There was a major article in the New York Times today - "How Visa, Using Card Fees, Dominates a Market" - about the controversy over the interchange fees merchants pay, which included some interesting historical context and provoked a lively debate in the comments area.  I posted a comment of my own (#246), which is reproduced below, for those of you who don't have time to sift through all the entries:

A number of commenters have suggested that retailers charge separate prices for cards and cash. They actually are allowed to do this today; the catch is that both prices must be posted in the same place. In other words, each item in the store would have to have two price labels, one for cash and the other for cards. You can't just have a sign at the register that says "1% discount for cash". This makes it impractical for most merchants to take advantage of the rule. Gas stations did it in the past, because they only had 3-4 different kinds of gas to sell, and could post the prices for each (although with the rise of integrated convenience stores, this is no longer true).

This illustrates the difficulty of finding solutions to the interchange conflict; you have to find a solution that does not cost more than the problem. When Wal-Mart and other merchants won the right to refuse signature debit, very few actually exercised that right, for a variety of reasons - the expense of reprogramming terminals and training staff, as well as the risk of losing customers to competitors.

The same issue affects other proposed solutions, such as printing the cost of interchange on the receipt. This would also require an expensive reprogramming of terminals, as well as some method for calculating the interchange at the time of purchase, which is not at all trivial, depending on the type of card used (not just the brand, but the rewards tier, like gold, platinum, etc.). Even if it were affordable, it is unclear that consumers would change their behavior.

Finally, all merchants are not created equal; Wal-Mart pays far less on its card transactions than small merchants do, partly because of its transaction volume, but also because it has negotiated bilaterally with each major bank to get special rates. The published rates are really just for those merchants without the market power to get a better deal. If the merchants did win the right to bargain collectively, there is no guarantee that small merchants would benefit. Voting power would surely be dependent on revenues, and large merchants would skew the deal to their advantage. Then you would have lawsuits between merchants.

Simply legislating lower interchange, as they did in Australia, ends up hurting consumers, because their points get cut and their annual fees increase as banks try to make up the loss of revenue. There is no evidence from the Australian experience that merchants actually lower prices in response to interchange reductions; instead, they pocket the savings. Over time, competitive pressures may result in a small reduction in prices for certain industries, but it would be no more than 1-2%, hardly noticeable against inflation. Again, it would be the large merchants who would be best able to offer lower prices, putting small merchants at a further disadvantage.

In my opinion, the best solution would be for merchants to work with banks to increase the value of their rewards programs and tie them more directly to in-store offers, which is already being done to a limited extent with the online "shopping malls" that Amex, Chase and other issuers provide. Legislation, regulation and lawsuits are blunt instruments that are unlikely to provide the relief the merchants are seeking. A more constructive approach could work to the benefit of all parties: banks, consumers, and merchants.