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American Express: Federal Court Favors Antitrust Lawsuit

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The Federal Court has ruled in favor of American Express Co. (AXP - Free Report) , which was accused of prohibiting merchants from promoting the use of credit cards that come with a lower processing fee. The decision reverted a lower court’s 2015 ruling which stated that such restrictions violated the federal antitrust law. It also stated that the higher fee charged by the company goes toward providing superior benefits to its card holders.

This implies that American Express will be able to stop merchants from steering customers to use cards that charge them lower transaction fees.

The allegation dates back to 2010, when the Department o Justice and 17 states of the U.S. had sued the company, along with two other dominant players of the industry, MasterCard Inc. (MA - Free Report) and Visa Inc. (V - Free Report) , alleging a breach of antitrust law and manipulation of policies in a way that prohibited merchants from promoting the use of credit cards with a lower processing fee.

The friction between American Express and merchants stemmed from a higher swipe fee changed by the former. This led to hidden costs for merchants in the form of higher prices.

Although MasterCard and Visa had long settled issues by allowing higher discounts on cheaper cards and reducing merchant discount rates, American Express has been fighting the litigation as it believed that such government remedies are complex and non-beneficial for consumers and will create an anti-competitive environment. The company also justified its position by reinstating that its ‘premium’ card services warrant higher processing fees.

However, the DoJ accused American Express of being guilty of imposing card fee practices that are unhealthy and detrimental to both market competition and merchants.

Though the Federal Court has backed American Express, the DoJ can appeal the ruling at a later date.

Merchants have been financially stressed by card networks, who charge over $50 billion as card-interchange fees annually, as per government records. Credit card interchange fees have been gaining a lot of attention not only in the U.S. but also in Europe and Russia, where MasterCard and Visa have faced regulatory challenges and conformed to new compliances in order to operate in foreign territories.

This ruling has bought a bit of relief to the company which was bothered by a number of headwinds such as termination of contract with its major client Coscto this year and loss of other co-branding deals with JetBlue.

American Express carries a Zacks Rank #3 (Hold). A better-ranked stock in this space is CIT Group Inc. (CIT - Free Report) , which saw a 1.2% rise in its 2016 Zacks Consensus Estimate to $3.22 earnings per share over the past 60 days. The stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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