News : Cheap Credit Cards

New laws could require negotiation over per transaction fees

Date : Tuesday, June 17, 2008

Stan Jaskowski doesn't mind swiping customers' credit cards.

Without the ability to process payments by plastic, Jaskowski knows his shop, Suburban Tire in St. Charles, would suffer.

"It's how the majority of my customers pay for the work, by credit card," Jaskowski, store manager, said.

He, like most other retailers, just would prefer if his customers paid in cash.

Nationwide, retailers, individually and through their industry associations, have launched an effort to combat what they see as unfair fees charged by the major credit card companies.

At the center of the storm is the so-called interchange rate, a flat, non-negotiable fee charged by the card issuers each time a consumer uses a credit card to make a purchase.

The rates typically average around 2 percent of the purchase price.

And that can add up to big bucks, retailers say.

Last year, the U.S. credit card industry racked up $42 billion in interchange fees.

And this year, that number is expected to be even higher, as more and more consumers switch to plastic as their primary means of payment, Jeff Lenard, spokesman for the National Association of Convenience Stores, said.

That rising cost, in turn, has led to higher prices for consumers and reduced profit margins for merchants, Lenard and representatives of the National Retail Federation have said.

The NRF estimated that the average American will pay $400 this year because of interchange fees.

In 2001, Americans paid an estimated $159 in interchange fees, the NRF said.

In the last four years, retailers, including a collection of well-known names from Wal-Mart to Walgreens, have filed suit against companies like Visa and Mastercard, alleging violations of federal anti-trust laws.

And last month, a concurrent lobbying effort in Washington resulted in the introduction of bills in the U.S. House and Senate that would, in essence, compel Visa and Mastercard to negotiate their fee rates with individual retailers.

Should individual negotiations fail, the law would empower federal arbitrators to set the rate.

"Since the start, they (credit card companies) have set the rates and written the rules," Lenard said. "We just want a seat at the table."

Credit card companies, however, argue that federal regulation would stifle a vibrant market and harm consumers.

In testimony before a House subcommittee last month, Josh Floum, general counsel for Visa, defended the interchange system, saying the system offers benefits to consumers and retailers alike.

"That over seven million U.S. retailer  locations accept Visa clearly indicates that the benefits of accepting Visa exceed the cost to most retailers," Floum said.

He said the legislation could hurt smaller financial institutions that cannot afford to reduce rates.

And, laws allowing federal regulators to set interchange rates could ultimately curtail benefits to consumers, while allowing merchants to maintain prices at current levels - a scenario he said has already played out in Australia after that government moved to regulate interchange.

While the fate of the bills remains uncertain, local merchants said they were unsure of whether the move would benefit them.

While retailers like Wal-Mart and other large chains would likely be able to negotiate lower rates, Jaskowski said his shop might be too small to merit such consideration.

"In the long run, it might be good for all of us," he said. "But by no means do we generate the kind of volume that they would look at and say, 'Oh, we've got to give them a better rate.'"

Paul Lencioni, assistant general manager at the Blue Goose Market in St. Charles, said interchange fees impact prices of the goods he sells.

And, he, too, wanted to see what direction the discussion takes before he offered an opinion on the pending legislation.

"We'd like to pay less, sure," Lencioni said. "But with so many people paying with credit cards right now, it's just a cost of doing business."