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American Express Co. capped a month of bad news by disclosing that its merchant pricing and "anti-steering" policies have kindled a government antitrust investigation. The outcome of the investigation could lead to higher revenues for some ISOs from Visa Inc. and MasterCard Worldwide transactions if AmEx must change its policies and merchants are allowed to steer customer payment types, an analyst says.
AmEx said in a regulatory filing that the Justice Department's antitrust division has demanded information and documents about its "policies relating to merchant surcharging and its 'anti-steering' policies," which prohibit merchants from charging customers extra for paying with AmEx cards and from encouraging payments using other cards. Visa and MasterCard transactions typically cost merchants less.
"For smaller ISOs, it could be more profitable" if merchants can encourage Visa and MasterCard transactions over AmEx, says Adil Moussa, group analyst at Aite Group LLC, a Boston-based research company. "Most of the time ISOs don't even get to do any kind of revenue sharing for AmEx," he says. Large acquirers typically earn revenue by acquiring a merchant for AmEx. In some instances, they also will earn a specific number of basis points annually on a merchant's AmEx transactions, he says.
However, AmEx is moving toward a more direct-processing model closer to Visa and MasterCard's operations, he says. AmEx announced in December 2007 that it was opening its network to third-party processors for the first time through an agreement with Greenwood Village, Colo.-based First Data. The difference in profitability for ISOs between MasterCard and Visa transactions and AmEx transactions may diminish as AmEx expands its processing program. Heartland Payment Systems Inc., a Princeton, N.J.-based processor, also said this week it is enrolling merchants for AmEx acceptance onto the Heartland processing system.
The New York credit card company also said in the regulatory filing Friday that it no longer expects to "meet its on-average and over-time financial targets," confirming what executives said during an October earnings conference call. This news came after an announcement last week that it would lay off 10% of its global work force as part of a $1.8 billion cost-cutting effort. (See related news on page 5.)
Drugstores Sue AmEx
The merchant-surcharging and anti-steering policies prompted three drugstore companies to sue AmEx in June, alleging that provisions in their agreements with the card company violate antitrust laws by restraining them from steering customers to other payment cards, which often carry a lower merchant discount rate. On Friday, both AmEx and a lawyer representing one of the drugstore plaintiffs said the investigation was not directly related to the lawsuits.
Paul E. Slater, a partner in the Chicago firm Sperling & Slater PC who represents CVS Caremark Corp. in its AmEx lawsuit, says, "The merchants I represent are very unhappy with the fees they pay to AmEx, but to the best of my knowledge we did not start the [Justice Department] investigation."
Joanna Lambert, an AmEx spokesperson, wrote in an e-mail that "the two are not related." Justice Department representatives did not respond to phone calls.
Government Interest
But Thomas Brown, a partner in the San Francisco office of O'Melveny & Myers LLP, says the lawsuits were probably indirectly responsible for the government's interest. Even if "this investigation does not relate directly to the lawsuits by CVS and others," he said, it has raised "the general interest in the subject matter" of networks' merchant pricing and steering policies.
Slater, who also is an adjunct professor of antitrust law at Northwestern University's law school and is representing grocery store chains that have filed similar lawsuits against Visa and MasterCard, said it was "a little unusual for the Department of Justice to be investigating a vertical agreement" between a network and merchants.
The government's request for documents was sent Oct. 10 in the form of a civil investigative demand, which Amex said "does not constitute the commencement of legal proceedings."
Brown agreed that such a request might not lead to further government action. "Often those CIDs are resolved without any change in a particular practice or without a lawsuit," he said.
Lambert wrote that the anti-steering and merchant surcharging policies under investigation "are both long-standing policies included in our merchant contracts to ensure our cardmembers have a positive experience at the point of sale. We're confident in our policies and practices and are cooperating with the request for information."
Maria Aspan is a reporter with American Banker, where this article first appeared.
