AmEx Executive Defends High-Fee Model as Competitive Edge

American Express Co. (AXP) courts wealthy clients with perks like access to premium tickets. That business model would be jeopardized if it cut processing fees to match those of rivals, an AmEx executive testified in a trial over claims the card company violates antitrust law.

Reducing that stream of revenue “would be disastrous, and we would have to rethink everything in our business model,” Joshua Silverman, president of the U.S. consumer services business for the iconic card company and co-founder of Evite Inc., told U.S. District Judge Nicholas Garaufis today in Brooklyn, New York.

AmEx stifles competition by imposing rules on merchants that bar them from encouraging customers to use cards with lower processing costs, namely Visa Inc. (V) and MasterCard Inc. (MA), the U.S. Justice Department claimed. New York-based AmEx says the opposite is true, and that its high-fee model, protected by its rules, allows it to offer generous rewards and services that differentiate it from other card brands and increase competition.

“You’re either the biggest or the best,” Silverman said under questioning from Justice Department lawyer Ethan Glass. “The place you can’t be is just like them but smaller.”

The most prolific card brands in the world, Foster City, California-based Visa and Purchase, New York-based MasterCard together have about 1 billion cards in the U.S., compared with about 55 million American Express cards, according to AmEx. Although it’s found in fewer wallets, American Express, with a market value of $97 billion, lags only behind Visa at $133 billion. MasterCard has a market value of $90 billion.

Big Spenders

AmEx caters to high-spending consumers, frequent travelers and “people who are financially responsible and highly likely to pay us back,” Silverman said. The firm focuses on building loyalty from its more select group of cardholders by offering perks that make them feel they’re “getting a special value,” he said.

“When people actually use their points, they like us more and spend more on their cards,” Silverman said. Cardholders feel they are getting “free money,” he said.

Merchants have long complained about fees they are charged to process card payments, estimated by the government to total about $50 billion a year in the U.S. and used in part to fund rewards programs.

The Justice Department, joined by 17 states, sued all three major card brands in 2010 over restrictive rules that prevented merchants from urging customers to use cheaper forms of payment. Visa and MasterCard settled with the government and agreed to changes.

Antitrust Violation

The AmEx case marks the first time a card firm has faced trial on allegations that merchant-fee practices violate U.S. antitrust law. The nonjury trial, which began earlier this month, follows years of litigation on behalf of U.S. business aimed at reducing the fees.

Witnesses testifying included representatives from merchants such as Starwood Hotels & Resorts Worldwide Inc. (HOT), Southwest Airlines Co. (LUV) and Crate & Barrel, and competitor Discover Financial Services. (DFS) American Express Chairman and Chief Executive Officer Kenneth Chenault may testify later this week, according to court documents.

The case is U.S. v. American Express Co., 1:10-cv-04496, U.S. District Court, Eastern District of New York (Brooklyn).

To contact the reporter on this story: Christie Smythe in Brooklyn at csmythe1@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net Joe Schneider, Andrew Dunn

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