Recent court decisions about credit cards will affect you — whether you use a credit card or not.
American Express AXP, +1.80% won a Supreme Court case this week that will prohibit merchants from giving customers incentives to use credit cards that aren’t made by American Express.
That’s a win for the credit card giant and a loss for consumers, some advocates say.
Stores sometimes don’t accept AmEx cards because AmEx charges merchants a higher interchange, or “swipe fee,” than its competitors do. When consumers buy items with their American Express cards, the credit-card company charges the store an average of 2.37%, compared to typically less than 2% at Mastercard MA, -0.14% and Visa V, +0.27% .
(American Express makes up for the higher fee when other factors are considered, including network and acquirer fees, a spokesman for the company said.)
American Express has argued that its clients have higher incomes and spend more, justifying the higher swipe fees. Several U.S. states and the Justice Department brought an antitrust case against American Express. But the Supreme Court ruled in American Express’s favor.
Meanwhile, Visa and Mastercard have also been attempting to settle a separate antitrust lawsuit against them, the Wall Street Journal reported.
The companies did not immediately respond to MarketWatch’s request for comment.
Under the settlement, which has yet to be finalized, Visa, Mastercard and banks that issue debit and credit cards including JPMorgan JPM, +1.04% and Citigroup C, +1.90% would pay merchants about $6.5 billion. The merchants had argued that the credit-card companies and banks conspired to inflate their interchange fees, leading to high costs for the merchants.
Chase and Citi declined to comment.
Credit-card companies also claim that they reduce costs for merchants, by helping them avoid theft and by giving them insight into trends at their stores.
But consumers get the short end of the stick, others say. When the Supreme Court made its decision about American Express, the National Retail Federation, a trade group, issued a statement that the decision “will perpetuate a system that costs merchants and consumers billions of dollars a year.”
“Today’s ruling is a blow to competition and transparency in the credit-card market,” Stephanie Martz, NRF senior vice president and general counsel said. “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.”
“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.” The potential impactThe NRF says that debit- and credit-card interchange fees in the U.S. cost retailers and customers more than $50 billion a year, adding $400 a year to costs of the average household.
But even if interchange fees were lower, it’s unclear that merchants would actually lower prices on products, said Nick Clements, the co-founder of personal-finance company MagnifyMoney, who previously worked in the credit-card industry.
For example: The Durbin Amendment, which was added to the Dodd-Frank financial reform legislation and went into effect in 2011, capped debit-card interchange fees for banks with assets of $10 billion. (It did not affect credit-card interchange fees.)
As a result, the average interchange fee for those banks dropped from $0.50 to $0.24, according to a study from George Mason University in Arlington, Va. But there is no evidence that merchants are actually passing that savings on to the consumer and charging less as a result, the study said.
In Australia, interchange fees on credit cards are capped. But Australian consumers have not seen a reduction in prices as a result. And banks offered fewer credit card rewards in order to make up for their lost interchange revenue, according to a report from Europe Economics, a management consultancy firm in London.
So in the short term, the court decisions may have benefited consumers who rely on lucrative credit-card rewards, Clements said.
“The rewards arms race continues,” he said.
