Credit cards are one of the most convenient ways to pay for purchases large and small. But how do they work, and what fees do merchants have to pay? When you use a credit card, the merchant pays an interchange fee to the credit card company. This fee is a percentage of the total purchase price, and it varies depending on the type of card you use. In addition to the interchange fee, merchants also have to pay a processing fee, which is aflat fee charged by their credit card processor.
American Express, Discover, MasterCard, and Visa are all publically owned [read for-profit] payment services that connect cardholders to merchants. Billions have gone into building the networks over the past 50 years. A standing feud exists between merchants who pay credit card interchange or discounting fees, and their belief in the fairness of it all.
Europeans use Directives to solve their payment issues. Cross-country mandates, often consisting of non-bankers make the rules, some better than others. Here in the US, we use the court system, which depending on where you sit on the issue, a better place. While courts are often wise, they are traditionally slow.
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The U.S. Supreme Court accepted a case that could roil the credit-card business, agreeing Monday to consider reviving government allegations that American Express Co. thwarts competition by prohibiting merchants from steering customers to cards with lower fees.
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The Supreme Court’s decision to take the case offers new hope to retailers trying to reduce the $50 billion in fees they pay to credit-card companies each year. It’s a boost for Discover Card Services, which says the rules undercut its ability to compete with American Express.
As in the case of Europe, American Express isolated the firm from regulators claiming some uniqueness in their credit card product. It will be interesting to see how their strategy works out today.
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Antitrust enforcers accused American Express of using its leverage over merchants to thwart competition from cards that would charge retailers lower fees. American Express’s agreements with retailers contain an “anti-steering” provision that bars them from doing anything to encourage the use of competing cards, such as offering discounts.
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The lawsuits originally targeted Visa Inc. and Mastercard Inc. over their anti-steering policies as well. Those two companies settled the claims in 2010.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
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