B
y Patricia A. Murphy
American Express Co. scored a coup when a federal judge ruled that Visa and MasterCard must abolish rules that prohibit banks from issuing non-bank card products, such as Amex and Discover cards. Then came the earnings report: Amex revenues were down 60% in the third quarter relative to third quarter 2000.
That Amex lost money isn't surprising, really. With the economy showing signs of a slowdown in summer, it would not have taken much to affect a company like Amex, with its focus on travel and entertainment. The events of 9/11 were more than enough. Amex card billings were down 3% for the quarter despite being up in both July and August by about 2% over previous months, according to published reports.
The company also reports that it took a $98 million direct hit as a result of the destruction of the World Trade Center buildings - including business interruption costs (Amex offices were across the street from the WTC and had to be moved to contingency sites), credit exposures in the travel industry service establishments, insurance claims, and waived finance charges and late fees.
Amex says it is hunkering down and trying to weather the economic and social storms that define the day. Oh, and then there is the opportunity - presented by a federal district court judge last month - to woo banks to the Amex card fold.
The court ruling, handed down in U.S. District Court for the Southern District of New York, was a victory (of sorts) for Amex but a blow to the U.S. Department of Justice, which had filed an antitrust suit over Visa and MasterCard rules that allow banks to issue both card brands. Although the court ruled the card "duality" is not anti-competitive, the bankcard associations were out of line when they adopted exclusionary rules to keep banks from issuing Amex, Discover and other general-purpose cards.
In her written decision, Judge Barbara Jones specifically cited debit cards as a reason why Amex should be allowed to issue payment cards through banks.
"The evidence demonstrated that the future of credit card products will be built on, and dependent upon, debit functionality," Jones wrote.
Visa and MasterCard are developing multi-function cards - like online/offline debit cards - that pivot on the demand deposit account (DDA) relationship, Jones noted. "Credit cards that do not have debit functionality will fall by the wayside," she wrote.
There's been much speculation since the ruling about which banks might join an Amex card-issuing network. Amex officials will say only that they are in "conversations with a number of banks."
It can only be speculation at this point because Visa and MasterCard are expected to appeal the decision. That could delay any dismantling of the associations' exclusionary rules by at least another two years.
Since we're in the realm of speculation, though, I asked Paul Martaus, President of Martaus & Associates, Mountain Home, Ark., to offer up an opinion. Paul's take on the ruling: If the bank card associations have to open their issuing networks to competition from Amex, then Amex should have to open its authorization/processing network to bank card acquirers.
"I'm talking about allowing acquirers direct access to the closed authorization network that has been a stalwart of Amex," he said. "Turnabout is fair play."
It's an interesting concept to ponder. Today, merchant acquiring is a closed loop in the Amex system. Bankcard acquirers and their sales agents can receive a bounty for merchant referrals, but only Amex can authorize and acquire Amex card transactions. The relationship with the merchant is exclusive to Amex. Interchange does not exist.
Nothing in the district court's ruling addresses the acquiring side of the equation. But in today's litigious society, it wouldn't be surprising if someone raised the argument in this or another court. The new fee opportunities alone are too great to ignore.
That is, unless you consider Amex's third-quarter revenues and you believe the country is headed for a long-term recession that will severely crimp travel and entertainment spending.
If that happens, debit functionality for payment cards will become even more important.
Visa, obviously, understands this. That's why Visa has been putting so much energy into promoting "check cards." Check cards look like credit cards and act like credit cards, except that transactions result in debits to DDAs rather than extensions of credit.
Merchants aren't too happy about accepting these offline debit cards. Merchant fees for check card purchases are the same as they are for credit cards even though the risks are substantially different.
So a group of merchants (led by Wal-Mart) has sued Visa and MasterCard, challenging the associations' "honor all cards" rules. Those rules require that a merchant accepting Visa credit cards, for example, also accept all Visa-brand card products.
That suit, which has been in limbo for the past year, may be ready to move. Last month, an appeals court in New York rejected Visa and MasterCard arguments that the retailers' suit did not qualify for class-action status.
Meanwhile, Visa is backing down on its plan to hike the interchange rate on its Interlink debit card network. Interlink is an online debit card that competes with the regional ATM/POS networks, such as Honor and NYCE. (NYCE, you may recall, recently was acquired by First Data Corp.; Honor was acquired, too, by Concord EFS.)
Fees for Interlink transactions were set to rise by more than 100% in October. What had been, on average, a 20-cent transaction was to cost as much as 45 cents, according to sources. Visa has put the fee hike on hold, citing "deteriorating economic conditions."
The economy might have something to do with Visa's decision. If Amex charge volume is down, credit card transactions run through the banking system must be waning, too.
As Jones noted in her decision, debit functionality is about to become critically important in the payments card business. Visa may not want to anger merchants anymore than it already has by forcing merchants to take offline debit cards and pay the same fees they pay for credit card transactions. Wal-Mart and a handful of others already have made clear their intentions not to accept Interlink cards if the planned price hike takes hold.
In a deteriorating economy, it doesn't seem wise to be irking customers.
Visa said it still plans to impose the price hike sometime next March. My guess is that unless there's a rapid turnaround in consumer spending, the Interlink fee hike will fall by the wayside. And, eventually, I suspect, so will Interlink.