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CINCINNATI, Ohio -- After years of attempts at negotiating a solution to rising credit card transaction fees, the Kroger Co. here is leading a group of major chains in taking the issue to the courts, in a bid to force at least one credit card company to answer for its policies.
Late last week, Kroger filed a federal lawsuit against Visa U.S.A., Inc. and Visa International Service Association, alleging that the credit card company has engaged in price fixing and restricting competition related to credit card transaction fees.
Joining Kroger as plaintiffs in the lawsuit, which was filed in the U.S. District Court for the Southern District of New York, are Ahold U.S.A., Inc.; Albertson's, Inc.; Eckerd Corporation; Maxi Drug, Inc.; Safeway, Inc.; and Walgreen Co.
The lawsuit alleges that Visa has unlawfully set the interchange fees that are charged to Kroger and other merchants each time a customer makes a purchase with a Visa credit card. The suit also charges Visa with creating and imposing rules and restrictions on merchants that preclude Kroger from being able to negotiate lower fees.
Rapidly rising interchange fees are a serious problem, costing retailers and consumers an estimated $20 billion or more each year, according to estimates cited by Kroger. The complaint seeks injunctive relief to stop the anticompetitive practices, plus unspecified damages.
"We believe that Visa's actions on interchange fees amount to price fixing that leads to higher retail prices for our customers," Kroger spokesman Gary Rhodes told Progressive Grocer. "This hidden cost is borne by all Kroger customers, whether they pay for their groceries with cash, by check, or by debit or credit card.
"At a time when technology has made card authorization and processing faster, cheaper, safer, and more efficient than ever, we believe that our customers should be receiving the benefit of declining interchange fees. Instead, Visa is using its extraordinary market power to line their pockets at our customers' expense. At the same time, Visa's rules and restrictions preclude retailers from being able to negotiate lower fees," Rhodes said.
Brian Dowling, v.p. of public affairs at Pleasanton, Calif.-based Safeway, explained why his chain is getting involved. "As you know, margins in the supermarket business are razor-thin. In the interest of providing value to our customers and controlling our cost, a major objective of this suit is to gain the ability to pay a market-based rate for the services that VISA provides."
Credit card companies make $30 billion annually, while the supermarket industry's after-tax net profit in 2004 was 0.88 percent, said Karen Brown, v.p. at the Washington-based Food Marketing Institute. The figure she quoted for credit card revenue came from the most recently available estimates from the Boston Consulting Group.
"From the standpoint of the supermarket chains, they make less in net profit than they pay credit card companies," Brown told Progressive Grocer. "Supermarkets have been trying to work with credit card companies on this issue for years. Part of the issue is their ability to negotiate the fees and to make the fees transparent, where people understand exactly what the fees are and see that there is parity across the board."
Interchange fees are the monies paid by retail merchants to the card association (Visa and its member banks) for processing and receiving payment for a transaction associated with a general-purpose payment card. The fees are set by Visa and its member banks and enforced by member banks through their contracts with merchants.
Kroger said this year the company expects to pay credit and debit interchange fees of approximately $350 million, up more than 215 percent from five years ago. During that period, Visa has raised Kroger's interchange rate 11 times. Additionally, Kroger said interchange fees reportedly cost the average U.S. household more than $230 a year.
At the same time, consumers are increasingly reliant on credit and debit cards. In 2003, for the first time ever, electronic payments comprised more than 50 percent of Kroger's sales. Today, over 60 percent of Kroger's overall transactions are made via credit or debit cards.