Ruling in American Express case protects card rewards
By Fred O. Williams | Published: June 25, 2018
Expert on consumer credit laws and regulations
The Supreme Court upheld American Express’s “anti-steering”
rules on Monday, a decision that indirectly safeguards the rewards that cardholders
American Express’s rule prevents merchants from steering credit
card users to a different card with lower transaction fees, called “swipe fees,” paid by the
The case, Ohio
vs American Express, was brought by Ohio’s attorney general and 16 other
states. They argue that the anti-steering rule blocks competition.
But when you consider the benefits to cardholders, the rules
against steering do not necessarily violate the principle of a competitive
market, the court said in a 5-4 ruling.
“The credit card market must be defined to include both
merchants and cardholders,” Justice Clarence Thomas wrote for the majority.
Looked at that way, AmEx’s anti-steering rules don’t necessarily harm
competition overall just because they drive up the transaction fees that
merchants pay, the decision stated.
Swipe fees charged to merchants average between 2 and 3 percent of each transaction, but can range up to 5 percent for some cards
with top-tier benefits. The fees pay for cash-back, points and miles that
rewards cards deliver.
In 2010, the U.S. Justice Department and several states sued
Visa, Amex and Mastercard, saying the anti-steering rule violates antitrust
law. Visa and Mastercard settled, but Amex remained in the fight.
Initially, a federal court ruled
against the card networks, saying their rules stifled competition. But the
2nd Circuit Court of Appeals in New York reversed that. The appeals court said
that card networks have two sets of customers: the merchants who select which
transaction networks to use, and consumers who select which credit card to use.
In this “two-sided” market, the prices charged to merchants are only part of
the story, the appeals court ruled.
See related: Credit card case before Supreme Court could change rewards game
AmEx argued that card rewards encourage card use and make
the market larger than it would be. According to court papers, AmEx
has 26.4 percent of transactions. That makes it a distant No. 2 after Visa,
with 45 percent. Mastercard followed with 23.3 percent and Discover had 5.3
percent, according to the 2013 statistics.
During a hearing before the Supreme Court in February,
Ohio’s lawyer Eric Murphy argued that AmEx should have to show that the
benefits of card rewards outweigh the negatives of anti-steering rules, not just
make the argument without proof.
The court’s ruling Monday disagreed, saying the burden was
on the plaintiffs to show anticompetitve practices. The ruling said that AmEx’s
business model depended on merchant swipe fees instead of interest paid by
cardholders. Visa and Mastercard, with different business models, could elbow
aside AmEx in the absence of anti-steering rules.
“This ruling could have major
ramifications,” Creditcards.com senior industry analyst Matt Schulz said. “Swipe
fees are the engine that powers the whole credit card rewards game.”
If anti-steering rules had been removed, retailers would
have been able to push back against rising swipe fees by giving customers a
break at the register for using cheaper cards.
The biggest losers in the decision might be people who use
cash or debit cards. They don’t get card rewards, but subsidize them through
prices they pay, consumer advocates argue.
In a dissent, Justice Stephen Beyer said the anti-steering
rule “clearly has serious anticompetitive effects.” Shoppers may benefit from
steering “whether because merchants will offer them incentives to use less
expensive cards, or in the form of lower retail prices overall.”
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