Advertiser Disclosure

Swipe Fees High, Retailers Mad: Potential Outcomes of the American Express Class-Action Lawsuit

Nov. 21, 2012
Credit Cards
Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own.

Aw nerds! It looks like this page may be out of date. Please visit NerdWallet’s Best Credit Cards page for updated info.

In 2003, retailers brought a class-action suit against American Express, and, next year, it’s expected that the Supreme Court will finally settle the matter.

Retailers have alleged that the card company unlawfully forced them to accept its everyday mass-market cards. AmEx countered that retailers are required to accept them as a condition of accepting the company’s corporate and premium cards. The problem for merchants: AmEx’s interchange fees are exorbitant compared to its competitors from Visa and MasterCard.

These interchange fees, or swipe fees, are levied every time a merchant swipes a card. The percentages are often around 2-3% of an item’s total cost—often in the single digits—but they’ve become a multimillion-dollar business for card companies and a thorn in retailers’ sides.

If retailers win, will consumers benefit?

Interchange fees are more or less invisible to consumers—to offset those fees, retailers build the extra cost into their pricing structure. So, the question for consumers is: If retailers win, will we see a decrease in prices?

Let’s take a look at the math: AmEx interchange fees are on average 3.5%, while Visa and MasterCard’s are 2-3%.  Let’s say AmEx loses and, to give retailers incentive to accept their cards, the company reduces interchange fees across the board, to that 2-3% range.  We’ll say the new interchange fee is 2.5% for the sake of easy math.

Since AmEx has a 23.8% market share of purchase volume, that 1% reduced interchange fee would put an extra 0.238% of the purchase in merchants’ pockets.  For them, I expect the additional profit would be noticeable. To each individual consumer? Not so much. I’m therefore hesitant to believe that retailers will turn around and distribute their extra profits to us, the consumers.

“Regardless of the outcome, it’s unlikely that the consumer will ever see any benefit,” said Andrew Schrage, editor in chief of Money Crashers. “Merchants and retailers frequently pass increasing costs to the consumer, and considering the fact that banks and credit card issuers were impacted financially by the recent credit card legislation”—the CARD Act—“I doubt that consumers will see any benefit.”

If retailers win, how will AmEx adapt?

In addition—or simply instead—of cutting interchange fees, AmEx might make their rewards more appealing on those mass-market, everyday cards. Consumers will therefore want to use them to earn points, and so merchants will feel the heat.

As it stands now, if AmEx does spice up its rewards, it may very well win out in the restaurant business, where 35% of the total dollar volume is charged through the AmEx network.

Although American Express Bluebird may not have any bearing on this specific lawsuit, it, too, could help the card company put pressure on retailers.

“With the implementation of their Bluebird program, AMEX is opening up an extremely large number of new, previously unbanked customers–who currently don’t own any other type of credit or debit card,” said Alan Guinn, the Managing Director and CEO of The Guinn Consultancy Group, Inc. “And, if marketed and positioned correctly, Bluebird basically guarantees retailers can gain a new and significantly extensive customer base–one untapped, previously– just by accepting all types of AMEX logo’ed cards”

In this writer’s estimation, Guinn is correct: if you use the Bluebird right, you won’t pay any fees at ATMs or for any other basic transactions—an increasing rarity among traditional checking accounts and many prepaid debit cards. So, if the Bluebird continues to grow like many credit-card bloggers expect it will, then retailers may have hedged their bets against AmEx at the wrong time.

“Between the perks of the logo, and the strength of the AMEX brand, I think many retailers are simply shooting themselves in the foot by participating in–or contemplating– any lawsuit against AMEX,” Guinn said. “Now, they can–of course–refuse to accept AMEX across the board and lose the potential business a new offering like this can create for them. Will they do that over a slightly higher fee? I doubt it, when they see the sales opportunities generated by the Bluebird program.”

AmEx is an even more formidable card company than in 2003, when the lawsuit was initially filed. So, even if retailers win, any victory would likely be short-lived.