AmEx Withdraws Cash From MasterCard

Beggars can't be choosers. In this environment, financial companies will take revenue any way they can get it.

American Express (NYSE: AXP  ) won a settlement with MasterCard (NYSE: MA  ) on Wednesday for as much as $1.8 billion, in one of the largest antitrust suits ever.

In 2004, the Supreme Court ruled that MasterCard and Visa (NYSE: V  ) had violated antitrust laws by preventing their member banks from using credit cards that used rival payment networks. American Express and Discover (NYSE: DFS  ) then filed suits for damages resulting from lost revenue.

AmEx received a huge settlement of as much as $2.25 billion from Visa in a similar suit last year. In this settlement, MasterCard agreed to make payments of $150 million per quarter for 12 quarters.

AmEx has been feeling the pinch of weaker business conditions, as borrowers grow increasingly delinquent on their payments and overall borrowing activity lessens. The company warned that credit conditions in this weak economy have deteriorated beyond previous expectations. According to AmEx CEO Kenneth Chenault, the revenue from the two settlements will provide a much-needed source of funds in a tough environment, helping to stabilize the company's balance sheet.

MasterCard and Visa have a different business model than American Express, Discover Financial, Capital One (NYSE: COF  ) , Bank of America (NYSE: BAC  ) , and the other credit-card lenders. Rather than actually lending money to people, the big two credit cards just collect transaction fees. As a result, MasterCard and Visa are not suffering from the increased wave of credit problems; instead, they're actually thriving in this environment, while the other lenders are hurting.

The lawsuit revenue will definitely help American Express. Although AmEx has a great business, it tends to be more cyclical than that of MasterCard and Visa. A great company finds a way to get things done. Fortunately, the credit-card lender has lawyers to help it through the rough spots. If you can't beat them, sue them.

One can argue, as I imagine the lawyers did, that the settlement revenue compensates for actual business revenue AmEx would have earned, had MasterCard and Visa competed fairly. But it's ironic that the source of the badly needed revenue isn't a superior business plan or an ability to execute better than the competition -- just a lawsuit. How very 21st-century.

Further Foolishness has its privileges:

Bank of America is a Motley Fool Income Investor selection. Discover Financial Services and American Express are Motley Fool Inside Value recommendations. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Tom Hutchinson holds no financial position in any companies mentioned. The Motley Fool has a disclosure policy.


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