In less than a week American Express (NYSE:AXP) will announce how well it fared in the most recent quarter. And there is another thing to watch that could forever change the course of its business -- as well as Visa (NYSE:V) and MasterCard (NYSE:MA) -- as we know it.
The thing to monitor
Nearly four years ago -- in October 2010 -- the Justice Department sued American Express, Visa, and MasterCard in an effort "to eliminate rules restricting price competition."
The DOJ asserted practices established by the three major credit card companies "prevent merchants from offering consumers discounts, rewards and information about card costs, ultimately resulting in consumers paying more for their purchases."
When the release was announced it was revealed Visa and MasterCard had settled with the Justice Department. While there was no actual payment that stemmed from it, the two firms agreed to provide merchants who accept their cards the option offer discounts as well as other incentives to customers in an effort to "encourage ... less costly" payment options.
But American Express was no so easily lured, and last week it officially entered into court to fight the matter.
The reason for the fight
In an open op-ed, Ken Chenault, the CEO of American Express, revealed why the company had chosen to fight the case when it was first announced. In it, he began by saying:
The government remedy does nothing for consumers. And, whatever its intention, the Justice Department is heading down a path that eventually leads to less competition, not more.
Without diving too far into the details, Chenault argued the move by the Justice Department would do nothing to benefit consumers -- what Justice Department alleges the suit will do -- and may result in them being forced to pay with a card that offers fewer benefits and protections. He went on to say:
The net result of this "bait and switch" is an unhappy customer who was pushed to use a backup card that didn't provide the customer service, buyer protection, benefits or rewards that he or she prefers. Only in Washington could that be called a consumer benefit.
In addition Chenault highlighted the broader payment industry is dominated by Visa and MasterCard. At last count $4.1 trillion was spent on credit, debit, and prepaid cards in the U.S. and just 15% of that was done using American Express. As a result, almost all American Express customers have Visa and MasterCard options, but a much smaller percentage of those with a MasterCard or Visa card have an American Express card.
All of that is to say, Chanault felt as a result of the case, "the Justice Department is supporting bad policy and disguising it with vague promises of consumer benefit."
The reason for investors to watch
Chanault concluded his remarks by noting:
It's never easy to take on a long, costly battle with the government, but what's at stake are some important issues: consumer choice, free market competition and the ability to deliver superior products and services to our customers. This is a fight worth fighting.
All of this is undoubtedly true, but what's also at stake here are important issues to investors as well.
It's well known American Express charges higher fees per transaction to merchants in order to provide the vast array of benefits it offers to its consumers. If the government rules against American Express, a merchant would be free to pressure a customer to use another payment option.
It would restrict the competition in the payments industry, and provide a tangible benefit to Visa and MasterCard but ultimately hurt American Express despite the reality their cardholders often spend more at merchants.
One can easily drift into thinking what possible negative consequences for American Express would be if it is in fact ruled against. At best there may be a fine leveled against it, at worst policies could be established which ultimately may restrict the number of sales made on its cards.
As a result, investors need to continue to watch the progress of these allegations to see where they progress, because this case could change the payment landscape as we know it.