While credit card transactional fees are a perpetual source of frustration for small businesses, none tend to be worse than the fees charged by American Express. Many businesses simply choose not to accept Amex in order to avoid the additional costs. Those that do accept these cards must agree to antisteering provisions that prohibit the business from discouraging a customer from using an Amex card once she is in the store or charging a higher fee to use the Amex card. The Supreme Court declined an opportunity to end this contractual provision once and for all under the federal antitrust statutes.
Amex earns money by charging merchants a higher fee in order to provide more incentives to customers. Each credit card company collects interchange fees in exchange for conducting the transaction. Because the credit card company uses a two-sided platform, acting as a middle man between the purchaser and the seller, it is able to collect fees on both sides of the transaction. The credit card company must balance the costs in order to have enough card holders to provide customers to businesses that accept the card, which in turn incentivizes more businesses to accept the card and subsequently incentivizes more card holders to use the particular credit card company. This creates an economic feedback loop that can be disrupted with minor changes in fee structure. While Visa and MasterCard earn the majority of their money on interest charged to the consumer and, to a lesser extent, on a sliding scale of fees to the business based on the type of card, Amex earns money by charging more to the business for all cards while sometimes losing money on the consumer through perks and rewards. This allows it to remain competitive with Visa and MasterCard while being more expensive to businesses.
In order to protect its market share, Amex requires each business to agree to an antisteering provision, where the business is prohibited from dissuading customers from using a different credit card company or from placing conditions on using an Amex Card. Several states felt that this was a restraint on trade in violation of the Sherman Act (one of the major federal antitrust laws) and sued. The district court agreed with the states because the practices result in higher merchant fees, concluding that the fees to consumers existed in a separate market than the fees to businesses. The Supreme Court in Ohio v. American Express Co., however, found that because of “commercial realities,” the credit card network market is a single market. The transaction with the consumer could not exist without the simultaneous transaction with the business. Accordingly, the Court found that the total costs of the services, not the individual costs on one side of the transaction, determined whether it was anticompetitive. Amex’s pricing policies do not increase the cost of credit card transactions, reduce the number of credit card transactions, or stifle competition.
Because of this decision, businesses must continue to either accept Amex cards as they are presented or decide to avoid the fees by not accepting Amex.
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