MasterCard, Visa Settle as Amex Fights U.S. Lawsuit

Visa Inc. and MasterCard Inc. reached a settlement with the U.S. Justice Department that will let merchants reward consumers for paying with lower-cost credit or debit cards, while American Express Co. vowed to fight a government antitrust lawsuit.

Today’s settlement means that about 4 million merchants across the U.S. that accept just Visa and MasterCard are now free to steer customers to different credit cards or forms of payment by offering discounts, rebates or other special treatment, the Justice Department said. Six million more retailers who also accept cards from American Express are still subject to restrictions until the lawsuit is resolved, the Justice Department said.

“We want to put money in consumers’ pockets,” said Attorney General Eric Holder at a press conference. “By eliminating credit-card companies’ anticompetitive rules, we will accomplish that.”

Restraints on retailers by the payment networks “impose a competitive straightjacket on merchants, restricting decisions by them to offer discounts, benefits and choices to customers that many merchants would otherwise be free to offer,” the Justice Department said in its lawsuit against the three credit- card networks. It was filed in U.S. District Court in Brooklyn, New York.

The freedom of merchants to offer incentives to customers for alternative forms of payment, including no-frills cards that are cheaper for merchants to accept, had been prohibited by the card networks.

No Monetary Obligation

Visa, based in San Francisco, and Purchase, New York-based MasterCard won’t be required to make any payments as part of the settlement.

Assistant Attorney General Christine Varney, head of the Justice Department’s antitrust division, said the case won’t be over as long as the lawsuit is pending against New York-based AmEx.

“American Express’s rules are the most restrictive,” she said, standing alongside Holder. They “restrain trade unnecessarily.”

“We have no intention of settling the case,” American Express Chief Executive Officer Kenneth I. Chenault said in a statement. “We will defend the rights of our card members at the point of sale and our own ability to negotiate freely with merchants.”

Struggle for U.S.

David Boies, an attorney for American Express, said the Justice Department will struggle to make a case that the company, which processes less than 25 percent of U.S. credit- card spending, has enough power to force retailers into agreements.

The settlement with Visa and Mastercard will have the ironic effect of making the market less competitive, he said. Under the agreement, Visa and Mastercard “can pay merchants to discriminate against American Express customers,” Boies said in a Bloomberg TV interview. “That’s bad economics. That’s bad antitrust law, and it’s bad for consumers.”

Retail and consumer groups including the U.S. Public Interest Research Group, the National Federation of Retailers and the Retail Industry Leaders Association said the settlement is a long-awaited victory.

“Merchants, small and large, welcome today’s news,” said John Emling, senior vice president of government affairs for the Retail Industry Leaders Association, in an e-mailed statement. “Credit and debit networks operate within a broken market where a few dominant firms set fees and dictate terms with impunity.”

‘Swipe’ Fees

The Justice Department probe also focused on interchange, or “swipe” fees, charged to merchants on each transaction. Visa and MasterCard set the fees, which exceed $40 billion a year, and pass that money along to card-issuing banks to compensate them for the risk of lending money, the cost of processing the payments and to help fund rewards programs. Richer rewards programs typically carry higher interchange rates.

“When merchants do agree to accept American Express, they promise not to bait and switch by taking advantage of American Express’s investments in attracting desirable card members and then steering those customers to use cards from another network,” AmEx Vice Chairman Edward P. Gilligan said in a conference call with reporters and analysts.

The American Bankers Association said it wants to see whether the settlement with Visa and MasterCard will result in lower costs for consumers.

Pricing Authority

“We look forward to seeing whether their new-found pricing authority will actually result in consumer benefit or merely be used to pad their own bottom lines,” said Kenneth J. Clayton, senior vice president and general counsel for card policy in an e-mailed statement.

American Express, in vowing to fight the lawsuit, called it “a significant retreat” from previous Justice Department efforts to promote competition in the payments industry.

“I think the Department of Justice will have a very tough case,” said Janet McDavid, a partner with Hogan Lovells US LLP in Washington, D.C., who represented American Express in a separate case against Visa and MasterCard. “Amex doesn’t have the market power of Visa and MasterCard; it’s not a ‘must-carry’ card. Balancing its justifications against the rules will be key to the analysis.”

American Express fell $2.73, or 6.5 percent, the most since Jan. 22, to $39.05 at 6:40 p.m. in New York Stock Exchange composite trading and was the day’s worst performer in the Dow Jones Industrial Average. MasterCard dropped $2.14, or 0.95 percent, to $222.64 after falling as much as 2.6 percent earlier. Visa slipped 8 cents, or 0.1 percent, to $73.24 after declining as much as 1 percent.

To contact the reporters on this story: Sara Forden in Washington at sforden@bloomberg.net; Peter Eichenbaum in New York at peichenbaum@bloomberg.net.

To contact the editors responsible for this story: Larry Liebert in Washington at lliebert@bloomberg.net; Alec McCabe in New York at amccabe@bloomberg.net.

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