battle is brewing in Washington over costs associated with credit and debit cards. For now, lawmakers are focused on the issuing side of the business. But Christopher Dodd, D-Conn., Chairman of the Senate Committee on Banking, Housing and Urban Affairs, is warning that lawmakers won't ignore the acquiring side of the business.

"Interchange fees are growing exponentially," Sen. Dodd said at the start of the Jan. 25 committee hearing. Entitled "Examining the Billing, Marketing and Disclosure Practices of the Credit Card Industry and their Impact on Consumers," the hearing was a first attempt on the part of the 110th Congress to take up issues related to credit cards.

"These opaque fees - assessed on merchants - are passed on, in part or whole, to consumers who have no knowledge or understanding that a fee is even part of the cost of bread or milk or any other consumer product," the Senator added.

Dodd's comments on interchange seemed almost an afterthought, coming near the end of his introductory statement. Still, the remarks seemed intended to dash any hopes bankers had that interchange would not be a battleground.

"This is another area that this committee should examine as part of the series of hearings on credit cards," Dodd said.

Interchange - the base price upon which merchant discount fees are calculated for credit and debit card purchases - has become a contentious issue in the United States and elsewhere.

Increasing scrutiny

The Australian central bank, for example, sets benchmarks for interchange pricing. Last fall, the benchmark rate for credit card interchange in Australia was slashed to 0.50%, which means the weighted average interchange rate across all categories of Visa International and MasterCard Worldwide transactions in Australia cannot exceed 0.50%.

Previously, the average had hovered around 0.55%, according to the Reserve Bank of Australia.

Debit card interchange in Australia last year was capped at AUD $0.12, substantially less than the average AUD $0.44 banks had been paying in debit interchange. Last month, the European Union released a policy report calling for closer scrutiny of interchange and other practices related to retail banking in Europe. "The present level of interchange fees in many of the schemes we have examined does not seem justified," said Neelie Kroes, European Commissioner for Competition Policy.

The report drew praise from U.S. merchant groups

"The EU commission's conclusion that interchange fees should be the subject of further antitrust inquiries is a big win for the European merchants and consumers who are still forced to pay these hidden fees," said Mallory Duncan, General Counsel for the National Retail Federation (NRF) and Chairman of the Merchants Payments Coalition, a group representing more than two dozen merchant organizations created with the express purpose of challenging interchange.

In a Jan. 26 NRF press conference, Steve Pfister, NRF Senior Vice President for Government Relations, said: "I can't tell you that, in this Congress, legislation will move its way through. But the credit card companies charging these fees recognize our industry's zeal on this issue.

"Hopefully, through the legislative process, we'll start to see movement and transparency on interchange fees, as we've seen in Australia."

"We're expecting [interchange totals] to be in the $40 billion range for 2006," added J. Craig Shearman, NRF Vice President for Government Affairs Public Relations. Interchange totaled $30.7 billion the prior year, he said.

Courting change

In the United States, challenges to interchange have been handled largely through the courts. Today, more than a dozen pending lawsuits are challenging interchange. However, lawmakers have been weighing in on the issue of late.

Two states - New York and Kentucky - considered but did not enact legislation mandating interchange not be assessed on the sales tax portion of payments made by credit or debit cards.

During the last Congress, several panels held hearings on interchange, including committees with oversight for financial services and for energy and commerce.

Legislation approved at the committee level would have had the Federal Trade Commission analyze the relationship between interchange and motor fuel prices. But the mandate was never approved by the entire Congress.

Under the rules of Congress, at the end of every two-year session all legislation introduced yet not enacted is scrapped, and lawmakers begin the next two-year session with a clean slate.