June 17 (Bloomberg) -- Visa Inc., MasterCard Inc. and JPMorgan Chase & Co., already squeezed by new U.S. curbs on how credit cards are marketed to consumers, are girding for a renewed battle over $48 billion in fees levied on merchants.

Lawmakers are promising new rules to bring down the interchange fee, a charge on purchases sometimes topping 3 percent that’s split by the two banks serving the customer and merchant. Supporters of the legislation include the biggest retail chains, restaurants and small businesses, which say the fees erode profit and inflate prices.

The debate pits the largest card lenders including JPMorgan and the two biggest payment networks, Visa and MasterCard, against Wal-Mart Stores Inc. and Target Corp. Interchange is the second-biggest cost after payroll, Target said, and merchants want to negotiate lower payments collectively without running afoul of antitrust law.

“The real question is whether the government is going to jump in and get into the game of price control in the free market,” Chris McWilton, MasterCard’s U.S. markets president, told investors at a June 4 conference. San Francisco-based Visa said June 5 the legislation would raise consumer costs and cut rewards. A similar bill failed last year, the firm said.

The limits would be added to rules signed into law on May 22 by President Barack Obama that curtailed consumer fees and interest-rate increases, which card issuers and analysts said will crimp profit.

Stock Rally

Lower earnings may derail the rally for shares of card companies including Visa, New York-based American Express Co. and Purchase, New York-based MasterCard. Each gained 14 percent or more this year through yesterday. JPMorgan, ranked first among card lenders last year by American Banker, added 6.25 percent. Retailers are grappling with an annualized sales drop of 9.6 percent because of the recession.

The Credit Card Fair Fee Act would let merchants bargain together on interchange rates and designates the Department of Justice as arbiter. Card networks and lenders would be forced to disclose components of the fee and how banks share the money.

House Judiciary Committee Chairman John Conyers, a Michigan Democrat, introduced the bill June 4. Senator Richard Durbin, the Illinois Democrat, followed on June 10. During a hearing a day earlier, Durbin complained to Treasury Secretary Timothy Geithner that U.S. agencies paid $200 million of interchange fees in fiscal 2007 and couldn’t negotiate better terms.

Dominant Players

Interchange accounted for 19 percent of revenue last year for card-issuing banks on the Visa and MasterCard networks, according to trade magazine Cards and Payments. The networks handled about 89 percent of worldwide purchases on general- purpose payment cards, according to the Nilson Report, an industry newsletter in Carpinteria, California.

Visa’s and MasterCard’s dominance allows them to “set these fees on a take-it-or-leave-it basis,” said J. Craig Shearman, spokesman for the Washington-based National Retail Federation. Shearman said interchange fees associated with the Visa and MasterCard networks tripled from about $16 billion in 2001 to $48 billion last year.

Ken Clayton, senior vice president for card policy at the American Bankers Association in Washington, said merchants want the benefits of electronic payments with none of the cost or risk.

Fee Structure

“Stores get enormous value,” Clayton said. “They don’t have to worry about fraud, and consumers buy more. The entity on the hook is the bank.”

In a typical transaction, the retailer’s bank deducts 1.9 percent from proceeds of the purchase, a sum known as the merchant discount rate. The largest portion -- the interchange fee -- goes to the bank that issued the card. The bank for the merchant keeps what’s left. Interchange fees average 1.7 percent of the purchase, according to JPMorgan analyst Tien-tsin Huang.

Visa and MasterCard get paid a processing fee from each bank of 15 to 18 cents on a $100 purchase, Huang said in a June 5 report. MasterCard and Visa process about 58 billion transactions annually, company filings show.

Visa told investors this month issuers use interchange to cover the growing cost of defaults. Moody’s Investors Service said May 27 the industry average for bad loans will breach 10 percent in the months ahead.

European Cut

The merchant discount at American Express averages 2.56 percent and doesn’t have an interchange component, said spokeswoman Christine Elliott. The legislation would have a “significant impact” on AmEx, which derived 49 percent of 2008 revenue from the merchant discount rate, Elliott said.

“It’s kind of unprecedented to give one industry that kind of negotiating leverage over their business partners,” she said.

Visa Europe Ltd. faces an antitrust complaint from EuroCommerce Inc., a retailer group that said this month that stores should be able to negotiate fees. MasterCard settled in April with European Commission antitrust regulators by reducing credit card interchange to 0.30 percent.

JPMorgan, Bank of America Corp. and Citigroup Inc., last year’s biggest bank card lenders, don’t detail interchange revenue. Betty Riess, spokeswoman for Charlotte, North Carolina- based Bank of America, and Matthew Towson at Riverwoods, Illinois-based Discover Financial Services, declined comment.

Leverage

JPMorgan and Citigroup, both based in New York, referred inquiries to the Electronic Payments Coalition. “Merchants don’t want to pay their share of the interchange system and they want consumers to pay it instead,” said Trish Wexler, spokeswoman for the Washington-based group.

Wal-Mart’s John Simley said the Bentonville, Arkansas-based company, the biggest U.S. retailer, backs the legislation and referred queries to the Food Marketing Institute, which represents 1,500 companies.

“In every other aspect, merchants have the ability to negotiate and reduce their costs except this one,” said Jennifer Hatcher, spokeswoman for the Arlington, Virginia-based institute.

Target lacks leverage because it’s “simply not realistic” to stop accepting cards, said Eric Hausman, a spokesman for Minneapolis-based Target. “This is a significant issue for Target, as interchange fees are the second-highest company cost, only exceeded by payroll,” he said.

GAO Report

Shawn Miles, group head of global public policy for MasterCard, said he’s urging Congress to wait until the Government Accountability Office conducts a study of interchange mandated by the law Obama signed.

Representative Bill Shuster, a Pennsylvania Republican co- sponsoring Conyers’ bill, focused on interchange last year as gasoline prices soared and service station owners complained the fees eroded profit. A filling station owner might have a gross profit of $1.50 on a $30 purchase, according to the Alexandria, Virginia-based National Association of Convenience Stores.

About a third of that income could go to interchange fees if customers use a Gold MasterCard, based on the firm’s rate schedule, which runs more than 100 pages.

To contact the reporter on this story: Peter Eichenbaum in New York at peichenbaum@bloomberg.net

Last Updated: June 17, 2009 14:39 EDT