The Supreme Court handed American Express (AXP) a major on Monday, deciding the credit card issuer didn’t violate antitrust laws by preventing retailers who support its cards from giving discounts for using cheaper alternatives.
Credit card companies typically charge merchants fees for each transaction (“swipe fees”) that are 2% on average, according to the National Retail Federation. Amex’s fees, however, have traditionally been higher, something that has frequently deters businesses from accepting payments made with Amex cards. (In March, however, it was reported that Amex was planning to cut fees, which the company told Yahoo Finance are now are in line with Visa and Mastercard.)
The Supreme Court was split along its traditional ideological lines 5-4 — Justice Clarence Thomas writing for the majority — but found that American Express’s agreements did not amount to antitrust violations.
Who is it good for? It depends on what’s in your wallet
In some circles, this news comes as a good thing and in others as a bad thing, but it’s not as intuitive as it might seem.
On its face, it’s probably a positive thing for people who use credit cards. American Express draws consumers with card-holder benefits and rewards, and if the company’s ability to collect fees had fallen, it likely couldn’t compete with Chase’s big rewards cards, like the Sapphire Preferred and Reserve.
According to CreditCards.com’s Matt Schulz, a loss for AmEx would have changed everything for credit card rewards.
“Swipe fees are the engine that powers the whole credit card rewards game,” he said in a note. “If those fees had taken a hit, which was a real possibility if the ruling had gone against AmEx, it would’ve been great news for merchants’ bottom line but almost certainly would have marked the end of the golden era of credit card rewards.”
As the thinking goes, incentivizing customers to use cheaper cards would make American Express unable to offer premium rewards, which would have meant less competition for Chase and Capital One, whose rewards would have also fallen as a result.
But examining why the court was divided along political lines is the key to understanding why some aren’t celebrating at all.
A driver of inequality
Standing on the other side with the retailers are the people without credit cards. Data from the Boston Federal Reserve found that in 2017, three-quarters of Americans have at least one credit card. However, the remaining 25% who don’t — and the people who don’t have an elite rewards card — essentially subsidize the rewards cards. (Charge or debit card fees are very low thanks to the Durbin amendment of the Dodd-Frank Act, and cash has no fees.)
Brookings fellow Aaron Klein explains it, “America’s payment system has become a silent reverse Robin Hood system transferring billions of dollars from working- and middle-class Americans who use cash, debit and prepaid cards, to the wealthy through elite platinum and black cards.”
Klein gives an example of a family with an $80,000 annual bill that gets $1,200 cash back thanks to a 1.5% rewards card. This isn’t taxed, so it’s as if the family earned an extra $2,000 pre-tax. For the median American family with a $60,000 income, that’s almost two weeks of pay.
In other words, if you get valuable credit card points when you buy things, you are getting a discount over people who use cash. If you don’t, you still pay the same prices, which merchants drive up due to swipe fees.
Now, as American Express is officially allowed to insist cash prices can’t be cheaper, the retailer has no other recourse to deal with the fees than to hike up prices for everyone — or abandon American Express.
The latter doesn’t seem likely, according to the market. American Express stock went up on the news, and Moody’s said the ruling was “credit positive.” It’s not hard to understand why, when the scale is taken into account.
“While it is only a few percentage points of each transaction, this subsidy adds up,” wrote Klein, who added that American Express has netted up to $5 billion per quarter on these fees. For banks, he pointed out, these fees to merchants can be more profitable than charges to the consumers, via interest or annual fees.
So where does this leave consumers? Well, if you can have a rewards card, make sure to use it when your paying means not missing out on this wealth transfer. Unfortunately, there’s not a lot someone without a fancy card can do, save choosing a cash-only place that may have lower prices than otherwise.
Update 6/28/2018: American Express comments added .