Feds sue major credit card companies, allege policies hurt consumers

Feds sue American Express, Mastercard, VisaThe Department of Justice today filed an antitrust lawsuit challenging business practices American Express, MasterCard and Visa use to prevent merchants from offering consumers discounts, rewards and information about card costs – anti-competitive behavior it says cost both consumers and businesses money.

The states of Connecticut, Iowa, Maryland, Michigan, Missouri, Ohio and Texas have joined the suit with the Justice Department – which also said it had reached a proposed settlement with two of the companies.

According to the complaint, American Express, MasterCard and Visa maintain rules that prohibit merchants from encouraging consumers to use lower-cost payment methods when making purchases, such as discounts or other incentives to encourage consumers to pay with credit cards that cost the merchant less to process.

"With today's lawsuit we are sending a clear message: We will not tolerate anti-competitive practices," said Attorney General Eric Holder in a statement. "We want to put more money in consumers' pockets, and by eliminating credit card companies' anti-competitive rules, we will accomplish that."

Credit card acceptance costs U.S. merchants approximately $35 billion each year. Those costs are collected from merchants in the form of a "swipe fee" they pay every time a credit card is used. American Express imposes the highest merchant fees of any credit card network, the department said.

Merchants then pass on billions in fees to consumers in the form of higher retail prices. By preventing merchants from rewarding consumers when they use less expensive credit cards to make a purchase, American Express, MasterCard and Visa hinder merchants' ability to reduce card acceptance costs and pass these savings on to consumers, the department charges.

However, the department announced it had already reached a proposed settlement with Visa and MasterCard. If approved by a court, the settlement would make Visa and MasterCard give merchants the freedom to offer discounts, incentives, and information to consumers to encourage the use of cheaper payment methods.

"The proposed settlement with MasterCard and Visa is an important step in bringing more credit card competition to the point of sale," said Christine Varney, Assistant Attorney General in charge of the Department of Justice's Antitrust Division, in a statement. "The department's lawsuit against American Express will continue that effort and, if successful, allow merchants more freedom to benefit their customers."

The proposed settlement requires MasterCard and Visa to allow their merchants to:
  • Offer consumers an immediate discount or rebate or a free or discounted product or service for using a particular credit card network, low-cost card within that network or other form of payment.
  • Express a preference for the use of a particular credit card network, low-cost card within that network or other form of payment.
  • Promote a particular credit card network, low-cost card within that network or other form of payment through posted information or other communications to consumers.
  • Communicate to consumers the cost incurred by the merchant when a consumer uses a particular credit card network, type of card within that network, or other form of payment.
The proposed settlement allows any merchant that only accepts Visa and MasterCard to take advantage of the relief immediately.

The ongoing litigation against American Express is aimed at allowing merchants who accept American Express cards to offer the same discounts and encouragements required by the proposed settlement with MasterCard and Visa allows. Until American Express's restraints on merchants are lifted, merchants that accept American Express, as well as Visa and MasterCard, won't be able to take full advantage of the proposed settlement, the department said.

In 2009, cardholders used American Express, MasterCard and Visa cards to purchase goods and services totaling $419.8 billion, $476.9 billion and $764.2 billion, respectively.

American Express responded forcefully, saying the company would fight the government lawsuit.

"Instead of promoting competition, the government remedy would ultimately wind up marginalizing it," Kenneth I. Chenault, the company's chairman and CEO said in a statement. "The government's one-sided remedy would put more power in the hands of Visa and MasterCard, the networks that steadily increased prices for credit card transactions over the past decade, that control over 70% of the market and that have 10 times as many cards as American Express. Anyone familiar with antitrust matters, would realize that in the real world such market power would ultimately work to the disadvantage of merchants as well as consumers."

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