After a strong third quarter, American Express Co. still has to contend with a Justice Department lawsuit that alleges merchant steering and that might affect the brand's cardholders.
Amex has no plans to settle the lawsuit, nor does it believe the government or merchants should tell consumers which card to use at the point of sale, Kenneth Chenault, its chairman and chief executive, told analysts Oct. 21 during an earnings conference call.
The lawsuit, which also named Visa Inc. and MasterCard Inc. as defendants, stems from a review the Justice Department initiated in 2008 of the payments networks' rules regarding merchant acceptance of their cards, particularly as they pertained to retailers' inability to encourage consumers to use other brands or types of cards.
Visa and MasterCard settled with the Justice Department, but Amex declined to do so.
One analyst said that was the smart move.
"Amex is definitely in the right to defend themselves from [merchant steering], because the company's account structure is different from Visa's and MasterCard's," said Adil Moussa, an analyst for Aite Group LLC in Boston. "Both Visa and MasterCard offer over 100 pricing points for each card, while Amex offers the same interchange rate for every card."
The difference between Visa's "high and low interchange rates is approximately 90 basis points, which is 90 cents on a $100 purchase, while the average Amex rate is about 25 basis points higher than Visa and MasterCard," Chenault said during the call. So steering between credit products does not really offer "a lot of marginal economics for merchants," he said.
Moreover, it seems questionable whether "merchants would disrupt the transaction at the point of sale and risk a potential loss of customer good will for the sake of a relatively small differential," Chenault said.
Moussa agreed that despite the difference in interchange rates, merchants most likely will not turn away a customer.
"At the end of the day, if a consumer is spending $1,000 and only has an Amex credit card, a merchant will not turn the consumer away just because they have to pay an interchange rate of 3.5%," Moussa said.
Beth Robertson, director of payments research at Javelin Strategy and Research, said that it probably would be "difficult for most merchants to manage and monitor the nuances from all the cards from various issuers … most merchants also pay an acquirer fee, so in the long run it may be hard to see the overall cost savings from choosing one card over the other."
Amex contends it should have the right to "negotiate freely with merchants on the terms of our contract," Chenault said. "Our actions in the marketplace are all about competition, not coercion."
Amex reported that its third-quarter net income rose 71.9% from a year earlier, to $1.1 billion. Total revenue net of interest rose 39.6%, to $6.7 billion.
Income for the three months included $93 million from MasterCard and $43 million from Visa related to the 2008 litigation settlements stemming from lawsuits Amex filed over the card brands' exclusionary rules that illegally blocked Amex from the U.S. bank-card market.
Cardholder spending in the U.S. rose 12.9% year over year, to $3.5 billion. Outside the U.S., cardholder spending rose 16%, to $2.9 billion.
The largest cardholder spending increases came from charge and premium cobranded products and from corporate cards issued by the company's bank partners, according to Amex.
"It's a good indicator that consumer spending appears to be increasing, especially because consumer spending has remained flat in the last few years," Robertson said. It also shows there is a "rebound in credit usage, even with the forthcoming regulation for debit cards," she said.
Amex's U.S. Card Services unit posted net income of $595 million, 277% more than a year earlier. Total revenue net of interest expense increased 23.3%, to $3.7 billion.
U.S. billed business increased 13.1%, to $120.5 billion, while total cards in force declined 2.6%, to 48.1 million.
The net writeoff rate on U.S. credit cards was 5.2%, down 460 basis points from 9.8% in the third quarter of 2009. The provision for loan losses fell 67.8%, to $274 million.