WASHINGTON -- Credit-card companies have always taken their cut when a customer uses plastic, part of the cost of doing business electronically.
But a surge in the fees has sparked an intense dispute, with small merchants complaining that the higher charges are forcing them to raise prices and, in some cases, threatening to drive them out of business.
With the two sides at loggerheads, Congress is preparing to step in on behalf of merchants and consumers. The issue is an inviting one for the Democrats who control Capitol Hill and are receptive to regulating consumer issues.
Credit-card executives insist that the fees are competitive and justified by the increasing number of perks their systems provide, such as identity-theft protection and airline frequent-flier miles.
But experts say that, despite such arguments, the prospect of congressional action could lead to change.
Credit-card companies "may change their practices somewhat, but only if they believe a speeding train - Congress - is about to run over them," said Elizabeth Warren, a law professor at Harvard University who has testified before Congress about the fees.
The charges, called interchange fees, vary depending on the type of credit or debit card, purchase and merchant. Most come as a flat fee of 10 cents to 25 cents per transaction, plus a percentage of the sale, about 2 percent on average. Thus, a $100 purchase would include about $2 or slightly more in fees, which the credit-card company shares with the bank that issued its card and the bank that processed the purchase for the merchant.
The average U.S. family pays the fees indirectly through higher prices, about $300 a year, according to the Merchants Payments Coalition. The Washington-based group, which represents 2.7 million businesses, estimates that merchants' interchange costs more than doubled to $35 billion last year from 2001.
Credit-card companies' profits from interchange fees rose 33 percent from 1990 to 2004, according to a report by the Government Accountability Office.
Sen. Christopher J. Dodd of Connecticut, a Democratic presidential hopeful and chairman of the Senate banking committee, plans a hearing on interchange fees and is working on legislation to limit credit-card fees and billing practices, his aides said.
"The recent substantial increases in interchange fees significantly raises the cost of engaging in our economy - both for the American consumer and business," Dodd said recently. "Clearly, they need to be examined in greater detail."
Other congressional leaders have promised a push to limit interchange fees, including Sen. Patrick J. Leahy, a Vermont Democrat and chairman of the Senate Judiciary Committee; Iowa Sen. Charles E. Grassley, the Republican Party's ranking member on the Senate Finance Committee; Rep. Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee; and Republican Sen. Norm Coleman of Minnesota.
Coleman, speaking to a panel of bank chief executives during a recent Senate subcommittee hearing, summarized the concerns of many small businesses, saying, "Interchange fees can significantly impact the prices charged by merchants and retailers, many of whom already operate on extremely thin profit margins."
In a January survey of about 2,000 adults by polling service Harris Interactive, 32 percent had heard of interchange fees. Once the fees were explained to them, 91 percent said Congress should compel credit-card companies to better inform consumers about interchange fees.
Some countries regulate the fees. Australia imposed new caps on interchange fees last year. Britain reduced the fees after analyzing the costs they were supposed to cover. As a result, the fees are lower in both countries - 0.7 percent in Britain and 0.6 percent in Australia.
In the United States, credit-card companies have boosted their revenue from interchange fees in several ways in recent years. Along with slightly increasing fee rates, they have raised the number of high-fee cards in circulation and heightened incentives for cardholders to pay for purchases by credit card rather than cash or check.
Last year, consumers used credit cards at 25 million businesses nationwide, according to Chase Bank USA. Merchants say the cost of processing credit cards should be negotiable, like cash and checks.
Credit-card executives say it would be impractical to negotiate fees with the different merchants that use their systems.
"We think the interchange model is the most efficient," said Rhonda Bentz, vice president at Visa USA.
But K. Craig Wildfang, a Minneapolis attorney at Robins, Kaplan, Miller & Ciresi who represents merchants in one of about 50 antitrust lawsuits pending against credit-card companies over interchange fees, said, "There are plenty of ways to operate a network without millions of bilateral negotiations."
Credit-card executives say merchants can always choose to stop accepting their cards - Bentz, the Visa executive, noted that the delicatessen in her company's headquarters in San Francisco didn't accept Visa.
But Warren, the Harvard Law professor, said that most small businesses, especially online merchants, rely on electronic payments and that it would hurt their businesses if they decided not to accept credit cards.
"They see themselves as trapped: If they tell their customers no, they may lose them, but if they take it, they lose 2 percent to 3 percent on a sale" if they don't mark up prices.
Noting that this creates a dilemma, especially for small businesses that operate on small profit margins, Warren added, "The merchants who are hit the hardest have almost no leverage with the credit-card companies."
Molly Hennessy-Fiske writes for the Los Angeles Times.