Antitrust concerns likely to bring down american express stock

The top 3 credit card companies in the country, MasterCard, Visa and American Express had recently been sued by the US Department of Justice for practices that were anti-competitive. The 3 card issuers were prohibiting merchants from offering discounts to customers in order to influence their mode of payment or the card with which they use to pay for items. The contract would stop merchants from promoting customers who use other credit cards or charge cards, which would mean lower fees for the merchants. MasterCard and Visa have already come to a settlement with the Department of Justice. However, American Express had decided to fight it. Now, the American Express stock could come down to 40 dollars due to the antitrust concerns.

Each time a card holder makes a transaction and pays with a card a transaction fee is charged to the merchant. A major part of this fee called the interchange fee actually gets passed on to the card issuing bank as a compensation for risk that often accompanies lending. It is also used for funding reward programs for card members. However, the average fee for American Express is higher and is around 2.2% compared to the average fee of 1.5% charged by other card competitors. This is because American Express usually brings those customers who spend, 2 - 4 times the customers of other cards on an average.

American Express, on its end tries to maintain these high expenditure customers by offering membership rewards and various other promotions that are compensated through the high fee. American Express gaining more per transaction is called a spend-centric model and has been highly publicized in recent times. MasterCard and Visa don`t lose much due to the antitrust lawsuit as it focuses on the interchange fee which accrues to the bank issuing cards. Both Visa and MasterCard do not lend themselves directly but only facilitate the payment processing on credit card spending using their network. The fee for that service wouldn`t be affected. On the other hand, with merchants gaining the freedom to promote certain types of card payments by offering incentives to customers, American Express stands to lose a lot in terms of its revenue. 74% of the American Express stock is made up of card transaction and the execution fee, which means American Express, will lose a lot, if it loses the lawsuit. American Express might also bring down the fee to the average levels in order not to lose transactions to other competitors.

Doug Nicholas

Doug Nicholas, a financial consultant by profession with a Masters degree in International Business from Brown University, is also an ardent writer. Though he has a full time job at one of the companies listed on Wall Street, he does manage to squeeze in time to follow his passion. He puts his ideas to words in his articles related to finance and business.