BusinessReport.com

A 28-year-old man walks into The Roux House on Third Street on a Friday night. One of his favorite bands is playing a set later, so for now, he is content to have a drink on the patio and chat with his buddies. He slides his debit card over to the bartender, who swipes it in order to start a tab.

What the man doesn’t realize when he closes out his tab with the same card is that he’s just made a transaction that will cost The Roux House between 2% and 6% of the amount charged. That might not seem like much, but multiply it by several thousand transactions and you have what Roux House General Manager Andrew Biemer calls a “significant” portion of what would otherwise be profit.

Welcome to the contentious world of credit-card interchange fees.

“We don’t have the option to refuse payment based on the consumer’s choice of credit card,” Biemer says. “Approximately 75% of transactions in terms of net dollar figures come by way of credit cards. It has a humongous impact.”

Interchange fees—fees charged to businesses when a debit or credit card is swiped during a transaction—are a mounting problem for small businesses that are seeing profits dwindle while fees increase.

From month to month, their owners find it impossible to budget for the cost of the fees, given the variety and complexity of fee calculations for each card as well as the range of reward programs that credit-card companies offer businesses. Indeed, the actual monthly cost can vary greatly during the course of the year.

For some businesses, the cost of interchange fees might mean the difference between making next month’s rent or hanging it up. For others, it diminishes the ability to compete with national retailers to expand into other markets.

Felder’s Collision Parts began accepting credit cards two years ago in response to customer demand. The business is a wholesaler, so they do less business in credit cards than other retailers that rely on debit and credit cards for most transactions. But owner Patricia Felder says the company is engaged in competition with a national retailer and has comparatively limited ability to raise prices to cover the fees. That means her company eats the costs, which definitely erodes profit margins.

“We don’t want to say no to our customers and we certainly can’t raise our prices,” Felder says, adding that interchange fees are “just another hit for small business.”

Bob Johnson, president of advocacy group Consumers for Competitive Choice, says interchange fees were responsible for siphoning $48 billion in revenue last year. National and international chains like Walmart, Sam’s Club and J.C. Penney’s pay between 0.5% and 1% of each transaction in interchange fees because of their scale and negotiating clout in the marketplace. While some small businesses have found success in coalitions, most are independent and therefore have little to no bargaining power in negotiating interchange fees, which are split between the bank, the credit-card company and the service processor.

Small businesses also fear new consumer laws that took effect in February in the Credit Card Reform Act of 2009 will result in still higher interchange fees. Legislation regarding interchange fee regulation has been referred to the House Financial Services Committee, and Johnson hopes that congressional hearings on the matter will begin within the next six weeks.

Robert Taylor, CEO of the Louisiana Bankers Association, says interchange fees are simply the cost of doing business that retailers deliberately opt into when signing up for the service. He points out that interchange fees cover identity theft and fraud prevention as well as the cost of the service.

“That merchant or retailer is guaranteed payment,” he says. “If they accept a check and it’s bad, they’ll have to absorb that. But if they accept a credit card, there’s no risk. What’s the value of that to a retailer? Enough to pay for it?”

Felder says small businesses, such as hers, would be happy to pay for the service, but argues that interchange fees should be the same for everyone, including large national chains. If credit-card companies and banks still make a profit off of relatively low interchange fees at Walmart and Sam’s Club, she says, then why should small businesses be charged so much more?

“The service required is no different for their transactions than it is for mine,” she says. “Small businesses are in an inequitable position against much larger operations. We need some sort of even playing field.”

Proponents and opponents of interchange-fee regulation point to countries like Australia, which instituted a 0.5% interchange fee across the board in 2003. To make up for resulting losses, Australian banks have cut credit-card perks such as rewards programs and increased annual fees. Australian merchants also have begun collecting surcharges on credit-card purchases, even though the interchange fee rates have fallen. Taylor says this development proves that even if interchange fees are lowered for small businesses, it’s not known where the money will go. Will it go directly to consumers or stay in the merchant’s pocket? Instead of the government regulating fees, the market should be the ultimate corrective force, he says.

In this case, the market has failed, Johnson says. Credit-card companies and, by extension, banks are charging small businesses at least eight times over cost when compared to larger companies, and the Australian regulations prove credit-card companies can still make a profit at lower fee rates. Regulating those fees would pump $40 billion back into the economy, giving consumers a break on prices and allowing more businesses to keep their doors open or expand.

“I’m not arguing that credit-card companies shouldn’t make a profit. Of course they should,” Johnson says. “But should they be allowed to garner a windfall profit of 800%? I think the answer is no by any standard.”

Biemer says parent company Last-In Concepts, which owns The Roux House in addition to Walk-On’s, Schlittz & Giggles and Happy’s Irish Pub, is pushing to expand into other markets. But the company’s pursuit of those plans is hampered by the unpredictability of interchange fees.

“These concepts that we have are being incubated in the Baton Rouge market, but we wish to expand Irish pubs, sports bars and pizza chains into a national market,” he says. “Small businesses such as this one are the engine that drives the economy and economic growth. When we’re hit with credit-card fees that are variable, it prevents us from expanding and creating new jobs.”