American Express Sues Visa, MasterCard, and Eight Banks: The Other Shoe Drops in Continuing Industry Change

NEW YORK – American Express has filed suit against Visa and MasterCard and eight of their issuing banks in an attempt to recoup what it alleges have been damages from the two card brands’ policies of not allowing their issuers to issue other card brands. Card industry observers have expected the suit ever since the U.S. Supreme Court declined to take up Visa’s and MasterCard’s appeal of lower court rulings which declared their exclusionary policies violate U.S. anti-trust laws. The suit does not specify an amount of monetary compensation, but American Express is expected to seek damages that could total in the billions of dollars. Individual banks named in the suit have been identified based, in part, on their being members of one or both of the associations’ board of directors at the time the restrictive rules were adopted and implemented. These include: J.P. Morgan Chase, Bank of America, Capital One, U.S. Bancorp, Household Bank, Wells Fargo, Providian National Bank and USAA Federal Savings Bank. “The federal courts have already found that Visa and MasterCard broke the law,” said Kenneth I. Chenault, CEO of American Express. “The card associations functioned as a cartel. Banks who had expressed an interest in working with us were stopped before they could start.” “Visa, MasterCard and their member banks restricted competition for years. They blocked the development of a new generation of products that would have provided consumers with greater value, convenience and choice. They also prevented American Express from competing to provide network services to banks in this country for over eight years. We intend to hold the associations and their member banks accountable for their illegal actions and seek compensation for the value that would have been generated for our shareholders.” But Visa and MasterCard countered that American Express has a history of failed experiments working with banks overseas and the company has prospered in the U.S. even during the time it was allegedly being hurt by the policies. “American Express can no longer hide in the shadow of the government. This lawsuit will showcase what American Express planned to do from the beginning – recruit the affluent, high-spending customers of select banks by enticing those banks with their higher cardholder and merchant fees, a cost which will be borne by consumers and merchants across the country,” said MasterCard general counsel Noah Hanft. “This is entirely contrary to the very purpose of the antitrust laws.” Hanft estimated that American Express’ history of failures to partner with financial institution issuers in foreign markets, along with the competing interests it will face between its proprietary business and its network business, will undermine any attempt by American Express to establish that it was damaged by MasterCard’s policy. “In fact, American Express has done nothing but prosper in the United States during the years when MasterCard’s policy was in effect, clearly demonstrating that Amex is not a company that has suffered any harm,” Hanft added. Credit unions have largely remained on the sidelines so far as American Express has sought new financial institution issuers, often because they doubt whether the generally upscale card line is really interested in their members or because the company’s card terms are often not considered favorable for small institutions. As might be expected, Visa CEO Carl Pascarella has vowed the number one card brand will fight American Express’ latest round of lawsuits, but he also signaled that Visa is looking past the suit to a stronger role in a changing payments industry. “We will vigorously fight this long-anticipated, opportunistic lawsuit. We are confident that a judge or jury will side with us once they understand the facts of the case,” Pascarella predictably said in a November 15 memo to Visa issuers. But Pascarella added that Visa will keep its eye on the ongoing changes in the payments industry. “I continue to believe that a huge opportunity exists for our industry regardless of the Court’s ruling or the American Express suit. That opportunity lies in redefining the way people pay – it’s not about fighting over marketshare in the credit market. While Visa will compete strongly in every corner of the payments industry, what is most exciting to me is how quickly the very fabric of commerce is changing. Today, we are on pace for cards to overtake cash and checks as the preferred form of payment within the next three years.” No one would comment for the record on the suit since it was just filed, but a number of card industry analysts said the damages in this case could very well hinge on how many banks American Express wants to avoid annoying as it simultaneously courts them as card issuers. MBNA, the large card-issuing bank which is also the lead buyer of credit union card portfolios was not named in the suit and American Express has agreed, under certain conditions, to repay any costs to large issuers which might be incurred in the suit. One card analyst opined that the case would likely be settled out of court for a nominal amount since American Express would be wise to move from challenging old policies in court to putting a competitive policy into place as soon as possible. “The fact is that the card industry in the U.S. has changed significantly in less than a month,” one analyst said. “Now is the time for action, not litigation.” -