Sideswiped

Two weeks before bitterly contested regulations regarding its debit cards went into effect in the fall, MasterCard threw a party in New York City. The company wanted to trumpet its commitment to the newest technology in payments, including a role in the about-to-launch Google Wallet, which lets a handful of eligible people buy chewing gum or bottled water by waving their smartphones around. Executives at the event were determinedly festive.

One of MasterCard's guests of honor was Tony Zazula, a thin, fastidious man whose jeans and rock-band T-shirt set him apart from the sober suits. Zazula became an unlikely spokesman for the banking industry when he stopped taking cash at his West Village restaurant, Commerce, a few years ago. As other merchants marshaled their decades of resentment at the card system into a successful legislative attack, Zazula helped with the defense-not of the fees, but of the value that cards provide over cash for small businesses like his. He appeared in publicity materials for MasterCard and Visa, and extolled the virtues of cards in stories that ran in The New York Times and The Wall Street Journal.

His praise only goes so far, though. Presiding over the canapes table at the MasterCard event, Zazula said that while he was still happy with Commerce's cards-only policy, he welcomed the coming regulations on debit. Like every other business that accepts plastic, Zazula's restaurant pays a fee when its customers pay by card. With a cap on what banks could charge for debit interchange, each swipe of a debit card would, on average, cost Zazula about half the amount it used to.

"It needs to go down," Zazula says. "These fees are exorbitant."

Merchants and payments companies have long had a symbiotic existence. Zazula appreciates this more than most. He gave up on cash in 2009, seeing as how the vast majority of his upscale clientele already paid with cards anyway. "I weighed it against the cost of handling all that cash-or that little bit of cash." He initially worried that people having a drink before sitting down to a plate of Commerce's roasted sweet potato tortelloni or pork schnitzel with fingerling potatoes might miss the ritual of throwing a $20 bill on the bar. But he says "no one is really that upset about it." Certainly Zazula isn't. He says eliminating the need for daily trips to the bank to make deposits and saving "all that time spent at the end of the night reconciling the $20 difference no one can find" made it well worth the extra expense to steer the cash portion of his business onto the card networks.

So when a cards evangelist like Zazula complains about excessive fees, it's a good indication of the fissures in the relationship between banks and merchants. Both sides say tension is at an all-time high, after a months-long fight in Washington over swipe fee regulation drew blood-and an estimated $5 billion in annual revenue-from banks and their card network partners.

"It's going to take a long time before that relationship can be repaired," says Richard Hunt, the head of the Consumer Bankers Association, who calls the retail industry's support of debit-card fee regulation "so disingenuous. ... They owe everybody an apology."

Retailers are far from apologetic, though. Preserving the debit card swipe fee reforms included in the Dodd-Frank Act was No. 1 on the Retail Industry Leaders Association's list of its top legislative accomplishments of 2011, when Republicans in Congress were threatening to repeal parts of the 2010 bill. Among RILA's top legislative priorities for this year? Extending swipe fee reform to credit cards.