Credit card interchange fees have long generated controversy. At times, the fees got so burdensome, they sparked a lot of public anger. Back in the 1980s, a local revolt by Boston merchants led to a front page photo in the Boston Herald of a man cutting an American Express card with a large knife in anger. Ouch!

Is another backlash brewing? 

The issue of interchange fees--the fees that merchants are required by card companies to pay banks every time the card is swiped--has certainly heated up again as such fees became a critical profit center for banks. We're starting to see more protest activity from fed-up merchants.

Convenience stores around the country, for example, are in the midst of a petition drive to galvanize the public to oppose such fees. 7-Eleven store owners have delivered a petition with nearly 1.7 million signatures to Congress, asking for relief. Back in Beantown, some merchants are voicing their anger by offering cash discounts if customers pay in cash. One merchant told the Boston Globe the credit card companies were like "loansharks." In the current environment, this may set the stage for another attempt at regulation, for better or worse. 

The movement may be gaining some traction. As part of its new rules for the card industry, Congress has so far not tackled interchange fees, but merchant groups are now pressing for action. Several proposals would basically impose a reduction on these fees. 

The theory behind the interchange fee was that it provided a way to compensate banks for the risks and costs incurred in offering the service. Specifically, there was credit risk and a lot of processing costs. But when it comes to debit cards, the money comes out of a checking account, meaning there's no credit risk. So should a debit card transaction carry a lower fee. 

And would anything stop banks and card companies from hiking fees in other areas. There's evidence from Australia that this indeed is what would happen. The industry can also soundly argue that the cards they provide tend to increase the volume of sales and offer a service that is generally good for the economy. 

So what to do? You can't blame banks for opposing regulation of the super-profitable interchange fee. But in this climate, they have to be attuned to the PR winds. The industry needs a strategy for dealing with this. - Jim