MBNA Sued Over Policies with New Amex Credit Card: Retailers Allege a Similar Policy to One That Visa and Mastercard Used

NEW YORK – MBNA, a leading purchaser of credit union credit card portfolios and one of two national banks in the United State which can currently issue American Express credit cards, has been sued by a retail association and other retailers over those cards. The suit, brought in the U.S District Court for New York’s Southern District, pits MBNA and Citibank against the National Supermarkets Association, a trade group for independent supermarkets, and two other retailers. Citibank also has an agreement with American Express to issue American Express credit cards. The case is the latest in a series of cases retailers have brought against the high-end card brand, alleging that Amex and the banks that would issue it violate antitrust laws by using what is essentially an Honor All Cards rule similar to one that Visa and MasterCard used to use but then abandoned under legal pressure from a retailers’ class action lawsuit. “In essence, American Express puts merchants to the following choice: either accept Amex-branded credit card products at rates that are 40% or so above market, or lose the right to accept Amex-branded corporate and personal charge cards – and lose your corporate clientele, along with traditionally well-heeled and high spending Amex charge card users,” the case alleged. No one from American Express or MBNA has become available to discuss the litigation and neither have issued statements about it. Gary Friedman, the leading attorney in the case for the plaintiffs and a partner in the New York law firm of Friedman and Shube, drew a clear line of distinction between what could be called the harmless part of having an Honor All Cards Policy and the parts of such a policy which, he said, could be used to promote anticompetitive practices. “Having an Honor All Cards policy in and of itself is harmless,” Friedman said, “but when it is used to force retailers to accept a card at a much higher cost than they would have otherwise, then there is a problem.” Prior to spring of 2003, both Visa and MasterCard had policies under which retailers who accepted their credit cards also had to accept their debit cards whose transactions consumers validated with their signatures. So far, so good. But the fees that retailers paid for the Visa and MasterCard debit card transactions were substantially higher than those they paid for debit card transactions that cardholders validated with a personal identification number and this discrepancy resulted in the card brands abandoning the policy and paying retailers billions of dollars. The legal actions against American Express, which have been consolidated into one case called, American Express Merchant Legislation, allege in part a similar dynamic. American Express, a privately branded card with its own acceptance and validation network, issues cards which carry significantly higher fees than do Visa and MasterCard. Merchants pay these fees because American Express transactions are generally of higher monetary value and they want to keep these well-heeled or corporate customers. The problem has arisen, the suits argue, because American Express is trying to force merchants to pay much higher fees for transactions with its credit cards that MBNA and Citibank issue as a condition of their accepting the privately branded card. So far, none of the cases have sought money damages for their claims. But they have sought an injunction from the courts against American Express and the issuing banks that would block them from putting the American Express policy and fees into place, thus making it uncertain how much income the cards could provide and dampening enthusiasm among financial institutions for the brand. Industry Impact Cited In his view, Friedman explained, not enough people have appreciated the overall impact American Express’ policy has on the costs of card transactions. “This policy has already begun to cause an anticompetitive impact,” Friedman said. The problem is that as American Express dictates higher fees for its credit cards, Visa and MasterCard will have to raise theirs as well to remain competitive for the issuing banks.” If Visa and MasterCard were to sit idly by, the case explained, American Express would come to dominate the U.S. credit card market by attracting all the large card issuing banks with supra competitive merchant discount fees made possible only by the illegal tying arrangement between the two card types. It’s unclear what this might mean in the short term. Friedman said he expects an initial ruling as to whether the case can go forward in terms of large retailers on February 1 and additional arguments regarding different issues regarding smaller retailers later on. “I don’t believe it is the largest challenge that American Express has faced,” said one analyst who refrained from speaking on the record because he had not yet seen the case, “but I definitely think it proves that we are in a wild and wooly card world and you can never tell where the next thing is going to come from.” -