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American Express and its credit card members landed a huge win in court on Monday.
In the lawsuit Ohio vs. American Express, the Supreme Court ruled in favor of American Express over the rules the financial services giant imposes on merchants who accept its cards, reported the Associated Press.
These rules, known as anti-steering provisions, prevent merchants from offering customers discounts, incentives, or preferences to use other cards, like Visa and MasterCard, which charge merchants lower swipe fees (the costs merchants pay for processing credit card transactions).
The federal government and several states argued that these provisions violated antitrust law by preventing merchants from sharing the true information about costs with customers.
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American Express defended its practices: They charge higher swipe fees to merchants than competitors because they have wealthier cardholders who spend more money, and these higher swipe fees offer its cardholders better rewards.
That’s right, rewards junkies, those perks you love — points, airline miles, and cash back — are funded by swipe fees.
“Swipe fees are the engine that powers the whole credit card rewards game,” Matt Schulz, CreditCards.com’s senior industry analyst, said in a statement. If the Supreme Court hadn’t found that American Express’s anti-steering provisions promoted healthy competition within the payments industry and the fees had taken a hit, “it would’ve been great news for merchants’ bottom line, but would almost certainly have marked the end of the golden era of credit card rewards.”
As this case demonstrates, the relationship between swipe fees and rewards puts business owners and consumers at odds.
Swipe fees offer perks for customers
American Express, Discover, and Capital One spent a combined $12.9 billion on credit card rewards in 2017 — a 59% increase since 2011, according to consumer research group ValuePenguin.
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“Year over year American Express has continued to increase their spending on such programs, which could have changed course had the Supreme Court voted the other way,” Joe Resendiz, credit cards analyst at ValuePenguin, told Business Insider.
Schulz said that consumers who love credit card rewards may have dodged a bullet with this victory.
“If merchants were allowed to give customers incentives to use cards with lower swipe fees, that could have been a game-changer,” he said. “That would likely have led to card networks reducing those fees in order to remain competitive, and fewer swipe fees surely mean fewer rewards for credit cardholders.”
This litigation is actually just one part in a series of fights that retailers, like Walmart and Amazon, are having with credit card companies over swipe fees, according to ValuePenguin. If the credit card companies lose, the banks could lose a major source of funding for credit card reward programs, thereby limiting perks for customers.
But they also create a problem for business owners
Yet, the win for American Express and credit card users comes at the cost of business owners — an effect shoppers may have to deal with firsthand.
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In a statement, National Retail Federation general counsel Stephanie Martz called the ruling a blow to competition and transparency in the credit card market. “The American Express rules in question have amounted to a gag order on retailers’ ability to educate their customers on how high swipe fees drive up the price of merchandise,” she said.
Retailers spend $50 billion in fees to credit card companies each year, according to ValuePenguin. These transaction costs are built into merchants’ prices — if they are unable to reduce that, customers could see an increase in the price of merchandise to offset the cost.
This is especially true if AmEx continues to raise its swipe fees.
“The record reflects that AmEx consistently has far and away the highest cost of payment compared to its competitors,” Southwest Airlines said in court papers, arguing that the prices for credit card services, particularly AmEx, have risen dramatically, even as the cost of providing services has decreased.
In 2011, Southwest paid about $353 million in credit card fees — $112 million went to AmEx.
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Walmart argued that AmEx is able to impose its anti-steering rules and increase their prices because merchants don’t have another choice — declining to take an AmEx card at all would mean a loss of business, and customers, focused on rewards remain oblivious to the costs.
Despite this, one-third of merchants that take credit cards don’t accept AmEx, reports CreditCards.com.
However, both retailers and consumers could get a reprieve. Stephen Squerio, CEO of American Express, announced the company will be reducing merchant fees to appeal to more merchants and expand the number of stores that accept their cards. The new fees will be the lowest they’ve been in nearly 20 years, according to ValuePenguin.
