By Andrew Longstreth
NEW YORK (Reuters) - American Express Co (AXP.N) has hindered price competition in the U.S. credit card market and prevented merchants and consumers from reaping cost savings, a lawyer for the U.S. government said on Monday during the first day of a trial in Brooklyn federal court.
In an antitrust lawsuit, the U.S. Justice Department and 17 states have accused Amex of blocking credit card companies from lowering processing fees and allowing businesses to pass on savings to consumers.
Every year, credit card companies charge merchants more than $50 billion to process consumer transactions, according to the government.
At issue in the bench trial, expected to last nine to 10 weeks, are rules Amex imposes on the millions of merchants that accept its cards barring them from offering incentives to customers to use less-expensive credit cards when making purchases.
"Amex doesn't want consumers to have simple, truthful information about how much their cards cost," Craig Conrath, an attorney for the Justice Department, said.
U.S. District Judge Nicholas Garaufis of Brooklyn, who is overseeing the trial and will determine the outcome, asked few questions on Monday and did not offer any clues on how he views the case.
The government's suit seeks an order allowing merchants that accept Amex to give consumers incentives to use less-expensive credit cards.
The stakes are high for Amex, which uses the processing fees it charges merchants to provide rewards to its cardholders. In securities filings, American Express has said that an adverse ruling "could have a material adverse effect" on its business.
During his opening statement, Evan Chesler, an attorney for Amex, said that the government case is an "assault on Amex’s business model, a model that has in fact driven competition to the enormous benefit of merchants and consumers for a number of years."
Chesler said that Amex has invested billions to provide high-quality service and rewards to its cardholders, which help differentiate it from bigger competitors.
The U.S. Justice Department and several states sued Amex, Visa Inc (V.N) and MasterCard Inc (MA.N) in 2010 over rules that allegedly obstructed price competition. The latter two settled the case the day it was filed. The states include Michigan, Ohio, Texas, Missouri, Maryland, Arizona and Iowa.
Conrath of the Justice Department said Monday that the evidence presented at trial will show that if not for Amex's "anti-steering" rules, merchants would use strategies to reward consumers to use lower-cost credit cards like giving them free upgrades for certain services or price reductions. He also said that credit card companies would compete on price.
Discover Financial Services (DFS.N), Conrath said, tried to offer merchants lower processing fees but the strategy failed because of Amex's rules.
The case is United States of America, et al v. American Express Co, U.S. District Court for the Eastern District of New York, No. 10-04496.
- Financials Industry
- credit card
- American Express