How the Supreme Court could reshape the payments landscape in 2018

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Merchants won't know for sure until about midway through 2018 whether they received a significant win, after the U.S. Supreme Court will rule on the anti-competition complaint against American Express.

The court's decision to hear the case gives hope to merchants who view Amex rules against "card steering" as detrimental to their businesses. Businesses want to be able to offer incentives to customers to use less expensive cards, rather than absorbing higher fees from Amex.

The case has been in the courts since 2010 when the U.S. Justice Department intended to sue Visa and Mastercard along with American Express, but Visa and Mastercard settled. Amex decided to litigate the case, as the Justice Department focused on what it considered a violation of free market and competition principles. A federal judge ruled against Amex in 2015.

An appeals court threw out that ruling a year later, and the Justice Department backed off of further pursuit of a favorable ruling.

But merchants did not, as 11 states and various merchant groups filed an appeal in June of 2017. Four months later, the Supreme Court agreed to weigh in.

Two weeks ago, the states bringing the case back through appeal filed their brief, as did merchant groups and individual businesses. Amex is expected to file its brief in late January.

"In the past, the Supreme Court has said that antitrust decisions ought to be based on the specific facts that each industry has submitted in trial, rather than abstract economic theory," said Jim Wilson, counsel for the Merchant Advisory Group. "We felt it was important for the court to see that in the brief we filed."

Essentially, the merchants feel that every aspect of their business — from buying goods from manufacturers or suppliers for reselling, to selling goods to their own customers — operates through a market in which competition through pricing or service is not prohibited. For Amex to apply a rule that says a merchant cannot offer a consumer incentive to use a card with a lower processing fee undermines those principles, Wilson said.

For its part, Amex has taken the position that its consumer clients are discriminated against when a merchant steers transactions toward another card.

"The earlier decision by the Second Circuit panel protects a consumer’s right to choose how they pay ... We believe the government’s claims lack merit and we will continue to vigorously defend the Second Circuit’s decision in favor of American Express," Amex said in an emailed statement to PaymentsSource.

Such steering also makes it unfair for Amex to compete against a Visa or Mastercard, it says.

"In antitrust terms, we think Amex has market power in that there is a group of consumers that have only an Amex card in their wallet and nothing else," Wilson said. "If a merchant says we are not going to take Amex, that group of cardholders is going to walk away. Merchants think that is what gives Amex the ability to impose the rules they did."

Those involved in the case expect the Supreme Court to allow oral arguments in March or April, and deliver a decision by June.

"We're hopeful that the Supreme Court will overturn what the Second Circuit did and return us to the original antitrust rules that have always applied," said Doug Kantor, counsel for the Merchants Payments Coalition. "So, as the district court ruled in this case, the Amex rules violate the law, and we think they definitely do."

For a time, between the district and circuit court rulings, some merchants were taking advantage of the district court ruling to encourage customers to use other cards for better prices on the products. This was easier in an e-commerce setting.

"In an e-commerce space, when I check out, the technology can come into play there and I think the customer will see it," said Hannah Walker, senior director of technology and nutrition policy at the Food Marketing Institute, citing the example of a discount offer for another card brand appearing on a payments page. "Also, I think it's going to incentivize the brands to actually start talking to us and offering lower-cost options."

That type of outcome would be music to the ears of merchants, many of whom have been battling the card brands over interchange fees for decades.

"At one time, Discover decided it would be merchant-friendly as the lower cost option," Kantor said. "They went to merchants and offered a deal to promote their cards. But all of that would have broken the Amex rules."

It's a scenario that merchants argue won't occur in most other industries.

"In some ways, it is more complicated because it is the card industry, but if someone said you couldn't charge discounts for Coke vs. Pepsi, or vice versa, what would happen?" Kantor asked. "Both Coke and Pepsi would be real expensive, real fast, and there would be no reason for them to hold back."

Though not directly related, the National Retail Federation last spring asked the Federal Trade Commission to avoid using the Payment Card Industry Security Council standards as a model by which to determine industry best practices.

The merchants were pointing out their belief that PCI, or EMVCo, are simply governing bodies made up of the card brands themselves, with little or no input from merchants or their customers. Such a mentality, they surmise, makes its way into other rules, standards or policies aimed at the merchant community.

"When that happens, it is inevitable that their own profit motives are going to come into play," Kantor said. "They don't make security decisions based purely on security, they make them on profit-making for themselves … and that is just kind of a clear, moral hazard in having a group structured that way."

Mostly, the merchant groups hope the Supreme Court agrees with their view of how merchants best operate and interact with consumers to complete more sales and develop customer loyalty.

"Merchants incentivize their customers with discounts all of the time," MAG lawyer Wilson said. "That is sort of the big aberration here, that you can't incentivize your customer to do something that is mutually beneficial by giving them a discount."

Daniel Wolfe contributed reporting to this article.

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