he war of words over fees that merchants pay to accept bankcards continues, and each side insists the other is out of touch with marketplace realities. Some have gone so far to urge the Federal Reserve Board to step into the fray. Chances of the Fed taking action are slim: Nothing in the Fed's charter grants it authority to mess with interchange pricing.

The Fed was established in the early 1900s to create economic stability. At the time, banks would often discount the face value of deposited checks drawn on other banks. Convinced this practice contributed to economic instability, one of the Fed's first actions was to step in and force banks to clear all checks at par, or face value. Many make comparisons between then and now, but those at the Fed to whom I've posed the question say it's not the same. Merchant groups argue that the trickle-down nature of pricing means interchange has a discernable influence on the prices consumers pay for goods and services. Merchants say this translates into a negative economic impact.

"The time has come for the Fed to reassert its stewardship over the U.S. payment system," said Lloyd Constantine, lead attorney in the so-called Wal-Mart settlement, at a conference held in early May by the Federal Reserve Bank of Kansas City. (The Wal-Mart settlement resulted in the de-coupling of MasterCard International and Visa U.S.A credit and debit card acceptance and hefty reductions in the interchange rates assessed merchants for offline debit card payments.)

However, in a recent letter to U.S. Representative Deborah Pryce (R-Ohio) addressing this same topic, Fed Chairman Alan Greenspan said it's not part of the Fed's job description. "The Board's regulatory authority does not currently encompass regulating the interchange fees established by payments networks for offline and online debit and credit card transactions," Greenspan wrote.

Another option is for merchants to take their arguments over interchange to the Federal Trade Commission (FTC) or the Department of Justice (DOJ), two federal agencies that have had some success stirring up things in the payments acquiring space.

Finding Common Ground

MasterCard and Visa, the card Associations that set interchange, aren't likely to voluntarily make the kind of changes Constantine is pushing. To hear some of these people speak, the brouhaha over card interchange is nothing more than a case of greedy lawyers lusting after money.

"Today, I am not going to hide behind the niceties of economic arguments because we've consistently won those and repeatedly justified what is self- evident," said Noah J. Hanft, MasterCard's General Counsel, in a speech at the Kansas City Fed conference the day after Constantine's remarks. "Make no mistake about it. 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."

The truth probably lies somewhere between these two extremes: the need for government action and a desire to blunt the litigious disposition of the credit/debit card space.

However, the reality of the situation is that unless the two sides in this economic debate can come to some kind of understanding (dare I say resolution?), it will get a lot tougher to sell bankcard services to the retail merchant community.

Parsing the Rhetoric

As word of the latest round of Visa and MasterCard interchange hikes has spread, the rhetoric over interchange has intensified. One of the more common quips from ISOs and merchant level salespeople is something like this: "When merchants balk, I tell them I have no control over pricing; it's set by Visa and MasterCard."

As the debate over bankcard interchange grows more public, merchants might not be so willing to let front-line salespeople off the hook.

I've heard plenty from merchants the last several months grousing about what some refer to as "banks' card fees." In public forums and private conversations alike, merchants pull cardholders into the debate, insisting that these card-acceptance fees aren't only a cost of doing business, but also a cost that's ultimately borne by consumers.

"Merchants have known for years that banks' interchange fees are a hidden tax that is driving up the cost of merchandise and services for American consumers every day," said Mallory Duncan, Senior Vice President and General Counsel at the National Retail Federation, the retailing sector's largest trade association. "We welcome the fact that the Federal Reserve is concerned enough to hold a conference focusing on this issue, and hope that this is a sign of action to follow,"

Duncan said. "American consumers and the American economy deserve protection."

Duncan chairs a newly formed coalition of trade associations representing businesses that accept credit and debit cards. The group, called the Merchants Payments Coalition, estimates that card interchange collected from its members accounts for about one-quarter of all interchange fees charged in the United States. The coalition wants the U.S. government to take a cue from other parts of the world, such as in Australia and Europe, where government intervention has and continues to drive down interchange.

"The United States has the highest credit card interchange fees of any industrialized country," said Stuart Zlotnikoff, Senior Vice President at the National Grocers Association and a member of the merchants' coalition. "Paradoxically, costs should be less in the United States due to our greater economies of scale. Yet interchange rates have continued to increase, even while the costs of processing, borrowing and fraud have declined. The international precedents for cost-based interchange rates are persuasive and demand serious review by U.S. public authorities."

In his remarks at the Kansas City Fed conference, MasterCard's Hanft also invoked the concept of taxation. He had this message for those he accused of "vilifying" bankcards: "Stop trying to grow your hidden tax. Find something else to do with your time. MasterCard provides an incredible service to the global community. It is one that is cherished by consumers; it should be celebrated, not regulated."

But which consumers did he mean? Certainly not the consumers of credit and debit card acquiring services.

"The banks' card fees are killing us," said the owner of a boutique shop I recently visited. "I'd rather take cash, even checks, than pay their fees anymore."

While the Fed might lack jurisdiction, and the FTC and DOJ have not yet been pressed into action, the marketplace reality is that merchants are growing restless over interchange. They do have other options. Although declining to accept credit or debit cards is probably not the best solution, some small merchants say they are forced to do just that.

Another option is for retailers to create their own card networks. The recent decision by Morgan Stanley to spin off its Discover Financial Services card operation could trigger this outcome. Only time will tell.

Patti Murphy is Contributing Editor of The Green Sheet and President of The Takoma Group. E-mail her at patti@greensheet.com .