The Supreme Court last week handed down an important victory for the credit card industry. While the last major Supreme Court decision involving credit card companies unleashed massive fees on consumers (Smiley v. Citibank 1996), the court this week helped consumers, siding with an earlier ruling that allows companies to issue more than just Visa or MasterCard.
Why is this big? Well, it means that banks that currently issue Visa and MasterCard will now also have the right to issue American Express (NYSE:AXP) and Discover cards. Again, why is this big? Because it means that consumers should see better credit card deals and that some banks, such as MBNA (NYSE:KRB), have another way to grow earnings.
Why will consumers get good deals? American Express will now have to compete with other issuers for cardholders. While lower annual fees may happen in the future, in the short term it most likely translates into extra-cool perks for those reward points. What this means for American Express Black Card perks, I can only imagine.
Profits at lenders should also be on the rise. MBNA is the first bank allowed to issue American Express, and issuance begins in the coming weeks. Being able to issue American Express cards will most likely help lenders such as MBNA solve the problem of how to make customers who pay their bills every month profitable. These "transactors" are usually of high credit quality and resources, making them attractive customers. Transactors are, however, marginally profitable as they do not earn interest or fees. If credit card lenders can use American Express cards to make transactors more profitable, then earnings should grow faster than expected.
It also poses interesting questions for the future of American Express and Discover. Will they become more like Visa and simply be a network that makes money, or will they continue to issue their own cards and allow others to do so as well? Regardless of strategy, this ruling should mean increased profits for both companies.
And what is to become of Visa and MasterCard? In the short term, they may experience some losses from lawsuits stemming from this ruling, as the parent company of Discover, Morgan Stanley (NYSE:MWD), has already vowed to pursue. In the long term, this means that the folks at Visa and MasterCard will have to be more creative in keeping banks happy.
Fool contributor David FitzMaurice does not own shares in any of the companies mentioned here.
