he battle over bankcard interchange is heating up. The National Retail Federation (NRF), which represents companies owning 1.4 million retail outlets nationwide, warned that "interchange is out of control." The Food Marketing Institute (FMI) called the latest round of Visa U.S.A. and MasterCard International interchange increases a "bad April Fools' joke." FMI represents the lion's share of U.S. grocers; its 1,500 member companies operate 26,000, or three-quarters of all retail food stores in the United States.

The complaints were loud enough to stir the interest of mainstream media outlets like "The Wall Street Journal." The newspaper reported "Merchants Balk at Higher Fees for Credit Cards" in its April 12, 2005 edition.

Rising Interchange Might Benefit Checks

At grocery stores run by SuperValu Inc., the changes in interchange pricing are expected to result in cost increases up to the "seven-figure" range, said Jackie R. Snyder, Senior Business Consultant at the firm. SuperValu owns more than 1,500 grocery stores, including those operating under names such as Cub Stores, Farm Fresh Markets, Save-A-Lot and Shoppers Food Warehouse. It reports annual sales of $20.2 billion. Snyder described interchange as her company's "number one concern." As a result of rising interchange, she said, "checks are a preferred method of payment for us."

Mallory Duncan, NRF Senior Vice President and General Counsel, suggested other retailers might also favor checks over cards. "Retailers are seriously looking at their alternatives," he said.

Crazy Quilt of Changes Benefit High-end Card Issuers

As reported in past issues of The Green Sheet, both Visa and MasterCard adopted new interchange rates, effective April 1, 2005. Unlike past increases, this time around they have less to do with the risk of a transaction going bad and more to do with card types as well as the size and type of the retail establishment that accepts a card payment.

Visa, for example, has hiked interchange on transactions initiated with rewards cards. It's also charging higher rates on credit card payments at restaurants and at all but the largest grocery chains. MasterCard is charging more for transactions on its upscale cards.

Interchange is the base amount paid to card issuers by transaction acquirers for each card payment processed; it's set at a percentage of the total of each ticket. The actual fees paid by merchants, known as the merchant acceptance fees, also take into account payments for processors, ISOs and any other organizations involved with a transaction.

Feeling the Pain

The April price hikes are part of a trend toward increasing interchange revenues in a maturing payment card market.

FMI's President, Tim Hammonds, complained in a statement that interchange on credit cards has increased five times since 1994, rising from 1% of the transaction amount to as much as 1.65% + $0.10, in the case of the Visa Signature credit card. Hammonds claimed that with the latest increases, grocers pay almost twice as much money to accept card payments as flows to the typical supermarket's bottom line.

FMI data indicate that net profits for the supermarket industry, overall, were 0.88% last year. NRF's Duncan likened the moves by Visa and MasterCard to "a hidden tax increase for American consumers."

"Credit card companies have become more than greedy, and are using these fees to increase their own profits far more than to provide any legitimate service to retailers or consumers," he said.

According to a recent report from Morgan Stanley, owner of the Discover card network (In April the company announced plans to spin off Discover), the weighted average for Visa and MasterCard interchange rose from 1.58% in 1998 to 1.75% in 2004. That report also predicted that card interchange would grow to an average 1.86% by 2010.

In 1998, card interchange cost retailers $9.4 billion, according to Morgan Stanley. By 1998, the interchange tab totaled $17.4 billion; the company projects interchange costs will reach $32.4 billion by 2010.

Grocers Lash Out at Visa

The FMI is particularly irked by Visa's price hikes. "The increase is yet another example of Visa asking retailers and consumers to fund marketing and rewards programs that benefit only a few customers, while being subsidized by everyone else," Hammonds said.

"Increases of this magnitude are unconscionable, especially when transaction costs are declining and plastic is becoming the predominant form of payment in the U.S. In every other aspect of business, when costs go down, fees go down. The card issuers apparently don't think the laws of competition apply to them."

NRF's Duncan added: "Banks are on the verge of killing the goose that laid the golden egg."