Consumer advocates say rising interchange fees are a serious problem, costing cardholders and merchants a total of at least $25 billion each year. Last month, dozens of protestors demonstrated against rising interchange fees outside the Javits Center in New York during the National Retail Federation's annual convention.

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The class-action complaint, being addressed in U.S. District Court in the Eastern District of New York, alleges that Visa, MasterCard, Bank of America, Citibank, Bank One, Chase Manhattan Bank, JPMorgan Chase, Fleet Bank, Capital One and other major banks are violating U.S. antitrust laws and stifling competition by colluding to fix rates for interchange fees. The plaintiffs include numerous retailers and some of the nation's largest merchant groups, such as the National Association of Convenience Stores. (Read also, Retail group sues MasterCard, Visa.)

"The United States has one of the highest interchange fees on the globe, which is surprising, considering that our banking system is more technologically advanced than systems in most other countries," said attorney K. Craig Wildfang, a partner with Robins, Kaplan, Miller & Ciresi LLP, a national law firm representing the plaintiffs in the class-action lawsuit. "Merchants have little or no ability to negotiate with Visa and MasterCard for lower interchange fees, which is a violation of our nation's antitrust laws. Regulatory authorities in many other countries have recently adopted measures to reduce interchange fees, but in the United States, it will take action by the courts to accomplish this."

The interchange war's latest skirmish occurred Jan. 27 in New York when a federal judge denied MasterCard International's motion to disqualify Wildfang. MasterCard argued a conflict of interest existed because Wildfang had served as special counsel to the U.S. Dept. of Justice during highly publicized antitrust litigation in 1993-96 which involved interchange fees.

The ruling to deny MasterCard's motion is "another important victory" for merchants and consumers, said plaintiff Mitch Goldstone, president and chief executive of 30 Minute Photos Etc. and www.30minphotos.com, an online boutique photo service. (Goldstone and his business partner, Carl Berman, write The Credit Card Interchange Blog.)

"It is good news to me and the other plaintiffs that MasterCard is resorting to drastic measures such as attacking our lawyers instead of disputing the facts of the case," Goldstone said. "The credit card companies and banks have been deafeningly silent about the case, which I think proves that they know the facts speak for themselves."

Rising use of plastic raises alarm

Goldstone said the fees are "unjust," especially for online vendors who "have little recourse but to accept the fees" because the nature of their businesses requires they accept plastic. On small-order transactions, most of the sale is paid to the banks for processing the transaction.

That's particularly alarming, he adds, since consumers are increasingly using plastic for small-purchase transactions. (In 2003, transactions of $5 or less totaled $1.32 trillion, according to a study by TowerGroup.)

"Interchange fees are just a way that credit card companies squeeze merchants to enhance their revenue stream," Goldstone said.  "There is absolutely no need for these fees to be so high, and without anything to control them, the banks and the credit card companies continue to find ways to escalate the fees."

The plaintiffs' first victory occurred Sept. 29 during a multidistrict litigation hearing in Asheville, N.C. A seven-judge panel agreed to consolidate about a dozen interchange-related cases and transfer them to U.S. District Court, instead of granting the credit card companies' motion to move the cases to Georgia.

"They are using every stall tactic they can to postpone a ruling," Goldstone said. "I think MasterCard wants to delay the lawsuits because it could cause problems for their planned $2.5 billion IPO." (Read also, MasterCard expected to go public.)

Interchange: Mounting concern for credit card companies

Banking experts say interchange complaints represent the credit card industry's most-crucial challenge since 2003, when Visa and MasterCard paid $3 billion to settle a class-action lawsuit spearheaded by Wal-Mart and Sears - a suit that alleged Visa and MasterCard forced retailers to accept debit cards. (Read also, from PizzaMarketplace.com, Cash action settlement.)

Now politicians are getting in on the war.

On Jan. 6, Washington Sen. Ken Jacobsen (D-Olympia) introduced a bill to the Washington State Legislature that would prohibit a merchant's financial institution from charging a credit/debit cardholder's FI interchange fees that total more than 1.5 percent of the transaction.

What's Important Banking experts say interchange complaints represent the credit card industry's biggest challenge since Wal-Mart and Sears filed their suit in '03. Merchants argue that lowering or abolishing interchange won't adversely affect commerce. Card companies argue that without interchange, the international trade system could collapse, hurting merchants and consumers.

MasterCard and Visa issued written statements regarding the lawsuit. (MasterCard also has posted information on its Web site.)

In a Jan. 27 statement issued by MasterCard International, the company says it "believes these lawsuits are without merit, and are a clear demonstration of merchants wanting the benefits of accepting payment cards without having to pay for the value of the services."

The company goes on to say that "merchants pay an extremely small amount for the phenomenal value they get from accepting MasterCard cards.

"MasterCard does recognize that merchants want lower costs for all aspects of their business, and has been working closely with the merchant community to find solutions that satisfy them while maintaining the benefits consumers receive from having the enormous choice of payment options available today."

Also echoed in MasterCard's statement is a comment made by Visa USA vice president Paul Cohen, who said last year that the class-action suit is merely "another in a series of attempts by some merchants to receive all the value of electronic payments, while shifting their normal costs of doing business onto consumers."

The card companies contend that taking plastic isn't much different from taking cash, where the bottom line is concerned.

"When you look at the whole picture and consider your costs of accepting cash and check, it's a myth that there is no cost - there absolutely is a cost to accepting cash," Visa spokeswoman Randa Ghnaim told Self Service World in January. (Read also, from Self-ServiceWorld.com, Card use increases for small purchases.) 

To further equalize profits, Visa lowered the rate it charges merchant-account providers on small purchases, cutting the bottom-line cost for retailers, Ghnaim said. Those changes have resulted in a 45 percent boost for Visa's small-ticket program since October 2003.

Interchange in the U.S.?

The key question in the interchange war, experts say, is whether the United States will follow other countries' lead by lowering or abolishing interchange fees. Recent efforts to reduce and/or regulate interchange rates have been successful in other countries. In Canada, interchange fees no longer exist.

The class action suit could have far-reaching impact. The Green Sheet reported in August 2005 that "the card organizations may be forced to adjust their existing interchange practices and create a uniform rate system for all retailers." (Read also, from The Green Sheet, Retailers File Another Interchange Lawsuit.)

And Wildfang, the plaintiffs' attorney, said he's not deterred by the decision of a California federal judge last fall to dismiss a similar case involving merchant complaints about interchange fees (Kendall v. Visa U.S.A. Inc. et al). In that case, the judge ruled that merchants, as indirect recipients of the fees, do not have standing to file a claim under antitrust laws.

The judge found that card associations set interchange fees for acquiring FIs, and the acquiring FIs in turn pass fees along to merchants.

The size and scope of the current class-action suit, Wildfang said, adds weight to the plaintiffs' complaint.

"I think that the courts will take these concerns seriously, especially with having the strength of the trade associations," he said. "Prior litigation, which challenged narrow aspects of Visa and MasterCard's collusive conduct, has proven ineffective at restraining the increase in credit card interchange fees; and as regulatory action is unlikely, class action litigation is the only alternative that offers merchants any prospect for relief from high and rising interchange fees." 

Merchants say lowering or alleviating fees would not negatively impact trade.

"We're not opposed to a cost-based interchange," Goldstone said. "The problem is the banks got greedy and raised the rates just to make more money. If interchange was actually cost-based, it would effectively disappear. In Australia, the interchange rate is less than half a percent. And Canada is a great example: Business is thriving even though the interchange rate is zero."