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Retailers, banks battle over credit-card fees

Lawmakers weigh legislation allowing them to negotiate fees.

(Page 2 of 2)

Visa, MasterCard dominate market

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Interchange-fee rules are set by banks that issue Visa and MasterCard, which control more than 80 percent of the credit-card market, according to the NRF (American Express has a different fee arrangement). Merchants must accept these terms or not allow the cards. Though the rules let merchants offer discounts to customers who pay with cash, they cannot assess surcharges for credit-card purchases.

That leaves merchants with few options, says Curtis Arnold, founder of "Are they just going to absorb the fees? Probably not – they're going to raise the costs of goods and services," he says.

"There's no question – if 50 percent of [a merchant's] transactions are on plastic and interchange fees average 2 percent, the average cost to everybody is 1 percent higher than it should be," Mierzwinski says.

The NRF charges that only about 13 percent of an interchange fee goes toward processing a transaction, "with most of the rest going to the cost of card issuers' rewards programs and profits," according to an NRF news release.

MasterCard disputes the notion that interchange fees are unreasonable. "Merchants are trying to position this as a consumer issue. But it's the cost of doing business for them. Every cost of business is probably reflected [in prices]," says Sharon Gamsin, a MasterCard spokeswoman.

Ms. Gamsin says governmental oversight, rather than enabling a fair market fee price, would limit the interchange-fee competition that already exists between Visa and MasterCard.

"We use them as a way to entice more issuance of cards and more issuance benefits merchants.… Is a government agency going to be able to understand and replicate the way we compete with each other?" she asks.

Gamsin adds that credit cards often allow people to spend more money than cash, which benefits merchants.

"I don't know about you, but when I go to Bloomingdale's, I spend more with my credit card than I would if I could only spend cash," she says.

Fees addressed down under

In Australia, when government regulation cut interchange fees, merchants' fees went down, Gamsin says. Despite levying surcharges to swipe, there's no evidence Australian merchants lowered prices, a MasterCard press release says.

Mierzwinski testified before Congress in May that Australian reductions actually "led to reduction of card costs, greater innovation, and greater competition leading to lower interest rates."

Fee changes, legislated or otherwise, could benefit consumers, other policy experts say.

Adam Levitin, associate professor of law at the Georgetown University Law Center, says two policy options deserve attention. One would ban rewards programs altogether. Bundling points and rewards with purchases distorts the card's purpose, he says, which is to allow consumers to make payments and build credit. By encouraging people to spend more, rewards programs lead to "greater use of a credit card," which can hurt the unbanked via price increases and lead to debt levels others cannot afford.

Another option would be to allow merchants to charge a small fee for using a credit card – which would help the unbanked in particular. "It seems only fair. If I'm getting a benefit, why should others be paying for my cash back? I'm getting a discount not available to a poor person," he says.

For now, Shearman of the NRF says, it's consumers who pay. "Credit card companies go so far as to say that [the charges are between] consumers' banks and merchants' banks. In reality, they're putting their hand into the pocket of the consumer and taking the fee out."