[Senate Hearing 109-583]
[From the U.S. Government Printing Office]

                                                        S. Hrg. 109-583



                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION


                             JULY 19, 2006


                          Serial No. J-109-100


         Printed for the use of the Committee on the Judiciary

29-737                      WASHINGTON : 2006
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512�091800  
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001

                       COMMITTEE ON THE JUDICIARY

                 ARLEN SPECTER, Pennsylvania, Chairman
ORRIN G. HATCH, Utah                 PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona                     JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio                    HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama               DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
JOHN CORNYN, Texas                   CHARLES E. SCHUMER, New York
SAM BROWNBACK, Kansas                RICHARD J. DURBIN, Illinois
TOM COBURN, Oklahoma
           Michael O'Neill, Chief Counsel and Staff Director
      Bruce A. Cohen, Democratic Chief Counsel and Staff Director

                            C O N T E N T S




Cornyn, Hon. John, a U.S. Senator from the State of Texas........     5
Durbin, Hon. Richard J., a U.S. Senator from the State of 
  Illinois.......................................................     4
Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa.     4
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.     2
    prepared statement...........................................   139
Specter, Hon. Arlen, a U.S. Senator from the State of 
  Pennsylvania...................................................     1


Cannon, W. Stephen, President and Managing Partner, Constantine 
  Cannon, Washington, D.C., on behalf of the Merchants Payments 
  Coalition, Inc.................................................    15
Douglass, Bill, Chief Executive Officer, Douglass Distributing 
  Company, Sherman, Texas, on behalf of the National Association 
  of Convenience Stores..........................................     5
Floum, Joshua R., Executive Vice President, General Counsel, and 
  Secretary, Visa U.S.A. Inc., Washington, D.C...................     9
Miller, Kathy, Owner, Elmore Store, Elmore, Vermont..............     7
Muris, Timothy J., former Chairman, Federal Trade Commission, Of 
  Counsel, O'Melveny & Meyers, Washington, D.C...................    13
Peirez, Joshua, Group Executive, Global Public Policy, and 
  Associate General Counsel, MasterCard Worldwide, Purchase, New 
  York...........................................................    11

                         QUESTIONS AND ANSWERS

Responses of Stephen W. Cannon to questions submitted by Senators 
  Specter, Grassley and DeWine...................................    27
Responses of Bill Douglass to questions submitted by Senators 
  DeWine, Specter and Grassley...................................    39
Responses of Joshua R. Floum to questions submitted by Senators 
  Specter, Durbin, Grassley and DeWine...........................    43
Responses of Kathy Miller to questions submitted by Senators 
  Specter and DeWine.............................................    61
Responses of Timothy J. Muris to questions submitted by Senators 
  Specter, Durbin and DeWine.....................................    62
Responses of Joshua Peirez to questions submitted by Senators 
  Specter, DeWine, Grassley and Durbin...........................    68

                       SUBMISSIONS FOR THE RECORD

Americans for Consumer Education & Competition, Rebecca Reid, 
  Executive Director, Washington, D.C., statement................    77
Cannon, W. Stephen, President and Managing Partner, Constantine 
  Cannon, Washington, D.C., on behalf of the Merchants Payments 
  Coalition, Inc., statement.....................................    79
Consumer and public interest advocates, joint letter.............    99
Douglass, Bill, Chief Executive Officer, Douglass Distributing 
  Company, Sherman, Texas, on behalf of the National Association 
  of Convenience Stores, statement...............................   106
Floum, Joshua R., Executive Vice President, General Counsel, and 
  Secretary, Visa U.S.A. Inc., Washington, D.C., statement.......   128
International Association of Airport Duty Free Stores, Michael 
  Payne, Executive Director, Washington, D.C., letter............   138
Miller, Kathy, Owner, Elmore Store, Elmore, Vermont, statement...   141
Muris, Timothy J., former Chairman, Federal Trade Commission, Of 
  Counsel, O'Melveny & Meyers, Washington, D.C., statement.......   146
National Association of College Stores, Oberlin, Ohio, letter....   158
Natonal Association of Shell Marketers, Thomas F. West, 
  President, Springfield, Virginia, letter.......................   159
National Association of Theatre Owners, G. Kendrick Macdowell, 
  General Counsel and Director of Government Affairs, Washington, 
  D.C., letter...................................................   160
National Association of Truck Stop Operators, Lisa J. Mullings, 
  President and Chief Executive Officer, Washington, D.C., letter   162
National Grocers Association, Arlington, Virginia, statement.....   164
National Restaurant Association, John Gay, Senior Vice President, 
  Government Affairs & Public Policy, Washington, D.C., letter...   173
National Retail Federation, Mallory B. Duncan, Senior Vice 
  President, General Counsel, Washington, D.C., letter...........   174
Peirez, Joshua, Group Executive, Global Public Policy, and 
  Associate General Counsel, MasterCard Worldwide, Purchase, New 
  York, statement................................................   176
Petroleum Marketers Association of America, Holly Tuminello, Vice 
  President, Arlington, Virginia, letter.........................   184



                        WEDNESDAY, JULY 19, 2006

                              United States Senate,
                                Committee on the Judiciary,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 9:30 a.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Arlen 
Specter, Chairman of the Committee, presiding.
    Present: Senators Specter, Hatch, Grassley, Kyl, Cornyn, 
Leahy, and Durbin.

                   THE STATE OF PENNSYLVANIA

    Chairman Specter. Good morning, ladies and gentlemen. It is 
9:30. The Senate Judiciary Committee will proceed now to our 
hearing on credit card exchange rates and the antitrust 
concerns raised by existing practices.
    Until recently, the two largest credit card companies--
MasterCard and Visa--operated as joint ventures among competing 
banks. The joint ventures MasterCard and Visa worked with 
member banks collectively to set exchange rates. Late last 
year, a group of merchants brought suit alleging that when the 
banks jointly set merchant fees, they violated the antitrust 
laws. The complaint alleges that the collective setting of 
interchange rates by banks that compete with each other to 
issue cards to consumers constitutes illegal price fixing. The 
higher exchange rates that result are passed on in the form of 
higher prices for goods to consumers, operating as an invisible 
tax on every purchase made by consumers.
    The merchants contended that the substantial overlap 
between the banks that are members of MasterCard and those who 
are members of Visa precludes competition between the two 
credit card companies, and Visa and MasterCard further prohibit 
merchants from charging a surcharge to customers who use the 
credit cards.
    The response has been from MasterCard and Visa that the 
interchange fees do not constitute illegal price fixing, and 
they point to the case of Texaco v. Dagher. Obviously, whatever 
is going on in litigation is a separate matter, and the 
Judiciary Committee hearings are not intended to and will not 
affect such judicial action.
    When you talk about per se violations and you talk about 
the rule of reason, that moves over to the area where Congress 
has the authority to modify the standards on antitrust. So 
obviously the courts function under the existing rules, but 
that does not preclude the Congress from setting new rules on 
antitrust violations.
    In May of 2006, MasterCard held an IPO to transfer control 
of its operation from its member banks to public stockholders, 
and although banks still own a minority interest in MasterCard, 
they are prohibited from owning voting stock, which is a 
sophisticated and subtle way of perhaps seeking to solve the 
problem, or perhaps not, by relinquishing control.
    At the same time, Visa created a Committee composed 
exclusively of independent members of its board of directors, 
not the member banks. And as a result of these changes, Visa 
and MasterCard member banks now contend that they no longer 
participate in the setting of exchange rates.
    Well, that may be so or that may not be so. It is obviously 
sophisticated legal work to try to divest control, but in the 
context of what has occurred in the past, and in the context of 
what the results may be, circumstantially you may have the same 
    I am doing a lot of reading this morning from the 
memorandum because this is like working through a maze. It is 
very complicated as to how these arrangements are worked out. 
And we live today in a plastic world. You do not see money 
anymore at restaurants. You do not see money anymore in 
clothing stores. You do not see money anymore in grocery 
stores. You see plastic all the time.
    I have only one credit card personally so I can keep it 
straight. On the occasion when I do not pay on time, I am 
astounded at the interest rate. Just astounded.
    Australia has gone to price fixing. I am not suggesting 
that. But I note that the Treasury Department succeeded in 
stopping Visa and MasterCard from stopping banks from issuing 
American Express and Discover cards. When I saw that, I was 
really impressed with the power of Visa and MasterCard to stop 
banks from issuing American Express and Discover. I thought 
American Express was a pretty big player.
    Well, at any rate, it is very complicated. I have had quite 
a few complaints from Pennsylvanians and I have had complaints 
nationally as to what these implications are. So we are going 
to take a look.
    I am joined by my distinguished Ranking Member, Senator 
Leahy. Senator Leahy?

                        STATE OF VERMONT

    Senator Leahy. Thank you, Mr. Chairman, and I want to thank 
Vermont State Representative Warren Miller, who came down here 
with his wife, Kathy, to testify. Leaving Vermont at this time 
of year is not always the easiest thing to do, and I appreciate 
it. They have the Elmore Store, in Lake Elmore, Vermont. My 
first memories of going in there are when I was about 3 years 
old, with my parents, and getting an ice cream cone. I have 
been there many times since. I usually drop by and get caught 
up on the news, and they let me know what I need to know. I 
look forward to hearing from you. It is one of the last of the 
really quintessential country stores run by a family, hard-
working, that makes it possible for a community to actually 
have a center.
    Now, Mr. Chairman, you mentioned that not too many of us 
have heard about these interchange fees, and that is true. I am 
still trying to figure out these fees which retailers pay the 
bank to process credit card transactions, because ultimately 
they are going to be borne by the merchant and the consumers.
    We are being asked whether these fees are too high and 
whether they are too high because the associations of banks 
that handle credit cards are behaving unfairly in the 
marketplace. Just this week, the European Union's Competition 
Authority announced that unless Visa and MasterCard change 
those fees, they are going to face an antitrust action. So it 
is not an issue we can ignore.
    The retailers tell me that interchange fees represent an 
increasingly large portion of their costs of doing business. 
They tell me that they are compelled to raise their prices and 
shift some of that cost burden onto their customers. And the 
customers then become harmed whether they are using a credit 
card, a debit card, or paying cash because the prices have to 
be up to cover the fees that go along with them.
    They also tell me--and I hear this from the Vermont Grocers 
Association and others--that they have not seen the rules for 
the interchange system. They cannot decipher the complicated 
billing schemes of the credit card companies.
    Now, there are many benefits to both retailers and 
consumers with credit cards: greater access to consumer 
purchasing power, more rapid payments, and increased payment 
options for consumers. In my household, it makes an easy way of 
keeping track of what we are spending. But you have to make 
sure that the cost of accepting those credit and debit cards 
does not outweigh the many possible benefits businesses and 
consumers should be enjoying. So we need more transparency.
    Mr. Chairman, I am sure it is the same in Pennsylvania. But 
I know the livelihood of many Vermonters depends greatly on the 
success of our small businesses. We are a State made up of many 
small businesses that play a very integral part in the 
community. They are part of the whole fabric of our community. 
I do not want to see interchange fees force smaller businesses, 
like the village store run by the Millers in Elmore, to take a 
net loss in order to both accept credit cards and sell the ice 
cream cones, the Green Mountain coffee, and everything else 
that makes a store like theirs a Vermont treasure, because in 
many of our towns that is the one central spot in the town, 
unless it is town meeting day when everybody is going to be in 
the town hall. Otherwise, that is the spot everybody goes.
    So we could say how great the Elmore Store is and how 
wonderful it is. It is very picturesque. I actually have a 
picture of it. It is a very picturesque place to be. But the 
family also has to make some money to be able to keep it going.
    So, Mr. Chairman, I am glad we are having this hearing, and 
I will put my whole statement in the record.
    Chairman Specter. Thank you, Senator Leahy. Without 
objection, your statement will be made a part of the record.
    [The prepared statement of Senator Leahy appears as a 
submission for the record.]
    Chairman Specter. Senator Grassley?
    Senator Grassley. Could I have just 60 seconds?
    Chairman Specter. Sure. Senator Grassley, you are 

                         STATE OF IOWA

    Senator Grassley. For several reasons.
    Number 1, I obviously owe you and Senator Leahy a thank you 
for holding a hearing because I was part of a group that asked 
for it. And then I am embarrassed to say that at 10 o'clock I 
have to have a meeting with our Ambassador Schwab on a lot of 
trade negotiations that are going on, so I will not be here 
very long.
    Chairman Specter. You are still Chairman of Finance, 
Senator Grassley.
    Senator Grassley. I am trying to be, yes.
    Senator Grassley. And then thank you, explain that I will 
not be able to hear all of the testimony. I am going to stay 
until 1 minute to 10 o'clock to hear what I can. And then to 
just, I think, emphasize what I heard Senator Leahy said and, 
Senator Specter, you may have said the same thing about the 
problems. And it is kind of a balancing act. I am probably one 
of the problems because I hardly ever use cash for anything. I 
would just as soon not carry around cash but use my credit card 
an awful lot for some things that maybe are not as significant 
    But I am just astonished by the number of constituents I 
have come to even Washington or Iowa to complain about the very 
dramatic increases in charges that we have had on the use of 
credit cards and asking us to look into it. I do not know where 
we will come out, but I am glad you are having the hearing so 
we can look into it.
    Chairman Specter. Well, Senator Grassley, I had said that 
we are a plastic society anymore and do not see cash in grocery 
stores or clothing stores or restaurants.
    Senator Durbin, would you like 60 seconds by way of 

                       STATE OF ILLINOIS

    Senator Durbin. Thank you. Thank you for the hearing.
    I am glad you are doing this. I am glad we are talking 
about this. I hope something good comes of it. We fought for 9 
years on a bankruptcy bill that the credit card industry wanted 
desperately so that people would end up burdened with credit 
card debt even at the end of bankruptcy. They prevailed, and 
people now who are running up these credit card bills for 
everything under the sun are now going to carry that debt past 
bankruptcy for a lifetime.
    As Elizabeth Warren has said, we are creating these many 
little debtor prisons because special interest groups, credit 
card companies, and financial institutions are so powerful on 
Capitol Hill.
    It is unlikely that much will come of this hearing, but I 
thank you for having this hearing. It is a chance that the 
consumers will have a voice up here, and I think we need much 
more of that.
    I recently went to Reagan National Airport, and I saw a man 
in front of me use his credit card for a charge of less than a 
dollar. And I said to the woman at the cash register, ``So what 
is the lowest amount you have ever had anybody put on a credit 
card here at the cash register?'' And she said, ``Oh, 29 
cents.'' And I thought to myself this is really out of hand. 
And when you consider the hidden fees that we are addressing 
here, this is a tax that everybody pays. This is a tax, a 2-
percent tax on grocery purchases and a lot of other purchases, 
that is a being paid over and over at the expense of retail 
merchants in Vermont and Illinois and Pennsylvania.
    So thank you for this hearing.
    Chairman Specter. Senator Durbin, let me voice just a 
slight dissent. It is not likely that nothing good will come 
from this hearing. It is not likely.
    Senator Cornyn, you were the early bird here. Would you 
like 60 seconds, or more?


    Senator Cornyn. Mr. Chairman, thank you for holding the 
hearing. I am glad to hear from all the witnesses, but 
particularly one of my constituents, Mr. Douglass, from 
Sherman, Texas, so thank you for doing this. I look forward to 
listening to all the testimony and learning more about this 
    Chairman Specter. Senator Hatch?
    Senator Hatch. No, thank you. I am just interested in the 
    Chairman Specter. We now then turn to our first witness, 
Mr. Bill Douglass, who is the Chief Executive Officer of 
Douglass Distributing Company, has a record in corporate 
America with Exxon and Humble Oil; past Chair of the American 
Petroleum Institute; served in both the Marine Corps and the 
Army; born and educated in eastern Pennsylvania; and a 
bachelor's degree from Muhlenberg College.
    Thank you for joining us, Mr. Douglass, and we look forward 
to your testimony.


    Mr. Douglass. Thank you and good morning, Mr. Chairman, 
Ranking Member Leahy, and members of the Committee. My name, as 
said, is Bill Douglass, and I am the CEO of Douglass 
Distributing Company. And my company, which is headquartered in 
Sherman, Texas, as Senator Cornyn said, operates 15 convenience 
stores and supplies gasoline and diesel to other retail 
locations in the Dallas-Fort Worth area. And I am here today, 
as said, representing the National Association of Convenience 
Stores, and I want to thank you all for holding this hearing.
    Credit card interchange fees hurt my customers who, in the 
end, have to pay for all these charges, and they hurt my 
business. Credit card fees are now the third highest operating 
cost for my business and for my industry. As a whole, the costs 
of credit cards are exceeded only by payroll and rent.
    I want to emphasize to this Committee that this market is 
broken and something must be done to fix it. The courts have 
said that Visa and MasterCard have market power, and I will 
tell you that the agreements among their member banks to charge 
the same fees and fix these fees are outrageous. While I am not 
a lawyer, I know I cannot agree with my competitors about what 
we will charge because it is against the law, and that should 
be just as true for the banks.
    About 60 percent of gasoline sales are paid for with credit 
or debit cards, and this is a staggering number, and it means 
one simple thing: I have to take these cards, or I will go out 
of business.
    Visa and MasterCard's dominance is very similar to the 
dominance of Ma Bell before the breakup of AT&T, and 
protestations by Visa and MasterCard that merchants do not need 
to accept credit cards rings just as hollow as someone saying 
we could choose not to have telephone service. It ignores how 
business is done today. Accepting cards is as necessary as 
having a phone and other utilities. The market power and 
actions of Visa and MasterCard make this market completely 
different than the other two-sided markets the card 
associations like to talk about. No newspaper, for example, has 
the nationwide dominance that Visa and MasterCard have. And 
newspaper executives do not meet to agree on the rates they 
will charge for advertising. Yet that is just what some banks 
do as members of Visa and MasterCard.
    Recent changes in the governance structure at Visa and 
MasterCard have not changed this basic problem. The Committee, 
courts, and antitrust lawyers can debate the legal 
technicalities of this system, but from my perspective it makes 
no sense. The average convenience store paid about $40,000 in 
credit card fees in 2005. The same store only made $42,000 in 
pre-tax profits in 2005. The fact that businesses in my 
industry are paying almost as much to the credit card companies 
each year as they are making before they pay Uncle Sam gives 
you a sense of just how broken this market is.
    My own fees this year are up 33 percent. And even paying 
all this money, I cannot get a copy of the rates I pay or the 
rules I must follow. The summaries of the rules on Visa's and 
MasterCard's websites are clearly inadequate, leaving out 
hundreds and hundreds of pages of rules. In my industry, the 
best example of this--or perhaps I should say the worst 
example--is something called ``reason code 96.'' This code 
comes up for retailers of gasoline and diesel when the purchase 
exceeds $50 for a Visa transaction or $75 for a MasterCard 
transaction. With these high gas prices we have had lately, 
exceeding these limits has become more common. But Visa and 
MasterCard say somewhere in their hidden rules that if a gas 
purchase exceeds these pre-approved levels, they can deny 
payment to the retailer. This is true even if the consumer pays 
and does not dispute the bill. This rule, as well as its 
secrecy, is abusive and amounts to a license to steal.
    Let me emphasize that this scheme is very unfair to our 
customers. The average American family pays $231 in interchange 
and related fees every year, and that is true whether or not 
the family even uses a credit or debit card. Because these fees 
are hidden in the cost of virtually everything we buy, even 
cash-paying customers ultimately pay for them.
    U.S. consumers are paying far more than their share. Even 
though our rates should be lower than other countries, just one 
look at the charts that we have over here will tell you 
something is wrong here. In truth, this is just a brief glimpse 
of the problems with this market. We look forward to working 
with the members of this Committee and the Congress to fix this 
broken market.
    Thank you.
    [The prepared statement of Mr. Douglass appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Mr. Douglass.
    I am going to yield to Senator Leahy to introduce Ms. Kathy 
Miller, who is from Vermont. Senator Leahy told me yesterday 
about his plans for August. He is going to be spending the 
entire month at the ``fahm''--f-a-h-m.
    Senator Leahy. In Middlesex, although I was with some 
Elmore folks, John and Kathy Gilmore, this weekend.
    Kathy Miller owns the Elmore Store. Now, I did not--I just 
want you to know, we Vermonters are proud of each other. This 
is what the Elmore Store looks like. She is former Chair of the 
Vermont Grocers Association. She and her husband, who is here, 
Warren Miller, a State Representative, organized and sponsored 
the New England dog sled race in Lake Elmore. She volunteers at 
Elmore's one- room school. And I am just very proud to have 
them here.
    I would have actually worn my Elmore Store T-shirt but it 
is at the ``fahm''--at the farm in Middlesex, Vermont. But 
thank you, I think Warren is going to give me another one. 
Thank you.
    Chairman Specter. Thank you for joining us, Ms. Miller, and 
the floor is yours.


    Ms. Miller. Thank you. Mr. Chairman, Senator Leahy, and 
members of the Committee, good morning. I would like to say 
thank you for allowing me to testify today. My name is Kathy 
Miller, and I, along with my husband, Warren, and daughter, 
Kelly, own and operate the Elmore Store in Elmore, Vermont. I 
am also here today as past Chair of the Vermont Grocers 
Association and on behalf of the Food Marketing Institute which 
represents our Nation's supermarkets and grocery stores.
    Senator Leahy. Is your microphone on?
    Ms. Miller. Sorry. I thought I hit it. I would like to read 
what I prepared and then answer your questions later. I did not 
realize I was going to be blown up and hanging on the wall 
there, but I do have more postcards, if anyone would like to 
see closer up what we look like.
    Ms. Miller. And I thought I was the small guy in the 
    This is the store that we have owned and operated now for 
24 years. I am a fifth-generation Vermonter with deep roots in 
Elmore, Vermont. I am the ``Mom'' part of the operation while 
Warren, sitting behind me, is ``Pop.'' Warren was elected to 
the State legislature in Montpelier 4 years ago. We are not 
only committed to our store, but our community and our State as 
    You may wonder why we do what we do--7 days a week, 96 
hours a week, 364 days a year. To be honest, some days we ask 
ourselves. But we believe that we can and do make a difference 
to all the people in the community that depend on us.
    My concern as a small independent store may seem small to 
you, but it is a huge burden for us and very real.
    Credit card fees are collectively set by the card 
associations--Visa and MasterCard--and we have no control over 
them. They are not negotiable and cannot be added on to the 
consumer's bill. We cannot set minimum amounts to swipe cards, 
credit or debit. That is against Visa and MasterCard operating 
rules, so I am told by our local bank. The fees keep increasing 
to us, and our profit margin sinks down even lower.
    Last year, in 2005, we did $58,500 worth of plastic 
transactions. The credit card fees to us, out of pocket, were 
$4,400. Each time a customer swipes their card, it costs us 
2.65 percent of the total dollar amount plus a 20- cent fee per 
sale. In our store we have two gas pumps that we own, not 
subsidized by any big petroleum company. When the price of gas 
goes up, so does interchange because the fee is a percentage 
rate. The banks make more even tough their costs are still the 
    Last year alone, American consumers paid Visa and 
MasterCard about $30 billion in interchange fees. FMI members 
have seen their costs for these fees rise 700 percent in the 
last 10 years.
    Since I said I was coming to Washington, D.C., to testify 
on this issue, I cannot tell you how many of my customers were 
unaware of the hidden fees. They swipe their cards and think 
all is free because there is no charge to them at all. 
Obviously, we lose money on many small transactions and too 
much on others, so we have to raise prices, but we cannot 
absorb it all. In the grocery business, we compete by lowering 
prices, not by raising them. I am not a lawyer or a huge Wal-
Mart, but I know this is a huge problem that retailers across 
the U.S., large and small, are facing. So I ask that you look 
into this matter seriously. We have streamlined our business as 
best we can. Maintenance does not get done as it should, less 
money goes out in payroll, but we just keep absorbing the fees 
and try to survive.
    I would like to ask you on your next ride home, like 
Senator Leahy is going to do here soon, to look into your small 
towns and see how many vacant storefronts there are. Just this 
last winter alone, within a 50-mile radius of us four closed. 
Some days I feel like I should just turn in my keys, but we 
cannot. Excuse me.
    We are a small town of 850 people with one of two one- room 
schoolhouses left. We are the hub of the community. So when 
somebody needs something, who do you call? Mom and Pop at the 
Elmore Store. We are just trying to keep the doors open.
    Thank you.
    [The prepared statement of Ms. Miller appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Ms. Miller.
    We turn now to Mr. Joshua Floum, Executive Vice President, 
General Counsel, and Secretary of Visa U.S.A. Before joining 
Visa, Mr. Floum had a distinguished law practice, was Chair of 
the California firm of Holmes, Robert & Owen, before that with 
the San Francisco firm of Heller Erman; an undergraduate degree 
from the University of California and a law degree from 
    We appreciate your being with us today, Mr. Floum, and we 
look forward to your testimony.


    Mr. Floum. Thank you, Mr. Chairman.
    Chairman Specter, Senator Leahy, distinguished members of 
this Committee, my name is Josh Floum. I am the General Counsel 
and Executive Vice President of Visa U.S.A. I thank the 
Committee for giving me the opportunity to answer the important 
question posed, and, Mr. Chairman, I would request the 
Committee's permission to submit my written testimony for the 
    Chairman Specter. Your full statement will be made a part 
of the record, without objection.
    Mr. Floum. Thank you, Mr. Chairman.
    I am proud to be able to share with this Committee a bit 
about Visa's history and the tremendous value that we drive to 
millions of American cardholders, retailers, and large and 
small financial institutions all around the country. We believe 
we have been a valuable engine which has helped to fuel the 
growth and efficiency of the American economy, and we think we 
continue to improve our products and services every day.
    Merchants play a key role within the Visa system. Visa 
enables the very smallest merchants to have the same payment 
opportunities as the very largest. Likewise, Visa provides to 
thousands of community banks and credit unions, large and often 
very small, who have the ability through our products and 
service to compete with the largest national banks. And as the 
merchants have told us, Visa services provide them with 
guarantee payment, increased sales, and higher profits.
    Visa provides enormous benefits to cardholders as well, and 
these benefits are just as important to us as those we provide 
to merchants. Visa services allow cardholders to access credit 
and deposit accounts and gives them zero- liability protection. 
Card issuers offer cardholders rebates, airline miles, and 
other benefits designed to encourage cardholders to use their 
cards. And we have also responded to consumer concerns about 
the overextension of credit, pioneering the U.S. debit card 
category in the 1970's. Today, in fact, debit cards, which do 
not carry interest cards, make up more than half of our 
    Clearly, the system is working. When a market is not 
functioning properly and there is ``monopoly-like behavior,'' 
one would expect output to be restricted and prices to be 
pushed up. But neither is the case within the Visa system.
    Merchants in the United States today pay a lower rate to 
accept general purpose payment cards than they did a half-
century ago when those cards were first introduced. Visa's 
pricing today remains lower than its smaller competitor, 
American Express, for example. Hardly the evidence of abuse of 
market power, as some merchants claim.
    Today, more cardholders and more merchants use and accept 
the card than ever before. In the past 3 years, more and more 
Visa cards have been put in the hands of U.S. cardholders. The 
number of merchant locations accepting the card has grown by 
almost a million locations--again, hardly the evidence that 
something is wrong in the marketplace.
    Cardholders today can choose between literally hundreds of 
credit and debit product offerings. Merchants also have many, 
many choices, with Visa, MasterCard, American Express, 
Discover, First Data, PayPal, Debitman, Google Checkout, and 
many others--not to mention cash and check--all vying for 
business, this is not an industry dominated by one or even a 
few firms.
    Price controls are a severe tool and often harm the people 
they are designed to protect. Lawmakers, regulators, and courts 
in the United States have declined the invitation to impose 
price caps, but regulators in other parts of the world have not 
exercised similar restraint. The impact of regulation overseas 
shows that consumers here in the United States would, in fact, 
be hurt by artificial price controls on interchange.
    Let's take Australia as an example. Three years ago, the 
Reserve Bank of Australia imposed artificial price caps on 
interchange fees, the same fees that are at issue in discussion 
today. The Reserve Bank cut rates by some 43 percent, and that 
regulatory intervention backfired. Cardholders in Australia are 
paying more for payment cards than they did before, through 
higher annual fees and finance charges, and they are getting 
less in terms of reward programs and other rebates. Merchants, 
meanwhile, have seen their costs of payment acceptance decline, 
but there is no evidence they have passed these savings onto 
consumers in the former of lower retail prices. In fact, the 
Reserve Bank of Australia, which has promised that retail 
prices would decline as a result of the intervention, has given 
up even trying to prove the existence of the promised decline.
    The Committee poses the question whether there are 
antitrust concerns with interchange. Our answer is an 
unqualified ``no.'' The merchants behind these lawsuits will 
make their arguments in the courts, but we believe we achieved 
the right balance in values and costs as between merchants and 
cardholders, and that that issue is a business matter that 
should be driven by supply and demand in the relevant markets. 
Indeed, the courts have specifically looked at interchange in 
the past and in each court decision have decided that 
interchange does not pose an antitrust problem and, in fact, 
promotes healthy competition, efficiency, and innovation.
    Mr. Chairman, you mentioned the Dagher case at the outset, 
where the Supreme Court said that it is entirely lawful and 
appropriate for joint ventures to set pricing within their 
associations. Indeed, there is no other way they could 
    In the past 30 years, Visa has built the most efficient, 
reliable, and secure payment system in the world. We are very 
proud to be a part of driving this country's economic growth 
and efficiency by delivering tremendous value to cardholders 
and merchants. With more cardholders and merchants 
participating every day----
    Chairman Specter. Mr. Floum, how much more time would you 
    Mr. Floum. Just 5 seconds, Mr. Chairman.
    Chairman Specter. Thank you.
    Mr. Floum. With more and more cardholders and merchants 
participating today, there is no antitrust problem, no reason 
for Congress to intervene.
    Mr. Chairman, I wish to thank the Committee for giving me 
this opportunity and stand ready to answer any questions.
    [The prepared statement of Mr. Floum appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Mr. Floum.
    We now turn to Mr. Joshua Peirez, Associate General Counsel 
for MasterCard; previously was an associate at Clifford Chance, 
where he was an antitrust litigator; bachelor's degree from 
Cornell and a law degree from the Brooklyn Law School.
    We appreciate your coming in today, Mr. Peirez, and look 
forward to your testimony.

                       PURCHASE, NEW YORK

    Mr. Peirez. Thank you. Good morning, Chairman Specter, 
Ranking Member Leahy, and members of the Committee. My name is 
Joshua Peirez, and I am a group executive with MasterCard 
Worldwide. It is my pleasure to appear before you this morning 
to discuss the highly innovative and efficient MasterCard 
system and the issue of interchange specifically. I ask that my 
full written testimony be submitted for the record.
    Chairman Specter. Without objection, it will be made a part 
of the record.
    Mr. Peirez. Thank you. The payments industry is extremely 
competitive. MasterCard competes against all forms of payment, 
including cash and checks, other brands such as Visa, American 
Express, and Discover, a wide variety of debit networks, as 
well as rapidly growing alternative payment systems, such as 
PayPal, that did not exist a few years ago. We also compete 
intensely for the loyalty of financial institutions, merchants, 
and cardholders. And the result of this competition is that 
consumers and merchants increasingly prefer to use payment 
cards for purchases, and there are many reasons for this.
    MasterCard cardholders know that they can walk into a store 
almost anywhere in the world and make a purchase using their 
card with the security that comes with not having to worry 
about carrying a lot of cash. Our popular advertising campaign 
says it best: ``There are some things money can't buy. For 
everything else, there's MasterCard.''
    Merchants also derive enormous benefits from payment cards. 
Most importantly, cards increase merchant profits because 
consumers tend to spend more using payment cards. Cards are 
also much cheaper and safer than checks, which most merchants 
don't even accept anymore or only accept locally. It is, 
therefore, no surprise that the number of merchant outlets 
accepting payment cards continues to increase. Historically, 
merchants were the first to recognize the benefits of payment 
cards when in the 1920's individual merchants began to issue 
cards to their customers. These programs were inefficient and 
expensive for merchants to operate, but the powerful desire on 
the part of merchants to benefit from payment cards created 
opportunity for others.
    In the 1950's, Diners Club and American Express both began 
to offer what is known as a three-party model in which a single 
company issues the cards, contracts with merchants, and 
operates the system itself. Banks then began to offer their own 
card programs which have evolved into the four- party systems 
known as MasterCard and Visa. These four- party systems created 
even greater efficiencies and benefits by bringing together the 
cardholders and merchants of hundreds and then thousands of 
banks to complete transactions.
    In a four-party system such as MasterCard, card issuance 
and merchant-acquiring functions are performed by financial 
institutions licensed by MasterCard, not by MasterCard itself. 
Since the inception of these three- and four-party payment 
systems, merchants have paid a fee called a ``merchant 
discount'' in exchange for the benefits of card acceptance. 
These fees are set in an intensely competitive merchant 
acceptance environment, and they cover some of the costs and 
the value the system brings to merchants.
    A substantial portion of the benefit provided to the 
merchant obviously comes from card-issuing activities. In 
recognition of this reality, the card issuer is paid an 
interchange fee in a four-party system. In the United States, 
MasterCard management sets a default interchange fee. Banks are 
free to use these default fees or to agree to a different fee 
between themselves. Setting default interchange fees is a 
challenging proposition that involves an extremely delicate 
balance. If we set the fees too high, the merchants' desire and 
demand for MasterCard acceptance will drop. If we set the fees 
too low, card issuers' willingness to issue and promote 
MasterCard cards will fall, as will consumer demand for those 
cards. MasterCard management works extremely hard to set 
interchange fees at levels that balance the benefits and costs 
to both cardholders and merchants.
    Some have sought to challenge the methods by which 
MasterCard and its competitor, Visa, set their respective 
interchange fees on antitrust grounds. To date, these cases 
have all failed, and the courts have upheld interchange fees as 
not violating antitrust laws. What the plaintiffs appear to 
really want are Government-mandated price caps at lower levels 
than what is offered today. There is simply no precedent for 
such a remedy under antitrust law. Such a policy also harms 
consumers. We have one test case of the results of such price 
caps in Australia which demonstrates that price caps harm 
consumers and competition. The effect in Australia has been 
higher annual fees and finance charges for consumers, as well 
as fewer benefits.
    In conclusion, merchants and consumers benefit 
significantly from the use of payment cards. It is my pleasure 
to discuss the topic with you, and I would be pleased to answer 
any questions you may have.
    [The prepared statement of Mr. Peirez appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Mr. Peirez.
    Our next witness is the former Chairman of the Federal 
Trade Commission, Timothy Muris, who served there from 2001 to 
2004. Previously, he had been in the Office of Management and 
Budget during the Reagan administration. He currently is of 
counsel to the O'Melveny & Meyers firm, where he co-chairs the 
antitrust practice; a bachelor's degree from San Diego State 
and a law degree from the University of California; a member of 
the Order of the Coif and associate editor of the Law Review 
    Thank you for being with us today, Mr. Muris, and we look 
forward to your testimony.

                        WASHINGTON, D.C.

    Mr. Muris. Thank you very much for inviting me to this 
important hearing. Before I begin, I would like to submit my 
written testimony and a Law Review article I recently wrote 
about this topic for the record.
    Chairman Specter. Without objection, both will be made a 
part of the record.
    Mr. Muris. Thank you.
    As you know, I personally advise Visa on antitrust and 
consumer protection, but the views that I express today are my 
own. Let me make three points.
    The first is that merchants are wrong to analogize 
interchange to the paradigmatic case for antitrust enforcement, 
cartel price fixing. A cartel is a group of otherwise competing 
firms that fix their prices. When businesses collude, they harm 
consumers by raising prices above the level that would 
otherwise prevail. Interchange has nothing in common with this 
behavior. Unlike the cartel, a four-party payment card system 
cannot exist without interchange. A default fee reduces the 
cost of negotiating separate fees between acquirers and 
    Moreover, for Visa to succeed, merchants need to honor 
cards from each of the thousands of issuers. Knowing that all 
cards must be honored, individual issuers could insist on very 
high fees. Merchants would then be subject to those fees and 
would be less willing to accept the network. A default 
interchange avoids this problem.
    The difference between a cartel and Visa is stark. With 
cartel pricing, an end to the cartel lowers prices, raises 
output, and increases innovation. The end of interchange will 
lead to chaos.
    The merchants understand this. They do not want interchange 
to end. Instead, they want lower interchange rates. But this is 
not an antitrust remedy. One of the fundamental maxims of 
antitrust is that the market, not Government, should set 
prices. Indeed, ``reasonableness'' is never a defense to price 
    Interchange began with Visa long ago. Bank of America 
started a three-party payment card system in California in the 
1950s. Because banks were then prohibited from crossing State 
lines, the bank tried to franchise its system to different 
States but found few takers. It spun off the system in the 
1970s. That spin-off, renamed Visa, began interchange to 
coordinate the four parties involved, beginning interchange 
long before they had any significant market share.
    My second point is to discuss how prices are set. Payment 
card systems are an example of a two-sided product connecting 
two groups of consumers. The challenge for any two-sided 
product is bringing both sides on board. Newspapers illustrate 
how most two-sided products set prices. I have today's 
Washington Post. In a business sense, this is a vehicle to 
bring together readers and advertisers. The readers pay very 
little. The publishers get their money from the advertisers. If 
newspapers charged us the direct cost of supply, they would 
lose readers given the alternatives. Without enough readers, 
there would not be enough advertisers.
    And, incidentally, in response to Mr. Douglass' point, if 
you want to talk about market power, I believe that the 
Washington Post has a very large share in the relevant market 
here in the Washington area.
    The economics of attracting two distinct groups of 
consumers drives the pricing. Again, we have readers and 
advertisers. The value of the two-sided product to one group of 
customers is determined by its attractiveness to the other. The 
group with the low-cost substitutes--in this case, the 
readers--gets the better deal.
    For payment cards, the consumer is the king. To compete 
with the two historically dominant forms of payment, cash and 
check, payment card systems are priced to provide value to 
cardholders. The industry has followed this model from its 
inception. In 1948, the Diners Club card was introduced with a 
merchant discount of 7 percent. Today, the average discount on 
American Express is about 2.5 percent, while Visa, which is a 
larger company, charges about 2.1 percent.
    Consumers and merchants clearly enjoy the benefits. Walk 
into a McDonald's or Subway, and you can swipe your card to 
purchase a meal. A few years ago, you could not do this. Nobody 
made those restaurants take the payment cards, but instead they 
found that the payment systems offered value for a price they 
were willing to pay.
    Let me conclude by noting that the attack on interchange, 
taken to its logical connection to end interchange, poses a 
direct threat to the American consumer. I understand the full 
fury of that consumer when aroused. While Chairman of the FTC, 
we created the National Do Not Call Registry, and I thank all 
the members here for their support. I suspect that many 
Americans feel as strongly about their plastic as they do about 
their dinner hour.
    Thank you. I will be happy to respond to your questions.
    [The prepared statement of Mr. Muris appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Mr. Muris.
    Our final witness is Mr. Steve Cannon, President and 
Managing Partner of Constantine Cannon; had service on the 
Senate Judiciary Committee back in the 97th and 98th Congress, 
where he was chief antitrust counsel of the Judiciary 
Committee. The 98th Congress was the time of my first service 
in 1981 when Senator Thurmond was Chairman of this Committee. 
He is also from South Carolina, and Mr. Cannon received his 
undergraduate and law degree at the University of South 
    Thank you for being with us today, Mr. Cannon, and the 
floor is yours.


    Mr. Cannon. Thank you, Mr. Chairman. It is great to be back 
in this room. I must say it feels a little different on this 
side of the dais.
    On behalf of the Merchants Payments Coalition, I am honored 
to be able to present this testimony on an issue of extreme 
importance, not only to the merchant community but to the 
millions of consumers we serve every day. Merchants Payments 
Coalition members provide virtually every American with a broad 
array of goods and services and employ over 50 million people.
    To answer the question posed by today's hearing, there are 
indeed crucial and timely antitrust issues raised by 
interchange fees. Let me be clear and unequivocal. What Visa 
and MasterCard and their member banks do is illegal price 
fixing, pure and simple. While the legal team for the cartel is 
here today to tell you that it may be price fixing but it is 
not illegal, both the law and common sense tell us that they 
are wrong.
    It is also important to note that other countries around 
the world have begun to figure all of this out and are acting 
quickly and decisively to end this price fixing. Just 2 days 
ago, as the Chairman referenced, the European Commission 
conducted a hearing on its preliminary finding that the 
justification for the current interchange system had no factual 
basis. According to media reports, EC Competition Commissioner 
Neelie Kroes called for the end of anticompetitive behavior in 
the payment card industry or face antitrust action. Last April, 
she warned that the industry's paradise days may be over.
    You have already heard a lot about Australia this morning. 
All I can say about that is that facts are stubborn things. 
Interchange rates there are currently one- third the rates in 
the United States, and what the card association witnesses have 
not told you is that, in fact, fierce competition has erupted 
between Australian credit card issuers trying to offer lower 
and lower interest rates to consumers rather than just trying 
to give you more miles.
    And, by the way, contrary to MasterCard's official written 
prediction of a death spiral for credit cards in Australia, 
credit card issuance is up, as is credit card use. In my 
written testimony, Mr. Chairman, I have cited several press 
articles to this effect from Australia, including one from last 
February that says, and I quote, ``Australians have never had 
easier access to a credit card with banks undercutting each 
other in a battle for the consumer's dollar.'' That sounds like 
competition to me.
    You have also heard this morning from both MasterCard and 
Visa that the merchants I represent want price controls. This 
is not a surprising argument since, in fact, Visa and 
MasterCard are themselves privately controlling prices through 
their cartel and have no other reason for anybody else to get 
involved in the process. As of today, they are very comfortable 
with imposing a consumer checkout fee on virtually every 
transaction. Their plea of ``Let the market decide'' really 
means ``Let us continue to privately regulate the market among 
ourselves.'' They refuse to publicly recognize, of course, that 
all our merchants have asked for is for Congress to look at 
this problem and potential solutions, not price controls.
    Our friends at the desk here would want you to think that 
you have only a choice, Mr. Chairman, between a cartel and 
chaos, and that is clearly not the case. There is a lot in 
between those two choices.
    Now let me turn to how to remedy this problem. On the 
question of liability for past conduct, that is easy. Only the 
courts can determine who is liable to whom for past conduct and 
how much damages should be. But we are not here to talk about 
litigation this morning. What the industry should look like 
going forward is a harder question. There are many 
possibilities that Congress could consider, and I am glad to 
discuss them or answer any questions the Committee might have.
    For the other question which is on everybody's mind today, 
which is whether the Congress has a role to play, we believe 
the answer is a resounding yes. And, Mr. Chairman, I reference, 
as you remember, the breakup of the Bell System in 1982 is a 
very apt analogy. At that point in time, for 14 years, from 
1982 to 1996, Congress deferred to a single Federal judge, Hon. 
Harold Greene, to make the vast majority of the most important 
telecommunications policy decisions of that era. I would only 
add that the arguments you have heard this morning that the 
payment card system is not broke so do not fix it is almost 
identical to what the Committee heard from the Bell System 25 
years ago and is absolutely wrong. I remember when the Bell 
System warned that using any piece of telephone equipment that 
Western Electric did not make would make the entire telephone 
network come crashing down, not to mention that $2 a minute was 
a very reasonable price for the miracle of long- distance.
    Mr. Chairman, that concludes my remarks. Thank you. I would 
be glad to answer any questions you may have.
    [The prepared statement of Mr. Cannon appears as a 
submission for the record.]
    Chairman Specter. Thank you very much for that testimony, 
Mr. Cannon.
    We now turn to the portion of the hearing on questioning by 
members of the panel for 5 minutes each.
    Mr. Peirez, you said that all cases have failed. Was that 
your testimony?
    Mr. Peirez. All the cases challenging interchange have 
failed, yes.
    Chairman Specter. Well, isn't it true that there were 
recently 50 cases consolidated in the Eastern District of New 
York which are ongoing and have not failed?
    Mr. Peirez. Those cases are pending in the early stages, 
and we will see where those cases go now. My testimony was 
that, to date, all the cases had failed.
    Chairman Specter. Well, those cases have not failed, have 
    Mr. Peirez. That is true. They have not failed.
    Chairman Specter. Okay. I just want to be sure that there 
are some that have not failed.
    Mr. Peirez. There are pending cases, yes.
    Chairman Specter. Mr. Muris, one of the cases alleged that 
the collective setting of interchange rates by banks that 
compete with each other to issue cards to consumers constitutes 
illegal price fixing and that there was a substantial overlap 
between the banks that are members of MasterCard and those that 
are members of Visa which precludes competition between the two 
credit card companies.
    Do those facts, if established, constitute a violation of 
the antitrust laws, in your opinion?
    Mr. Muris. No, and let me analogize what is going on here, 
and I think Mr. Cannon's reference to AT&T really shows this is 
not a simple price-fixing case.
    If you and Senator Leahy practiced law as competitors and 
you did nothing else but agree to fix prices, that would be an 
antitrust violation. If you formed a law firm and you fixed 
prices, that would not be illegal because you had formed a 
legal joint venture. And what is happening here--and the Dagher 
case I think makes this clear--is we have a legal joint venture 
which has the right to set prices.
    What we have here is a business dispute. Mr.--
    Chairman Specter. Let me interrupt you, Mr. Muris. You have 
already said it does not constitute a violation.
    Mr. Muris. Yes.
    Chairman Specter. Should it? Should the antitrust laws be 
modified? It sounds to me like pretty anticompetitive 
    Mr. Muris. As you will recall when we met, I learned my 
antitrust law from Jim Liebler, and Professor Liebler was a 
strong believer in the market. Underlying antitrust law is a 
strong belief in the market, and the market should set the 
prices here. Legal joint ventures have--as the Supreme Court 
made clear just this year--the right to set a price. Obviously 
you have the right to change the antitrust law--but you would 
be changing it in a fundamental way that would be inconsistent 
with the 116-year history of the Sherman Act.
    Chairman Specter. Mr. Floum, according to the briefing 
materials provided to me, the Justice Department successfully 
challenged MasterCard and Visa rules which prohibited their 
member banks from issuing American Express and Discover cards. 
Is that true?
    Mr. Floum. That is correct, Mr. Chairman.
    Chairman Specter. Isn't that pretty heavy-handed for that 
kind of market pressure to be brought on banks so that they do 
not issue other credit cards from companies as prominent as 
American Express and Discover?
    Mr. Floum. At the time we thought not, Mr. Chairman, and 
the reason is that we believe that what our system does is 
promote vigorous, what we call ``intra-system competition,'' 
competition between the banks. Now, I know that--
    Chairman Specter. You thought that was not a violation, but 
the Department of Justice disagreed with you.
    Mr. Floum. That is correct, Mr. Chairman. We did petition 
to the Supreme Court for certiorari, which was denied, and we, 
of course, rescinded that rule in accordance with the Court 
    Chairman Specter. Mr. Cannon, does that sound like an 
antitrust violation to you to have member banks prohibited from 
issuing other companies' credit cards?
    Mr. Cannon. Well, it does and it is. And, in fact, that was 
a 34-day trial before a Federal judge in New York. It went up 
through the Second Circuit. The Second Circuit found that, in 
fact, there was market power that had been exercised, and that 
is now the law of the land. And I am glad to say that at this 
point Visa was required to abrogate those rules and, therefore, 
they had to--and now competition is beginning to flourish on 
that side as well.
    But if I can say one thing about Mr. Muris' response on 
saying this is not a simple price-fixing case, this is a simple 
price-fixing case, and everyone is doing a lot to try to make 
you think that it is really complicated. The problem is that it 
involves two players in this industry that control 80 percent 
of the market. So it is price fixing. It just happens to be 
done by two people with a large market share.
    Mr. Muris. Could I respond to that? No one who raises AT&T 
as the appropriate remedy I think can credibly claim this is a 
simple price-fixing case. The unraveling of AT&T and the 
extraordinary efforts of Judge Greene, the 1996 
Telecommunications Act, and the efforts that are needed now to 
rewrite that law show that this issue is very different than 
the simple price-fixing case of two lawyers in town--the 
analogy he is making is that two otherwise competing lawyers 
fixed prices. The remedy is simple: just tell them not to fix 
prices. You do not make an analogy to AT&T and get the Congress 
involved and oversight for dozens of years.
    Mr. Cannon. Senator, that actually makes my point 
precisely, which is this is an industry--it is an industry that 
needs attention, and I would posit that everybody in Congress 
thought that for the period of 14 years, it would have been a 
lot better if Congress was making competition policy and 
telecommunications policy as opposed to Judge Greene, not to 
not give Judge Greene his due deference, but that is the 
position that industry and everybody on the Hill found 
themselves in.
    Chairman Specter. The red light went on during that lively 
exchange, which I did not want to interrupt.
    Senator Leahy?
    Senator Leahy. No objection here, Mr. Chairman. I thought 
it was helpful.
    Ms. Miller, let me ask you, we have heard some say, well, 
we just do not accept credit cards, and if some other store 
does not want to pay these interchange fees, well, they should 
not accept credit cards. Tell me how practical that would be in 
    Ms. Miller. It would not be practical. More and more of my 
customers come in, they are going by on a little bicycle tour. 
I mean, they are not carrying cash in their pockets. They have 
got a card. They come in to get a bottle of water. I make 30 
cents on a bottle of water. I have got to swipe their card. It 
costs me 20 cents plus the transaction fee. So in some 
instances, like candy bars, they are on sale three for a 
dollar. Somebody buys candy bar, I might as well just give them 
the candy bar instead of swiping the card. But it is a matter 
of survival. It is what customers expect. It is what I need to 
do to have my business to survive.
    If a customer is in my store, just because he is using 
plastic, he is not going to buy more. They are at the deli. If 
you were going to buy one sandwich, you are not going to buy 
two. If you are camping at the Elmore State Park, you need a 
fishing license, you are not going to buy two. But the 
expectation is there. They are in Elmore. I appreciate their 
business and I want to take care of them.
    Senator Leahy. Well, in Mr. Douglass's testimony, he says 
that--I think I am quoting this correctly, Mr. Douglass--
''Congress does not yet have enough information about these 
fees to come up with a solution to this problem.'' Well, we are 
holding this hearing as the first step to get that information. 
What further or additional information do you think we should 
    Ms. Miller. I do not have all the answers, but I know that 
you people have the capability to look into this issue. And it 
is very huge. It is very real. It is wonderful that the 
dialogue has started. Even if I had access to the rules on the 
Internet, I do not have time to sit down and read 1,300 pages' 
worth of information. I probably would not understand them, and 
I could not print them off so somebody could--
    Senator Leahy. What if you had the interchange fees appear 
on the customer's bill? Would that be helpful?
    Ms. Miller. According to the bank that I do business with, 
that is not legal for me to do. I cannot pass that on to the 
    Senator Leahy. Okay. Well, Mr. Floum, Mr. Peirez, why not 
just have the interchange fees associated with the credit card 
transactions appear on the bill? Why shouldn't consumers know 
what it is actually costing to get the free airline miles, 
which may or may not be available, or the lower interest rate 
or the annual fee rate? I mean, shouldn't they know what 
interchange fees are ultimately costing?
    Mr. Floum. Mr. Chairman, Senator Leahy, I think it is 
important to understand that the interchange fees are akin to 
wholesale rates. They are not fees which are paid by the 
merchant or paid by the cardholder. They are fees that are paid 
by the merchant bank--
    Senator Leahy. But why not let us know? I would be 
interested in knowing. And all this stuff is computerized. It 
would be very easy to do.
    Mr. Floum. The feel schedules are available online, 
Senator, but it would be like going to the Macy's store in 
Pentagon City and expecting to see the wholesale charges for 
the various items disclosed at the store.
    Senator Leahy. No. Let's not get off the subject. Mr. 
Peirez, why not do it?
    Mr. Peirez. Mr. Leahy, Ms. Miller is perfectly allowed 
under our rules to post that on the receipt. We do not restrict 
that. She should discuss it with her bank.
    Senator Leahy. How do you get it?
    Mr. Peirez. She could ask her bank for it. They are not 
prohibited from providing it. She can also search on the 
Internet. They are there.
    Senator Leahy. Ms. Miller?
    Ms. Miller. Just a little example of something that 
happened in my store the other day. We are still very small. We 
run in-house charge accounts. Some customers come in, they pay 
by the week. I had a woman in. It is raspberry season. She 
bought $108 worth of raspberries. She is going to go home. She 
wants to make raspberry jam. She goes to get her wallet, her 
pocketbook, ``Oh, I forgot it, but I have got my card in the 
car and I want to pay my slip. Would you rather have me go get 
my card and swipe it or would you like me to pay cash 
tomorrow?'' I said, ``Have a good night, Alex. Go home, make 
your jam, come back and pay me cash tomorrow.'' That is just 
what is happening.
    Senator Leahy. I still do not understand why we cannot get 
these fees--I mean, you are able to do everything else, 
including inundate us with free credit cards or offers of free 
credit cards. My 5-month-old grandson, he could get one. My 
former chief of staff's dog could get one. You sure are willing 
to spend money on that. You ought to be able to open this.
    Let me discuss one other area, the issue of piracy. There 
is a website in Russia called ``allofmp3.'' It sells 
copyrighted material but without the permission of the 
copyright owners. Customers are here in the United States. The 
website is in English. It features American music, none of 
which has been licensed. So they are selling music, in effect, 
illegally, but they accept Visa and MasterCard. In fact, those 
are the only two credit cards that are on the site. It is such 
a degree of concern that it may be one of the reasons why 
Russia has failed to get into the World Trade Organization. 
They will not shut it down.
    Now, why don't Visa and MasterCard just pull the plug on 
that, agree to suspend their services to allofmp3? You do this 
on some child pornography sites. Why not do it on allofmp3 in 
    Mr. Floum. We intend to do so, Senator Leahy. Visa deplores 
any illegal use of its cards, and as you mentioned, whether the 
issue is Internet pornography, online pharmaceuticals, illegal 
downloading of music, our rules expressly forbid the unlawful 
use of the card.
    Now, it gets more complicated when you have different 
jurisdictions involved, and we are trying to enforce that in 
Russia in the case that you specifically mentioned, and we hope 
to be able to shut down that merchant very soon.
    Senator Leahy. Mr. Peirez?
    Mr. Peirez. We prohibit and deplore the use of our system 
for any illegal activities, including this activity.
    Senator Leahy. Are you going to shut down this Russian 
    Mr. Peirez. Yes, we are working on it.
    Senator Leahy. Okay.
    Mr. Cannon. Senator, may I add one thing about your 
question about the receipt? We believe that the rules of Visa 
and MasterCard actually prohibit merchants from doing exactly 
that, which raises the entire question about all of the rules 
that are hundreds and hundreds of pages long that the 
associations essentially keep hidden from the merchants. They 
have told us time and time again, they have been asked time and 
time again to make rules available, and now, frankly, even this 
Committee is not going to be able to get them unless they have 
a change of heart. They announced this week they would make 
them available online to merchants but, in fact, would exclude 
things dealing with interchange fees, of all things.
    So it would be very helpful if the merchants could actually 
see these rules.
    Chairman Specter. Thank you, Senator Leahy.
    Senator Kyl?
    Senator Kyl. Thank you, Mr. Chairman, and I appreciate you 
holding this hearing. I confess that this is a subject that is 
very confusing, I think, to a lot of folks, including me, and I 
think it is wise to at least try to understand it better. And 
for that reason I would like to go back to a more basic or 
fundamental point.
    People have told me that the reason for concern here is 
that fees have gone up rapidly, I gather much more rapidly than 
other cost-of-living increases. And it has created a suspicion 
that there must be some reason for this other than market 
factors, like collusion, for example. And, of course, there are 
a series of lawsuits that have been discussed here that attempt 
to reach that.
    The question, the fundamental question I have, is: What 
market protections are in place to ensure that, at least over 
time, pricing adjustments are made to truly reflect the state 
of competition, the value of these interchanges, the value of 
the product, in effect? How does the market work? Is there a 
place where it is not working? And if not, why?
    I pose this to all of you, and I think it would be good to 
get both points of view here.
    Mr. Floum. Senator, I would be happy to try to respond. We 
call it a two-sided market, so when you ask the question about 
the marketplace, we look at both merchant demand and cardholder 
demand. And unless you have enough cardholders, merchants will 
not be interested in accepting the card. Unless there are 
enough merchants that accept it, cardholders will not use it. 
So we need to try to balance so that the product is attractive 
to both.
    If interchange rates are too high, merchants will not use 
the product. We heard the example of raspberries with cash the 
next day. It demonstrates that merchants do have a choice to 
use the card products or to use other payment devices.
    On the card-issuing side, if cardholders are asked to pay 
too much in terms of annual fees, interest rates, other devices 
that financial institutions use to recoup their costs on the 
cardholder side, then cardholders will not be interested.
    So I think there is an inherent balance that is built into 
this two-sided market.
    Ms. Miller. Could I just say something?
    Senator Kyl. Yes, ma'am, go ahead.
    Ms. Miller. The point that I was trying to make was I am 
small, that was a local customer. She had no idea, until we 
started talking about what fees were like, what I had to deal 
with. She felt bad. She apologized to me for swiping her card 
in my store. So, yes, I did have the option in that situation.
    But nine times out of ten, that option is not there. You 
are busy. Your store is full of people. You are scooping ice 
cream cones. You are making sandwiches. You are pumping gas. 
You are just doing business, and it is costing us way too much.
    Thank you.
    Senator Kyl. Mr. Cannon?
    Mr. Cannon. Senator, when competitors get together and are 
allowed to fix the price of what they are going to charge 
someone else, that is fundamentally not the free market, and 
that is exactly what we have here today. And it does not matter 
whether it is two-sided markets or a four- party system or two 
times four. It makes no difference. We have to keep this simple 
and keep focused on exactly what is going on today. It is not 
complicated. It is price fixing. It is in the open. It is not 
secret. It is not collusive. The question is, Is it a violation 
of the law? And it truly is.
    So in a situation where people are involved in an antitrust 
violation and they are then deemed to be in violation of the 
law, they have to stop doing that illegal activity. So the 
question is: If you cannot fix prices, what else can you do? 
Every other business in the United States manages to do their 
business without fixing prices, and surely Visa and MasterCard 
could as well.
    Senator Kyl. To you or anyone else, Mr. Muris maybe, there 
is a legal remedy here. There are plenty of lawsuits that are 
resolving this, and it just takes a couple of them to establish 
the law in this area. Is that the preferable remedy here to any 
kind of Congressional action?
    Mr. Muris. Obviously, the issue is in court, and if they 
think it is an antitrust violation, they have that forum.
    To respond to the basic questions, I have one of every kind 
of card, and these are Discover and American Express. From the 
standpoint of merchants, they are identical because the 
merchants pay a merchant discount, as they do with Visa and 
MasterCard. But because they are not organized as joint 
ventures, they are not part of these lawsuits, even though they 
do the exact same thing. They are organized as individual 
companies in the way that MasterCard has now just recently 
    The reason that Visa and MasterCard are organized the way 
they are is a historical anomaly. As I mentioned in my 
testimony, when Visa began and MasterCard began, the law 
prohibited interstate banking. So if Bank of America in 
California, had this great idea, if could not take the idea to 
America by using Bank of America across the country. It had to 
form this cooperative.
    The last point is, in a legal joint venture, just as in the 
law firm analogy I said where it is completely legal to fix 
prices, interchange fees are used to fuel the enormous 
competition between the thousands of issuers. Interchange fees 
result in enormous benefits. I have a Cap One miles card. I 
have a MasterCard that gets me cash back. It is double cash 
back at gas stations, which is particularly valuable at the 
moment. These fees result in benefits to consumers. I get the 
float and the convenience. I do not have to carry cash. Cards 
are enormously beneficial, and it is why this is one of the 
great innovations of the last century, this payment card 
system, and it costs billions of dollars to put it to where it 
is today.
    Mr. Cannon. Senator, if I may respond to Mr. Muris, he has 
made my point for me. These miles and other benefits and 
things, ask yourself, Who pays for these? And the answer is you 
pay for them. Not only you pay for them as a credit card 
customer; every single customer of every single retailer and 
every single merchant pays for it as well, because it is pretty 
clear and undisputed that that price gets baked into the price 
of what we pay every day for everything.
    So when you think you are getting a great deal for your 
miles, you really ought to ask yourself, gee, if I am making 
that much, how much is somebody else--how much is going out of 
my other pocket?
    Mr. Muris. But, Senator, and my good friend Steve--we have 
been friends for a long time--his merchants, if they want, 
could say I will give you a better deal if you pay me cash. 
They could discount for cash. It is perfectly legal. Almost 
none of them do. The gas stations tried a long time ago for a 
while, and they do not now because it is less convenient and 
because many consumers would resent it.
    We have a system where the consumer is king, and the 
consumers like their plastic.
    Chairman Specter. I have a couple of hands up at the end of 
your questioning. Mr. Douglass, proceed.
    Mr. Douglass. Mr. Chairman, thank you for the chance to do 
this. The difference between American Express and Discover and 
Visa and MasterCard is Visa and MasterCard have 80 percent of 
the market. They are just the dominant leader. I mean, they 
control the market. And back to Senator Leahy's question about 
can we post the price, the problem is we only get the average 
price of what they are charging us. We cannot tell what they 
are charging us for one of these reward cards when they swipe 
that card in our dispensers at the pump. That is a different 
rate than if they have a non-reward card. So they have all 
these different rates, and we get an average. So we would have 
to have a computer to determine whether they are using a PIN 
number or whether they are using a remote swiping device. So it 
is very complicated.
    And back to the point that the counsel here has a card that 
gives him double the money back at his pump, we pay for that at 
the pump. It takes 50 percent of our gross margin at the pump 
to pay that credit card charge for that particular refund.
    Chairman Specter. Mr. Cannon, you had your hand up for a 
response to Senator Kyl's last question.
    Mr. Cannon. I do, Senator. Mr. Muris, responding to the 
other question, saying, Gee, the rules say you can discount for 
cash, well, our merchants, the impression or understanding they 
have is you cannot do that unless you are willing to post a 
cash price and a credit price on every single item in that 
    Now, I will tell you, what would be great, what might end 
this argument, this debate, is if we could see the rules. It 
would be a great thing. But, unfortunately, that has not been 
the case, and the merchants are given very thin documents, very 
short summaries of things to be able to say, oh, here is what 
you have to do.
    Now, I will tell you, if a merchant violates the rule, they 
are the first to tell you very quickly. But, gee, having a copy 
of the rules to begin with is a much harder thing.
    Chairman Specter. Mr. Peirez, you had your hand up in 
response, again, to Senator Kyl's question?
    Mr. Peirez. Thank you, Mr. Chairman. I actually wanted--
    Chairman Specter. Senator Kyl may turn out to have a 15-
minute round here.
    Mr. Peirez. Thank you, Mr. Chairman. I actually wanted to 
respond to a couple of points.
    First of all, all of the MasterCard rules that apply to the 
merchant side of the business are available in their entirety 
online, on our website, mastercardmerchant.com, including our 
discounting for cash rule, which says nothing about posting two 
separate prices. We have heard that allegation before. I can 
tell you right here right now, if a merchant wants a sign at 
the cash register saying a discount of blank is afforded for 
the use of cash, our rules do not prohibit that, and the 
applicable rules are available to the merchants.
    Second, I would like to respond to what is a convenient 
shorthand for people when they try to refer to this alleged 
market power by saying there is this 80-percent figure. 
MasterCard and Visa are fierce competitors. MasterCard is 
currently a public company in majority public hands, with all 
voting stock in hands independent of the financial institutions 
that participate in our system. And we are simply not an 
overlap or a proxy for our competitor Visa. And to lump us 
together like that, is inorrect. Even the Court in the 
Department of Justice case that you mentioned, Mr. Chairman, 
has recently found that MasterCard alone does not have market 
power. And so it is simply untrue. And when MasterCard sets its 
interchange rates, we do so as an independent public company 
today. We believe the way we did it in the past was 
justifiable, as it was upheld in the NaBanco decision and other 
court cases.
    So thank you for the time.
    Chairman Specter. We had gone to Senator Kyl before Senator 
Durbin, although Senator Durbin was here earlier, because of 
the rule of alternating, but we will await Senator Durbin's 
return. I know he had other commitments, but we would like to--
we will keep going a while longer here to give him a chance to 
    Mr. Douglass, staff advises me that you are not permitted 
to have a surcharge for people who use credit cards. Would you 
like to be able to have the freedom, if you chose, to have a 
surcharge for people who use MasterCard or Visa?
    Mr. Douglass. Mr. Chairman, no, I would not like to be able 
to have a surcharge. That would just drive the customers off. 
People really have been sold on plastic, and it is a real 
convenience, and we are on that system.
    The dilemma we have is that the charges just keep 
escalating. As I say, my costs have gone up 33 percent this 
year because of the escalating price of fuel, primarily.
    Chairman Specter. Is it true, Mr. Peirez, that there cannot 
be a surcharge?
    Mr. Peirez. We do not allow surcharging.
    Chairman Specter. Well, why can you get a discount for 
cash, but you cannot allow a surcharge? Just six of one and 
half a dozen of another.
    Mr. Peirez. It economically should be the same equivalent 
to a merchant that is looking to drive people to cash. However, 
we do not like having people using our cards feel that they are 
being discriminated against. It is a rule, however, that we 
continue to look at. We do allow surcharging in Europe and in 
Australia today. The U.S. is our largest and most important 
market. We tend to be a little slower to move here.
    Chairman Specter. I am glad to hear that you are looking at 
it because it is exactly the same thing.
    Mr. Cannon, MasterCard and Visa have made some structural 
changes here. They have transferred control of operations from 
member banks to public stockholders. Member banks can still 
have a minority interest, but it is nonvoting. MasterCard has 
made a change. Visa has created a Committee composed 
exclusively of independent members of the board of directors, 
not member banks, which make all the decisions regarding 
interchange fees. Have these changes eliminated the controls so 
that there is not a violation of antitrust laws under existing 
    Mr. Cannon. Yes, sir, it is. What they are trying to do is 
simply promote a little form over substance. It is very clear--
and I devote about two pages in my written testimony to this, 
Senator. Yes, it does not make a difference. The activity that 
is going on is still unlawful and should be stopped.
    Chairman Specter. Well, why is it unlawful if they have 
structured it so that the banks do not have control over the 
fee setting?
    Mr. Cannon. Well, Senator, in fact, if you--and I will be 
glad to submit this for the record. If you look at the S-1, 
which is the registration statement that MasterCard filed, it 
is very educational on this point, and it says clearly and 
unambiguously that the banks are--the banks still, by the way, 
hold 44 percent of the stock of MasterCard, the new company. 
And, in fact, it says, ``Our success or failure will still be 
dependent upon our customers. And who are our customers? Our 
customers are banks.''
    And so I can tell you, there is every incentive for this 
activity to continue regardless of the form, and the fact that 
MasterCard now says it has an independent board making this 
decision, what is the definition of ``independent''? I think 
everyone in business wants to make sure that they bring as much 
to the bottom line as they can, and that is exactly what will 
still happen.
    Chairman Specter. Mr. Peirez says that all of the rules of 
his company are publicly known. Is that true, too, with you, 
Mr. Floum, with your company?
    Mr. Floum. It is, Mr. Chairman.
    Chairman Specter. Well, where is the discrepancy?
    Mr. Cannon. I have not seen them. I would love to see them. 
And my understanding, Senator, was that Visa--
    Chairman Specter. Don't you have a website, Mr. Cannon?
    Mr. Cannon. We do. We do. But my understanding was that 
Visa was going to announce this week--
    Chairman Specter. But they say you can look on their 
website and find out. This is a pretty simple question of fact.
    Mr. Cannon. I do not think it is there, Senator. I was told 
that Visa was going to announce this week it was going to make 
their rules available; however, they were going to be 
accessible online. They could not be printed off. And, more 
importantly, if you are a merchant and getting these rules like 
that, you had to sign a non- disclosure agreement that you 
could not share them with anybody else. That does not seem like 
    Chairman Specter. Is that true, Mr. Floum, a non- 
disclosure agreement?
    Mr. Floum. That is correct, Mr. Chairman. Our rules--
    Chairman Specter. Why?
    Mr. Floum. Our rules govern the operation of our 14,000 
member banks. They address those banks and what those banks are 
supposed to do to participate in the system.
    Chairman Specter. Could they disclose them to the Senate 
Judiciary Committee?
    Mr. Floum. Yes, of course, and we will be happy to make 
those available. However, the rules, you need to understand--
    Chairman Specter. Make them available to the Committee. Mr. 
Peirez, we can show them then to Mr. Cannon.
    Mr. Floum. We will, Mr. Chairman.
    Chairman Specter. Senator Leahy?
    Senator Leahy. Mr. Chairman, your last question was the 
only question I was going to ask. I like the answer. I have no 
further questions.
    Chairman Specter. What is the projection as to Senator 
Durbin's return?
    Chairman Specter. Senator Kyl, do you have any further 
    Senator Kyl. No, Mr. Chairman.
    Chairman Specter. Senator Durbin will be submitting 
questions for the record. Thank you very much, Ms. Miller, Mr. 
Douglass, Mr. Floum, Mr. Peirez, Mr. Muris, and Mr. Cannon. 
This is a very important subject, and I think that we have 
learned a good bit about it, notwithstanding its complexity.
    That concludes our hearing.
    [Whereupon, at 10:54 a.m., the Committee was adjourned.]
    [Questions and answers and submissions for the record 
    [Additional material is being retained in the Committee