Supermarket executives are mad as hell about the fees they are being charged by bank-owned funds transfer networks, and they don't want to pay them any more.

They realize, though, that they may have little choice.

The historical tensions between the industries boiled over in recent months as MAC and NYCE, the two big networks in the Northeast, imposed interchange fees to compensate their member banks each time their debit cards are used in participating stores.

The banks see the fees of 6.5 cents or 7.5 cents per transaction as fair and necessary to sustain growth in their on-line point of sale programs. Retailers have not resisted popular changes in payment methods, and debit would appear to be no exception.

But supermarkets - and other merchants with tight profit margins that became accustomed to low-cost transaction services - use words like "insane" and "horrendous" to describe what many of them consider the moral equivalent of a shakedown.

"These increases can't be justified," complained Tom Shortt, director of retail services for Twin County Grocers, Edison, N.J., and a representative on a Food and Marketing Institute committee that tracks electronic payment developments.

"This level is just excessive," Mr. Shortt said. "I know it's not good for my merchants."

Larry Friedman, vice president of finance at Golub Corp./Price Chopper in Schenectady, N.Y., added that there is a crying need for "a level playing field" between card issuers and the merchant-acquirers of their transactions.

"The payment networks like MAC and NYCE are owned by financial institutions, and they will look after their own interests," said Mr. Friedman. "They don't give us a say in policy and pricing. We need that for the good of the industry."

While expressing some sympathy toward merchant concerns, Richard P. Yanak, president and chief executive of Infinet Payment Services Inc. in Hackensack, N.J., said they knew, or should have known, how their operations and costs would change when they began taking credit cards.

In the view of Mr. Yanak, whose company operates the NYCE and Yankee 24 networks, credit cards and off-line debit cards like Visa Check and MasterMoney yielded sufficient interchange income to encourage banks to promote them more aggressively than regional debit programs like NYCE. The regionals had to respond in kind with an interchange fee.

"The supermarkets created an economic problem for themselves, and many regret their decisions to accept credit cards because of the increased costs," said Mr. Yanak. "They can also understand how it is in my interest to try to create a benefit for my members.

"It is fair compensation to the issuing bank, and the economics of on- line debit are still more favorable than checks, off-line debit cards, or credit cards."

A 1994 study by the Food Marketing Institute, the grocers' trade group, would seem to throw some doubt on that claim. It concluded that the fully loaded cost of a supermarket's accepting a check was then 37 cents, compared with 30 cents for an on-line debit card. The subsequent MAC and NYCE interchange fees of 6.5 cents and 7.5 cents, respectively, would thus wipe out the differential.

"There has been a fundamental change in the supermarket business in the last couple of years, revolving around the sudden growth and popularity of debit cards and credit cards," Mr. Yanak said. "This changed the value of on-line debit in the eyes of the (card) issuers . . . We are trying to produce a revenue stream in on-line debit" comparable to that of credit cards.

Acknowledging that supermarketers' resentment is "natural," Mr. Yanak conceded he would "accept the criticism that we could have done a better job communicating." He pledged to set up a retailer forum to bring the two sides closer together.

Merchants such as Mr. Friedman, however, do not seem willing to settle simply for improved public relations. "We, as an acquirer, want to have a say in policy and pricing, a level playing field, and control over our destiny," he said.

"I'm certainly willing to work with the networks. We did a lot of promotions with MAC and NYCE, but then they raised their prices without discussing it with the acquirers.

"There are a lot of things we can talk about. I'd like to work on using PINs with credit cards to cut down on fraud. There are improvements we can work on together, but we need more of a sense of cooperation."

Conflicts between the networks and supermarkets are typical of cross- industry disunities that can afflict a variety of credit systems, according to Lewis N. Pergament, senior vice president of Transaction Network Plus, a New York-based provider of point of sale network services.

"I think that the banks and networks must work in unison," said Mr. Pergament. "I don't see a clear strategy across home banking, ATM usage, and point of sale. They need consistent pricing."

While Mr. Pergament works closely with supermarkets, he does not entirely share their resentment, attributing it more to perception than reality.

"Retailers are very cost-conscious these days," he said. "If (the networks) had put interchange fees in initially, there would be no problem, but whenever you increase costs to stores and retailers, there is always a negative feedback."

In Mexico, Mr. Pergament said, banks charge merchants two to three times the discount rates that prevail in the United States, "and they complain just as loudly.

"When you buy milk (in the United States), retailers say they're making 4 cents, but they're actually making 8 cents."

However valid the supermarket operators' complaints, their anger is palpable. It has created what Joseph E. Wolfson, a pioneer of automated teller machine and point of sale networks, sees as an entrepreneurial opening.

After several years' absence from the electronic banking business, Mr. Wolfson has formed Integrated Delivery Technologies, Buffalo, which is offering a network alternative called "Cartel."

Mr. Wolfson, known for his early involvement in the now-defunct Metroteller system, said Cartel can give retailers negotiating leverage in the placement of banking and payment devices in their stores, or can give them more control as system owners or participants.

"I think there is the possibility for another option out there," Mike Wheeler, Food Marketing Institute chairman, said of Cartel. "Retailers could have an equity interest in it."

Mr. Wheeler also envisions a possible turning back of the clock, in which supermarkets encourage checks and not debit transactions.

Mr. Pergament doesn't give the Wolfson proposal much of a chance. "Many times people have tried to change the cost structure, and they have always failed," he said.

Some have suggested the supermarkets could band together and develop their own operation, with or without the help of somebody like Mr. Wolfson.

"A potential problem is the antitrust aspect," said Mr. Wheeler. "Can all retailers join together to form their own switch?"

Whatever the future holds, all agree that the current acrimony must not continue. "Every financial transaction needs an acquirer and an issuer," said Mr. Friedman. "They must work together."

Jeffrey Kutler contributed to this report

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