American Express 2012 Annual Report Download - page 30

AMERICAN EXPRESS COMPANY
2012 FINANCIAL REVIEW
Dodd-Frank also authorizes the Federal Reserve to establish
heightened capital, leverage and liquidity standards, risk
management requirements, concentration limits on credit
exposures, mandatory resolution plans (so-called “living wills”)
and stress tests for, among others, large bank holding companies,
such as the Company, that have greater than $50 billion in assets.
In addition, certain derivative transactions will be required to be
centrally cleared, which may create or increase collateral posting
requirements for the Company.
Many provisions of Dodd-Frank require the adoption of rules
for implementation. In addition, Dodd-Frank mandates multiple
studies, which could result in additional legislative or regulatory
action. These new rules and studies will be implemented and
undertaken over a period of several years. Accordingly, the
ultimate consequences of Dodd-Frank and its implementing
regulations on the Company’s business, results of operations and
financial condition are uncertain at this time.
Department of Justice Litigation
The U.S. Department of Justice (DOJ) and certain states
attorneys general have brought an action against the Company
alleging that the provisions in the Company’s card acceptance
agreements with merchants that prohibit merchants from
discriminating against the Company’s card products at the point
of sale violate the U.S. antitrust laws. Visa and MasterCard,
which were also defendants in the DOJ and state action, entered
into a settlement agreement and have been dismissed as parties
pursuant to that agreement. The settlement enjoins Visa and
MasterCard, with certain exceptions, from adopting or enforcing
rules or entering into contracts that prohibit merchants from
engaging in various actions to steer cardholders to other card
products or payment forms at the point of sale. If similar
conditions were imposed on American Express, it could have a
material adverse effect on American Express’ business.
Other Legislative and Regulatory Initiatives
The payment card sector also faces continuing scrutiny in
connection with the fees merchants pay to accept cards.
Regulators and legislators outside the United States have focused
on the way bankcard network members collectively set the
“interchange” (that is, the fee paid by the bankcard merchant
acquirer to the card-issuing bank in “four-party” payment
networks, like Visa and MasterCard). Although, unlike the Visa
and MasterCard networks, the American Express network does
not collectively set fees, antitrust actions and government
regulation relating to merchant pricing could affect all networks.
In January 2012, the European Commission (the Commission)
published a Green Paper (a document to begin a process of
consultation toward potential regulation) covering a range of
issues affecting the payments industry, including interchange
fees, non-discrimination and honor-all-cards rules, surcharging,
separation of processing from card network management,
perceived barriers to cross-border acquiring, mobile payments
and technical standardization. The Commission has completed a
consultation period and is expected to issue its preliminary
conclusions in early 2013. These conclusions may involve
proposals for regulation or recommendations for self-regulation
and could take up to 18-24 months to adopt and implement.
In certain countries, such as Australia, and in certain member
states in Europe, merchants are permitted by law to surcharge
card purchases. While surcharging continues to be actively
considered in certain jurisdictions, the benefits to customers
have not been apparent in countries that have allowed it, and in
some cases regulators are addressing concerns about excessive
surcharging by merchants. Surcharging, particularly where it
disproportionately impacts American Express cardmembers,
which is known as differential surcharging, could have a material
adverse effect on the Company if it becomes widespread. In June
2012, the Reserve Bank of Australia announced changes to the
Australian surcharging standards beginning March 18, 2013 that
will allow the Company and other networks to limit a merchant’s
right to surcharge to “the reasonable cost of card acceptance.” In
the European Union (the EU), the Consumer Rights Directive,
which was adopted by the EU Council of Ministers in October
2011, will prohibit merchants from surcharging card purchases
more than the merchants’ cost of acceptance. The EU member
states have until December 2013 to transpose the directive into
national law.
Although neither a legislative nor regulatory initiative, the
settlement by MasterCard and Visa in a U.S. merchant class
litigation (which has been given preliminary, but not final,
approval by the trial court) requires, among other things,
MasterCard and Visa to permit U.S. merchants, subject to
certain conditions, to surcharge credit cards, while allowing
them to continue to prohibit surcharges on debit card
transactions.
Also, other countries in which the Company operates have
been considering and in some cases adopting similar legislation
and rules that would impose changes on certain practices of card
issuers, merchant acquirers and payment networks.
Refer to “Consolidated Capital Resources and Liquidity” for a
discussion of the series of international capital and liquidity
standards published by the Basel Committee on Banking
Supervision.
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