Despite reporting a strong third quarter, American Express Co. remains focused on challenging a U.S. Department of Justice lawsuit over alleged merchant steering and how it might affect the brand’s cardholders.
AmEx has no plans to settle the lawsuit, nor does it believe the government or merchants should be tell consumers which card to use at the point of sale, Kenneth Chenault, AmEx chairman and CEO, told analysts during the Oct. 21 conference call to discuss earnings.
The lawsuit, which also named Visa Inc. and MasterCard Worldwide as defendants, stems from a review the DOJ 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.
Both Visa and MasterCard settled with the DOJ, but AmEx declined to do so (
One analyst contends AmEx made the proper choice. “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,” Adil Moussa, an analyst for Boston-based Aite Group LLC, tells PaymentsSource. “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 explained 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 goodwill for the sake of a relatively small differential,” Chenault noted.
Indeed, despite the difference in interchange rates, merchants most likely will not turn away a customer, Moussa agrees. “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 says.
Additionally, it probably would be “difficult for most merchants to manage and monitor the nuances from all the cards from various issuers,” Beth Robertson, director of payments research at Javelin Strategy & Research, tells PaymentsSource. “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 explained. “Our actions in the marketplace are all about competition, not coercion.”
For the quarter ended Sept. 30, AmEx reported net income of $1.1 billion, up 71.9% from $640 million during the same period last year. Total revenue net of interest rose 39.6%, to $6.7 billion from $4.8 billion.
Income for the quarter includes $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. bankcard market (see story). http://www.paymentssource.com/news/bulletin-amex-reaches-18-billion-settlement-615921-1.html
For the quarter, cardmember spending increased by 12.9%, to $3.5 billion from $3.1 billion a year earlier. Outside the U.S., cardmember spending increased 16%, to $2.9 billion from $2.5 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 says. It also shows there is a “rebound in credit usage, even with the forthcoming regulation for debit cards,” she adds.
AmEx’s U.S. Card Services unit posted net income for the quarter of $595 million, up 277% from $158 million a year earlier. Total revenue net of interest expense increased 23.3%, to $3.7 billion from $3 billion.
U.S. billed business increased 13.1%, to $120.5 billion from $106.5 billion, while total cards in force declined 2.6%, to 48.1 million from 49.4 million.
The net write-off rate on U.S. credit cards was 5.2%, down 460 basis points from 9.8% during the third quarter of 2009. The provision for loan losses decreased 67.8%, to $274 million from $850 million.
The company’s International Card Services unit reported net income of $153 million, up 15% from $133 million. Total international revenue net of interest expense was $1.17 billion, up 0.9% from $1.16 billion.
International billed business increased 17.4%, to $58.8 billion from $50.1 billion, while total cards in force rose 4.9% to 40.9 million from 39 million.
The net write-off rate on international cards was 5.1%, down 350 basis points from 8.6% a year earlier. International provisions for loan losses fell 74.4%, to $64 million from $250 million during the same period last year. AmEx attributes this decline to continued improvement in credit quality for the charge and credit card portfolios.
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