AmEx’s Big Lawsuit: A Power Play Through the Banks?

American Express Co. Inc.'s decision to include eight banks as defendants in the lawsuit it filed earlier this week against Visa USA Inc. and MasterCard International Inc. may be a power play to weaken the bank card networks by widening policy differences between the networks and their major members, some observers say. “The only outcome they're looking for is intensifying tensions between the card associations and the banks in hopes this will get more banks to envision life without Visa and MasterCard,” says Gwenn Bezard, a payments analyst with Celent Communications. He reasons the banks may be annoyed at AmEx for filing the suit but will upon reflection blame the bank card associations and their policies for causing it. Tensions have arisen from time to time in recent years between the associations and some of their members over such issues as branding and the associations' decision last year to pay $3 billion and cut signature-debit interchange rates to settle a massive lawsuit brought by Wal-Mart Stores Inc. and other retailers. In its announcement of the suit, AmEx said it is suing the banks?which include J.P. Morgan Chase & Co, Bank of America Corp., Capital One Financial Corp., U.S. Bancorp, Household International Inc. (a unit of HSBC Holdings PLC), Wells Fargo & Co., Providian Financial Corp., and USAA Federal Savings Bank?because they were board members of the card networks during the time the networks excluded AmEx from issuing cards with banks in the U.S. This exclusionary rule, which also applied to Discover Financial Services Inc., was struck down by a federal court in 2001, a decision the Supreme Court let stand last month after Visa and MasterCard appealed. Discover filed suit against the card associations immediately, alleging their rule had harmed the issuer, and AmEx filed its own widely expected action on Monday in U.S. District Court for the Southern District of New York. AmEx's suit seeks unspecified damages for business it says it lost as a result of the exclusionary rule. Its announcement says the damages “could total in the billions of dollars.” Unlike Discover, however, AmEx is also suing major banks. This comes at a time when it is courting Visa and MasterCard issuers to issue cards on its network, leading some observers to regard the inclusion of the eight banks as defendants as a risky and puzzling gambit. In January it signed on MBNA Corp., a program it put into motion after the Supreme Court decision. AmEx says it will compensate MBNA for any costs it may have to incur as a result of its suit. The decision to name the other banks, though, could weaken the associations if the banks ultimately blame them for bringing it on, Bezard says. “It puts pressure on Visa and MasterCard [through the banks],” he says. It could also hand AmEx negotiating leverage with the banks, he adds, as AmEx approaches them to issue cards on its network. “They're gambling they can negotiate to drop the suit if they can get the issuer on board,” he says.