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Chains take on credit card fees

In an antitrust lawsuit, supermarket and drug store retailers have accused VISA USA of price fixing what it charges them to process transactions.

By MARK ALBRIGHT
Published July 16, 2005

Consumers aren't the only ones riled about credit card fees. Retailers are wrangling over them again too.

Six of the nation's biggest supermarket and drugstore chains Thursday lodged a federal antitrust, price-fixing and restraint of trade suit against Visa USA for the ever-increasing fees the credit card industry slaps on retailers.

Clearly the gloves are off in what been a simmering commercial dispute over so-called interchange fees that retailers pay Visa for processing credit and debit card charges. On average the fees approach $2 on a $100 purchase. In some cases small retailers are paying as much as $2.90 after Visa raised its rates in April. The suit contends the fee this year costs the average U.S. household $230, including those who pay by cash or check cash, as more commerce shifts from paper to plastic.

As the second suit of its kind filed in a month, the escalated hostilities underscore that the retail industry's 2003 out-of-court truce over credit/debit card transaction fees is broken. The 2003 dispute ended with Visa forking over $2-billion and MasterCard $1-billion to a consortium of retailers who filed it.

The latest suit charges that Visa USA, an association of 14,000 banks that runs a credit/debit card processing network, charges far more than the job costs. The suit claims Visa and its bank members use their monopoly power to force retailers to accept all-or-nothing bundles of services that drive up card fees despite the supposed savings of advances in technology.

Visa counters that retailers are charged the fee because they benefit from a more convenient payment system. It maintains that the rates, which vary by size of the company, are set in a competitive marketplace.

Visa processes about 52 percent of U.S. credit and debit card transactions, according to the Nilson Report, while the Visa network handles 65 percent of merchant transactions put on plastic.

There's a lot of money at stake. The National Retail Federation estimates retailers paid about $17.4-billion in interchange fees in 2004, almost double the $9.4-billion in 1998. A recent Morgan Stanley report estimates the weighted average for Visa and MasterCard fees rose to 1.75 percent in 2004, up from 1.58 percent in 1998. Morgan Stanley estimated the average rate will rise to 1.86 percent by 2010 even as the number of transactions continues to rise. That would generate $32.4-billion in interchange fees.

The amount has been skyrocketing as credit card purveyors prod consumers to put more small transactions on plastic. That drives the number of transactions, which drive the fees. The spread of so-called premium cards - those with redeemable rewards points - are a huge factor.

Such cards come laden with higher interchange fees for retailers. Visa has a goal of putting premium cards in the hands of 40 percent of cardholders by 2010, almost triple the 15 percent in 2002.

Because interchange fees are buried inside the purchase price of goods and services, each side accuses the other of trying to figure out a way to gouge consumers.

"The credit companies already earn huge profits from interest," said Tracy Mullin, president and chief executive of the National Retail Federation. "There is no justification for them to double-dip into consumers' pockets."

"This is just 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," countered Paul Cohen, vice president of Visa USA. "Visa will fight to protect consumers from this attempt to shift costs."

The suit was filed by supermarket giants Albertsons Inc., Kroger Co., Safeway Inc. and Ahold U.S.A. Inc. and two of the three biggest drugstore operators, Walgreen Co. and the American units of Montreal-based Jean Coutu Group, which operates the Eckerd and Brooks pharmacy chains. The suit does not ask for specific demages.

Kroger expects its annual interchange fee bill this year will have risen 215 percent to $350-million from what it was five years ago.

Visa raised the chain's rate 11 times in that period. Meanwhile, 60 percent of the supermarket's customers put their purchases on plastic in 2004, up from 50 percent in 1998.

Mark Albright can be reached at albright@sptimes.com or 727 893-8252.

[Last modified July 16, 2005, 00:24:14]