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UNDUE DUES

Credit card companies and merchants tussle over fees

By Ed McKinley

Ken Sykes, a cordial and well-spoken convenience store owner, sounds cheerful even when he’s talking about something he claims to despise: the credit card interchange fees that merchants pay when customers use plastic to make purchases. Because of those fees, he sometimes loses a penny on a gallon of gas, while Visa or MasterCard makes a nickel.

“It’s crazy,” said Sykes in an amiable tone of voice during a phone interview from the Exxon Super Store he operates in suburban Jackson, Miss. But that amiable tone does not change the plain meaning of his words about fees: “I hate them.”

Many share his disdain. Together or singly, dozens of angry merchants, and trade associations representing thousands more, filed at least 39 lawsuits this year against Visa International, MasterCard U.S.A. and about 40 major banks that issue credit cards.

Nearly all the plaintiffs seek to reduce the interchange fees they say are more than double what retailers pay in Australia and Europe. Many allege in their suits that the card associations — as Visa and MasterCard are called — violate antitrust laws by working together to set fees.

“Visa and MasterCard are joint ventures of essentially all the banks in the country, so the banks get together and set the interchange rates by sitting around a table and calling themselves the Visa board of directors or the MasterCard board of directors,” said K. Craig Wildfang, a partner in the Minneapolis office of the law firm of Robins, Kaplan, Miller & Ciresi.

Wildfang is lead attorney in the suit that many consider this conflict’s first salvo, fired late in the spring on behalf of 30 Minute Photos Etc., an online photo service based in Irvine, Calif., and several other small retailers from around the country. In September merchant disgust with interchange fees penetrated the national consciousness when Wildfang filed another suit against MasterCard and Visa. This time the plaintiffs included the National Association of Chain Drug Stores, the National Association of Convenience Stores, the National Community Pharmacists Association and the National Cooperative Grocers Association. In October Publix Super Markets filed a suit of its own.

Meanwhile, Ahold USA, Albertsons, Eckerd Corp., The Kroger Co., Maxidrug, Walgreen Co. and other major retailers had already sought legal action during the summer, some on their own, some acting jointly.

MasterCard and Visa maintain that the suits lack merit, a position they have been content to communicate mainly through press releases. However, Noah J. Hanft, MasterCard’s general counsel, took the opportunity to lambaste the plaintiffs and their lawyers while speaking at a Federal Reserve Bank of Kansas City conference in Santa Fe, N.M., in May.

“All of the hype and attention focused on interchange is nothing more than a highly effective public relations effort by class-action lawyers to get higher fees for themselves, and by a subset of merchants seeking lower fees,” Hanft said, according to a copy of his prepared remarks.

The conference was part of an ongoing Fed study of interchange fees, and more government scrutiny could be in store. In October the House of Representatives passed the Gasoline for America’s Security Act of 2005, which directs the Federal Trade Commission to investigate these fees as they relate to gas prices at the pump. The bill was in the Senate at press time.

Congress is reacting to consumer outrage over gasoline prices, but vendor complaints about interchange fees are nothing new.

Part of the impetus for the current lawsuits may have been a $3 billion settlement Visa and MasterCard made with Wal-Mart Stores and others in 2003, says Scott Strumello, an associate at the Westbury, N.Y.-based Auriemma Consulting Group, which specializes in the card industry. The card associations also agreed to lower some interchange fees and to stop requiring stores to accept debit cards.

Because these concessions were based on volume, Strumello says, some of the smaller retailers may see the settlement as primarily benefiting the larger ones, especially Wal-Mart. “These opinions,” he concluded, “may have contributed to the current spate of suits.”

Whether or not that is so, what the unhappy merchants observe going on overseas can only rankle them further. According to published reports, recent changes in Australia and Europe have cut rates from about 0.95 percent of each sale to about 0.55 percent. U.S. fees average about 1.75 percent, though they vary according to volume and retail category. These rates, which according to published reports were up already from a weighted average of 1.58 percent in 1998, rose again in April.

“Rates are set slightly higher for retailers with lower credit card volume, and slightly lower for those with higher volume,” said Strumello.

The fee for gasoline purchases, for example, comes to 1.75 percent, plus an additional 10 cents per transaction. When gasoline is selling for $2.80 a gallon, as it was recently at Sykes’ convenience store in Mississippi, the fee amounts to about 5.5 cents a gallon on a 20-gallon fill-up. When his markup slips to 3 or 4 cents, he is losing on every gallon customers buy using plastic. Sykes says he dreams of making a dime on a gallon of gas but rarely succeeds.

What is more, as the price of gas soars, the interchange fee rises in tandem, despite the fact that the card issuers and their association perform no additional work and take on no additional risk, says Jeff Lenard, director of public affairs at the National Association of Convenience Stores, which has headquarters in Alexandria, Va.

The percentage of customers paying with cards was rising as the price increased, Lenard says, adding to what was already the third-highest expense for convenience store owners, after labor and rent.

A rapid run-up in medicine prices has created another windfall for cards, says John Rector, senior vice president and general counsel of the National Community Pharmacists Association, also located in Alexandria. He says the cost of the average prescription is now $55, up from $34 four years ago.

In other businesses, customers sometimes return merchandise for a refund, but the merchants do not get the interchange fee back, association officials say.

Rector and other plaintiffs say interchange fees average $235 a year and constitute a hidden tax on consumers — though merchants cannot always shift the cost to customers.

The card groups say there are reasons for all this. Visa and MasterCard set the interchange fees, but the money is paid to the banks that issue the cards, wrote Sharon L. Gamsin, MasterCard’s vice president of global communications, in an e-mailed response to SCT. Cutting the interchange fees, she says, could force the banks to curtail services to cardholders or to charge them higher annual fees.

Further, says Gamsin, the Reserve Bank of Australia keeps interchange fees artificially low there. And because the U.S. card business differs from that of Europe, direct comparisons of rates are misleading, she says. In any case, Visa and MasterCard set their interchange fees lower than the markup American Express assesses on the cards it issues, she points out.

Hanft said at the Kansas City Fed’s conference that interchange fees have been ruled legal in court cases and that the card associations should set the fees, not the courts or federal regulators. “The merchants pay what is an extremely small price for the phenomenal value they get from accepting MasterCard,” he said. The issuers say credit cards have transformed the American retail landscape, and allowed consumers to increase their spending through the instant credit approval they get every time they swipe their cards.

Paul Cohen, a Visa vice president of corporate relations, addressed pricing in a written statement released by the company to the media. “While we respect that businesses want to find ways to lower their normal costs of doing business, merchants have many options to improve their economics that do not include costly and time-consuming litigation,” the statement said.

Collusion or delusion?
Pricing aside, the plaintiffs allege there have been antitrust violations too, and the pharmacist association’s Rector likens the card groups to a cartel.

“They’re unregulated, and there’s no transparency,” he said. “There’s a strange coincidence in terms of the rates.”

MasterCard denies that there has been any collusion. “MasterCard has not, and never will, discuss or in any way coordinate its interchange fees with Visa,” said Gamsin. “MasterCard and Visa compete vigorously for all aspects of our customers’ business.”

Just the same, MasterCard announced late this summer it will make a public stock offering, which analysts say would lessen the appearance that it is a consortium of banks. The company declined to comment about the IPO, citing the required quiet period, but reports state it will take place next year.

Of course, none of this is any comfort at all to convenience store owner Sykes, whose “amiability” and profitability alike continue to be put to the test.

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