DOJ settlement sets up battle between basic and premium credit cards
Written by Curtis Arnold
Posted On: October 11, 2010
While American Express vows to fight accusations of anti-competitive practices, MasterCard and Visa have chosen to settle lawsuits filed October 4 by the Justice Department. The suits had been rumored for weeks, with insiders suggesting that the wave of anti-bank sentiment responsible for passage of the Credit CARD Act had enough juice left to put pressure on payment platform operators.
Savvy credit card shoppers already know the secret. Merchants often pay between two and four percent of every purchase in interchange fees. Banks and service providers split up these fees with the help of payment platform providers like Visa and MasterCard. Those two companies captured the bulk of the DOJ's attention. Most merchant account providers market the two brands together, often locking business owners into a flat rate for accepting both kinds of cards.
Premium Interchange Fees for Premium Cards
American Express and Discover approach merchants a little differently. As premium brands, they issue most of the credit cards bearing their logos themselves. Only a handful of partner banks have been allowed to create their own AmEx and Discover products. Both platforms typically charge higher merchant fees, but their Membership Rewards and cash back rebates tend to attract more affluent customers that charge up higher average tickets.
Although Discover escaped its own lawsuit, federal investigators allege that merchant account terms put too much pressure on businesses to accept cards equally. For instance, a merchant might have cut a deal to accept Visa and MasterCard at a 2% rate, while accepting American Express at a 3.5% rate. Under previous merchant agreements, a retailer couldn't steer their customers toward one form of credit card payment over another.
Credit CARD Act Opened the Door to Change
That shifted with the passage of the Credit CARD Act, which restored merchants' abilities to offer discounts for cash payments. If Visa and MasterCard follow through with their proposed settlement, they won't have to pay any fines. However, they will have to revise merchant agreements and allow businesses to give customers special discounts or rewards on the spot if they swipe a particular kind of credit card that costs less to process.
The settlements set the stage for a battle between consumers who like the purchasing power of premium rewards cards and shoppers who prefer to get the best deal at the register. American Express officials told reporters that their company chose to fight for their right to offer a premium service for both cardmembers and merchants. Higher merchant fees fuel bigger rewards, but they often attract business accounts that might otherwise shop elsewhere. Even if the DOJ drops its lawsuit, merchants have already won the ability to practically beg customers to use other banks' cards.