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AmEx Resolves Twin Class Action Lawsuits

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Shares of American Express Co. (AXP - Free Report) or AmEx rose 2.2% in the last two trading sessions, following the announcement of the settlement of its two significant antitrust class action litigations with merchants in the U.S. involving card transaction fees. The settlement apparently partly mitigates financial risk for the company and helps retain market confidence in the stock.

One of the lawsuits was filed in 2006, while the other one dates back to 2004. Both the lawsuits alleged that AmEx manipulated the company policies in a way that prohibited the merchants from promoting the use of cheaper cards with lower processing fees.

Higher processing fees and promotion of higher-charged cards by such card giants have burdened merchants, consumers and the government in the past. Each time consumers swipe their credit card, the merchant is bound to pay a fee.

Accordingly, AmEx has agreed to amend its policies so that merchants can now charge the surcharge on its debit, prepaid and credit cards to cover their costs. However, this surcharge should not exceed the industry benchmark. Subsequently, merchants can now offer incentives to customers to use debit cards, cash or checks instead of credit cards that carry high swipe fees, thereby eliminating extra costs.

Moreover, the company will pay attorneys’ fees for both cases of up to $75 million. Additionally, AmEx will recompense the merchants in the class action as much as $2 million and will provide another $2 million of funds to notify merchants regarding the terms of the settlement.

Nonetheless, AmEx will continue to keep the surcharge or swipe fee intact. The company has also stressed on prohibiting merchants from attaching extra fees and steering customers away to other forms of payment adopted by competitors.

Although these modifications are liable to make the merchants powerful, the consumers may still have to bear the brunt of higher fees from the card network, directly or indirectly. However, AmEx awaits the final approval from the court. Earlier this month, card giants, MasterCard Inc. (MA - Free Report) and Visa Inc. (V - Free Report) , also settled similar litigations.

More Unresolved Lawsuits

While multiple lawsuits still lay unresolved at AmEx, one of it would be worth considering. In 2010, the U.S. Department of Justice (DoJ) sued the company along with MasterCard and Visa, alleging breach of antitrust law and promoting high-charge credit cards.

Both MasterCard and Visa have settled issues by allowing higher discounts even on less expensive cards and reducing merchant discount rates. However, AmEx has been fighting the litigation as it believes that such government remedies are complex, non-beneficial for consumers and will only lead to an anti-competitive environment, thus helping the two dominant players who already enjoy over 70% market share.

Since AmEx’s operations are based on a spend-centric business model, we believe the outcome of such lawsuits have mostly been detrimental to the company’s financials and operations. Hence, we anticipate risk from these multiple lawsuits in future as well, although we remain at the periphery at present to notice further developments and the impact of the final settlement.

While AmEx presently carries a Zacks Rank #2 (Buy), both Visa and MasterCard bear a Zacks Rank #3 (Hold). However, a stock worth considering in the financial sector is Euronet Worldwide Inc. (EEFT - Free Report) , sporting a Zacks Rank #1 (Strong Buy).

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