As Congress and the White House examine consumer protection rules for the banking industry, merchants hope they'll also look into another aspect of the card game -- the increasing fees retailers are forced to pay in exchange for accepting credit card payments.
In recent years, small mom-and-pop stores have teamed up with big box retailers to battle the major credit card networks, Visa and MasterCard, and the nation's largest banks, over so-called "interchange fees" -- charges that a merchant must pay to have an electronic transaction processed.
In the U.S., merchants pay 1.8 percent of every credit or debit card transaction to have the payment cleared. Last year, interchange fees cost them roughly $35 billion, according to The Nilson Report, a newsletter that tracks card payments. It's the second-highest expense for many businesses, after labor costs, and some merchants say that the fees hurt, especially when they're struggling to survive the recession.
Interchange fees are now the central issue in what is being called the largest private antitrust litigation in U.S. history.
Five years ago, Mitch Goldstone, an independent owner of scanmyphotos.com, an online photo service company, was struggling to keep his Southern California shop afloat. He began scrutinizing every expense and revenue stream of his small business. When he realized that an already costly expense -- interchange fees - was increasing, he was livid.
"It got to the point where I had just a few employees and things were looking really bleak," said Goldstone. "Interchange fees were the one expense that was going up, no matter what I did."
In 2005, Goldstone (PDF) and more than 30 other merchants filed antitrust lawsuits in U.S District Court against Visa, MasterCard and several of their member banks, accusing them of breaching federal antitrust law by fixing the prices on interchange fees.
Goldstone accused Visa and MasterCard of working in collusion with their largest member banks to set interchange rates. Together, he said, they have 80 percent of the market and, in the age of plastic, most merchants can't do business without them.
"The people who used to sit on Visa's board of directors are now on MasterCard's and vice versa. Visa and MasterCard's rates always go up together," said Goldstone. "I need to make sure my customers are satisfied or I can lose their business. That's why it's a monopoly, because their costs keep going up and we have no choice but to pay."
MasterCard responded to Goldstone's allegations by saying, "Simply put, it's not true." In an e-mail statement, a company spokesperson said they set their interchange rates "independently" and "compete vigorously" with Visa.
Visa said interchange rates are, "set in a dynamic and competitive marketplace." And if the merchants prevail in court, consumers will end up paying more for goods and services.
A Lack of Transparency
One of the problems with interchange fees, say merchants, is that the rates vary depending on the type of card used in the transaction, making it very difficult for businesses to know what they'll end up paying at the point of sale. Debit cards have cheaper interchange fees than credit cards. Rewards cards have the most expensive fees.
Another problem, say critics, is that unless you're an industry insider, it's almost impossible to figure out how they come up with the interchange rates, how much money is being made, and where it all goes.
"We don't have a lot of data on this," said Adam Levitin, an associate law professor at Georgetown University, who writes frequently about interchange. "There is no data from Visa and MasterCard, and the best way to make policy is to do it on an informed basis."
Levitin said interchange fees are a tool to ensure continued growth of the card networks -- the revenue from them pays for the rewards programs that entice consumers to use plastic. "Interchange pays for the honey that lures in the flies," he said.
Credit Card Companies Say Merchants Benefit
Trish Wexler, spokesperson for the Electronic Payments Coalition, the trade association representing the credit card industry, said interchange fees are necessary because they cover the risks of operating a card program -- risks like defaults and fraud. And merchants also benefit, said Wexler, because shoppers who pay with credit cards tend to spend more at the cash register.
"The bigger the card system gets, the merchants and consumers are ultimately benefiting," said Wexler. "The increased use of cards in America has led to the financial success of merchants."
Reforming Interchange Laws
There are signs that interchange fees may face tougher regulation as Congress tackles reform for the financial and consumer credit industries. Soon after President Obama signed the Credit CARD Act of 2009, members in both houses of Congress went to work on legislation that would rewrite the interchange rules. There are currently three bills that aim to reform those fees.
One bill is Representative Peter Welch's (D-Vt.). He took interest in interchange fees, he said, in the summer of 2008 when gas hit $4 per gallon. His bill, H.R 2382, would allow merchants to surcharge different payment methods, meaning that merchants could charge more for consumers who pay with credit cards, in order to make up for the cost of interchange fees, or they could decline higher-cost rewards cards.
"The owners of the mom-and-pop gas stations were saying they paid more in interchange for a tank of gas then they were making themselves," said Welch. "I looked into it and learned that that was the business model of the credit card companies. I was aware that they would rip off individual consumers, and then I started to see that the merchant was in the same position."
Two other bills, one put forth by Rep. John Conyers (D-Mich.) and another by Sen. Richard Durbin (D-Ill.), would allow merchants to form collective bargaining groups to negotiate interchange rates with credit card companies, and require greater disclosure of those fee rates. In Durbin's bill, failure to reach an agreement would require each side to submit a proposal to a three-judge panel to determine a fair market interchange rate.
Reform Could Hurt Small Businesses
Trish Wexler, with the Electronic Payments Coalition, believes that interchange legislation wouldn't just hurt credit card companies and banks, but also many small businesses by giving big-box retailers an advantage over their mom-and-pop competitors.
"This is nothing but a grab for market share by big-box retailers," Wexler said. "If they can reduce their costs by even a fraction they can find ways to squeeze out small retailers on pricing."
Harry Alford, president and CEO of the National Black Chamber of Commerce, said his organization opposes any legislation that reduces interchange revenue for banks. While it may look like lowering interchange fees would help small businesses, Alford believes that, in the end, it would only exacerbate the credit crunch.
"Our culture relies on credit," he said. "There is a cost to the money. It's not going to be free."
Mitch Goldstone, who filed the antitrust lawsuit, disagrees. He contends that in looking at other countries, such as Australia, that have regulated interchange, there's no evidence that reducing fees negatively impacts the economy.
"It's a scare tactic," he said. "It will squeeze the banks' profits. It will not squeeze credit."
Paul Gackle is a freelance reporter and a recent graduate of the UC Berkeley Graduate School of Journalism.