2nd UPDATE: GAO: Cutting Credit-Card Fees Hard To Implement

Proposals to cut certain fees that credit-card issuers charge merchants would be challenging to implement, the Government Accountability Office said in a report Thursday.

The charges, known as interchange or swipe fees, have been the subject of growing controversy in recent years. Retailers must pay issuers the fees--set by credit-card networks such as Visa (V) and MasterCard (MA)--every time a customer uses credit to make a purchase.

The GAO report said that even "consumers who do not use credit cards may be paying higher prices for goods and services, as merchants pass on their increasing card acceptance costs to all of their customers."

Interchange fees average about 1% to 3% of the purchase price.

Mallory Duncan, senior vice president and general counsel for the National Retail Federation and chair of the Merchants Payments Coalition--a representative of retailers, grocery stores, gas stations and other businesses--calls the fees a "cash cow for banks."

Some retailers characterize interchange fees as a hidden tax on consumers who end up paying higher prices as a result of retailers passing along the costs of the fees.

But the American Bankers Association said this characterization is incorrect. "Efforts by the merchant community to have the government interfere with the payment system amount to little more than retailers not wanting to pay their fair share and to have consumers bear this burden," said Kenneth Clayton, the association's senior vice president and general counsel for card policy.

The Electronic Payments Coalition, which represents credit unions, banks and payment card networks, expressed a similar sentiment, saying legislation proposed by the U.S. Congress in May "places the needs of giant retailers over the needs of consumers."

The Credit Card Interchange Fees Act of 2009 would, among other things, limit the fees merchants accepting credit cards could be charged and allow merchants to give discounts for cash purchases. It would prohibit charging higher fees to merchants when customers use reward cards and would give the Federal Trade Commission authority to review interchange-fee practices. The bill's author, Rep. Peter Welch (D., Vt.) maintains "credit card fees are killing small businesses."

Other proposed legislation aims to give merchants greater leeway to negotiate fee amounts with banks.

But the GAO warns that cutting the fees wouldn't be easy and the outcomes of various scenarios in which fee structures could be changed is unclear.

"If interchange fees for merchants were lowered, consumers could benefit from lower prices for goods and services, but proving such an effect is difficult, and consumers may face higher costs for using their cards," the GAO wrote.

Further, the GAO said card issuers, faced with lower revenue from fees, could trim back the availability of credit. Smaller issuers also may cut back on reward cards, the GAO said.

The fees, not federally regulated in the U.S., are a significant source of revenue for card issuers.

"If the merchant lobby succeeds in artificially reducing their acceptance costs, consumers will pay higher card fees while having fewer payment choices with fewer benefits," said Shawn Miles, MasterCard's head of global public policy and regulatory strategy.

Miles said the GAO didn't conclude that merchants were likely pass on any savings they obtained through lower fees to consumers.

-By Meena Thiruvengadam, Dow Jones Newswires; 202-862-6629; meena.thiruvengadam@dowjones.com