American Express 2014 Annual Report Download - page 60

AMERICAN EXPRESS COMPANY
2014 FINANCIAL REVIEW
In December 2013, we announced that certain of our subsidiaries reached settlements with several banking regulators, including the
CFPB, to resolve regulatory reviews of marketing and billing practices related to several credit card add-on products. For a description of
these settlements, see Part I, Item 3. “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2013.
In October 2012, we announced that American Express Company and certain of our subsidiaries reached settlements with several bank
regulators, including the CFPB, relating to certain aspects of our U.S. consumer card practices. For a description of these settlements, see Part
I, Item 3. “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2012.
Dodd-Frank prohibits payment card networks from restricting merchants from offering discounts or incentives to customers to pay with
particular forms of payment, such as cash, check, credit or debit card, or restricting merchants from setting certain minimum, and for certain
merchants maximum, transaction amounts for credit cards, as long as any such discounts or incentives or any minimum or maximum
transaction amounts do not discriminate on the basis of the issuer or network and comply with applicable federal or state disclosure
requirements.
Under Dodd-Frank, the Federal Reserve is also authorized to regulate interchange fees paid to financial institutions on debit card and
certain general-use prepaid card transactions to ensure that they are “reasonable and proportional” to the cost of processing individual
transactions, and to prohibit payment card networks and issuers from requiring transactions to be processed on a single payment network or
fewer than two unaffiliated networks. The Federal Reserve’s rule provides that the regulations on interchange and routing do not apply to a
three-party network like American Express when it acts as both the issuer and the network for prepaid cards, and we are therefore not a
“payment card network” as that term is defined and used for the specific purposes of the rule.
Dodd-Frank also authorizes the Federal Reserve to establish enhanced prudential regulatory requirements, including 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 American Express Company, that have greater than $50
billion in assets. We are also required to develop and maintain a “capital plan,” and to submit the capital plan to the Federal Reserve for our
quantitative and qualitative review under the Federal Reserve’s CCAR process. In addition, certain derivative transactions are now required
to be centrally cleared, which have increased our collateral posting requirements. In September 2014, the CFTC and the U.S. federal banking
agencies issued proposals that would impose mandatory margining requirements for certain non-cleared swaps, which may further increase
collateral posting requirements for us.
Department of Justice Litigation
The DOJ and certain states’ attorneys general have brought an action against us alleging that the provisions in our card acceptance
agreements with merchants that prohibit merchants from discriminating against our card products at the point of sale violate the U.S.
antitrust laws. On February 19, 2015, the trial court found that the challenged provisions were anticompetitive and will now determine the
scope of the remedy when it enters judgment in the case. We intend to vigorously pursue an appeal of the decision and judgment. See Part I,
Item 3. “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2014 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 our business. See Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for further information on the
potential impacts of an adverse decision on our business.
Other Legislative and Regulatory Initiatives
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 us if it becomes widespread. The Reserve Bank of Australia allows us 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 card purchases more than the merchants’ cost of acceptance in those Member States that permit surcharging.
Although neither a legislative nor regulatory initiative, the settlement by MasterCard and Visa in a U.S. merchant class litigation required,
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 and prepaid card transactions. In December 2013, we announced the proposed settlement
ofanumberofU.S.merchantclassactionlawsuits,which,ifapproved, would change certain surcharging provisions in our U.S. card
acceptance agreements. For a further description of the proposed settlement, see Part I, Item 3. “Legal Proceedings” in our Annual Report on
Form 10-K for the year ended December 31, 2014.
Refer to “Consolidated Capital Resources and Liquidity” for a discussion of capital adequacy requirements established by federal banking
regulators.
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