NEW YORK--(BUSINESS WIRE)--In a legal settlement poised to transform the credit card industry and alter consumer spending habits, American Express has agreed to drop its ban on retailers asking users of American Express credit cards to pay the transaction fees that fund their frequent flier miles and other rich rewards.
For decades, American Express has imposed a rule forcing retailers to pass on credit card fees to all of their customers -- even those who use cash, checks or debit cards. With the rule changes that results from this settlement, merchants can keep prices lower for all consumers by offering incentives to use debit cards, cash or checks instead of credit cards that carry high swipe fees.
Today’s settlement of long-running merchant class action lawsuits represents “some of the most consequential relief ever obtained in a private enforcement action under the U.S. antitrust laws,” the merchant plaintiffs said in a court filing supporting the settlement.
“To maintain the fiction that Amex and other issuers offer ‘free’ rewards, retailers had no choice but to inflate the prices they charge to all customers. The old rules forced consumers using cash, debit and even electronic benefits cards to subsidize the high swipe fees that credit card companies charge to pay for rewards,” said lead counsel Gary B. Friedman of Friedman Law Group LLP.
U.S. merchants pay swipe fees that are some of the highest in the world. For many businesses, swipe fees are their highest non-payroll expense. And in some industries, swipe fees exceed profit margins.
That is poised for change under the settlement because merchants will be able to steer consumers towards debit cards, cash and checks. This will lower merchants’ costs and allow them to offer lower prices to consumers.
A settlement forcing similar changes in Visa and MasterCard rules was approved last week by federal judge John Gleeson, who was sharply critical of rules that created “a regime in which the poorest consumers subsidize the awards conferred upon premium cardholders.”
In the past, some merchants have complained that they cannot practically implement the Visa and MasterCard settlement – enabling them to steer customers to debit cards, cash and check – until American Express also implements the same policies. That could occur as soon as May, when federal judge Nicholas Garaufis is expected to decide whether to approve today’s class action settlement agreement.
In another related case two months ago, federal judge Jed Rakoff struck down a New York State law that prevented store owners from imposing credit card surcharges to cover the swipe fees, observing that such bans “were enacted in the name of consumer protection at the behest of the credit-card industry over the objection of consumer advocates.”
The settlement with American Express caps ten years of hard-fought litigation initiated by The Marcus Corporation, a Milwaukee-based movie theater chain and hotel operator, along with Atlanta-based Animal Land Inc. and a broad array of smaller merchants.
“We saw this case through out of principle and are pleased that today’s outcome will benefit all merchants,” said Marc Morrison, owner of Animal Land.
The sentiment was echoed by Steve Milles, owner of Five Points Academy, a well-known martial arts gym in Manhattan: “Credit cards are a killer. We pay around 3% of every dollar. If we can get people to use debit cards or cash instead, that reduces the costs we have to pass along.”
Jason Saucier, owner of The Harbor Bar & Grill in New Orleans, concurred: “We’re thrilled with the settlement. We love our customers but don’t love buying their frequent flier miles.”