AmEx CEO Chenault Says Merchant Rules Help Keep Trust

American Express Co. Chief Executive Officer Kenneth I. Chenault defended company rules that bar merchants from asking customers to use credit cards with lower processing costs as a measure needed to protect its brand.

“I do not want discrimination against our card,” Chenault, 63, said today under cross-examination by a U.S. Justice Department lawyer during an antitrust trial in Brooklyn, New York. Allowing shops that take American Express to tell customers they prefer another card would be “nonsensical,” he said.

The executive took the stand as the iconic New York-based company tries to fend off U.S. claims that its rules, which help protect AmEx’s fee structure, violate antitrust law. Long a sore point with merchants, processing fees for credit cards amount to about $50 billion in the U.S., according to the government.

U.S. District Judge Nicholas Garaufis is to rule without a jury on the Justice Department’s claim that American Express is abusing its market power. The card company said its rules promote competition by allowing it to offer generous rewards and set itself apart from Visa Inc. and MasterCard Inc., which have larger market share.

In testimony that began yesterday, Chenault described past standoffs with merchants such as Walt Disney Co. and United Airlines, which threatened to stop accepting AmEx cards unless the company lowered its fees.

‘Terrified’ Company

Disney’s challenge “terrified” AmEx, which worked out an agreement “that frankly from an economic standpoint was not a good deal to do,” Chenault said yesterday.

When asked today by Craig Conrath, the Justice Department lawyer, whether he told United Airlines executives that it would be “interesting to watch you survive” without the card, Chenault said he was in a “tough situation” and the impact of parting ways with the airline would be “massive.”

“We were playing a high-stakes game,” he said.

Chenault, who joined the company as a director of strategic planning in 1981, said AmEx struggled to expand in the 1980s and 1990s because of a “double chokehold” of pressures imposed by its competitors, including a campaign by Foster City, California-based Visa in the 1990s to encourage merchants to ask customers to use its card in lieu of AmEx.

Fewer Wallets

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 found in fewer wallets, American Express, with a market value of $95 billion, lags only behind Visa at $133 billion. MasterCard has a market value of $90 billion.

While some stores choose not to accept American Express because of the higher costs, almost all of the country’s 100 largest merchants take the card, according to the government.

The Justice Department, joined by 17 states, sued all three major card companies in 2010 over rules that prevented stores, restaurants and other merchants from asking customers to use cards with lower costs. AmEx continued to oppose the claims after Visa and MasterCard settled.

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

Before it's here, it's on the Bloomberg Terminal.