Justice Department Takes on Credit Card Giants

The Department of Justice (DOJ) today announced a settlement with Visa and MasterCard and an ongoing lawsuit against American Express regarding the companies' allegedly anticompetitive practices. In order to accept credit cards from these networks, merchants must agree not to provide discounts to customers using other card brands or some other payment forms. The government argues this strategy by the networks is bad for competition. Although Visa and Mastercard have agreed to settle on this issue and allow retailers more flexibility, American Express is still fighting. There are several interesting things to note about this announcement.

Big winner: Discover and Retailers

Assuming the DOJ ultimately triumphs, then this news is quite good for any company other than those big three networks. At the top of that next tier of credit card companies is Discover. It doesn't appear to be named in the suit. Presumably it still has a small enough share of the market that it could benefit from increased competition with the more popular networks.

Of course, retailers will also probably have higher profits. If they can provide an incentive for people to use payment options with lower interchange fees, then they'll make more money. Presumably they'll generally leave a little room between their fee savings and the discount to customers to allow a little more profit.

Not About Cash

To be clear, this ruling isn't about cash versus credit. If you followed the financial regulation battle, then you might recall a part of the summer's bill that addressed precisely the behavior of credit card forbidding discounts for other payment types. An amendment to the bill sponsored by Sen. Dick Durbin (D-IL) already took the first step in forbidding such practices by stopping credit card networks from blocking discounts for broad forms of payment, like cash or debit.

The DOJ's stance is a different nuance. It would forbid discounts for particular brands, types, or forms of the same payment type, like Visa, Amex, PIN debit, etc. So the financial regulation bill should have already provided vendors the option of offering a cash discount, but now they can also offer a Discover or Visa discount -- or essentially charge more for customers using a network with more expensive interchange fees.

American Express Now the Sole Target

It's a bit unusual for the DOJ to be taking such a hard line on anticompetitive behavior against American Express, because it doesn't have a dominant share of the market. In prepared remarks today, Attorney General Eric Holder said:

Because of American Express's current rules, some consumers will continue to pay higher prices. That is unacceptable, so we will continue to pursue litigation against American Express until we ensure a fair market for every consumer.

Yet, an article in the Wall Street Journal by Robin Sidel and Thomas Catan reminds us:

Cards that are branded with the Visa and MasterCard logos make up about three-quarters of the market for plastic. American Express executives believe that the company's smaller market share will bolster its argument to the Justice Department that its policies aren't anticompetitive, say people familiar with the negotiations.

So this is kind of like if regulators were going after T-mobile for anti-competitive behavior after settling with Verizon and AT&T. If this is damaging anticompetitive behavior on the part of American Express, then it isn't working very well to give the company a huge advantage. It still has less than a quarter of the market share.

Effect on the Consumer

Will this make much difference for consumers? In aggregate, it will probably be a wash. Credit card networks might have to reduce their interchange fees to better compete with other payment options. In order to do so, however, they'll probably also have to reduce their rewards or create monthly maintenance fees to compensate for the lost income. So really, this will mostly help people who don't use credit cards that charge a lot for interchange, since they might be able to get a discount that others using the popular networks won't benefit from.