa in the 1990s to encourage merchants to ask customers to use its card in lieu of AmEx. The government alleged that the Visa campaign led AmEx to tighten its rules.

'Negates' Investment

"When a merchant does not accept us or says use another card, that spills over to other merchants," Chenault said. "It negates all the investment that we made."

His testimony is expected to continue today.

Witnesses at the trial, which began in early July and is likely to last at least eight weeks, have included merchants, credit card firm executives and academic experts as the government seeks to prove American Express abuses market power with rules to protect its fees.

The case is U.S. v. American Express Co. (AXP), 1:10-cv-04496, U.S. District Court, Eastern District of New York (Brooklyn).

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