Retail groups and others aired their thoughts about the fees credit card companies charge merchants when consumers pay with plastic during a hearing on “the law and economics of interchange fees,” held by the Congressional subcommittee on Commerce, Trade and Consumer Protection. This has long been an issue of contention among many of the nation’s largest retail groups. But, rising prices at the gas pump helped bring the subcommittee to hold this hearing.

Without issuing an opinion on fees, in an opening statement, Rep. Cliff Stearns of Florida said, “because it is a percentage, the size of the interchange fee increases with the amount of the transaction. Therefore, as we saw in the aftermath of the hurricanes last year, if a merchant charges his customers more, the associated increase in the interchange fee will correspond to the price increase.

“This becomes a bit more complicated when a merchant makes a certain margin based on the current cost of a bulk commodity, like gasoline, and the interchange fee starts to eat into that margin when the costs of that product go up,” Stearns continued. “This is basic economics and, at least in theory, the terms associated with this scenario should be transparent and agreed to freely.”

This struck a special chord with Henry Armour, president and CEO of the National Association of Convenience Stores (NACS), a retail class that he says “sells the majority of the gasoline purchased in the US.” Armour had previously testified to the full committee regarding gasoline prices and the increasing amount of money that credit cards take “out of every gallon of gasoline purchased,” he said in reiterating that claim during this hearing.

Armour and the National Retail Federation (NRF) noted that in fall 2005, the House of Representatives passed legislation, which is still pending in the Senate, that would have required a Federal Trade Commission investigation into interchange’s role in rising gasoline prices.

“Skyrocketing bank fee income reported last summer was not due to any new or greater sophistication or marketing innovations on the part of bank executives,” said a consumer advocate, Edmund Mierzwinski, consumer program director of the US Public Interest Research Group (PIRG), who also represented the Consumer Federation of America at the hearing. The “skyrocketing income,” he said, “was simply due to the spike in gasoline prices, which provided banks with massive returns on their long-term strategy to use legally questionable market power and anti-competitive practices to collect billions of dollars in excessive interchange fees from merchants accepting credit or debit cards.

“Because many consumers, and perhaps even more consumers, as gas prices skyrocketed, used credit or debit cards at the pump, bank income from fees imposed on merchants simply spiked,” Mierzwinski said. Quoting from a an article in the Washington Post, he said, “a year ago, when gas prices averaged $1.87 (a gallon), banks involved in credit card processing made about $12.5 million a day on fees. . . .Today, with prices averaging $2.75 nationally, the credit card companies are raking in $18.4 million a day. That is $183 million more a month, or nearly $2.2 billion on an annual basis in extra money paid to the nation’s banking giants just because of rising gasoline prices.”

Interchange doesn’t just apply to gas purchases, but to all purchases made with Visa or MasterCard credit or debit cards, which, according to Armour, make up 90% of the US credit and debit card business. The cost, he and the NRF point out, is passed on to all consumers, whether or not they use plastic at the checkout. “The average family pays $331 in interchange and related fees every year,” Armour said, estimating that it adds up to $27 billion a year.

The NRF puts the total at nearly $40 billion in what it calls “secret fees that credit card companies force merchants to pass on to consumers annually.” The hearings, the federation said in a statement, “could lead consumers to demand that credit card companies disclose and reduce the fees.” The fees generally range from between 1.6% and 2% of the purchase price of a product.

Mallory Duncan, NRF SVP and general counsel, said, “consumers know about the interest they pay and late charges and over-limit charges. What they don’t know is that credit card companies are collecting a secret checkout fee every time they use their cards.”

Speaking for the other side of the argument, Karen Kerrigan, president and CEO of the Small Business & Entrepreneurship Council, a Washington DC-based non-profit advocacy organization, urged Congressional caution. “Government or regulatory intervention often carries the possibility of unintended consequences,” she said.

She acknowledged that small business owners don’t like paying interchange fees and said, “they would much prefer that these costs were lower or non-existent, similar to other costs, such as electricity and rent.” Yet, she added, they “recognize that government regulation, whether directly or through litigation, has the potential to cause dislocation in a system that has generally served them well.

“Those prescribing price controls on interchange fees, have been remiss in not acknowledging the benefits that electronic payments have provided.” Among those she listed are increased sales, rapid and certain payment, enabling of internet commerce, and reduced worries and losses in respect to theft issues. “A reduction in the use of cards,” she concluded, “would not be a positive development for small business owners.”

Kerrigan also presented testimonials from her group’s members to the subcommittee. Kim Adamsn Graham of the Adams Pecan Co. in Union Springs, AL, said her company sells pecans all across the country over the internet. “If the federal government sets an arbitrary limit on the fees card companies can charge, I fear it may make them less interested in promoting the use of their cards to new and existing customers. Fees are a part of their profit structure and they need to make a profit to say in business. Just as I am free to set what I think is a reasonable price for our pecans, credit card companies should be able to set their own prices, too.”