BusinessReport.com

The $4.39 gallon of milk you’re grabbing off the shelf at LeBlanc’s Food Stores might be keeping a secret.

Some 4 to 7 cents of its price has nothing to do with the price of dairy products or even rising shipping rates from higher energy costs. It’s a charge U.S. merchants pass on to consumers to cover “interchange fees” or what the industry’s two main players—Visa and MasterCard—charge to process retailers’ credit card transactions.

“The fee is spread over all items and you pay it whether you pay with cash, credit or check,” says Randy LeBlanc, co-owner of the eight-store grocery chain. “The fee to handle credit cards has gone from totally insignificant to one we itemize on our income statement. Now it’s a major expense to us.”

Consumers’ growing passion for plastic might be getting pricier than they realize. Of the $26 to $32 bill shoppers average at LeBlanc’s grocery store, 1%—or 26 to 32 cents—is for interchange fees. Multiply that times every trip to the grocery store or to any merchant, and it adds up. For

Visa and MasterCard, those pennies are projected to add up to $48.8 billion this year.

That’s at the heart of the mounting fight in Congress over House Bill 5546—also called the Credit Card Fair Fee Act of 2008—which was introduced March 6 by U.S. Rep. John Conyers, a Michigan Democrat.

Louisiana groups, including the state Retailers Association [LRA] and Associated Grocers have joined a national effort called the Merchants Payments Coalition to rally national support. The Louisiana Bankers Association, along with numerous other state and national groups, is opposing it. Visa and MasterCard deferred comment to the Electronic Payments Coalition, which also is opposing the bill.

Jessica Elliott, director of government affairs with the 1,000-member LRA, says fees have skyrocketed in the last decade, and they want more transparency and competition to lower fees.

“We believe it’s a misguided bill,” says Joe Gendron, director of government relations with the Louisiana Bankers Association. “Right now, the fees charged to merchants are the result of the free-market process.”

If adopted, H.B. 5546 would create an appointed three-member committee of merchants and representatives of card companies and banks to negotiate fees. The group also would decide which transactions the fees will cover. Disputes would be decided in binding arbitration by a panel. Resulting fees would remain in effect three years and could be renegotiated at that time depending on costs and market conditions.

“It’s just another form of government regulation,” says Gendron, who adds merchants have the option not to accept Visa or MasterCard. “There could be undesirable consequences. All you know for sure is it’s not the free market at work.”

Agreeing with Gendron, the Electronic Payments Coalition states a government rate-setting board imposing price controls on the payments system could “never match the ability of the free market to determine the most appropriate price for services.” It also states consumers will see no economic benefit and calls the legislation a “thinly veiled attempt by members of the Merchants Payments Coalition to lessen their own costs of doing business.”

According to MasterCard, “It would be inappropriate for the U.S. government to set prices and negotiate the terms of contracts for private commercial entities.” The company further states there is no evidence price controls will result in savings for consumers.

But J. H. “Jay” Campbell Jr., president and CEO of Associated Grocers, which represents 180 store owners, says fees are already artificially high.

“The major credit card companies charge a rate not based on economic reality,” he says. “They can charge whatever they want because there is basically no competition. In other countries, the rate per transaction is less than half of what it is in the U.S.”

With Visa and MasterCard having more than 80% of the market, Campbell says they really have no competition so they control the fees, which nationally average 1% to 1.5% per transaction. These fees have steadily risen over the past five to 10 years, which he contends have become a major cost to businesses.

The Merchants Payments Coalition says the fees have steadily grown over recent years and are fast approaching the $50 billion mark.

“Today, these fees are an increased cost of doing business that is being passed on to the consumers, and there is no financial justification for the increases,” Campbell says. “The cost of providing the service has not changed all to support or justify the fee increases. The providers are taking advantage of the reality that they have no competition.”

He maintains merchants are dealing with rising fees along with other inflationary costs sweeping the country like wage pressures, energy costs, insurance and other business costs that raise prices to consumers.

LeBlanc also questions the lack of competition in electronic payment services, calling it an expense he can’t shop for because the banks have a monopoly on it.

“It’s affecting our bottom line first and foremost,” LeBlanc says. “The cost of handling credit cards is a key ingredient in the price we put on our products.”