Washington, DC—While independent retailers, including jewelers, are still celebrating last week’s SCOTUS online sales tax ruling, their enthusiasm will be tampered somewhat by Monday’s ruling that prevents them from suggesting customers use a lower-fee credit card such as Visa, Mastercard, or Discover to pay for purchases instead of higher-fee American Express (Amex) cards.
“Today’s ruling is a blow to competition and transparency in the credit card market,” NRF senior vice president and general counsel Stephanie Martz said. “The American Express rules in question have amounted to a gag order on retailers’ ability to educate their customers on how high swipe fees drive up the price of merchandise.”
“By denying merchants the right to simply ask for another card or offer an incentive for using a preferred card, the Supreme Court has undermined the principle of free markets where one company should not be allowed to dictate the practices of an entire industry in order to protect its business model,” Martz said.
American Express’s business model focuses on cardholder spending rather than cardholder lending. To encourage spending, Amex provides better rewards than the other credit-card companies, but it must continually invest in its cardholder rewards program to maintain its cardholders’ loyalty—and to fund those investments, it must charge merchants higher fees than its rivals.
Although this business model has stimulated competitive innovations in the credit card market, it sometimes causes friction with merchants who, to avoid higher fees, sometimes attempt to dissuade cardholders from using Amex cards at the point of sale, a practice known as “steering.”
Amex places anti-steering provisions in its contracts with merchants to combat this. At issue in the Supreme Court case was the assertion that these provisions violate the Sherman Antitrust Act. The Second Circuit Court determined that the credit-card market is one market, not two (merchant and consumer), and that Amex’s anti-steering provisions did not violate Sherman. SCOTUS upheld the ruling, upsetting retailers.
“This misguided decision represents a missed opportunity to take a stand in favor of free markets and bring soaring credit card fees under control,” said NRF’s Martz.
When consumers use a credit card to make a purchase, merchants are charged a “swipe” fee to process the transaction; an average of about 2% of the transaction. Amex’s swipe fees are traditionally higher (closer to 3%, say jewelers), Discover’s the lowest, with Visa and Mastercard in the middle. Rewards cards in general also can carry higher processing fees.
For luxury merchants dealing in high-ticket transactions, those fees are significant. Calculated as a percentage of the transaction, a $50,000 sale charged to a credit card will cost a jeweler between $1,200 and $1,500 to process—and more if the card is not physically present at the time of the sale, such as in a phone or online sale. If the item is later returned, the jeweler may be able to avoid a second processing fee—but the original fee isn’t refundable.
Even a few cents per transaction on lower-ticket items adds up for retailers—to more than $70 billion a year nationwide, says the National Retail Federation. “Card industry rules have effectively forced retailers to build the fees into the price of merchandise, increasing costs for consumers by hundreds of dollars a year for the average family,” the association says.
Amex, Visa and MasterCard all used to have rules prohibiting merchants from encouraging customers to use lower-fee cards, but Visa and MasterCard dropped the restriction in a 2010 settlement with the Justice Department. Amex refused to do the same, and was sued by the Justice Department. A U.S. District Court judge ruled in 2015 that the Amex rules were a violation of federal antitrust law, but Amex appealed and a three-judge panel of the Second U.S. Circuit Court of Appeals ruled in its favor in 2016. 11 states that had joined the Justice Department lawsuit appealed to the Supreme Court, which agreed to take the case last fall and upheld the Second circuit ruling on Monday.
NRF has argued in court that the Amex rules have helped the card company avoid pressure to reduce the fees it charges merchants and, in turn, has reduced incentives for Visa, MasterCard or Discover to do the same. In a friend-of-the-court brief filed late last year, NRF and other retail groups said the Amex rules “lead to increased prices for all consumers.”
NRF has led the retail industry’s fight against high swipe fees for years, calling for increased transparency and competition that would lead to lower fees. The industry has refused, with each of the thousands of banks that issue credit cards generally charging the same fees for a given brand and type of card.
"Nothing has changed and we don't have a position on it at this time," David Bonaparte, president and CEO of Jewelers of America, told The Centurion.