American Express Co.
) or AmEx rose 2.2% in the last two trading sessions, following
the announcement of the settlement of its two significant
antitrust class action litigations with merchants in the U.S.
involving card transaction fees. The settlement apparently partly
mitigates financial risk for the company and helps retain market
confidence in the stock.
One of the lawsuits was filed in 2006, while the other one
dates back to 2004. Both the lawsuits alleged that AmEx
manipulated the company policies in a way that prohibited the
merchants from promoting the use of cheaper cards with lower
Higher processing fees and promotion of higher-charged cards
by such card giants have burdened merchants, consumers and the
government in the past. Each time consumers swipe their credit
card, the merchant is bound to pay a fee.
Accordingly, AmEx has agreed to amend its policies so that
merchants can now charge the surcharge on its debit, prepaid and
credit cards to cover their costs. However, this surcharge should
not exceed the industry benchmark. Subsequently, merchants can
now offer incentives to customers to use debit cards, cash or
checks instead of credit cards that carry high swipe fees,
thereby eliminating extra costs.
Moreover, the company will pay attorneys' fees for both cases
of up to $75 million. Additionally, AmEx will recompense the
merchants in the class action as much as $2 million and will
provide another $2 million of funds to notify merchants regarding
the terms of the settlement.
Nonetheless, AmEx will continue to keep the surcharge or swipe
fee intact. The company has also stressed on prohibiting
merchants from attaching extra fees and steering customers away
to other forms of payment adopted by competitors.
Although these modifications are liable to make the merchants
powerful, the consumers may still have to bear the brunt of
higher fees from the card network, directly or indirectly.
However, AmEx awaits the final approval from the court. Earlier
this month, card giants,
), also settled similar litigations.
More Unresolved Lawsuits
While multiple lawsuits still lay unresolved at AmEx, one of
it would be worth considering. In 2010, the U.S. Department of
Justice (DoJ) sued the company along with MasterCard and Visa,
alleging breach of antitrust law and promoting high-charge credit
Both MasterCard and Visa have settled issues by allowing
higher discounts even on less expensive cards and reducing
merchant discount rates. However, AmEx has been fighting the
litigation as it believes that such government remedies are
complex, non-beneficial for consumers and will only lead to an
anti-competitive environment, thus helping the two dominant
players who already enjoy over 70% market share.
Since AmEx's operations are based on a spend-centric business
model, we believe the outcome of such lawsuits have mostly been
detrimental to the company's financials and operations. Hence, we
anticipate risk from these multiple lawsuits in future as well,
although we remain at the periphery at present to notice further
developments and the impact of the final settlement.
While AmEx presently carries a Zacks Rank #2 (Buy), both Visa
and MasterCard bear a Zacks Rank #3 (Hold). However, a stock
worth considering in the financial sector is
Euronet Worldwide Inc.
), sporting a Zacks Rank #1 (Strong Buy).
AMER EXPRESS CO (AXP): Free Stock Analysis
EURONET WORLDWD (EEFT): Free Stock Analysis
MASTERCARD INC (MA): Free Stock Analysis
VISA INC-A (V): Free Stock Analysis Report
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