American Express (NYSE:AXP) has been able to get away with charging merchants higher fees than rivals Visa (NYSE:V) and MasterCard (NYSE:MA) because of its fiercely loyal customer base and its strict merchant policies.

American Express Flickr Princess Marida

flickr/ princess marida

However, those policies could be changing soon. According to the U.S. Justice Department, the rules preventing its merchants from incentivizing other credit cards is anti-competitive.

Does the Justice Department have a case? And how could the outcome affect Amex, Visa, and MasterCard?

Why the Justice Department is taking action
American Express charges the highest fees of any of the major credit card processors, which is why more businesses won't accept Amex cards than Visa or MasterCard. The company can get away with the higher fees, mainly because of its very desirable customer base that tends to charge more than consumers who primarily use other cards.


While there is nothing inherently wrong with charging higher fees, it's the policy American Express imposes on its merchants that's in question. In a nutshell, American Express forbids its merchants from offering incentives to customers who use other cards.

Let's say accepting an American Express card costs a retailer 3%, as opposed to 1.5% for a Visa card. In theory, the retailer could offer a customer paying with Visa a 1% discount on purchases and still make more from that customer than if they had paid with American Express. This may not sound like much, but could definitely sway some consumers. However, Amex's current policy prevents them from doing so.

The Justice Department claims the policy is anti-competitive and unfairly deprives Visa and MasterCard of the potential competitive advantage their lower fees should entitle them to.

American Express' viewpoint
According to American Express, it is too small of a company to have such an effect on the market. Between these three payment processors, there are about 486 million U.S. issued credit cards. Only 53.6 million, or 11% of them, are American Express cards.

The company also says the higher fees are justified because of some of the services American Express provides, like fraud protection and analytics.

The eventual outcome of the case is anyone's guess, but let's see what the impact would be on the industry if Amex is required to change its ways.

Potential effects on Amex, Visa, and MasterCard
For American Express, losing this case would indeed be inconvenient. Fees collected from merchants make up more than 65% of the company's revenue. Losing the case could produce two negative outcomes.

Either the company could keep its fees high and absorb the loss of business that would come from merchants incentivizing Visa and MasterCard cards, or it could adjust its fees downward to more closely match what the other companies charge. I think the former is much more likely, as the company depends on its high fees to offer its excellent reward programs and customer service that attract the affluent and desirable customers in the first place.

Visa and MasterCard could see a bump in sales if retailers choose to incentivize the use of their cards, and it would make the most sense to do so for merchants like gas stations that already have different cash and credit prices.

However, the impact of potential discounts in the 1% range is probably not enough to sway most people from using their preferred payment method. After all, most consumers still use cards to pay for gas purchases, even though it costs 1-2% more to do so in many places.

Most likely scenario
While a loss here would certainly be a thorn in American Express' side, and could provide a pop to Visa and MasterCard, this will by no means be a game-changer in the payment-processing industry.

Simply put, American Express offers some of the most attractive credit card products in the business, and their customers aren't going anywhere. And, merchants want a piece of this attractive group of consumers.

Just because merchants could soon be allowed to offer incentives to Visa and MasterCard users doesn't mean they will. Merchants know the value of appealing to American Express' cardholders, and that's exactly why they've decided to suck it up and pay the high fees for years.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends American Express, MasterCard, and Visa. The Motley Fool owns shares of MasterCard and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.