The Supreme Court’s American Express Decision – Two-sided Platforms and Harm to Consumers

The Supreme Court determined, in its June 2018 decision, that American Express (“Amex”) did not violate the antitrust laws by requiring merchants to refrain from encouraging patrons at the point of sale to use other cards for which merchants paid lower “swipe” fees on each transaction. The Justice Department and more than a dozen states argued that this contract requirement was anticompetitive, since it discouraged competition between credit card networks on swipe fees and resulted in higher consumer prices when merchants passed along the higher swipe fees through higher store prices. The Supreme Court majority disagreed, arguing that credit card networks need to be analyzed in the context of a “two-sided” platform where one cannot simply look in isolation at competition on “swipe fees” at the merchant level.

“Swipe” fees, sometimes referred to as interchange fees, are the fees that Amex (and other credit card competitors) charge merchants for processing a credit card transaction. Amex uses a different business model to compete with Visa and MasterCard. Amex’s swipe fees generally are higher than those of rivals Visa and MasterCard. Amex encourages cardholder spending through generous rewards packages financed from these merchant fee revenues. This, in turn, enables Amex to recruit merchants who benefit from Amex’s high-spending customers despite Amex’s higher swipe fees. Visa and MasterCard compete with Amex by offering lower merchant fees and promoting their broader acceptance, but Amex’s alternative business model also has led Visa and MasterCard to introduce card options not unlike the Amex card. The Supreme Court’s decision raises several important antitrust issues concerning how different business models compete in a two-sided platform marketplace.

First, in a two-sided platform marketplace, credit cards compete both for merchants to accept their cards as well as for consumers to use their cards. These two “sides” are connected, since merchants are more likely to accept cards that many consumers use, and consumers are likely to use cards that merchants widely accept. Cards compete for merchants both by offering a stable of users as well as through the “swipe” fees they charge merchants. Presumably there can be a trade-off here —– cards that can deliver users that are likely to make more substantial purchases may be able to charge higher “swipe” fees and still have merchants accept the card. Cards also compete for consumers, both through the fees the cards charge (e.g., annual fees, interest, late fees) and rewards the cards offer consumers, as well as through the number of outlets where the card is accepted. In such a two-sided platform setting, it is necessary to consider whether (a) merchants have other means to put pressure on Amex to lower its swipe fees, e.g., simply refusing to accept the Amex card, and (b) consumers can turn to other cards to the extent they are unhappy with a card that, while it offers high rewards, is not accepted in as many stores due to high merchant fees. The fact that many merchants do not accept Amex cards suggests that Amex’s competitors have taken advantage of Amex’s higher merchant fees to limit the reach of the Amex card.

A second issue concerns the ability of Amex to exercise market power in a two-sided platform marketplace. Amex is one of four major credit card networks. According to the Supreme Court decision, the value of transactions on Amex cards is about one-third the value on Visa and MasterCard combined. However, when comparing the number of cards in circulation, Amex has only about one-eighth as many as Visa and MasterCard. With a relatively small share of cards, it is unlikely that Amex can raise swipe fees anti-competitively, since merchants have alternative card choices with substantially more users. Additionally, evidence indicates that Amex has been lowering its swipe fees somewhat in recent years, particularly for small businesses, in an effort to get more merchants to accept its cards.

A third issue relates to possible pro-competitive justifications for Amex’s anti-steering provisions. One possibility is that these provisions can mitigate “free rider” effects. While a consumer who is being “steered” may correctly gauge the potential loss of his own Amex benefits if he does not make his purchases with an Amex card, he is unlikely to account for the larger network effect of his decision. If enough consumers are steered away from Amex by merchants at the point of sale, this would cause a substantial reduction in the swipe fees paid to Amex by merchants. As a result, Amex may have to lower the high reward benefits it offers to consumers, which would decrease its ability to compete for additional customers under its current business model. The Supreme Court appears to have recognized the role of the anti-steering provision in Amex’s business model and that an elimination of Amex’s anti-steering provision could end up stifling competition among the credit card networks for customers and merchants, not increasing it.

In sum, the Supreme Court decision in the Amex case arguably may allow Amex to maintain higher swipe fees to merchants than if Amex’s anti-steering rules had been disallowed. Even this outcome may not occur, and in the context of a broader, two-sided platform marketplace, any such higher fees may not be anticompetitive. Merchants have tools besides point-of-sale steering to encourage Amex to lower its swipe fees. As the Supreme Court concluded, the credit card market had experienced expanding output and vigorous competition among different types of card networks, indicating that Amex’s anti-steering provisions have not had a substantial anticompetitive effect that harmed consumers (as opposed to merchants) when seen in the context of a broader relevant market.

EI Principal Robert Stoner has provided expert economic assistance in a number of matters involving credit and debit card fees.