{"id":1339,"date":"2016-07-20T11:26:42","date_gmt":"2016-07-20T16:26:42","guid":{"rendered":"http:\/\/starpointgroup.com\/?p=1339"},"modified":"2023-09-07T12:19:28","modified_gmt":"2023-09-07T17:19:28","slug":"supreme-court-decision-keeps-consumers-in-the-dark","status":"publish","type":"post","link":"https:\/\/www.starpointgroup.com\/supreme-court-decision-keeps-consumers-in-the-dark\/","title":{"rendered":"Supreme Court Decision Keeps Consumers in the Dark"},"content":{"rendered":"

A bedrock principle of classic micro-economic theory is that rational consumers will make better decisions when they have access to all the information that affects a transaction in a given market.\u00a0 But in a head-snapping decision in favor of American Express, a 5-4 majority on the Supreme Court ruled that consumers would be better off if they were not exposed to the full costs of credit (and debit) card transactions.<\/p>\n

Ohio vs. American Express<\/strong><\/p>\n

In 2010 the Federal Government and more than a dozen states sued American Express, Visa and MasterCard over the \u201canti-steering\u201d provisions they had inserted in their contracts with merchants who accept their cards as payment.\u00a0 These anti-steering provisions prevent merchants from encouraging their clients to use the payment method with the lowest \u201cswipe fee\u201d \u2013 the amount taken off the top every time a purchase is made with a credit or debit card.\u00a0 Visa and MasterCard agreed to change their business practices and to settle the case; American Express, which charges the highest swipe fees, chose to go to court.<\/p>\n

American Express argued that its higher swipe fees were justified as they help to finance its generous rewards program, a significant benefit to card members.\u00a0 AmEx also argued that, on average, its card members were wealthier and spent more when shopping or dining out, thereby providing a benefit to the merchants who accepted their card.\u00a0 Finally, they argued that competition in the credit card market was robust and that their swipe fees had caused no obvious damage AmEx\u2019s competitors.\u00a0 The plaintiffs countered by arguing that American Express\u2019 anti-steering provisions stifled competition between credit card networks leading both to higher fees for merchants and, ultimately, higher prices for consumers.<\/p>\n

Better for Consumers? <\/strong><\/p>\n

The issue underlying the dispute is the difference in \u201cswipe fees\u201d charged by the major credit card companies and banks.\u00a0 It is estimated that merchants (and consumers through higher prices) pay more than $50 billion annually in swipe-fees.\u00a0 Swipe fees vary by brand of credit and debit card and by the size and negotiating power of the merchant, but can be as high as 5% of the total.\u00a0\u00a0 American Express charges higher swipe fees than Visa, MasterCard or Discover Card and small, local businesses, with limited negotiating leverage, are charged the highest rates.<\/p>\n

Merchants, especially small merchants, clearly would prefer that consumers pay with the method that charges the lowest swipe fee.\u00a0 If they were fully aware of the magnitude and the differences in those swipe fees, consumers probably would choose the lowest cost option as well because, in the end, it all comes back to them in terms of higher prices at check-out.<\/p>\n

But the Supreme Court sided with American Express by allowing it to continue to bar merchants from \u201csteering\u201d consumers toward credit (and debit) cards that charge lower swipe fees.\u00a0 I have no sympathies for either Visa or MasterCard, as will be explained below, but this decision should give pause to everyone who is really committed to free-market competition.<\/p>\n

Writing for the majority, Justice Clarence Thomas argued that American Express was justified in charging higher swipe fees because:<\/p>\n