American Express Co. Chairman and CEO Kenneth Chenault took time at the beginning of the company's third-quarter earnings conference call Thursday to discuss recent regulatory changes and a lawsuit brought by the Justice Department against the company.
Chenault said the New York-based company is taking the lawsuit "very seriously," but regulatory changes "are likely to have far greater impact on industry growth, pricing, consumer behavior and merchant relationships than the DOJ suit alone."
The CEO maintained that the lawsuit is about steering customers between different credit products, specifically between American Express and Visa and MasterCard. "Merchants are already allowed to offer a discount or incentive for customers who pay by cash, check, or debit card, but few do," he said. While it costs merchants slightly more to accept American Express, "it seems questionable whether merchants would disrupt the transaction at the point-of-sale and risk a potential loss of customer goodwill for the sake of a relatively small differential."
"For me, the core issue of the lawsuit is a simple one. It's about consumer choice and the right of a customer to select the card they want to use at the point of sale."
Chenault also said he thinks the government's suit rests in part on a claim that American Express has market power, which he denied. "Merchants choose to accept Amex because they understand the value we bring them _ higher spending customers, our superior service, and our marketing expertise to help them expand their business." He maintained the end result of the lawsuit could be merchants pushing more customers to use Visa and MasterCard, or in effect, increasing the market share of the larger card networks.
In terms of regulatory changes, Chenault said new credit card regulations, a provision in the financial overhaul bill that limits charges to merchants for processing debit card transactions and new limits on debit overlimit fees combine to be "the most significant in the history of the card industry."
But each will have a different impact on the market. The credit card law has changed how banks charge interest rates, he said, while simplifying terms for consumers and making disclosure more transparent. "And it forced some issuers to stop practices that were misleading or, at best, very hard for customers to understand."
It also may cause some banks to limit access to credit "to all but the most financially secure borrowers" and increase the overall cost of borrowing.
"It's made the traditional mass-market credit card business less attractive," Chenault said.
The credit card law affects American Express less because many of its cards are charge cards, where the balance must be paid each month, rather than bank-issued credit cards that allow balances to revolve from month to month.
The provision regarding debit card fees and the limits on overdraft fees do not affect Amex directly because it doesn't issue debit cards. But charge and credit cards do compete with debit, and the end result of the laws could mean merchants try to encourage customers to use debit cards.
Finally, he said, the creation of the Consumer Financial Protection Bureau will "represent continued uncertainty until its approach and regulatory program are clarified."
Taken together, Chenault said he thinks the various regulations and laws will have the effect of changing some banks' traditional card businesses. "Some issuers will focus on low-cost, no-frills products. Others will focus on full-service, high-value alternatives, and this segmentation among issuers is already under way." Debit cards may end up changing as well, with the potential for rewards to disappear and costs to rise.