CHESSNOID

Last week, I mentioned that the Department of Justice is investigating American Express.  People want to know if it is in regards to Amex increasing credit card rates, lowering credit limits, or canceling the credit cards altogether.

I found a snippet that summarizes what the DOJ is looking into and why this is affecting Amex’s stock price adversely.

Investor Guide:

The current DOJ anti-trust suit is focused on the opaque process of merchant processing fees. Prior to the suit, merchants were not allowed to reveal processing fees for different credit cards to customers. This means that even though the merchant would incur a heavier charge from one credit card over another, they would be unable to change their final product price. Under the new DOJ rules, merchants would not only be able to reveal these different charges to the customer, but offer substantial discounts in accordance to the credit card used. This would benefit lower cost cards such as Discover and harm higher charge cards like American Express. In addition, American merchants will soon be able to also offer cash-only prices, which will be substantially lower than credit card prices and potentially change spending habits across the country. This system of cash versus credit price is already used in many countries, and will inevitably hurt the bottom line of credit card companies across the board. U.S. Attorney General Eric Holder said of the new assault on the credit card companies, “We want to put more money in consumers’ pockets, and by eliminating credit card companies’ anti-competitive rules, we will accomplish exactly that. The companies put merchants and their customers in a no-win situation.” American Express spokesman Michael O’Neill replied, “Our attitude is that is bad law, bad economic policy. We don’t think there is anything in it for consumers.” In addition, the recently passed Fin Reg Bill has placed additional restrictions on merchant card fees, and will further cloud the future of big plastic in the American marketplace.

The unending barrage of bad news for these companies has sunk these stocks – Visa and Mastercard were sold for weeks on end until their recent recovery on brighter macroeconomic prospects, as was American Express, until its recent defiant move against the DOJ. Yet American Express may have an ace up its sleeve with its diversified portfolio. Whereas Mastercard and Visa earn their main revenue from a single network of swipe fees, thus bearing the brunt of most of the recent legislation, American Express has partnered investments in corporate and travel entertainment as well as a recovering financial arm which can help keep the blood flowing should times get tough for big plastic. In the previous quarter ending in June 2010, the company’s revenue tripled over the previous year due to increased spending and a recovering consumer environment. The company is set to report earnings on October 19, and while the numbers may be even better than the previous quarter, current legislative concerns are sure to weigh on the stock price for the time being.