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American Express Sinks Again on U.S. Antitrust Case

American Express Sinks Again on U.S. Antitrust Case
American Express credit cards in New York. Photographer: Andrew Harrer/Bloomberg

American Express Co. fell 2 percent in New York trading, adding to yesterday’s 6.5 percent drop, after choosing to fight a U.S. antitrust complaint while larger rivals Visa Inc. and MasterCard Inc. settled the case.

AmEx, the day’s worst performer of the 30 companies in the Dow Jones Industrial Average, had skidded as much as 4.4 percent before rebounding to $38.28 at 4:15 p.m. in New York Stock Exchange composite trading. Visa, based in San Francisco, advanced 2.4 percent to $74.99 and Purchase, New York-based MasterCard climbed 1.5 percent to $225.90.

Visa and MasterCard, the world’s biggest payment networks, will no longer bar merchants from steering customers to alternative forms of payment, including credit cards with lower acceptance costs. AmEx, based in New York, will keep its rules in place as it challenges the Justice Department’s lawsuit, widening “the perceived gap” between its prices and those of its competitors, said Scott Valentin of FBR Capital Markets.

That may “reduce a merchant’s incentive to accept American Express cards and negatively affect billed business,” Valentin said today in a note to clients. “The primary concern is that American Express has more to lose, given its higher merchant fee, if merchants have the ability to steer toward competing networks.”

Stock Ratings

Valentin today cut his target price on AmEx to $45 from $48. He maintained his “market perform” rating. Analyst David Hochstim at Buckingham Research Group sees the stock’s decline as a buying opportunity as he maintained his $56 price target.

“In the short run, there should be little change on AmEx’s business as it won’t change its operating rules until the dispute with the Department of Justice is resolved,” Hochstim said today in a research note. “We expect the company can continue to grow.”

Retailers pay American Express an average of about 2.5 percent on every transaction, a fee known as the merchant discount. Visa and MasterCard have similar fees, most of which they pass on to banks that issue their cards. The fees compensate card issuers for the risk of lending money, processing costs and to help fund rewards programs.

Market Share

“Average spending on our cards, which is substantially higher on a per-card basis for us versus our competitors, represents greater value to merchants in the form of loyal customers and higher sales,” American Express said in its annual report. “This enables us to earn a premium discount rate and thereby invest in greater value-added services for merchants and card members.”

Visa and MasterCard process about 70 percent of annual U.S. credit-card spending, demonstrating that American Express doesn’t wield enough market power to justify the Justice Department’s case, AmEx General Counsel Louise M. Parent said yesterday in a conference call with reporters and analysts.

Parent’s legal team cited the government’s arguments in an earlier antitrust case against Visa and MasterCard in which the Justice Department argued that AmEx didn’t have market power and served as a counterweight to its rivals’ dominance.

“American Express is a critical competitive component in the marketplace and these provisions in our contracts are critical to our ability to effectively compete against Visa and MasterCard,” said Evan Chesler, an attorney for AmEx and chairman of New York-based Cravath Swaine & Moore LLP, in the conference call.

Market Power

AmEx’s argument that it lacks market power shouldn’t allow the company to limit retailers’ ability to offer customers discounts, said Douglas Kantor, a partner at Washington-based Steptoe & Johnson LLP who advises the National Association of Convenience Stores and the Merchants Payments Coalition.

“Saying you can’t charge less for someone else’s product than for mine is like going into a room with that person and fixing prices,” Kantor said in a telephone interview. “They’ll realize soon they’re not going to be able to win that case.”

The settlement is a victory for the biggest U.S. merchants, including Bentonville, Arkansas-based Wal-Mart Stores Inc., said David Robertson, publisher of the Nilson Report, a credit-card industry newsletter.

Retail Win

“This has been a tremendous coup for large retailers, and there are none bigger than Wal-Mart,” Robertson said. “Retail is a high-volume game, so they’re always looking to manage costs, and payment processing is an escalating cost center for retailers because Americans are spending more with plastic. This is exactly what retailers ought to be doing for their own self-interest.”

Greg Rossiter, a Wal-Mart spokesman, declined to comment.

American Express has good reason to fight the Justice Department, said Bert Foer, head of the American Antitrust Institute in Washington.

“AmEx has a lot to lose if merchants can steer customers away from their card,” Foer said. The company “will fight very hard, and it will probably go up to the Supreme Court, which has not been fond of antitrust.”

The case is U.S. v. American Express, 10-4496, U.S. District Court, Eastern District of New York (Brooklyn).

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