At Dizzy’s Diner in Brooklyn, N.Y., you can order the macaroni and cheese with Rice Krispies topping for $7.45, but you’ll have to pay cash: The restaurant stopped accepting credit cards early this year after its owners learned how much interchange fees were cutting into profits.

And thus, Dizzy’s became yet another symbol of merchants’ frustration with credit card interchange fees, a feeling so strong that a group of them — some large, some small — banded together to sue Visa U.S.A. and MasterCard International. While the protests of the larger merchants get more ink and command more attention from Visa and MasterCard — Wal-Mart Stores Inc., for example, drew headlines last week for its decision to stop accepting transactions processed through Visa’s Interlink network — the small merchants are also making more and more noise.

The retailers’ antitrust case is now a class action involving all four million merchants that take Visa and MasterCard (who will be sent opt-out notices later on in the process, in case they choose not to be party to the litigation), but it began with 17 named plaintiffs. Seven of these large retailers or trade groups, including Wal-Mart, The Limited, the National Retail Federation, and Sears Roebuck & Co. But the other 10 were small merchants, most of them with only one store. They included a coffee shop in Philadelphia, a gym in Birmingham, Mich., a small music store in New York, and a dentist in Florida.

Lloyd Constantine, the lead attorney for the merchants, said that when the lawsuit was filed five years ago, few merchants understood much about interchange fees. Small merchants were less likely to know about them than larger ones, in part because the fees can be hard to figure out from a processor’s statement. Particularly opaque, Mr. Constantine said, is the fact that the fees for signature-based debit transactions are higher than PIN-based debit transactions, which is the topic at the heart of the litigation known as the Wal-Mart case.

“Only a small number of very large, sophisticated merchants understood how destructive and costly this was both to them and their shoppers,” Mr. Constantine said.

After the Wal-Mart case was filed and because of the publicity it generated, he said, more merchants began paying attention to their processing statements. Many, he said, realized for the first time that they had been accepting offline debit cards. “It was a wake-up call,” he said. Today, a number of merchants still do not understand the fee system, or bother to scrutinize whether or not it is fair, Mr. Constantine said.

Kelly Presta, a spokesman for Visa U.S.A., said that while it benefits merchants to accept card payments, since customers tend to spend more when using cards, merchants are never obliged to take them.

“From time to time, merchants, mostly small ones, will drop out. No one is required to take the product. But many merchants don’t understand that cash and checks carry their own problems. With checks there are issues with collection; cash, with handling and theft. But those are less visible” impediments than paying interchange fees, he said.

And American Express spokesman Tom Sclafani said his company asks small merchants to call if they are having difficulties paying the fees. Mr. Sclafani said businesses that handle less than $5,000 of American Express charges a year can pay a flat monthly fee of $5 if the transactions are done electronically. “We would encourage small merchants to talk to their American Express representatives if they have questions. We have a program designed to make life easier, understandable, and affordable for them,” he said. As of the second quarter, American Express’s average merchant fee (for large and small merchants) was 2.68%.

The parties in the Wal-Mart case are still waiting to see if the Second Circuit Court of Appeals in New York reverses Federal District Court Judge John Gleeson’s class certification. Until the Appeals Court decides (it heard Visa’s and MasterCard’s appeal in February), the District Court will not allow plaintiffs’ attorneys to give notice to the four million members of the class. The notification process usually takes several months, during which members of the class can opt out of the suit.

Mr. Constantine, who called rising interchange fees “the single greatest increase in prices” that merchants have faced over the past several years, said that large merchants generally cannot risk turning away card business. “There are merchants who don’t accept certain kinds of cards, but those are few and far between,” he said. “I don’t know of a significant merchant that accepted Visa and MasterCard, stopped, and could still continue. There have been a couple of famous examples like Nordstrom, and K-mart tried once. But every time they were forced to come back,” he said.

The change at Dizzy’s Diner occurred last winter, when the managers inserted a statement in the menu that explained the new policy and directed people to an automated teller machine two blocks away. Benjamin Hoen, one of the owners, began explaining to customers that Dizzy’s wanted to put its revenue towards the quality of the food, not to credit card companies.

“At first customers would say, ‘How can you do this to us?’ “ Mr. Hoen said. “But the majority of our customers are regulars. We are a neighborhood business, and now they know just to bring cash when they come.”

The diner opened in 1999, and after a year in business, Mr. Hoen and his business partner began scrutinizing their balance sheet. Their goal was to trim $1,500 a month from costs. “It was mid-winter, when business is slower. We were trying to save wherever we could,” he said.

A statement from their bank, which settled all of the restaurant’s card transactions, showed that in a typical month they were paying several hundred dollars in fees on the transactions. American Express Co. was charging 3.5% of the total sales figure, and Visa and MasterCard around 1.6%.

Mr. Hoen said despite the fact that a quarter of their customers paid by credit card, they decided to terminate their merchant account with the bank and stop taking all card payments — not just American Express, as some small merchants do to economize. Dizzy’s customers were given a one-month “probationary period” during which they could still pay by card if they forgot to bring cash. Afterward, cashless customers were directed to the ATM at a nearby deli.

The staff told Mr. Hoen that the move would spell doom for the diner, but so far the cash-only policy has not been a big impediment. At a neighborhood restaurant, he said, customers who have already finished their meals can be trusted to leave and come back with cash.

Occasionally, he acknowledged, the staff tells him that a party of 10 had to be turned away at the door because of the no-cards policy. “So, I guess, anecdotally, we sometimes suffer,” he said.

Other small merchants have found different ways to minimize the pain of interchange fees. Eric Camarata, the proprietor of Tom Austin Shoes in midtown Manhattan, said his store accepts every kind of payment card, because “if someone wants to pay you, you never say no — that’s the first rule of business.”

Mr. Camarata, whose business has been in his family for over 60 years, said that by haggling with his merchant-acquirer, he managed to cut the fees to a tolerable rate. “I get calls all the time from companies offering me lower rates. Then I call [my acquirer], quote a number, and ask if we can get this reduced,” he said. Generally, he added, this strategy works.

Mr. Camarata also steers customers who pay by offline debit cards to make PIN-based transactions, which cost less in fees. “I ask if I can run it as a [PIN-based] debit, and they invariably say yes,” he said.

But he added that there is only so much a merchant can do to circumnavigate the fee structure. If a business wants to take cards, he said, it has to pay the fees. “Is it a monopoly? Sure,” Mr. Camarata said. “Do you have many options? No. But if you can’t close a transaction at the point of sale and you say to the customer, ‘Why don’t you go to the corner and get some money?’ how many are really going to come back?”

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.