* Justice Department battles rules hindering cheaper cards
* American Express vows to fight antitrust lawsuit
* Shares of AmEx finish down 6.5 percent
(Adds comments from AmEx, government, investor, analyst,
lawyer, background on regulation, updates shares to close)
By Maria Aspan and Diane Bartz
WASHINGTON/NEW YORK, Oct 4 The U.S. Justice
Department sued American Express Co (AXP.N), Visa Inc and
MasterCard Inc on Monday, accusing them of violating antitrust
laws and citing rules that prevented merchants from encouraging
consumers to use cheaper credit cards.
Simultaneously, the Justice Department settled with Visa
(V.N) and MasterCard (MA.N), which agreed to allow merchants to
offer discounts to consumers who use less expensive types of
credit or debit cards. The companies said the settlement,
subject to court approval, did not involve any payment.
The lawsuit has the potential to cut into a significant
source of profits for American Express and threatens to reshape
the competitive landscape of the card processing business.
Shares of American Express, which charges merchants more on
average for processing credit card transactions than its
rivals, closed down 6.5 percent at $39.05.
Consultant Philip J. Philliou, a former executive for
American Express and MasterCard, said via email that the
lawsuit was "problematic for AmEx.
"If nothing else, it highlights to retailers and consumers
the premium that retailers pay to accept AmEx as a form of
payment," he wrote.
"This ruling may impact which card a consumer pulls out of
their wallet," Philliou added.
American Express said the lawsuit would hurt consumers by
limiting their ability to use their AmEx card.
"We have no intention of settling the case," Kenneth
Chenault, chairman and chief executive officer of American
Express, said in a statement.
American Express executives and lawyers declined repeatedly
on a conference call with investors and reporters to quantify
the potential impact of losing the lawsuit, or to say how much
it would have cost the company in revenue to settle the case.
"I think, with reason, AmEx thinks the negative impact
would be material," consultant Eric Grover, who previously
worked at Visa, said in an email.
Attorney General Eric Holder said at a press conference on
Monday that credit card companies "put merchants and consumers
in a no-win situation. Accept our card, pay our fees and don't
even think about trying to get a discount."
Merchants pay fees to banks and processing networks like
Visa and MasterCard every time a customer pays for something by
using a credit or debit card. These so-called interchange fees
usually amount to between 1 to 3 percent of each total bill.
American Express, which lends directly to consumers and
processes credit card transactions, charges merchants a higher
percentage on average. AmEx said on the conference call that
merchants get more business from American Express cardholders
in exchange for the higher fees because its wealthy customers
tend to spend more than the average credit card user.
Visa, MasterCard and American Express and their affiliated
banks collected more than $35 billion in fees from U.S.
merchants in 2009, according to the lawsuit.
American Express cardholders charged $419.8 billion worth
of purchases in 2009, while MasterCard cardholders charged
$476.9 billion and Visa card holders charged $764.2 billion.
Christine Varney, head of the Justice Department's
antitrust division, said the government would try to resolve
the case as quickly as possible.
But American Express Vice Chairman Edward Gilligan told the
conference call, "We anticipate that this process will take
several years before it is resolved.
Both merchants and consumer groups hailed the government's
action against the credit card companies.
Ed Mierzwinski, consumer program director of the U.S.
Public Interest Research Group, said in a statement that the
lawsuit and settlement "will finally open competition in the
card payment market, ultimately leading to lower prices to
But in a statement late Monday afternoon, the American
Bankers Association said it looked "forward to seeing whether
(merchants') new-found pricing authority will actually result
in consumer benefit or merely be used to pad their own bottom
Jan McDavid, an antitrust attorney who represents American
Express in other matters, said the government would have
trouble proving that American Express had market power,
essential to this case, because it had said the opposite in
1998 when it sued Visa and MasterCard in an antitrust case.
"Visa and MasterCard have 70 percent of the credit card
market. If you think about debit cards, American Express's
market share goes down even more," said McDavid. "I think
Christine's got a tussle on her hands."
Visa shares closed down 0.10 percent at $73.24, and
MasterCard shares closed down 1 percent at $222.64. Investors
attributed the declines to uncertainty about a law due to go
into effect next year that will limit debit-card transaction
fees merchants pay both companies and their partner banks.
"Any time you can get a headwind like the DoJ lawsuit
behind you that's a positive ... but I think the overriding
issue right now is (still) the Durbin amendment" restricting
debit fees, said Michael Nix, a portfolio manager at Greenwood
Capital Associates, who owns Visa shares.
Visa said that as part of the settlement, it would allow
merchants to offer discounts to consumers who use certain types
of cards, such as non-rewards credit cards, which carry lower
Until this year, these fees have been relatively
unregulated in the United States.
"Credit cards cost phenomenally more in the U.S. than
abroad and the DOJ action will help open the market," said
David Balto, a former policy director at the Federal Trade
Commission's competition office.
(By Diane Bartz in Washington and Maria Aspan in New York;
Editing by Tim Dobbyn)