American Express Company (AXP, Financial) has been found guilty of antitrust violations by a federal judge Nicholas Garaufis in New York. The company was found guilty of anti-competitive trade by barring shops from encouraging customers to use cheaper cards. The 150 page ruling stated that the company told merchants that they could not accept American Express cards while offering credit cards by competitors Visa and MasterCard to customers. Immediately after this news was made known, the company lost around $1.5 billion in market value.
Retrospection
American Express Company, the American MNC was established in 1850. The company has its headquarters at Manhattan's Three World Financial Center in New York City, US. The company provides charge cards, credit cards, traveler's check etc.. Around 24% of the total volume of credit card transactions in the United States are from AmEx cards alone. In 2011, AmEx acquired Loyalty Partner for a whooping $685 million. The company started running into troubled waters from November 2010 itself. It received a word of caution from the Office of Fair Trading since the company encouraged their customers to turn unsecured credit card debts into a kind of secured debt. History repeats itself with fresh charges being made about the company's anti-trust violations.
Financial Stats Of AmEx
American Express Company has a market caps of 81,118.64M USD as of 19th February 2015. The company reported net income of $1.3 billion in the fourth quarter. As compared to the $637 million last year, this years' net income proves to be a substantial increase. Diluted earnings rose from $0.56 to $1.21 per share. Revenues net of interest expense for 2014 rose 4% (5 percent FX adjusted) from $31.6 billion last year to $33.0 billion this year.
Legal Tangle
The company is claimed to have restrained trade by implementing “non-discrimination provisions” in all of its contracts, according to the U.S. Government as well as attorneys general from seventeen different states. The non-discrimination provision restricts merchants from offering any kind of perks to customers who pay with credit cards from it’s competitors. Perks could range from discounts to free shipping. This means that any retailer cannot put up a sign that says 2% discount for using "ABC" card, IE American Express' competitors card. The company officials said that they would appeal the ruling. Although the company argued that they were only leveling the playing field, it did not seem to go down well during the ruling. U.S. Government witnesses who testified said that if this “non-discrimination provision” was removed, the merchants could easily offer benefits to customers for making payments with a different credit card. Thus, the merchants would then be free from any kind of unfair restrictions.
Case Study
American Express lost the case fair and square. US District Judge Nicholas Garaufis has now asked the company and DOJ to submit a joint proposed remedial order within a span of thirty days as well as a joint memorandum. The joint memorandum will state the reason as to why the proposed remedial order is appropriate. This means that the judge is trying to seek a compromise and asks for the contract clauses to either be eliminated or modified. If there is no agreement between the said parties, they will have to file a joint submission stating their differences and agreements.
Impending issues
American Express is also known to charge merchants a high fee. Every merchant pays the credit card company few percents (depends on the credit card company) of the credit card charge amount. This is mainly done so that the card company can pay the merchants immediately for the purchases made. The company however justifies the high fee by saying that their consumers are rich and the merchants get more revenue. So why complain? Moreover the credit cardholders seem to pay their pending balances every month. Hence, according to American Express, their percent of interest earnings reduce.
Just recently, the company lost their exclusivity to Costco (COST, Financial), the American membership-only warehouse club. The anti-trust violations now come as an additional blow to the company.
Hopefully the loss is not as bad as it appears. Though it is certain that AmEx will have to modify some clauses, compromises will have to be made between the company and DOJ.
