Supreme Court’s AmEx Ruling Hands Win to the Rich and Creditworthy

(Bloomberg) -- Points lovers just got a boost from a most unusual place: the U.S. Supreme Court.

On Monday, the court threw out a lawsuit filed by the U.S. government and 11 states that accused American Express Co. of thwarting competition by prohibiting merchants from steering customers to cards with lower fees. At the heart of the ruling is a battle between card issuers and retailers over the $90 billion merchants spend each year on so-called interchange, or the fees charged to accept electronic payments.

The ruling is a boon for AmEx's wealthy cardholders, because the fees paid by merchants help fund popular card rewards programs, such as Marriott International Inc.'s Starwood. Those rewards are a key part of banks' strategy in fending off new competition from tech giants like Alipay and Amazon.com Inc., some of which seek to circumvent card networks and connect directly to consumer bank accounts.

“This shows the court's support for interchange, to the extent that the card reward proposition to cardholders is commensurate,” Moshe Orenbuch, an analyst at Credit Suisse Group AG, said in a note to clients.

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Merchants argue interchange fees support reward programs that benefit wealthy or the most creditworthy customers, leaving out poorer people who end up shouldering higher costs at the cash register. Card issuers have stepped up competition for rich clients in recent years by sweetening points programs and other services.

AmEx charges roughly 2.4 percent of a transaction's price, while the rate is about 1.8 percent to 2 percent at competing card networks, said Jason Arnold, an analyst at RBC Capital Markets.

In its decision, the Supreme Court ruled that AmEx uses higher merchant fees to offer its cardholders a “more robust rewards program, which is necessary to maintain cardholder loyalty and encourage the level of spending that makes it valuable to merchants.”

While the Supreme Court's decision offers protection for the higher fees, AmEx has cut its rates while recovering from the loss of its largest co-brand partner, Costco Wholesale Corp. AmEx has said it will charge merchants less as it tries to reach parity coverage with Visa Inc. and Mastercard Inc. by 2019.

“This was a long battle, but well worth the fight because important issues were at stake: consumer choice, fair market competition, and the ability to deliver innovative products,” AmEx Chief Executive Officer Steve Squeri said in a statement.

AmEx climbed as much as 2.95 percent on Monday's ruling, ending the day up 1.4 percent in New York. Visa, Mastercard and Discover Financial Services dropped.

--With assistance from Greg Stohr.

To contact the reporter on this story: Jenny Surane in New York at jsurane4@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Dan Reichl, David Scheer

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