Court Rules Against AMEX - Bad News for Networks & Card Issuers Posted by AVCU on 10:32 AM

CU Journal reports that just yesterday U.S. District Judge Nicholas Garaufis' decided that the merchant contracts of American Express are illegal. Specifically, the judge struck down AMEX's ban on a practice called "steering," in which merchants offer customers discounts or other perks for using cards that cost merchants less to accept.  The decision potentially forces card companies to more aggressively compete on interchange rates, to the benefit of merchants, and could set off a price war that squeezes all payment card networks, not just AMEX, as well as card-issuers. Such a price war could strain community banks and credit unions if larger banks promote agreements to retailers to steer customers toward their cards. AMEX, whose rates are generally higher than competitors like Visa and MasterCard, argues that its anti-steering requirement is crucial to keeping it strong and promoting competition. AMEX has 30 days to work with the government to revise its merchant agreements so that they do not violate the law.

Although a loss for AMEX and win for merchants on the surface, the court ruling against anti-steering doesn't help Visa or MasterCard either.  Anti-steering is preferred by VISA and MasterCard also because without them merchants create a demand for more competitive pricing by networks.

In 2010, VISA and MasterCard settled a suit brought by the Justice Department They agreed to cease preventing steering in their merchant contracts, without paying any fines.

AMEX says it will not survive if provisions in its merchant contracts preventing steering are removed. The company's stock lost almost 2% Thursday. AMEX
plans to file an appeal.

Read the story in entirety on CU Journal.