American Express 2013 Annual Report Download - page 53

AMERICAN EXPRESS COMPANY
2013 FINANCIAL REVIEW
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. See Item 1. “Legal Proceedings” in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2013, for
descriptions of the DOJ action and related cases. 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 and terms of merchant
rules and contracts. Regulators and legislators outside the U.S. 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 issuer in “four-party” payment networks, like Visa and
MasterCard). Although, unlike the Visa and MasterCard networks, the
American Express “three-party” payment network does not have
interchange fees or collectively set any fees, antitrust actions and
government regulation relating to merchant pricing or terms of
merchant rules and contracts 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. The Commission completed the
consultation process and on July 24, 2013, issued its
recommendations, which included draft legislation now under
consideration within the European Parliament. The Commission’s
recommendations included a number of proposals that would likely
have significant impact across the industry and would apply either in
whole or in part to American Express. The proposed changes include:
폷Price caps — The Commission proposed capping interchange fees at
20 basis points for debit and prepaid cards and 30 basis points for
credit and charge cards. Although American Express does not have
interchange fees like four-party networks such as Visa and
MasterCard have, the caps would be deemed to apply to elements of
the financial arrangements agreed between American Express and
each GNS partner in the European Union (the EU). The discount
rates American Express agrees with merchants would not be
capped, but the interchange caps could exert downward pressures
on merchant fees across the industry, including American Express
discount rates. The Commission would exclude commercial card
transactions generally from the scope of these caps.
폷Network rules on card acceptance — The Commission proposed to
prohibit honor-all-cards and anti-steering rules across all card
networks. In addition, the draft proposals sought harmonization of
surcharging rules so that, across the EU, transactions that are
subject to the interchange caps may not be surcharged, but
transactions falling outside the scope of the caps could be
surcharged up to cost.
폷Network licensing — The Commission proposed to require all
networks, including three-party payment networks that operate
with licensing arrangements, which would include the Company’s
GNS business, to establish objective, proportionate and non-
discriminatory criteria under which a financial institution could
qualify to be licensed to operate on the network. In addition, the
scope of network licenses would be required to cover the entire EU.
These requirements are inconsistent with the flexibility and
discretion that American Express has had to date in deciding when,
where and with whom to grant a license in the GNS business.
폷Separation of network processing — The Commission proposed to
require card networks to separate their network processing
functions (in which transactions between different issuers and
acquirers are processed for authorization, clearing and settlement).
This proposal does not apply to three-party payment networks, such
as American Express, but may be deemed applicable in situations
where a different GNS issuer and acquirer is involved in a
transaction, which represent a very small percentage of transactions
on the American Express network. Further clarification of the
applicability of this requirement is needed where, as with GNS,
licensing arrangements do not give rise to inter-bank transactions
or relationships.
These proposals are currently subject to debate and amendment by
the European Parliament and Council in a complex legislative process
that will also involve the EC. It is too early to assess the exact scope
and impact of any final legislation.
In certain countries, such as Australia, and in certain member
states in the EU, 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 Card Members, which is known as differential
surcharging, could have a material adverse effect on the Company if it
becomes widespread. The Reserve Bank of Australia changed the
Australian surcharging standards beginning March 18, 2013 to allow
the Company and other networks to limit a merchant’s right to
surcharge to “the reasonable cost of card acceptance.” In the EU, the
Consumer Rights Directive, prohibits merchants from surcharging
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