Nov. 19 (Bloomberg) -- U.S. consumers may not save money and could wind up paying higher credit-card costs if lawmakers force payment networks including Visa Inc. and MasterCard Inc. to cut fees charged to merchants, a government watchdog said.

“Merchants would benefit from lower interchange fees,” the Government Accountability Office said in a report today. “Consumers would also benefit if merchants reduced prices for goods and services, but identifying such savings would be difficult. Consumers also might face higher card-use costs if issuers raised other fees or interest rates to compensate.”

Lawmakers may cite the report as they debate whether to cut “swipe fees” paid by merchants. Wal-Mart Stores Inc. and Target Corp. are among retailers asking Congress to reduce the fees. Bankers have said the current system helps merchants by guaranteeing payment and simplifying record-keeping. Changing the rules may crimp profit at lenders including Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co.

“The GAO report is unlikely to have a significant impact on the ultimate outcome of the interchange debate on Capitol Hill,” Jason Kupferberg, an analyst with UBS Securities LLC, said today in a research note. “The lack of any significant ammunition in the report to support interchange regulation should be positive for Visa and MasterCard.”

Interchange Revenue

Banks use interchange revenue to pay for rewards programs and cover costs from cardholders who default. It’s also a source of revenue; interchange fees totaled $48 billion last year, according to the National Retail Federation, and accounted for 19 percent of revenue for card-issuing banks on the Visa and MasterCard networks, according to trade magazine Cards and Payments.

“From our perspective, it shows that consumers could be harmed,” Trish Wexler, a spokeswoman for the Electronic Payments Coalition, a Washington-based industry group that opposes interchange regulation, said of the report.

Fees charged to merchants at the point of sale average about 2 percent in the U.S. -- the highest in the world, according to Representative Peter Welch, a Vermont Democrat. He’s sponsoring a bill that would prohibit payment networks including San Francisco-based Visa and Purchase, New York-based MasterCard from setting higher interchange for premium cards.

Welch says richer rewards hurt “mom-and-pop” merchants in his district.

Swipe Fees

Visa and MasterCard told the GAO that interchange rates have remained flat in recent years when fees charged for debit purchases are included. The government watchdog said it found that swipe fees, particularly premium cards, have increased and that rate schedules have become more complex.

In 1991, Visa and MasterCard each had four standard rate categories for domestic credit-card interchange fees, the report said. By 2009, Visa had 60 and MasterCard had 243, the GAO said.

“This report confirms what every small business owner in the country already knows: credit-card fees are killing small businesses,” Welch said today in a statement. “Ever-increasing swipe fees are driving up costs for merchants, who then pass those costs to consumers. This study shows that curtailing the credit-card industry’s most egregious practices could lower prices for all consumers.”

Joint Bargaining

The National Retail Federation said Congress should move quickly to regulate interchange.

“This report confirms what we have been saying about swipe fees for years - that they drive up costs for consumers and are a cash cow for banks,” Mallory Duncan, general counsel for the Washington-based trade group, said in a statement.

House Judiciary Committee Chairman John Conyers, a Michigan Democrat, and Senator Richard Durbin, Democrat of Illinois, introduced bills that would let merchants bargain together on interchange rates and have the Department of Justice arbitrate. Card networks and lenders would be required to disclose components of the fees and how banks share the money.

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

Last Updated: November 19, 2009 15:15 EST