American Express VP Defends Merchant Rules

BROOKLYN, N.Y. (CN) - Restrictions that American Express imposes on merchants - such as not letting them disclose credit card fees or incentivize the use of less-costly cards - are a simple "matter of parity," not a hindrance to competition, a AmEx exec testified Wednesday in the federal lawsuit against the credit card giant.

"This is an extremely, extremely competitive business," American Express senior vice president Joseph Quagliata testified in the courtroom of U.S. District Judge Nicholas Garaufis. "We have formidable competitors. It's a very, very tough business, particularly with Visa or MasterCard."

Quagliata said offering benefits - like coupons for freebies or the benefit of standing in shorter lines, for example - to customers for using a credit card that would charge merchants less and maybe result in lower consumer prices would put merchants in violation of American Express' mandatory nondiscrimination policy that it requires merchants to sign before they can accept AmEx in their establishments.

The contracts also forbid merchants from informing customers about the fees they face to process AmEx cards or from making any comparisons to other credit card companies.

Letting merchants disclose to customers the rates they pay would be "detrimental" and cause a "cumulative effect" that could hurt its hard-fought business in a hard-fought industry, the executive added.

"We fight for shares every day," Quagliata said. "The intent [of the clauses] is to allow card members to use the products as they see fit," and to ensure that its customers are "treated fairly and equally ... nothing more, nothing less."

The U.S. government and seven states argued in an October 2010 federal lawsuit that American Express, Mastercard, Visa and their affiliated banks collected more than $35 billion in credit card transaction fees in 2009 alone. They said antitrust violations occur when the companies limit the ability of merchants to disclose to their customers what those rates are and which ones are less expensive, and when they forbid the provision of any incentive to get them to use one card over another.

"Merchants cannot reward their customers based on the customer's card choice," the lawsuit said. "Merchants cannot even suggest that their customers use a less costly alternative card by posting a sign stating 'we prefer' another card or by disclosing a card's acceptance fee. In short, defendants' merchant restraints prohibit merchants from fostering competition among credit card networks at the point of sale."

Mastercard and Visa settled immediately, and a federal judge approved a final judgment in 2011 that required the credit companies to remove the allegedly anticompetitive clauses from their contracts and replace them with terms more favorable to vendors.

But Quagliata said disallowing vendors from providing bonuses to entice consumers into using one card over another is a way to ensure that its card members are not "unduly influenced, cajoled or pressured," and that they should be free to "use their card in an unfettered way."

"It's consistent with our brand and our brand promise," the executive added.

The alternative would be "incredibly damaging to our business," Quagliata said.

"We just want our card members to be treated fairly and equally,' he continued. "Noting more, nothing less."

And besides, he noted, most merchants don't know - and couldn't figure out - the complex fee structures even if they wanted to. That would mean they would be making bogus assumptions about whose fees are more expensive, thus wrongly steering customers away from AmEx based on false assumptions.

"A vast majority of merchants do not understand" the credit card fees," Quagliata said. "It's very confusing and very often they get it wrong."

Quagliatta was testifying for the federal government, but will then testify again for AmEx as the trial progresses.

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