Amex has been given the court's blessing to deter merchants from steering consumers away from its pricier cards, raising questions for those pushing newer loyalty strategies.
An appeals judge in New York has ruled that despite a federal judge's ruling that Amex's policy is a violation of antitrust law, merchants are free to simply drop the brand if they don't like its terms. Since Amex merchants can't urge consumers to pick a different card based on its pricing, stores must dance around that in any marketing that does favor one payment method over another.
"Not all competition is on the basis of price," said Richard Crone, a payments consultant. "There's going to be a lot of creativity in marketing."
Amex has said it charges higher fees than other card brands to support more expensive benefits for cardholders. Visa has about 45% of the U.S. card share, according to the court filing, while Amex has 26%, Mastercard 23% and Discover 5%. Visa and Mastercard did not return a request for comment by deadline.
"American Express reasserts itself as the luxury brand," Crone said. "It will not be pressured to just be another undifferentiated card brand. Consumers enjoy the feelings of status and merchants from the halo effect from acceptance."
The most recent court decision reverses an earlier court decision that's just a year old, so many of these companies have already done business with merchants under the umbrella of Amex's steering policy in the past, according to Rick Oglesby, president of AZ Payments Group. Thus, Monday's court ruling is more of a restoration than a new environment.
Some large Amex merchants have long offered discounts to use other cards. Target accepts American Express but offers 5% discount for using the Target RedCard. Also, Starbucks accepts American Express but offers extra benefits for using the card to fund Starbucks prepaid accounts, which lowers the per-transaction cost by allowing the retailer to pay a fee only on the lump-sum funding amount.
In the case of merchant-funded rewards programs such as BankAmeriDeals, the merchant identifies target customer types and reaches them via bank channels and card-linked offer platforms, said Zil Bareisis, a senior analyst at Celent.
"The offer is usually linked to a specific card and the 'steering' happens behind the scenes by creating an incentive for the consumer to use that card, rather than at the point of sale," Bareisis said. "Arguably, Amex's reward propositions financed by higher interchange are no different; they also steer the customer toward using that card before they even enter the store, instead of specifically at the point of sale."
Amex's policy does allow merchants to offer incentives for non-Amex cards within certain parameters, the company said.
"Merchants are already able to offer discounts or in-kind incentives to encourage customers to pay with check, credit cards, debit cards or cash as long as the discounts and incentives are made available to all customers and there is no discrimination on the basis of network or issuer. American Express’ Non-Discrimination Provisions permit these discounts and incentives," said Andrew Johnson, an Amex spokesman, in an email.
Moreover, as the court noted in its opinion, merchants are permitted to promote their own private label cards more actively than they promote Amex's cards, Johnson said. As the opinion also notes, many large merchants have negotiated the right to steer toward their co-brand cards, Johnson said. "American Express generally allows merchants that wish to do so to offer short-term promotions of up to 6 months, subject to limited restrictions that are narrowly designed to protect Amex's brand and cardholder choice," Johnson said.
Amex's policy is meant to deter Amex-accepting merchants from posting signs at the point of sale advising shoppers to use other card brands, according to Thad Peterson, a senior analyst at Aite Group.
Even if merchants want to opt for lower cost payment types and drop Amex entirely, a long history with an well-known card brand has a powerful inertia.
Beyond the large card networks and merchants' cobranded cards, lots of mobile technology startups have popped up over the past decade to with the promise of lowering merchants' payment fees. Companies such as SCVGNR's LevelUp have made cutting interchange fees part of the marketing model. Many mobile payment companies, such as Gyft and Square have at times used interchange avoidance as part of marketing, and mobile wallets are considered a means to broadly cut costs from traditional card acceptance, including discounts and loyalty schemes.
"Every retailer has the right to not accept a payment brand based on the terms of acceptance," Crone said. "Costco changed its exclusive relationship from American Express to Visa, and Walmart is experimenting with not accepting Visa in Canada. It is very hard to gauge the elasticity of not accepting a payment type."
However, discontinuing existing card acceptance is complicated, even when based on expense, Crone said.
"It is very hard to decommission a payment type," Crone said. "Marketing generally will overrule treasury regardless of cost."