It’s amazing how large companies with slick lawyers so quickly lose their memories when asked about items that they can’t possibly forget.
You’d think that American Express, the credit card outfit, has magically lost all memory of a famous episode 24 years ago in Boston. It started with a small story that featured a newspaper photo of a restaurateur with a butcher’s knife hacking up an American Express card in a protest over the high fees it was charging merchants.
American Express was gambling that its unusually high merchant fees wouldn’t leak into the papers, leap up, and bite it in the face.
Instead, Steve DeFillippo and his 10-inch knife publicized the one secret Amex did not want widely known: that the company charged fees so high that many merchants were asking customers to pay with other cards instead.
Amex is still fighting that nagging reputation: that it was an arrogant card company overcharging businesses for the ability to market its card to “affluent” users who whipped out the card without realizing the costs that would saddle merchants who accepted it.
The Boston Fee Party, as the 1991 fiasco was known, resulted from a feisty band of Boston restuarateurs willing to tell Amex where to stuff itself. The issue was the “merchant agreement” that Amex wanted to enforce prohibiting retailers from publicly preferring other cards because Amex fees were fleecing them.
On Friday, a U.S. judge told it the policy violated antitrust laws because it amounted to restraint of trade that could result in higher prices for consumers (in the credit card business, a “customer” is the merchant and the “consumer” is the one paying).
The ruling resulted from a 2010 case brought by the U.S. Justice Department and supported of merchant groups. Amex had long tried to enforce the right to strip merchants of their ability to take its card if they spoke publicly about its fees and “steered” consumers away from paying with its card.
Over the years, many merchants agreed to shut up, but not willingly. Others did not care what Amex did. Then DeFillippo — who runs the Davio’s chain — decided to entrust some publicity to his 10-inch butcher’s cleaver.
The merchant fees are known to every business that accepts the Amex. Amex’ fees are higher than those of competitors. At the time of the Boston Fee Party, merchants were sending about 4 percent of the purchase price back to Amex or other middlemen as a “cut of the action,” or “discount,” while competing card companies charged 1.2-1.5 percent, including MasterCard and VISA, who didn’t fight federal claims.
Some merchants offer discounts to avoid Amex, take other cheaper cards or simply decline to take Amex altogether.
With every skirmish like Boston’s, Amex would send a band of experts to soothe merchants. After Amex decided to spurn Justice’s 2010 settlement inquiries, Bloomberg Business recalled stories about Amex using a “bear hug” approach while “reiterating the value proposition.”
Amex, starting in the 1980s, was prized for its dedication to disputing charges on behalf of consumers. But that reputation competed with its urge to coddle merchants as well.
The Amex’ fees are at the heart of the bread and butter of the multi-million dollar hidden world of credit card processors, issuers and network specialists whose fees are grouped together under “interchange fees” charged to consumers. Even Congress has had to clip back the industry’s rich plumage from time to time — a plumage built on non-disclosure.
The Amex argument in the case it just lost Thursday argues that a merchant shouldn’t be able to determine which cards he or she prefers to take because then Amex card-holders rights would be infringed. Most cardholders are unaware of the fees charged to merchants. But it wouldn’t surprise merchants to learn that when a merchant accepts an ultra-rich benefit card, he is often charged a higher “interchange fee” to finance the benefit. He risks the wrath of the consumer by avoiding Amex.
The New York judge who issued his ruling Thursday raised a different issue, arguing about the effect such interchange fees were having on ultimate prices charged to everyone. If a merchant grew tired of seeing his take cut, he might just raise his prices to all consumers, including the poorest.
Kenneth Chennault, the ex-Amex CEO, even referred to “bait and switch” tactics in arguments against consumer card choice.
The stock market verdict on Amex stock was swift both in 2010 when the company risked battling the feds, and on Thursday when the judge issued his ruling in the case. The company’s stock tanked.
Amex also lost big battles last week when two big retailers, JetBlue and CostCo, ended credit card deals with Amex over as-yet-undisclosed matters. There, the schemes focused on some blend of exclusivity with Amex offering extra benefits to consumers to lure them in if JetBlue and CostCo would accept no other credit card.
While it ponders its future, you’d think Amex would take something to keep its memory of the Boston Fee Party intact.
The writer (dukeofdanforth@gmail.com) is a founder of the Aspen Daily News and appears here Sundays.