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How much should we incentivize card usage?

on August 12, 2014

In case you missed it, the Department of Justice filed a lawsuit in 2010 against American Express that challenges the practices of Amex (and many credit card companies,) where the card companies prohibit merchants from giving incentives that encourage customers to use cheaper forms of payment. These anti-steering rules prohibit merchants from explicitly asking or incentivizing customers to use cheaper (to them) methods of payment. The most prominent example in the article: Alaskan Airlines was prohibited from mentioning their Visa-card partnership with Bank of America as a lower cost alternative to American Express.

There is more to the dustup between American Express and merchants over fees and the ability of merchants to offer discounts, incentives and information to encourage the use of less costly payment methods than meets the eye.  This is a battle where a number of different factors have been left unsaid.  First, while it seems anti-consumer for card networks to prohibit merchants from using incentives to encourage consumers to use cheaper forms of payments, this battle revolves around the use of company-issued credit cards.  The problem for merchants like Alaska Airlines is that 60% of the company paid travel is paid with American Express Corporate Travel Cards.  American Express has clearly been leveraging its corporate card market share to protect its own interests.  Is this anti-competitive or just good business?

Second, the battle ignores substantive differences in the depth and breadth of information available from different card networks to different participants from merchants and cardholders.  There are significant differences in the richness of the data and someone needs to pay for it.  This difference in data depth and breadth is particularly important to many companies who issue travel cards to their employees.

Third, the battle ignores other differences such as the incentives card networks offer cardholders to use their cards at different merchants.  Cash back rewards incentives are some of the most popular marketing ploys credit card companies have at their disposal. The card networks have always structured merchant and cardholder programs that are designed to encourage use.  The Alaska Airlines Visa through Bank of America uses airline miles as its incentive.

 Merchants are free to participate with card networks that provide the greatest value to these merchants businesses.  And cardholders should be free to use any card network based on each network’s acceptance.  In the end, why not let the market dictate?