Retailers' rebellion against bank card industry pricing could take forms even more militant than the pending antitrust lawsuit against MasterCard and Visa, retail industry executives warned last week.

With the card associations' interchange rates-the basis for the processing discounts that banks collect from merchants-set to increase next month, resentment is rising in the retailing community. It has been simmering for years, has boiled over in the lawsuit challenging the prices charged on debit card transactions, and prompted several caustic comments during a panel discussion at the annual Star System member meeting in San Diego.

The hostility could extend even to regional electronic funds transfer networks such as Star and its merger partner Honor, which have had friendlier relations with retailers because their transactions cost retailers considerably less than those for MasterCard and Visa cards.

The critics warned that if the regional debit and automated teller machine networks too closely follow MasterCard's and Visa's price hikes, they, too could provoke a backlash-perhaps even involving the formation of independent, retailer-initiated payment systems.

"Financial institutions want higher interchange from credit," said Steve Minihan of Arco Paypoint Electronic Payment Systems Inc., a payment processor for the petroleum company and other merchants. "If the (regional) networks go to higher interchange, they will run into trouble with the retailers."

Much of the retailing industry is already unified on the federal antitrust case in U.S. District Court for the Eastern District of New York, frequently called the Wal-Mart suit because of its largest plaintiff. The suit challenges the pricing system for MasterCard and Visa debit cards and the associations' "honor all cards" requirement that prevents stores from being selective in accepting cards carrying the international brands.

Speaking at the Star meeting Friday, Mr. Minihan, president of the Paypoint venture, said the retailing industry might rally around legislation that might "get to the heart of the issue" better than litigation.

Joy Nicholas, director of applied technology for the Food Marketing Institute, a co-plaintiff in the Wal-Mart case, raised the possibility that retailers could "build their own networks" to circumvent or bypass those owned by banks.

She pointed out that Nordstrom, a Seattle-based department store company, owns a bank that could be used in this way. Major stores or chains such as Target are big enough to do something similar, she added.

Ronald V. Congemi, president and chief executive officer of Star System and of its new holding company, H&S Holding of Maitland, Fla., acknowledged that the banking industry risks being "hoist with its own petard" by its proclivity to raise interchange rates. He said he has firsthand knowledge of how serious retailers are about fighting back.

"I've seen RFPs," he said -requests for proposals for alternative processing arrangements that could use the automated clearing house system for transaction settlements.

Beyond that, none of the participants in the merchant panel discussion led by Mr. Congemi-others were John Enright, manager of cash and credit for Target Stores, and Frank Jack, treasury operations manager, Long's Drug Stores-elaborated on the possibility of going their own ways.

But Mr. Enright said: "It has gotten that expensive. We have to look at what other options we have."

Like Mr. Minihan, Mr. Enright raised the possibility that the heretofore favored regional networks could go too far with their own pricing changes.

"The cost differential made the difference for us" in deciding to accept on-line debit payments," Mr. Enright said. "It paid for itself very quickly.

"As the network gap closes, that window of opportunity will go away," because retailers would lose the economic justification to deploy devices for entering personal identification numbers and bearing other costs related to on-line debit processing, he added.

"As volumes go up, transaction costs should go down," Mr. Enright said, articulating his industry's objection to the direction of point of sale economics.

Regional debit networks have long underpriced MasterCard and Visa interchange reimbursements-the percentage of a sale that the merchant's bank pays the cardholder's bank. But any credit card interchange increases give the debit networks leeway and incentive to raise their rates to make their programs more attractive to card issuers.

For instance, a $40 sale on an off-line debit card bears an interchange fee of 48 cents. If the consumer used a regional ATM card, the fee would range from 3 to 10 cents, depending on the network.

Despite the spleen vented at the Star System event, the combatants' positions were not absolute. The retailers reiterated their historical support for the regional networks, mainly lamenting the possibility that further consolidation could limit choice and competition.

"The more networks we have, the more competition we have," Ms. Nicholas said. "The networks assure that both the issuer and merchant sides' interests in a transaction are covered."

She also praised the networks' roles in developing technologies that could deliver longer-term benefits, such as smart cards, converting checks to automatic debits, or wireless POS terminals.

"The networks play a huge role in keeping on-line debit viable and competitive," Mr. Minihan said.

"Competition is critical," Mr. Enright said. "Visa and MasterCard need that competition."

Meanwhile, Mr. Congemi expressed support for the principle, if not the execution, of interchange rate policies. They provide a mechanism for cost- sharing.

But the retailers kept coming back to what they viewed as an incongruity: that as technology advances and computing and telecommunications costs come down, POS transaction fees keep going up.

The economics are "all upside-down," Mr. Enright said. "These price increases are totally backward. There is something wrong with that equation."

Among the "drastic measures" he said he could envision would be to allow the costs of various payment methods to "flow through to consumers." The higher costs of credit cards would then be evident and there might be more debit or cash transactions. Under current Visa and MasterCard rules, no payment method is supposed to be favored in this manner.

Mr. Enright also argued in favor of fixed per-transaction fees rather than interchange percentages, which can mount significantly on bigger- ticket card payments.

Ms. Nicholas conceded that companies should be fairly compensated: "We want stable organizations and fee structures ... but with what we know about the Internet and other technology, transactions should be getting cheaper."

Mr. Enright asked, "Where is the added value to the merchant" of higher interchange rates? That's hard for us to see."

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