[House Hearing, 110 Congress]
[From the U.S. Government Printing Office]
CREDIT CARD INTERCHANGE FEES
ANTITRUST TASK FORCE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
JULY 19, 2007
Serial No. 110-77
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas STEVE CHABOT, Ohio
MAXINE WATERS, California DANIEL E. LUNGREN, California
WILLIAM D. DELAHUNT, Massachusetts CHRIS CANNON, Utah
ROBERT WEXLER, Florida RIC KELLER, Florida
LINDA T. SANCHEZ, California DARRELL ISSA, California
STEVE COHEN, Tennessee MIKE PENCE, Indiana
HANK JOHNSON, Georgia J. RANDY FORBES, Virginia
BETTY SUTTON, Ohio STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois TOM FEENEY, Florida
BRAD SHERMAN, California TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota
Perry Apelbaum, Staff Director and Chief Counsel
Joseph Gibson, Minority Chief Counsel
Antitrust Task Force
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California STEVE CHABOT, Ohio
RICK BOUCHER, Virginia RIC KELLER, Florida
ZOE LOFGREN, California F. JAMES SENSENBRENNER, Jr.,
SHEILA JACKSON LEE, Texas Wisconsin
MAXINE WATERS, California BOB GOODLATTE, Virginia
STEVE COHEN, Tennessee CHRIS CANNON, Utah
ANTHONY D. WEINER, New York DARRELL ISSA, California
ARTUR DAVIS, Alabama J. RANDY FORBES, Virginia
DEBBIE WASSERMAN SCHULTZ, Florida STEVE KING, Iowa
LAMAR SMITH, Texas, Ex Officio
Perry Apelbaum, Staff Director and Chief Counsel
Joseph Gibson, Minority Chief Counsel
C O N T E N T S
JULY 19, 2007
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, and Chairman, Antitrust Task Force. 1
The Honorable Steve Chabot, a Representative in Congress from the
State of Ohio, and Ranking Member, Antitrust Task Force........ 2
Mr. Steven C. Smith, President and Chief Executive Officer, K-VA-
T Food Stores, Inc.
Oral Testimony................................................. 3
Prepared Statement............................................. 5
Mr. John Buhrmaster, President, First National Bank of Scotia,
Oral Testimony................................................. 7
Prepared Statement............................................. 9
Mr. Edmund Mierzwinski, Consumer Program Director, U.S. PIRG
Oral Testimony................................................. 11
Prepared Statement............................................. 14
Mr. Timothy J. Muris, Of Counsel, O'Melveny & Myers
Oral Testimony................................................. 25
Prepared Statement............................................. 27
Mr. Mallory Duncan, Senior Vice President and General Counsel,
National Retail Federation
Oral Testimony................................................. 47
Prepared Statement............................................. 50
Material Submitted for the Hearing Record
Prepared Statement of the Honorable Lamar Smith, a Representative
in Congress from the State of Texas, and Member, Antitrust Task
Prepared Statement of the Honorable Sheila Jackson Lee, a
Representative in Congress from the State of Texas, and Member,
Antitrust Task Force........................................... 88
Prepared Statement of the Honorable Steve Cohen, a Representative
in Congress from the State of Tennessee, and Member, Antitrust
Task Force..................................................... 92
Letter from Timothy J. Muris, Of Counsel, O'Melveny & Myers LLP
to the Honorable John Conyers, Jr., with attachments:.......... 93
1. GSubmissions from a study by Javelin Research, April 2007
2. GSubmissions from a report by Aite Group, ``Five
Misconceptions About Interchange in America,'' 2005
3. GChart showing merchant discount rates in various European
countries to rates paid by U.S. merchants in 2004
4. Submissions from a report by Aite Group, 2005
5. Tables showing Visa U.S.A. Interchange Reimbursement Fees
6. G``Interchange Fees: Network, Issuer, Acquirer, and Merchant
Perspectives: Panel Remarks,'' Chair: Avivah Litan, Kansas City
Federal Reserve 2005
Prepared Statement of the National Association of Convenience
Stores (NACS).................................................. 130
Prepared Statement of the National Grocers Association (NGA)..... 137
Letter from John Gay, Senior Vice President, Government Affairs &
Public Policy, National Restaurant Association, to Chairman
Conyers and Ranking Member Chabot.............................. 141
Letter from G. Kendrick Macdowell, General Counsel and Director
of Government Affairs, National Association of Theatre Owners
(NATO), to Chairman Conyers and Ranking Member Chabot.......... 142
Letter from Randy Schenauer, Chairman, Government Relations
Committee, Society of American Florists (SAF), to Chairman
Conyers and Ranking Member Chabot.............................. 144
Letter from Brian E. Cartier, CAE, Chief Executive, National
Association of College Stores (NACS), to Chairman Conyers and
Ranking Member Chabot.......................................... 145
Letter from Lisa J. Mullings, President and C.E.O., NATSO, Inc.,
to Chairman Conyers and Ranking Member Chabot.................. 147
Letter from Darrell K. Smith, President, National Association of
Shell Marketers (NASM), to Chairman Conyers and Ranking Member
Letter from Heidi M. Davidson, Vice President, Global Public
Policy, MasterCard Worldwide, to Chairman Conyers, with
enclosed news releases......................................... 150
Letter from the Petroleum Marketers Association of America (PMAA)
to Chairman Conyers and Ranking Member Chabot.................. 154
CREDIT CARD INTERCHANGE FEES
THURSDAY, JULY 19, 2007
House of Representatives,
Antitrust Task Force
Committee on the Judiciary,
The Task Force met, pursuant to notice, at 2:11 p.m., in
Room 2141, Rayburn House Office Building, the Honorable John
Conyers, Jr. (Chairman of the Antitrust Task Force) presiding.
Present: Representatives Conyers, Berman, Boucher, Lofgren,
Delahunt, Waters, Cohen, Chabot, Keller, Cannon, Issa, and
Mr. Conyers. Good afternoon. The hearing of the Antitrust
Task Force will come to order. We are delighted to have this
stellar group of all-male witnesses.
The issue that brings us together today is about a fee that
affects the American consumer. Most people are unaware it even
exists and how much of it they are paying, and so we are going
to learn today some of the truths about the hidden interchange
fee. You see, every time you use a payment card at the mall, at
the grocery store, on the Internet, the merchant is charged a
fee, which gets divided up three ways, between the merchant's
bank, the consumer's bank, and the credit card company. It
covers processing fees, fraud protection, billing statements,
and other costs.
Almost 90 percent of this fee is a so-called interchange
fee, which is the payment made by the merchant's bank to the
consumer's bank. The percentage of this amount is set by the
credit card companies, generally Visa or MasterCard, and
averages 1.75 percent of the total purchase. Last year, these
fees totaled $36 billion, an increase of 117 percent since the
year 2001. These fees are ultimately passed onto consumers in
the form of higher prices for goods and services, whether they
purchase these items by credit card, check or cash.
Merchants are increasingly concerned about these fees
because, as the rates rise and credit cards become more and
more ubiquitous--and they cite the lack of public awareness
about interchange fees among consumers, inconsistent charging
practices, and the possibility that Visa and MasterCard may be
setting the interchange fees--dare I say it--collusively,
instead of allowing competition to work.
Now, the payment card industry defends these fees, arguing
that the credit card companies don't prohibit disclosure of
interchange fees to consumers, the fees are a result of healthy
competition and are vital to the entire system of payment
cards. In this regard, we are trying to clear up a couple
questions: Are interchange fees imposing unfair costs on the
consumer? Are interchange fees increasing at too rapid a rate,
and why? And, finally, are our friendly credit card companies
engaged in anti-competitive behavior?
Now, I come to this hearing with as open a mind as I can,
but I think the proof is on the credit card companies to give
us some reassurance. And so I look forward to a frank
discussion with all of you here today.
I am happy to recognize now my friend, Steve Chabot, the
Mr. Chabot. Thank you, Mr. Chairman. I want to thank the
Chairman, the distinguished gentleman from Michigan, for
holding this important hearing today, examining the role that
credit card interchange fees play in our economy. We have an
expert panel of witnesses with us today, and I look forward to
hearing their perspectives on this issue.
This hearing is yet another example of how technology has
changed the way that we live, the way we work, we do business,
and travel. Credit cards have brought consumers and merchants
together in ways never thought possible. Coupled with the
increased use of Internet, buying and selling has never been
And recent statistics prove it: there are more than 14,000
card issuers in the United States today, with one billion cards
in use. Think of that. We have about 300 million people in this
country, yet we have a billion credit cards in use. In 2002,
consumers bought more than $43 billion worth of goods on the
Internet. That figure rose to $100 billion in 2004. Experts
predict that, by 2009, U.S. consumers will spend more than $5
trillion using electronic payment systems.
Today's hearing is about the costs of doing business with
credit cards. In our market economy, supply and demand sets the
prices of goods and services, and the Sherman Act was enacted
to protect consumers from anti-competitive behavior. Recently,
concern has been expressed that the interchange payment system
is anti-competitive; yet, it is no secret, especially with the
statistics that I just read, that the number of Americans
buying on credit has increased. Consumers continue to obtain
and use credit and debit cards for their convenience, ease,
and, in certain instances, their rewards programs.
However, this increase in consumer use has brought with it
increased concern that merchants are paying disproportionately
high transaction costs associated with credit and debit
electronic payments. Businesses large and small want a more
competitive and transparent system. In my district, I have
received a number of letters from retailers and grocery stores
and other merchants expressing concern about the impact that
these fees have on businesses and their ability to provide
goods and services.
I look forward to hearing from our witnesses today and to
gaining a better understanding of the market for credit cards,
the origins of the interchange fees, the role that these fees
play in facilitating transactions, and learning whether
Government intervention is appropriate. I said in the last
three antitrust hearings that we have had in this particular
Committee that we have held that Government intervention is not
always the best remedy, and we must be careful not to do more
harm than good. Of course, sometimes Government action is
appropriate, and it is for us to determine, and this is one of
those hearings that will help us to decide that particular
issue. But I think most of us are trying to keep an open mind
This hearing is a necessary first step in fulfilling our
oversight responsibilities, and I again want to thank the
Chairman for holding this hearing, and I want to also thank
each of the members of the panel here for their attendance this
afternoon. And we are hoping to learn a great deal.
I yield back.
Mr. Conyers. Thank you very much, Steve Chabot. We will
incorporate all other opening statements in the record.
And I yield now to the distinguished gentleman from
Virginia, Rick Boucher, to introduce one of our witnesses.
Mr. Boucher. Well, thank you very much, Mr. Chairman. And I
commend you, also, for organizing today's hearing.
Unfortunately, after this introduction, I am going to need to
depart, but I look forward to receiving the benefit of
testimony provided here today and learning more about this very
I have the privilege this afternoon of introducing to the
Committee a person who is not only a constituent of mine, but
also a personal friend. His name is Steve Smith. He is the
Chairman of the Food Marketing Institute, which includes 1,500
member companies, both food retailers and also food
wholesalers. He is also the President and Chief Executive
Officer of K-VA-T Food Stores, which operates more than 90 Food
City grocery stores, 67 pharmacies, and 46 refueling stations
in Virginia, Kentucky and Tennessee.
Of particular interest to me is the focus that Steve Smith,
through his various stores, has placed on the need to acquire
from local farms in our region locally grown produce and also
locally produced meat. He has worked with my office to foster
the market in our region for sheep and value-added beef
farming, as well as fruits and vegetables purchased from local
farms, benefiting our economy and also providing very fresh
local produce for the benefit of my constituents.
So it is a privilege to welcome today one of our region's
most successful businessmen, who I know will have enlightening
testimony for the Committee. And I am pleased to introduce to
the Committee Mr. Steve Smith.
And thank you very much, Mr. Chairman, for allowing this
Mr. Conyers. Mr. Smith, you have been introduced by one of
our stars in the Congress, so I won't add anything to it, but
except to tell you, you have got a heavy burden to prove here.
We welcome you, though, nevertheless. Please feel free to
TESTIMONY STEVEN C. SMITH, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, K-VA-T FOOD STORES, INC.
Mr. Smith. Well, thank you very much, Congressman Boucher,
for that kind introduction.
And, Chairman Conyers and Members of the Committee, I am
honored to appear before you today and present information of
great concern to my company, to members of the Food Marketing
Institute, and to the American consumers. I am here today to
shed light on the best-kept secret, I think, of the credit card
industry, and that is the hidden tax that has been thrust upon
consumers due to the ever-increasing interchange fees that
credit card companies charge retailers as a result of the
collective pricing setting by Visa and by MasterCard and their
respective card-issuing banks.
This collective price setting does not occur in isolation.
Rather, it is part and parcel of a system that imposes
collectively set rules that effectively require merchants to
keep the cost of accepting cards secret from their customers.
The rules also prevent merchants from refusing to accept
particular types of credit and debit cards that impose higher
fees, including premium and corporate cards. Further, we cannot
make brand preference based on card or payment type. Thus, the
card systems can--and do--increase their collectively set
interchange fees without any fear of resistance by the
cardholders who remain unaware of the increased costs that they
are imposing and incurring.
The grocery industry is comprised of a variety of
retailers, from big box retailers, nationally known, to small
mom-and-pop retailers on the corner. Our industry serves
probably the broadest cross-section of the retail industry that
I can think of. And each of our consumers enjoy a very
competitive marketplace that exemplifies what most Americans
believe the free enterprise system to be. Because of this
healthy competition, the profit margin in the grocery industry
is generally in the 1 percent range. Now, I don't know of any
other industry that operates in such a competitive, low-margin
Now, when we first started accepting credit cards, our
interchange rate was around 1 percent, about the same as our
profit margin. The initial volume of card payments was low.
And, quite frankly, our industry expected the rate charges
would fall as transaction volume increased. This would be
consistent with basic economic theory and our experience with
various other aspects of our business. However, the exact
opposite proved true.
As credit card usage has become more prevalent and
interchange fee rates have climbed, our costs have increased
exponentially, resulting in a 700 percent rise in total
interchange fees over the last 10 years. Today's high rate of
credit card usage, combined with the fact that credit card
companies are allowed to collectively set interchange rates,
leaves retailers faced with the ``take it or leave it'' system.
The retailer's only practical option is to pay up and pass this
uncontrollable expense onto our consumers. Because of these
factors, the grocery industry now faces credit card interchange
fees that can be over 2 percent of a sale, nearly double our
industry's profit margin of 1 percent.
As FMI chairman, I represent over 26,000 retail food stores
with combined annual volume of over $340 billion. These
retailers have been put in the position of having to pass along
to consumers over $4 billion annually in interchange fees. In
the grocery industry, our very survival depends on customer
attraction and retention amidst an intensely competitive
Every entity of the retail world is faced with some form of
competition, and this competition serves as a safeguard to
ensure that our practices and prices remain in check. Yet the
reverse is true of the credit card companies. Visa and
MasterCard, accounting for over 80 percent of the industry
transaction volume, each work collectively with their members
to drive rates upward rather than maintaining a healthy
balance. In their non-competitive market, normal pressures do
Visa regularly increases its collectively set interchange
fee to encourage the issuance of cards, and MasterCard does the
same. Meanwhile, the unsuspecting consumer is the conduit for
the rise in fees, thanks in part to those collectively set
rules that prevent merchants from responding competitively to
the increased cost of particular cards.
Fair and rigorous competition is the foundation of our
industry. We are not lobbying to deny credit card companies
their reasonable profits. We only ask that we not be faced with
costs imposed on us that have been set collectively by card
systems and their member banks in an environment that is
deliberately designed to deprive American merchants of any
freedom of competitive action. Given Visa and MasterCard's
market share, we simply don't have the ability to say no to the
card systems' all-or-nothing proposition.
The conventional wisdom tells us that, as volume grows,
prices should fall, but instead credit card companies have
created much greater volume and raised fees and costs
substantially. This is contrary to the basic concepts of the
American free enterprise system, and the situation is the
result of card systems controlling 80 percent of an industry
collectively setting prices in violation of the antitrust laws.
And the great shame of it, my friends, is that the consumer
bears the cost, and this fact has been effectively hidden from
them. I don't know of any other industry which is allowed to
blatantly abuse both the consumer and the retailer. Credit card
companies should be required to operate in the same competitive
environment as any other facet of business throughout our
Thank you very much, and I will be happy to answer
questions at the appropriate time.
[The prepared statement of Mr. Smith follows:]
Prepared Statement of Steven C. Smith
Chairman Conyers and Members of the Committee, I am honored to
appear before you today and present information of great concern to my
company, K-VA-T Food Stores, Inc., the members of the Food Marketing
Institute and American consumers.
I serve as President and CEO for K-VA-T Food Stores, Inc., a retail
supermarket chain operating 95 stores under the Food City banner in
Kentucky, Virginia and Tennessee. We are a family owned business,
dating back to 1955. 16% of our company is owned by our associates
through our Employee Stock Ownership Plan and we currently employ over
Also, I serve as Chairman of the Food Marketing Institute, commonly
referred to as ``FMI.'' FMI is a national trade association that has
1,500 member companies made up of food retailers and wholesalers in the
United States and around the world. FMI's members operate approximately
26,000 retail food stores with combined annual sales of $340 billion,
representing three quarters of all retail food store sales in the
United States. FMI's retail membership is composed of national and
regional chains as well as independent grocery stores. Our
international membership includes some 200 companies from 50 countries.
I am here today to shed light on the best kept secret of the credit
card industry; that is, the great hidden tax that has been thrust upon
consumers due to ever increasing interchange fees that credit card
companies charge retailers as a result of collective price setting by
Visa and by MasterCard and their respective card-issuing banks.
This collective price setting--which looks to me like price fixing
under the antitrust laws--does not occur in isolation. Rather, it is
part and parcel of a system that imposes collectively-set rules that
effectively require merchants to keep the cost of accepting cards
secret from their customers. The rules also prevent merchants from
refusing to accept particular types of credit or debit cards that
impose higher fees. Thus, the card systems can, and do, increase their
collectively-set interchange fees without any fear of resistance by
their card holders who remain unaware of the increased costs they are
imposing and incurring.
My testimony today will focus on three topics: First, I would like
to give you some understanding of the supermarket industry in today's
marketplace; Second, the history of electronic payment transactions in
our industry; and last, the effect of interchange fees on the retail
industry today and the hidden ``tax'' burden it has laid upon the
The grocery industry is comprised of all types of businesses--from
national ``big box'' chain stores to the traditional ``mom & pop''
store on the corner. It is my opinion that this industry serves a
broader cross-section of the American public than any other retail
industry. Each of those consumers enjoys a very competitive marketplace
that exemplifies what most Americans believe their free enterprise
system to be--specifically, each member of our industry has to fight,
each and every day, to offer the consumer the best product at the
fairest price in order to win them as a customer.
Because of this healthy competition, the profit margin in the
grocery industry is generally in the 1% range; that is, our operators
generally only make $1 of profit for $100 of sales. I like to say that
we are a ``penny'' business--I know of no other industry that operates
in such a competitive, low-margin environment.
Back in the early 1990's, supermarkets first began experimenting
with credit and debit card acceptance. When we signed on to accept
credit/debit cards, the issuing banks actually paid retailers to accept
their cards and offered a variety of incentives to entice retailers to
``sign up'' and join the system.
Over time, our interchange fees were increased. And even though our
profit margin was right around 1%, the same amount as our 1%
introductory interchange fees, the initial volume of credit card
payments was low. The industry fully expected that the rate charges
would fall as transaction volume increased--this would be consistent
with basic economic theory and our experience with various other
aspects of our business. However, the exact opposite proved true.
Today consumer use of credit and debit cards is at an all time
high, with 60-65% of all payments in our industry made with plastic. As
the credit card payment method has become more and more prevalent, and
interchange fee rates have increased, our interchange fee volume began
to increase exponentially--resulting in a 700% increase in total
interchange fees over the past 10 years. Today's high rate of credit
card usage combined with the fact that credit card companies are
allowed to collectively set interchange rates leaves retailers faced
with a take it or leave it system--basically it comes down to a
decision to either swallow hard and pay high fees that are set with no
competitive influences or turn your back on the 65% of your revenue
from customers who have been influenced by the card industry's
advertising to believe they are social outcasts if they pay with actual
cash. The retailer's only practical option is to ``pay up'' and be
forced to pass this uncontrollable expense on to consumers.
Because of these factors, the grocery industry now faces credit
card interchange fees that can be up to 2% or more of a sale. Please
recall my earlier statement that our industry is a ``penny business''
or 1% of sales. Therefore, the effect is that fees set collectively by
the credit card companies are now double the industry's profit margins.
As FMI Chairman, I represent 26,000 retail food stores with
combined annual sales of $340 billion, or three quarters of all retail
food store sales in the United States. These retailers have all been
put in the position of having to pass-along the costs of these credit
card interchange fees. As a result, consumers pay over $4 billion
annually in FMI member stores and because the fees remain hidden, they
don't even realize it!
To the ``injury'' of higher interchange fees, our members must add
the ``insult'' of the anticompetitive, Visa and MasterCard Operating
Rules. These rules prevent stores from setting minimum charges; require
retailers to accept all cards, even premium rewards or corporate cards
which carry a higher interchange fee and are not available to the
majority of consumers; don't permit retailers to make preferences based
on card type or even payment type; and prevent retailers from reviewing
the rules of practice without obtaining a signed nondisclosure
In the grocery industry, our very survival depends upon customer
attraction and retention amidst an intensely competitive marketplace.
Every entity of the retail world is faced with some form of
competition--from the contractors that build our stores and suppliers
that provide our products to our utility companies. This competition
serves as a safeguard to ensure that our practices and prices remain in
Yet the reverse is true of credit card companies. Visa and
MasterCard, accounting for 80% of industry transaction volume, each
work collectively with their members to drive rates upward rather than
maintaining a healthy balance. In their non-competitive market, normal
pressures do not apply. Visa regularly increases its collectively-set
interchange fees to encourage the issuance of its cards and MasterCard
does the same. Meanwhile, the unsuspecting consumer is the conduit for
this rise in fees--thanks in part to those collectively-set rules that
prevent merchants from responding competitively to the increased cost
of particular types of cards. The only beneficiaries are those lucky
few who qualify for the premium cards packed with rewards on airline
miles, cash back, hotel rooms, etc. But even they often find that the
greatly touted rewards programs lack the promised substance.
My company operates 95 stores in 3 states. We see credit cards from
every state in the country and I have yet to find even one bank that
chose to offer an interchange rate lower than those collectively set
and agreed upon by Visa or MasterCard. Fair and rigorous competition is
the foundation of our industry. We are not lobbying to deny credit card
companies their reasonable profit. We only ask that we not be faced
with costs imposed on us that have been set collectively by card
systems and their member banks, in an environment that is deliberately
and collectively designed to deprive America's merchants of any freedom
of competitive action: given Visa and MasterCard's market share we
simply don't have the ability to say ``no'' to the card systems' all-
The conventional wisdom tells us that as volume grows prices should
fall, but instead credit card companies have created much greater
volume AND raised fees and costs substantially. This is contrary to the
basic concepts of the American free enterprise system. This situation
is the result of card systems controlling 80% of industry volume
collectively setting prices in violation of the antitrust laws. And the
great shame of it all is that the consumer bears the costs and this
fact has been effectively hidden from them. I hope that you can work
with representatives of FMI and other merchant groups to develop
solutions to end the anticompetitive conduct of the major card systems.
I know of no other industry which is allowed to blatantly abuse both
the consumer and the retailer. Credit card companies should be required
to operate in the same competitive environment as every other facet of
business throughout our nation.
Thank you for the opportunity to testify.
Mr. Conyers. Thank you very much, Mr. Steven Smith.
Our next witness is the chairman of the Payment and
Technology Committee of the Independent Community Bankers of
America, known as ICBA. Mr. John Buhrmaster is the chairman of
this ICBA committee, the only national trade association that
exclusively represents community banks. He is the president
also of the First National Bank in Scotia, New York, and has
been recently appointed to the ICBA Bank as a director. He also
served on the association's Hurricane Katrina disaster task
And we welcome you to this hearing.
TESTIMONY OF JOHN BUHRMASTER, PRESIDENT,
FIRST NATIONAL BANK OF SCOTIA, NEW YORK
Mr. Buhrmaster. Thank you, Chairman Conyers and Ranking
Member Chabot, Members of the Task Force. My name is John
Buhrmaster, and I am president of First National Bank of
Scotia, a $270 million community bank located in Scotia, New
York, upstate New York. I am pleased to be here today on behalf
of the Independent Community Bankers of America and its nearly
5,000 member banks, just like myself.
Today, I would like to focus on two key aspects of the
interchange debate: how interchange affects consumers in the
market and the impact of interchange on competition.
It is important to realize that, for a community bank like
mine, which is engaged in credit and debit card activities,
both as an acquiring bank and a card issuer, our customers are
both the consumers who trust us with their personal banking
needs and our many local merchants. This might not seem
obvious, but as consumers can shop around for a bank that best
meets their financial needs, merchants setting up a credit card
acceptance process can also shop around for a level of service,
customer support, and a range of fees that best suits their
If a merchant opts to sign with First National, it is
getting a tremendous value because of the interchange system.
Small business in and around my community can set up a deal
with my bank where they are paying competitive fees, can accept
plastic, and are assured a consistent payment experience,
backed by sophisticated fraud detection systems. This
acceptance is very important to the economic base of my
The payment system in our country is not free. It did not
materialize overnight and should be paid for by those choosing
to take advantage of it. We don't want our merchants to pay
high fees, but interchange is a cost of doing business for them
and is a cost to the acquiring side of my bank's business.
My aunt runs a winery in the Finger Lakes of New York. In
setting up her business, she made the choice to accept credit
cards. She told me that interchange is a good value for her
business, because credit cards allow people to buy who might
otherwise not. Sometimes they even purchase more if it is on a
card, rather than if they are paying with cash. She views the
interchange as a part of her overhead, and it helps her reach
Contrary to popular belief, for many community banks, the
services we are able to provide thanks to the existence of a
negotiated interchange fee system are not huge profit centers.
For me and many community bankers, the variety of products and
the high level of personal service we are able to offer
consumers is what makes the system most valuable, not the
Some have also stated that the interchange system is not
transparent and that these rates should be printed on payment
card receipts. I have no problem telling the merchants the cost
they incur to accept debit and credit cards, but printing
interchange rates on customer receipts, beside adding an
additional expense, would be the equivalent of my aunt telling
her customers how much it cost the venue to pick the grapes.
The interchange system enhances competition and functions
so well that thousands of small community banks are able to
stand toe to toe on both the issuing and acquiring side of the
business and offer services to consumers in direct competition
to banks like Citigroup and Bank of America, while providing
the type of consumer experience that only a community banker
Our bank was founded in 1923, and I am the fourth
generation of my family to serve as president. If we were
forced to compete in an environment without the card networks
negotiating interchange against the mega-banks with national
footprints, our relatively small size would put us at a
competitive disadvantage that would be difficult to overcome.
I also want to point out that the interchange rates we
currently receive as an issuer and pay as an acquirer are on a
level playing field with the largest banks in our country.
Consumers and merchants are not always better served by
something just because it is big, and that is where a community
bank plays a vital role.
I believe that aspect is often overlooked in this debate,
because it is so easy to focus on the largest issuers and
acquirers. I also believe it is inaccurate and misleading to
characterize interchange as a hidden tax on consumers. It is no
more a hidden tax than is the cost of check processing or the
cost of counting cash or the cost of making change. And if
anything, interchange is more transparent than the cost of
Interchange is a fee for a valuable service provided to the
merchant. It is a fee that allows a bank like mine to support
local businesses and give those businesses the ability to
accept and to attract more customers with additional payment
choices and allows those customers the flexibility of paying on
credit. That is the benefit of a balanced market that works the
way it is supposed to, with an intermediary like Visa or
MasterCard standing in for us, successfully bringing together
and meeting the payment needs of banks, merchants and consumers
Again, thank you, Chairman Conyers and Ranking Member
Chabot for the opportunity to testify on behalf of ICBA and
community banks in this country. I look forward to your
[The prepared statement of Mr. Buhrmaster follows:]
Prepared Statement of John Buhrmaster
Chairman Conyers, Ranking Member Chabot, Members of the Task Force,
my name is John Buhrmaster and I am President of 1st National Bank of
Scotia, a $270 million community bank located in Scotia, New York, and
I am pleased to be here today on behalf of the Independent Community
Bankers of America (ICBA).
On behalf of ICBA's nearly 5,000 member banks, I want to express
our appreciation for the opportunity to testify on the important role
credit and debit card interchange fees play in supporting community
banks and our customers. While there are many aspects to the
interchange debate, I would like to focus on two today: how interchange
affects consumers in the market, and the impact of interchange on
THE IMPACT OF INTERCHANGE ON CONSUMERS
For a community bank like mine, which is engaged in credit and
debit card activities as both an acquiring bank--i.e. a member of Visa
or MasterCard that maintains the merchant relationship and receives the
card transactions from the merchant--and a card issuer, it is important
to realize that not only are our customers the consumers who trust us
with their personal banking needs, but also the many local merchants
who have decided, after shopping around, that we can provide them with
the best acquiring services to meet their needs.
Just as consumers should always shop around for a financial
institution that best meets their banking needs, a merchant who is
setting up a credit card acceptance process should shop around for a
level of service, customer support, and range of fees that best fits
their business plan. If a merchant opts to sign with 1st National, at
the end of the day, it is getting tremendous value because of the
interchange system that I, as an acquirer, am able to utilize. The
merchant does not have to extend credit directly. It gets guaranteed
funds in its account right away, the ability to accept credit and debit
cards carried by millions of consumers, and doesn't have to worry about
bounced checks. And also because of interchange, merchants, as well as
cardholders and card issuers, all benefit from state-of-the-art fraud
detection systems. These fraud-detection systems are even more
important to smaller merchants who lack the deep pockets of their much
larger competitors. The same applies to my bank as a small card issuer.
There was a time when, if you wanted to use credit for a purchase,
you had to shop at a large department store that could afford an in-
house credit program. Today, most consumers can use credit to shop at
even the smallest merchant because most consumers carry a line of
credit in the form of a credit card in their wallets. What small
retailer could afford its own proprietary card nowadays? Because of my
ability to issue cards and be a merchant acquirer, small businesses in
and around my community can set up a deal where they are paying
competitive fees, can accept plastic, are assured a consistent payment
experience, and are protected against the fraud I described earlier.
This acceptance is important to the viability of my local merchants and
the economic base of my community.
Contrary to popular belief, for many community banks, the services
I'm able to provide thanks to the existence of a negotiated interchange
fee system are not huge profit centers. The real value lies in my basic
ability to offer these products to consumers and merchants. Does it
make me some money? Of course. But for me and many community bankers,
the high level of personal service I am able to provide consumers is
what makes this system valuable, not gigantic profits.
In my estimation, government intervention in the interchange system
would most significantly harm my customers who, again, include both
small merchants and consumers. In all likelihood, without the incentive
of interchange, community banks like mine would not be able to offer
the same services we do now, which means fewer choices for consumers
and less competition for their business. In addition, if more banks
stop offering interchange-fee-supported products and services, I think
it's very likely the industry would consolidate into just a few very
large issuers and acquirers, and costs of running the system that are
currently covered by interchange would be passed on through the
payments chain, with the final burden falling on your average consumer
who uses a credit card. The payment system and infrastructure in our
country is not free, did not materialize overnight, and should be paid
for by those choosing to take advantage of it.
We don't want our merchants to pay high fees, but interchange is a
cost to the acquiring side of my bank's business. It is a factor in
determining the merchant fee (``discount'') I charge the merchants my
bank supports. This merchant discount is a cost of doing business just
as the wholesale cost of Concord grapes--a significant industry in my
part of Upstate New York--is a cost of doing business to a winery. The
merchant winemaker needs to know the cost of both the merchant discount
and the wholesale cost of grapes. The regular statements I provide to
my merchant customers gives them explicit figures on the cost to them
of card acceptance, just as the bills winemakers receive from grape
growers tell them the wholesale cost of grapes.
Also, as a card issuer, I could not afford to make those products
available to consumers, giving them the opportunity build that
relationship with their local bank, without interchange income. It is
also likely that the remaining issuers would scale back reward programs
and grace periods, turning credit cards into straight short-term
lending products and not the transaction accounts they have evolved
into for many people who take advantage of free airline tickets and
Some have also made the assertion that the interchange system is
not transparent, and that these rates should be printed on payment card
receipts. I have no problem telling merchants the costs they incur to
accept debit and credit cards. But printing interchange rates on
customer receipts would be the equivalent of telling consumers how much
it cost the vineyard to pick its grape harvest. The more relevant
information for the consumer would be the wholesale cost of the grapes
and the merchant discount paid. Right now, nothing prevents a merchant
from voluntarily printing both on receipts; but doing so would add
additional costs to the payment process.
THE IMPACT OF INTERCHANGE ON COMPETITION
On the issue of competition, our bank was founded in 1923, and I am
the fourth generation Buhrmaster to serve as President of 1st National.
I can tell you with confidence, if I didn't have a card network like
Visa or MasterCard standing in for me to negotiate interchange rates
against the mega-banks with national footprints, I--and maybe my father
before me who served as President--would simply not have been able to
compete for as long as we have. The financial services we provide to
the people and businesses in our communities would have been gone long
ago because we, quite simply, would not have been able to offer the
competitive products and services to stay in business.
Put another way, our interchange system works so well that
thousands of small community banks are able to stand toe-to-toe, on
both the issuing and acquiring bank sides of the business, and offer
services to consumers in direct competition to banks like Citigroup and
JPMorgan Chase, while providing the type of customer service that only
a community banker can give. If we were forced to compete in an
environment without interchange, our relatively small size would put us
at a significant competitive disadvantage in negotiating the rates we
would receive. It is important to note that the interchange rates we
currently receive as an issuer and pay as an acquirer, are the same
rates paid by the largest banks in our country. Without our market-
driven system, how would a small bank compete against the clout of
While big banks will always beat us in terms of economies of scale,
they just can't offer the flexibility to customers that we do. A person
can walk into one of our bank branches and set up all of their
financial services in one place, including walking out with one of our
credit or debit cards. They can have a relationship with one bank that
knows them and their community, and they can do that thanks to
I'd also like to address what I believe is a very unfair
characterization: that all interchange does is allow big institutions
to take advantage of the little guys. Not only is that wrong, it's also
opposite of reality. Interchange, as I described previously, offers
many protections against things like losses from fraud. Yes, the big
issuers and big banks do drive interchange pricing. But some large
banks choose to have interchange as a main profit center, and are very
good at creating efficiencies. But consumers, including folks who walk
in off the street and merchants, are not always better served by
something just because it's ``big,'' and that's where a community bank
plays a vital role. I believe that aspect is often overlooked in this
debate, because it's so easy to focus on the large issuers and large
acquirers, ignoring the harm that could be done to the thousands of
community banks should the interchange system be curtailed and not
allowed to operate by the dictates of the market.
I also believe it is inaccurate and misleading to characterize
interchange as a hidden tax on consumers. It is no more a hidden tax
than is the cost of check processing or the cost of counting cash and
making change. Interchange is a fee for a service that allows a bank
like mine to offer additional services to local businesses, gives those
businesses the ability to attract more customers with additional
payment choices, and allows those customers the flexibility of paying
on credit. That's the benefit of a two-sided market that works the way
it's supposed to, with an intermediary like Visa or MasterCard standing
in for us and successfully bringing together and meeting the various
payment needs of banks, merchants and consumers. Were there not some
value to be added to a business model by accepting the costs of
participating in the credit and debit card interchange fee system, we
would see rates of electronic payments on the decline. Of course we all
know, that is not the case and the number of electronic payments
continues to grow. Only thanks to interchange can complete strangers
exchange plastic for large-dollar items within the parameters of a
controlled, predictable system.
To conclude, ICBA strongly believes the credit and debit card
interchange system in our country is working, and provides tremendous
benefit to American consumers who are opting in greater numbers each
day to use credit and debit cards. Merchants have many choices
available to them with regards to the form of payments they wish to
accept, just as consumers have many choices regarding the financial
institution with which they choose to do business. I compete every day
for the business of both merchants and consumers, and I do so in large
part thanks to the availability of default interchange rates.
Intervening in a functioning market will only harm the merchants and
consumers currently benefiting from an efficient process.
Again, thank you Chairman Conyers and Ranking Member Chabot for the
opportunity to testify on behalf of ICBA, and I look forward to any
questions you may have.
Mr. Conyers. Thank you very much.
We now have the consumer advocate with the U.S. Public
Interest Research Group, Ed Mierzwinski. He has been before the
Congress and State legislatures. He has written extensively on
consumer issues. He is frequently quoted. You may have seen him
on TV even, or read about him in the New York Times. And now we
have him before us today.
We welcome you, sir.
TESTIMONY OF EDMUND MIERZWINSKI,
CONSUMER PROGRAM DIRECTOR, U.S. PIRG
Mr. Mierzwinski. Thank you very much, Mr. Chairman. And we
appreciate all your leadership on consumer issues over the
years, as well.
I am Ed Mierzwinski, and I am consumer program director
with U.S. PIRG. My testimony today is also on behalf of the
Consumer Federation of America and Consumer Action, two leading
consumer groups. After I submitted my testimony, Consumers
Union also endorsed it, so some of the leading consumer groups
all agree that interchange is a significant problem for the
Congress to consider.
A prime purpose of our organization is to advocate for a
fair and competitive marketplace. And, quite frankly, we
believe that the financial services markets work best when
there is vigorous competition and consumers are protected from
anti-competitive practices. The work of your Committee is very
important in this regard.
I have one simple message today: The deceptive and anti-
competitive practices of the Visa and MasterCard payment
networks have injured both consumers and merchants for many
years. Interchange fees are, in fact, hidden taxes or charges
paid by all Americans, whether they use credit cards, whether
they use debit cards, whether they use checks, or whether they
pay with cash. There may be some modest benefits to those
cardholders who use cards and get some rewards, but I think
those benefits are offset dramatically by the costs that all
consumers pay, because, again, interchange is paid by all of us
because of the way that the system works.
The consumers who don't use credit cards basically
subsidize credit card usage by paying inflated products, prices
inflated by the $36 billion of dollars of anti-competitive
interchange fees paid each year. We present six main points.
Again, all consumers, even those who pay with cash, pay more at
the store and more at the pump because these interchange fees
are passed along in higher costs of goods and services.
The significant increased interchange fees signal a broken
marketplace. Visa and MasterCard have tremendous market power.
Merchants have no choice but to accept their cards on their
terms. It is not surprising that interchange fees have
increased significantly, even though costs have gone down and
are much higher in the U.S. than in any other country due to
these anti-competitive practices. In a competitive market,
prices would fall when costs fall.
Third, the card associations' rules prevent merchants from
informing consumers about the costs of payment and limit the
ability of merchants to direct consumers to the safest, lowest
cost, and most efficient forms of payment. I never use a debit
card myself. I use an ATM card, but not a debit card. Debit
cards are risky when you use them in a signature-based
transaction. The rules that protect you are not as good as the
rules when they use a credit card, but merchants would prefer
you to use an online transaction, the PIN-based debit, but the
Visa and MasterCard rules prohibit them from doing so. There
are a variety of unfair and deceptive practices that they use
to drive you to the higher cost payment, and rewards is simply
one of them.
Fourth, neither the card issuance nor the card network
markets are competitive. Because of the lax merger policy of
the Government regulators, the card issuance market is
essentially an oligopoly. Interchange and consumer fees have
increased as concentration has increased to enormous levels.
And, finally, I want to point out that interchange is only
one problem of this oligopoly of the card networks. The issuing
banks have become so concentrated that they are able to engage
in a number of unfair practices to consumers. Owning a credit
card company issuing credit cards is essentially a license to
steal. The top 10 companies now control 90 percent of the
market. Their contracts with consumers allow them to change the
rules at any time for any reason, including no reason. And
consumers are subjected to unfair mandatory arbitration if they
want to change or dispute anything on their contract.
You might ask, why would I be talking to you about these
practices at the Antitrust Task Force? Well, there are three
reasons. First, the industry will suggest the limitless
benefits of credit cards. I submit to you that the story of the
benefits is far more ambiguous, and I submit to you that the
purpose of rewards, for example, is simply to get either
merchants to pay more in merchant interchange fees or to get
consumers to rack up high-cost credit card debt. And the
concentration of the market facilitates these deceptive and
onerous practices. The ability of the dominant card issuers to
maintain this tight oligopoly is contributed to by these unfair
We urge the Committee to examine closely the competition
issues that allow this oligopoly to treat customers so
unfairly. In particular, we ask you to question whether DOJ, in
approving virtually every recent credit card company merger
with no conditions, has adequately reviewed the competition
implications of the mergers.
And, finally, we believe these deceptive and anti-consumer
practices demonstrate the lack of competition in the card
network market. Visa and MasterCard have the ability to prevent
many of these unfair practices; they choose not to. About the
only rule we know of that they have enforced--and enforced in a
bad way, as you will hear from the merchants--is preventing
merchants from offering discounts for cash.
So we think that there is a lot of serious problems before
the Committee. We are very pleased we have the opportunity to
testify on behalf of consumers today. We look forward to your
[The prepared statement of Mr. Mierzwinski follows:]
Prepared Statement of Edmund Mierzwinski
Mr. Conyers. Thank you very much.
Our next witness is counsel for O'Melveny and Myers, Mr.
Timothy Muris, esquire. He has had a lot of experience here
defending these companies, and he is a former chairman of the
Federal Trade Commission. And he served also on the Advisory
Panel on Federal Tax Reform.
So we welcome you to our Committee hearing and invite you
to proceed, sir.
TESTIMONY OF TIMOTHY J. MURIS, OF COUNSEL,
O'MELVENY & MYERS
Mr. Muris. Thank you much, Mr. Chairman.
May I submit for the record my written testimony and a law
review article I recently wrote?
Mr. Conyers. Yes, all the testimony is incorporated in the
record, including your law review article.
Mr. Muris. Thank you, sir.
I personally advise Visa on antitrust and consumer
protection, but the views that I express today are my own. Let
me make four points: First, payment cards benefit both
consumers and merchants. Cards rank with the cell phone,
microchip, and personal computer as one of the last century's
great inventions. The simplicity of pulling a card from your
wallet or purse, however, belies an extraordinarily complex
technological infrastructure that supports these transactions.
It cost billions of dollars to create and allow the
transactions to occur securely, reliably and efficiently.
Second, payment cards are an example of a two-sided product
connecting two groups of consumers. The challenge for any two-
sided product is bringing both groups on board. Newspapers
illustrate how most two-sided products set prices. This is
today's Washington Post. Now, in a business sense, this is a
vehicle to connect readers and advertisers. The readers, in
fact, pay very little. The publishers get their money from the
advertisers. If newspapers charged readers the direct cost of
supply, they would lose many of them. Without enough readers,
there wouldn't be enough advertisers. Without both sides of the
market working, not as many consumers would enjoy their
newspaper, and advertisers would lose benefits of this medium.
The economics of attracting the two distinct groups drives
the pricing. The value of the two-sided product to one group is
determined by its attractiveness to the other. The group with
the low-cost substitutes--in this case, its readers, who can go
a lot of other places for their news and information--gets the
better deal. For payment cards--this is my Visa card--the
consumer is king.
To compete with the two historically dominant forms of
payment, cash and check, the payment cards are priced to
provide value to the cardholders. The industry has followed
this model from its inception. Originally, the merchant
discount, the amount that the merchants paid, was 7 percent;
today, the average discount on American Express is about 2.5
percent, while Visa and MasterCard, larger companies, charge
about 2.1 percent. Discover charges about 1.5 percent.
Consumers and merchants clearly benefit. Walk into a
McDonald's, and you can now swipe your card to purchase a meal.
Nobody made McDonald's take the payment cards, but instead it
found that the cards offered value for a price it was willing
My third point is that merchants are wrong to analogize
interchange to cartel price-fixing. Unlike a cartel, a four-
party payment card system cannot exist without interchange. A
default rate reduces the cost of negotiating separate fees
between the thousands of acquirers and issuers. Moreover, for
MasterCard and Visa to succeed, merchants need to honor cards
from each of the thousands of issuers. Knowing that all cards
must be honored, an individual issuer could then insist on very
high fees. Merchants would then be subject to higher costs and
would be less willing to accept the network. A default
interchange rate, which the payment networks set, avoids this
The difference between the payment card systems in a cartel
is stark. With cartel pricing, an end to the cartel lowers
prices, raises output, and increased innovation. The end of
interchange produces the opposite results and would lead to
chaos. The merchants understand this. They don't want
interchange to end; instead, they just want to pay less. While
they argue against the card systems setting their respective
interchange rates, this is exactly what they want the Federal
Government to do.
This is not an antitrust remedy. One of the fundamental
maxims of antitrust is that the market, not the Government,
should set prices. Indeed, reasonableness is never a defense to
price-fixing. Interchange began with Visa decades ago. Bank of
America started a three-party payment system in California.
Because banks could then not cross State lines, the bank tried
to franchise its system outside of California with no takers.
It spun off the system, renamed it Visa, and Visa then began
interchange long before Visa had any significant market share.
My final point is that we are here primarily because
merchants want to cap the rates they pay for payment cards.
Such caps would inevitably increase card prices to consumers,
just as if you reduced the amount advertisers paid for
newspapers. The merchants' effort to regulate prices,
therefore, poses a direct threat.
Despite what you have heard, most consumers know that
merchants pay when consumers use their cards. If consumers
understood the threats that the merchants' campaign poses to
their wallets, the cards in their wallets, I suspect that we
would see nothing less than a consumer revolt.
I understand the full fury of the aroused American
consumer. While chairman of the FTC, we created the National
Do-Not-Call Registry. I suspect that many Americans feel as
strongly about their plastic as they do about their dinner
Thank you very much, and I would be happy to respond to
[The prepared statement of Mr. Muris follows:]
Prepared Statement of Timothy J. Muris
Mr. Conyers. Very interesting.
Our last witness is Senior Vice President and General
Counsel for the National Retail Federation, Mr. Mallory Duncan.
His job is to coordinate strategic, legislative and regulatory
initiatives involving customer data, privacy, bankruptcy, fair
credit reporting, and truth in lending.
Well, you have got a big job there, my friend. He has been
on a lot of boards of nonprofit organizations throughout his
legal career, including the National Hospice Foundation. And we
welcome you to this hearing.
TESTIMONY OF MALLORY DUNCAN, SENIOR VICE PRESIDENT AND GENERAL
COUNSEL, NATIONAL RETAIL FEDERATION
Mr. Duncan. Thank you very much. Thank you very much, Mr.
Chairman. Thank you very much.
I am General Counsel of the National Retail Federation, and
I am also Chairman of the Merchants Payment Coalition. I want
to thank the Chairman and the Ranking Member for inviting me
here today to speak on behalf of those two organizations.
The MPC represents virtually every type of retail
operation, from corner stores to the Nation's largest retail
chains. We want the Committee to appreciate what is going on
here. This market is broken, and it needs to be fixed.
The card industry has told you the market is functioning
fine and that this is so complicated, four-sided markets, that
it would be best if you just ignored it and moved on. But in
truth, this is a very simple scheme, privately regulated, not
by the market, but by a set of card company rules that they
won't make available to this or to any other Committee.
The banks that are members of Visa and MasterCard will tell
you that the card business is competitive. On one side, that is
true: The banks compete for customers. Each tries to get
consumers to carry their brand of card, and the piles of credit
card offers in your mailbox is a test of that.
But on the merchant's side, the opposite is true. For
example, Visa and its banks get together and decide how much
they are going to charge to process card payments. All issuing
banks agree to charge the same fees, regardless of which bank's
name is on the card. These otherwise competing banks, under
Visa and MasterCard's banner, insist that merchants accept
their cards, fees and rules on a take-it-or-leave-it basis,
with no opportunity to negotiate. And even though the fees are
outrageous and the rules harsh, no merchant can stand up
against that kind of power.
We believe the two card associations each operate as an
illegal price-fixing cartel in clear violation of Federal
antitrust laws. Who are the banks among these cartels? Well,
they are Citi, Chase and B of A, to name three. Their card
divisions are each nearly the size of American Express. What
business do these three banks have being in a price-fixing
arrangement with each other, not to mention with thousands of
other banks? If Kroger, Safeway and Publix agreed with every
other grocer to set the price of milk at $10 a gallon, would
anyone here believe that this to be a fine, functioning market,
delivering value to consumers?
The banks also fix the rules, rules designed to support the
cartel and hide its operations from the consumers who
ultimately pay for these fees. Let me give you just one
example. Retailers are very competitive. The average net profit
after wages, taxes, rent and goods is about 2 percent. For
grocery stores, it is just about 1 percent. The card company
rules say that the regular price we offer to the public must be
the credit card price, but a 1 percent or 2 percent profit
margin isn't large enough to absorb 2 percent in interchange
So a shopping cart of back-to-school clothes that we would
willingly sell for $99 cash has to be priced at $101 because of
their rules. But look what has happened: $101 has become the
regular price for $99 worth of cash merchandise. And regardless
of whether you pay with cash, check or food stamps, we all end
up paying the credit card company price.
Now, by the way, merchants are not allowed to show the
interchange fee on the receipts the way we would show a sales
tax, for example, which essentially is what interchange is.
Now, as you can see here, interchange fees are growing at about
17 percent a year, and we expect them to hit $40 billion in
2007. That is more than annual fees, cash advance fees, late
fees, and over limit fees combined. It amounts to more than
$300 in hidden fees per household each year.
Now, what does interchange pay for? Last year, Diamond
Consulting independently studied interchange and discovered
that only 13 percent goes to pay for processing transactions.
Most of the remainder taxes consumer prices to provide profits
for the cartel and rewards for a relative few.
Now, although we may disagree on the benefits, in his
written testimony Mr. Buhrmaster accurately describes what is
happening here. He essentially said the big banks set the
rules, and they set them high, so high that even small or
inefficient banks can make a profit, while the big banks make a
killing. This is not the workings of a competitive market.
Now, if you look at this chart, you will see that the blue
line is the rise in the retail sales over the last several
years, and the red line is the rise in interchange. These
rising fees have other consequences on other businesses. At
Balliets, a highly regarded $7 million-a-year women's clothing
store in Oklahoma, interchange fees rose to more than $80,000
last year, topping the $60,000 the owner spent on health
insurance for his employees. In order to pay the card companies
this year, he was forced to reduce the company health insurance
contribution from 70 percent to 50 percent minimum required by
his carrier. He tells us that next year, Balliets may actually
be forced to stop offering health coverage to its employees if
interchange fees continue to rise.
In conclusion, the collective setting of interchange fees
represents an ongoing antitrust violation and is costing
merchants and their consumers tens of billions of dollars
annually. Competition authorities in the rest of the world has
realized this and begun to address it, and the rates in those
countries are lower. The U.S. rates are on the far right side
of this chart; the other industrialized countries are to the
The credit card system is an important component of our
economy, potentially benefiting consumers, merchants and banks
alike, but it has become dramatically tilted in favor of the
two cartels that control the market. There are several pending
lawsuits, but the courts' remedies are limited. Courts can
deliver damages, prohibit specific conduct, or become
regulatory czars. Congress has much more nuance and flexible
tools at its disposal.
We urge you to study this problem and work with all of the
parties on a solution to this anti-competitive market. Thank
[The prepared statement of Mr. Duncan follows:]
Prepared Statement of Mallory Duncan
Mr. Conyers. Thank you, Attorney Duncan.
And I thank all the witnesses.
Mr. Duncan. Mr. Chairman, I also have comments from other
members of the MPC I would like to submit for the record, if I
Mr. Conyers. I would be happy to receive them.
Mr. Duncan. Thank you.
Mr. Conyers. Well, men, we heard the preliminary opening
statements in this case. And without rushing to any judgment,
it doesn't look so good for the credit card companies. So let's
see if we can find out a little bit more.
Now, Mr. Buhrmaster, with all respect to your aunt's winery
business, she has not been found guilty of committing fraud in
the Federal court system and holding back information like the
credit card companies, so I would distinguish her conduct and
her activities very much from the credit card companies.
Mr. Buhrmaster. Not to my knowledge, she hasn't.
Mr. Conyers. Well, that is good enough for me, and we will
check the kind of quality of her products, too, while we are at
Mr. Buhrmaster. It is very good, I assure you.
Mr. Conyers. Okay.
Mr. Buhrmaster. Would you like me to respond?
Mr. Conyers. No. [Laughter.]
With regard to--this is a statement that could be the
subject of another hearing that is quite separate. ``The
market, not the Government, should set prices.'' That always
grabs me by the collar, coming from a former Chairman of the
First of all, we find out the market isn't setting the
prices here. But even if it were, it wouldn't make me feel
better. I mean, markets sometimes go really crazy, and we have
to bring in the Government. That is what all these agencies are
trying to do is bring down prices. Following the market can get
you into very big trouble. But we are not even using the
market, as it turns out.
So let me get to the main point of all this. What are we to
do? Congressman Johnson, a Member of this Judiciary Committee,
has introduced a bill which is supposed to--he has got some
legislation that would--it is called the Arbitration Fairness
Act, with respect to unfair use of mandatory arbitration, which
is another little problem, where you can't go in and sue on
your own, but you are caught. And, of course, that is always in
the fine print in many instances.
So let's get to the solution part of it. Mr. Mierzwinski,
after we investigate thoroughly, complained to the high
heavens, tons of mail, constituents raising sin, so what do we
Mr. Mierzwinski. Well, Mr. Chairman, first, I want to thank
you for bringing up Congressman Johnson's bill, which all the
consumer groups support. Arbitration, of course, is a separate
issue, but it is related to the problem consumers face with
their credit card companies. All their unfair issuer practices,
you can't do anything about them, and the Arbitration Fairness
Act would solve that problem.
By the way, the only people the Congress has ever protected
from arbitration are car dealers. They said, ``We are very
small compared to car manufacturers,'' and so Congress did
exempt them from mandatory arbitration. We think consumers
deserve the same.
But on this particular issue, I think you are doing the
exact right thing. The first step should be--sunlight is the
best disinfectant, and the Committee is conducting its
oversight role. I think there are some real questions about all
of the mergers that have gone on in the issuer marketplace that
have been just simply rubberstamped over at Justice.
And the issue here is being litigated with all the retailer
lawsuits, but I think it is important that Congress takes a
look at it. That would be the first step to solve this problem
of unfair interchange fees and try to dig into further some of
these problems with non-transparency that the card issuer--I am
sorry, that the associations have, where nobody knows what
their rules are, nobody can look at their rules unless they
sign an NDA, et cetera, et cetera.
Mr. Conyers. Well, the credit card companies are being sued
all over the place, but they have settled one antitrust suit
case for $336 million, where they were accused of fixing credit
card foreign currency and exchange rates, but there are other
lawsuits going on, and that is why they declined to come here
today, to be present at the hearings.
Mr. Chabot. Thank you, Mr. Chairman.
My first question--and it is kind of a series of questions.
I would invite perhaps one representative from the credit card
companies and one representative from the retailer folks or
consumer folks to respond. And we have only got 5 minutes, so
it is kind of hard to do this.
But the first question would be this. If I am a business
owner or retailer, and I want to be successful, how important
is it to accept payments electronically? And what are my
options for payment within the credit card industry? And would
I negotiate these options with my bank or with the individual
credit card companies? And what are my options if I choose to
accept payments only in some form other than credit cards, like
cash or check? And does acceptance of credit or debit cards
impact my chances of success?
And whichever one wants to take it, either side is fine
Mr. Buhrmaster. I would be happy to answer that question. I
am an acquirer, and I have merchant customers. We have about
160 merchant customers, and these customers have made a choice
to accept electronic payment cards. They don't have to, but
they have made a business decision, because it makes sense for
what they do.
When they make that decision, they will come to us--and
they will probably go to another bank and maybe another payment
processing company and ask us how much it is going to cost.
They want to know what it is going to involve. What are the
risks? What are the costs? And so forth.
We can sit down, if they can tell us what their average
volume is and how many customers that they expect, the average
ticket size--that is the average charge that is made--and we
can come pretty close to giving them an estimate of what it is
going to cost them to run this operation for themselves and
what it will mean to their bottom line.
Those businesses that come to me and ask for payment
services, they understand this is a cost of operating your
business. They want to attract those customers that want to pay
by card. In today's society, people want things now. Everybody
wants it now, and the best way to have that is through
electronic payments. In other words, that is how they can get
things now, either on credits or using their debit card.
Mr. Chabot. Okay, thank you. And have you decided which one
of the other three would like to--Mr. Smith?
Mr. Smith. Let me just address the first part. There is no
negotiating with the credit card companies. It is a take-it-or-
leave-it proposition. You don't negotiate your fees. If you
choose not to take credit cards, which we are free to do, we
are turning our back on about 60-plus percent of transactions.
And, again, that is not something that is very inviting for the
retailers to tell their consumers, ``No.''
I don't think any of us in the retail industry mind taking
a credit card. What we want is a fair fee to be able to be
charged to our retailers. We want them to compete for our
business just as we compete for our consumers.
Mr. Muris made the analogy to cell phones and computers and
credit cards being some of the greatest inventions. Look at
what the cost of cell phones has done as volume has gone up.
Look at the cost of computers as volume has gone up. But look
at the analogy of credit cards: As volume has gone up, the fees
have gone up, as well, when, in our opinion, they should be
going down because of the additional usage.
So it is just not a free market enterprise system, and that
is what we would like for it to be.
Mr. Chabot. Mr. Buhrmaster, did you want to follow up? And
I would invite either one of the folks if you would like to----
Mr. Muris. Can I?
Mr. Buhrmaster. Please.
Mr. Muris. Merchants can do lots of things. Believe it or
not, there are prominent merchants that don't accept certain
kinds of credit cards. Costco is one of the most successful
merchants in the world in Mr. Smith's line of business, and I
can't use my Visa or MasterCard or Discover card there. I can't
use Visa at Sam's Club. On the other end, if you go to Neiman
Marcus, you can use only American Express. Lots of small
restaurants I go to don't take cards.
Merchants can offer cash discounts. We heard a lot of
things--and if someone gives me the chance, I would correct
them for the record later--about restrictions on merchants.
Merchants are allowed to discount for cash. They can advertise
that fact. They can post big signs in the stores that they
discount for cash. Merchants can steer customers--and many of
them do, especially in the grocery business--to debit, which is
cheaper. Discover is significantly cheaper.
There are thus lots of options for merchants. And, in fact,
the contracts are not take-it-or-leave-it. Supermarkets have
negotiated a better deal, in terms of interchange fees, than
almost any other major group of merchants.
Mr. Chabot. I am just about out of time, so let me go back
to the retailers. Mr. Duncan?
Mr. Duncan. Thank you. Just a couple of points. First of
all, in terms of supermarkets negotiating a better deal, what
happened there, actually, was they gave the supermarket
industry--this is monopolist. What does a monopolist do? They
segment the market. They went to supermarkets and said, ``We
will give you 1 percent,'' and cards came in at 1 percent, and
then they began introducing new cards with extra high rates,
but they weren't part of the deal. So suddenly supermarkets are
paying 2 percent for some of their transactions.
This is not fair dealing. They changed the terms on
merchants the same way they change the terms on consumers.
Mr. Chabot. Thank you very much, Mr. Chairman. I see I am
out of time. I yield back my time.
Mr. Conyers. Okay.
Mr. Howard Berman? No questions.
May I gain the attention of my friends at the other end? Do
either of you have any questions that you would like to pose to
the witnesses? Okay, you can think of some.
That is the way Bill Delahunt works. He is a very
Mr. Delahunt. Spontaneous is the word, Mr. Chairman. And I
thought Mr. Berman would, but if you care. He is listening.
Mr. Berman. I am meditating.
Mr. Delahunt. What would be the problem, for the sake of
transparency, on some document--the sales slip, et cetera--list
the exchange fee? What is the problem with that?
Mr. Muris. There is nothing now that prevents merchants
from doing that. Consumers aren't interested, but if merchants
want to go ahead and do that, they can. Merchants know what
they pay, which is the merchant discount----
Mr. Delahunt. I am talking about the credit card----
Mr. Muris. No, that is what I am saying.
Mr. Delahunt. I am talking about--oh, the issuer you are
Mr. Muris. The issuer?
Mr. Delahunt. Yes.
Mr. Muris. I am sorry, the issuer----
Mr. Delahunt. I am talking about the credit card companies.
Mr. Muris. Yes, the issuer has a relationship with the
consumer and discloses the fees that it pays to the consumer,
if that is----
Mr. Delahunt. But would the issuer have a problem, given
the dimensions of the customer base--and having the
wherewithal, in terms of the software, just for sake of
transparency, put down what the exchange fee was in that
Mr. Muris. But the issuer--the transaction is between the
consumer and the merchant, not the issuer.
Mr. Delahunt. I understand that, sir. But for the issuer--
Mr. Muris. I am sorry, the issuer can't do what you are
Mr. Delahunt. Can he, Mr. Duncan?
Mr. Duncan. Sure, certainly they could. I mean, look, they
are the ones who have these prices, and they are the ones who
develop these prices. If they wanted to disclose it, it would
be a very simple thing for them to do. Frankly, it would be a
lot easier for them to disclose it than for us to disclose it,
because we don't know how much a transaction is going to cost
us until after you----
Mr. Delahunt. That was the rationale opposing it. What is
Mr. Muris. Well, in fact, the interchange fees are
disclosed, and they are available on the Visa and the
MasterCard Web site, if that is your question.
Mr. Delahunt. Please, please, Mr. Muris, you know, on the
Web site? I mean, some of us don't know how to access a Web
site, let alone asking the consumer to do that--I mean, in the
real world, people get a slip. It would be very convenient for
them, for the consumer, to understand what the exchange fee
was. And what is the problem for the issuer to do that?
Mr. Muris. There is nothing that prevents when consumers
engage in a transaction the merchant from disclosing that. I
believe consumers aren't interested in that information.
Consumers are interested in the prices that they pay.
Mr. Delahunt. But the consumer, I dare say, would like to
know, you know, if they are paying 1 percent or 2 percent or 3
percent more what it was. Why not, just for the sake of----
Mr. Muris. But consumers know what they pay to the credit
card company. They know what they pay to the merchant. If the
merchant, for whatever reason, wants to break it down----
Mr. Delahunt. They don't know what--please.
Mr. Muris. Sure, they know.
Mr. Delahunt. They know? They don't know what the figures
Mr. Berman. Would the gentleman yield?
Mr. Delahunt. Of course I yield.
Mr. Berman. I thought I heard one of you--I don't know if
it was Mr. Duncan or Mr. Mierzwinski--say that, under the
contract between the merchant and the issuer, that the merchant
Mr. Duncan. We have to advertise everything as the credit
card price. There is----
Mr. Berman. Right.
Mr. Duncan. So the price to the consumer--we have to tell
the consumer is the credit card price.
Mr. Muris. Mr. Duncan said that the companies, Visa and
MasterCard, prevent the disclosure that you are asking for, and
they don't. And, second, if the merchants want, they can offer
a discount for cash and they can advertise it. There is nothing
that prevents them from doing that. In fact, some merchants do.
Mr. Duncan. May I mention this discount for cash? I mean,
that is thrown around as if it were a panacea. In fact, they
have a series of rules that they disclose to us through the
merchant banks as to how you can offer a discount for cash.
Most merchants understand those rules to say that you can offer
a discount for cash as long as the credit card price is the
most prominent price and the discount for cash is the smaller
price, and it has to be separately listed in each instance.
So that means, where do you see it? You won't see it in the
Sears, with 100,000 different items. They are not going to put
200,000 prices on the merchandise. You will see it at a gas
station, because they only have three products, regular, mid-
level and premium. And so there it is conceivable you could put
a lower price.
But even when you have that option, they are trying to stop
us from doing it in gas stations. Just this last couple of
months, Visa went to a gas station in San Francisco, no less,
that was offering a 10-cent-a-gallon discount for cash. They
had a sign up that said, ``Credit price, cash price,'' and Visa
said, ``No way. No can do, because it looks like the credit
price is not the regular price. You have got to call that''----
Mr. Delahunt. Reclaiming that time, I think that is easy to
corroborate. I mean, and you are saying--or it has been said
that, you know, we are trying to--that the retail industry
wants Government to do what the marketplace should be doing.
I mean, clearly, there is an appropriate role for
Government in certain circumstances. We have usury laws, you
know? I mean, the reality is, we have got, you know, in some
States, there are caps in terms of interest rates. Otherwise,
you know, we could follow the rule, you know, let it go. I
mean, the mafia would be in good shape. It wouldn't be
interest; it would be called the vig under those circumstances.
But maybe we are talking about the vig.
And I yield back.
Mr. Cannon. Mr. Chairman, I ask unanimous consent that the
gentleman be granted an additional 2 minutes, because I am
actually interested in hearing from Mr. Muris how it is obvious
to the consumer, because it doesn't seem to me to be obvious--
Mr. Delahunt. I yield to the gentleman, if I get an extra 2
Mr. Cannon. Then, Mr. Muris, you were insisting that it is
obvious to the consumer. How is it obvious to the consumer?
Mr. Muris. I am saying what is obvious to the consumer is
what the consumer cares about, which is the price that they
pay. If Sears wanted to, however, Sears could post a gigantic
sign that says, ``Minus X percent''--pick 2 percent--``Minus 2
percent for cash.'' They don't have to post it on every
Most Americans, sir, most Americans know that merchants
have to pay for credit cards. There have been surveys that show
that, consumers understand that. Consumers also understand that
they get a good deal from the payment card companies. There is
enormous competition, despite what we have heard today.
Mr. Cannon. Pardon me, but have there been any studies
where you have asked consumers what they think they are paying
for their credit card fees?
Mr. Muris. Yes. Credit card fees are disclosed. Okay, we
are talking about two different things here. Consumers visit a
Mr. Cannon. Well, we only want to talk about one thing, and
that is, what percentage of the final price that a consumer
pays in a store does he think he is paying for the store and
what does he think he is paying for you? Have there been any
studies where you have asked consumers what they think the
appropriate interchange fee that the merchant pays should be?
Mr. Muris. Yes. When consumers are asked, do they know
about that the merchant is paying? They say, ``Yes.'' And when
they are asked, are they okay with the arrangement, at various
Mr. Cannon. Are they ever asked how much they think they
Mr. Muris [continuing]. Most Americans are okay with that.
Mr. Cannon. Have you ever asked what Americans think they
are paying when you ask those other questions? In other words,
do we have any studies that indicate that Americans know what
the fee actually is?
Mr. Muris. The fees that Americans pay for credit cards are
disclosed. The prices that they pay in stores are disclosed. If
the stores wanted to--as I have said----
Mr. Cannon. Pardon me. Pardon me. I guess it is my time,
having had it yielded, I am asking a really simple question. I
think most people know they pay a fee, but I don't think they
know that it is anywhere near what it actually is. I am just
wondering if you have done any studies that you can show us
where you have asked people what they think an appropriate fee
to pay for a credit card transaction would be?
Mr. Muris. There are studies that address that issue. I
would be glad to submit them for the record. But there is a
more important point here, which is--if Mr. Smith or Mr.
Duncan, who worked with me at the FTC years ago--if they feel
that consumers want to pay cash, they can tell consumers that,
``You will get a discount,'' and they can say it is 2 percent
or whatever it is they want, paying for cash. Why isn't that a
solution to the problem?
Mr. Cannon. You are here telling me what you think the most
important issue is and not really answering the question. I am
looking forward to the report to see what people think they are
paying. I was actually quite startled.
Mr. Smith. Mr. Chairman?
Mr. Cannon. And yielding back--let me yield back to the
gentleman from Massachusetts.
Mr. Conyers. The Chair is conflicted, because Mr. Smith was
very agitated about trying to get in the conversation. So if we
grant 1 minute more to Mr. Delahunt's time, maybe he can get in
his two cents.
Mr. Delahunt. I yield to----
Mr. Conyers. Smith?
Mr. Delahunt [continuing]. Smith.
Mr. Smith. Well, Mr. Chairman, it won't take that long. We
as a retailer do focus groups with our consumers on a periodic
basis. And one of the questions we have asked our consumers,
``Do you know what you pay or what we pay in credit card fees
or debit card fees?'' And I cannot--we have never hit double
digits with people that even have an idea of what they pay.
Most people think it is free. They think they get their credit
card, they pay fees for the credit card, in a lot of cases, and
they don't have an idea that the retailer pays a fee.
Now, some will say, ``Yes, I am sure you pay some fee.''
The vast majority of customers, when we do our focus groups,
have not a clue that they are paying extra for their product
because of credit card fees.
Mr. Conyers. Thank you very much.
The Chair recognizes the very patient gentleman from
Florida, Mr. Ric Keller.
Mr. Keller. Well, thank you, Mr. Chairman.
And I have 23, 24 questions, and no way we are going to be
able to get to it in my 5 minutes or before votes, so let me
just give a brief opening statement to kind of lay out what my
concerns are and try to get to as many questions as I can.
I remain very open-minded about this issue. On the one
hand, I think the electronic payment system, dominated by Visa,
MasterCard, and their participating banks, has provided a very
positive convenience to consumers and merchants over the past
On the other hand, I am quite concerned that, despite the
dramatic increase of the volume of interchange fee business, we
have seen that interchange fee rates have not fallen, as we
might expect, but instead have increased, along with the volume
of business. And these costs have been passed onto consumers.
Now, earlier today, I went down to the congressional liquor
store on Capitol Hill to check out something. [Laughter.]
I feel I could use it now, but I saw that a six-pack of
Coke is only $3.65, and that is the exact same price of a six-
pack of Pepsi. I saw that a six-pack of Bud Light is only
$5.29. It is the same price as Miller Lite, exactly. Pepsi
keeps Coke honest. Miller Lite keeps Bud Light honest.
Why the heck isn't MasterCard keeping Visa honest? Why
doesn't MasterCard say to the retailers and merchants, ``Hey,
they may charge you 2 percent fees, but we are going to have 1
percent''? Why don't we see that competition? Is there
collusion going on between MasterCard, Visa and their
participating banks? Or could it just be that the cost of
business for these organizations has gone up and they have to
incur costs associated with fraud and other expenses?
The $64,000 question for me is: Can we find a way to hold
down the increase in interchange fees without resorting to
price controls? And I haven't heard the answer to that yet.
And I am just going to be honest with you. Both sides have
very strong points and very weak points, and let me just tell
you what I think they are, as I see it as a neutral observer.
In terms of the banks and the credit cards, they have made
a strong point in saying that they have provided a valuable
service with the electronic payment system offering convenience
and a strong point in pointing out we shouldn't have price
controls. That is not our way. On the other hand, they have no
good explanation that I have heard for why we have seen these
dramatic increases in interchange fees.
On the other hand, I look at the merchants and retailers,
and they have a very good explanation of the problem and the
unfairness of having these fees jacked up dramatically over the
past 10 years. And in light of the fact that 60 percent of
their customers are using MasterCard and Visa, they have you by
the shirt. And on the other hand, the weakness here, you have
not given us any good solutions at all. And so I would love to
hear what the solutions are, outside of price controls.
Let me begin with you, Mr. Smith, and make sure I am
walking through this process property, at least Food City. I go
to your store, and I buy $100 worth of groceries at Food City
with a Visa card issued by my bank. It is my understanding that
Food City, in terms of the allocation money, would pay
approximately $2.10 to its bank, called the merchant discount
rate. Its bank would then keep a processing fee of about 35
cents, and then Food City's bank would pay an interchange fee
of approximately $1.75 to my bank, the issuing bank. And then
my bank would pay approximately 9.5 cents to Visa or
MasterCard, so for a grand total of about $2.10.
Is that roughly how it works?
Mr. Smith. Mr. Keller, I am not sure I can tell you exactly
how the transactions work. I can tell you that my bill is going
to be over 2 percent of my transaction.
Mr. Keller. Two percent. All right, and I know you are
concerned about that, because it used to be 1 percent about a
decade ago, right?
Mr. Smith. Yes, sir.
Mr. Keller. Now, let me ask you this. If you take that same
$100 grocery example, and your customer instead uses of the
credit card, uses a debit card, and he puts in PIN number,
isn't it true that Food City would only have to pay about 25
cents, rather than the two dollars in fees associated with the
Mr. Smith. That is correct. It would be much, much less
than the credit card.
Mr. Keller. Why don't you just put up a sign encouraging
customers, ``Please use your Visa debit card, and put in your
PIN number, instead of using your Visa credit card''?
Mr. Smith. We do encourage customers to use a PIN-based
debit card, and a lot of our customers choose to do so. But by
the same token, a lot of our customers choose to use a credit
card for many different reasons. Maybe they don't have the
money in the bank at that particular time. Maybe it is rewards
or points that they have been enticed with to be able to use
that credit card.
Mr. Keller. Do you offer a discount to those customers who
use their Visa debit card with PIN numbers or who pay in cash?
Mr. Smith. We do not.
Mr. Keller. Are you legally allowed to if you wanted to?
Mr. Smith. It is my understanding that we are not allowed
to do that. Now, I heard Mr. Muris say that we are allowed to.
Maybe we will look into that. I stopped by--and I know nobody
can see this--but I stopped by my local commissioner of
revenue. I live in the commonwealth of Virginia. And this is a
property tax payment form that is put out by the county. And
they surcharge. If you use a Visa or a MasterCard to pay your
property taxes--which I didn't realize people did, but they
do--they actually allow them to surcharge. And it surcharges up
to 3 percent.
But we can't surcharge. We cannot surcharge. If we can
discount, that is news to me, but other entities, such as
governments--I think the IRS does the same thing--surcharge
consumers for using those credit cards.
Mr. Keller. Well, thank you. I have a ton more questions,
but, Mr. Chairman, my time has expired.
Mr. Conyers. All right, you can put them in the record or
send them to the witnesses to submit their responses if you
would like, Mr. Keller.
The very distinguished gentlelady from California, Maxine
Ms. Waters. Thank you very much, Mr. Chairman.
Before I move forward with my questions, I think we should
make sure the record reflects that the Congress of the United
States does not own a liquor store. [Laughter.]
I can just see us bombarded with our citizens saying,
``Aha, there you go, you have got a gym and a liquor store.''
So the record reflect that that is some retail store that has
adopted the name ``Congressional Liquor Store.''
Mr. Conyers. So reflected.
Ms. Waters. Thank you.
Secondly, for the study that Mr. Muris referred to, he
wasn't very exact about the time of the study, what the study
entailed. He said he would submit it to us, and I would like
the Chair to ask that that be submitted by a time certain,
within the next 10 days or so.
Mr. Conyers. Is that all right with you?
Mr. Muris. Yes, sir.
Ms. Waters. All right, thank you very much.
Now, to Mr. Duncan. I would like to explore with you this
business about the interchange fees, and how they have
increased, and how they do this. As a consumer, I know that
credit card companies have the teaser rates that they get you
in with and then they increase over a period of time. I also
know that, once you become a customer, if you are late paying,
they have a way of increasing your interest rates. They have a
way of generating fees.
And then I discovered that fee generation is a whole
business, that there are companies who do nothing but teach
banks and financial institutions how to create more fees. And I
think something I read some time ago indicated that some of our
businesses are getting more money, more profit in fees than
they are on the actual services.
So we know, as consumers and customers, how we have gotten
caught up in the fee game and the fees that we have--explain to
me, why do you think these fees have increased over a period of
time, when everybody concedes that they should have been
reduced? And what other ways and what other techniques are
being used in order to get more money out of the merchants?
Mr. Duncan. Congresswoman, there is a number of answers to
that question. I guess the simplest one is to say that a
monopolist will do what a monopolist does. And Visa and
MasterCard are essentially a duopoly, and so they will try to
find ways of profit maximizing.
And not surprisingly, many of the same techniques they will
use with consumers, such as teaser rates, they will also use
with the merchant community. As someone mentioned a moment ago,
they introduced a new category at a low rate and then flood the
market with higher rate cards, which essentially drives that
They also have rules, and we haven't really focused on the
rules today. But there are rules which the executive vice
president of Visa says are the size of the New York City
phonebook. That is 1,900 pages, roughly. They will only
disclose a fraction of that, and yet we are expected to abide
by them. And the fraction they expose, in the case of one
company, you have to sign a gag order. NRF could go on the line
and look at those rules, but then I couldn't talk to you about
them and we couldn't solve this problem.
So they have a number of techniques, such as rate
increases, that are governed by those rules, that cause prices
to go up. I think, talking about the number of options, it is
beyond the scope of the time we have here, but needless to say
it is a profit-maximizing endeavor.
If I may, may I just respond to one thing that Mr. Keller
raised, in terms of the pricing? You saw similar pricing
between Visa and MasterCard. This market is broken; it needs
transparency and genuine competition. But currently, Visa and
MasterCard don't battle for merchants. They battle to get banks
to issue their brand of cards. So this is the only market in
which the competitors compete, by raising prices rather than
Ms. Waters. Wow. I had another question, and I am so taken
away--oh, I want to ask this. This Congress and most public
policymakers wax eloquently about support for small business.
As a matter of fact, if you polled the Members of Congress
about their feelings and support for small business, that would
rank very high in those public policy considerations that they
work with, they deal with.
I want to know the impact of these interchange fees on
small businesses. Are our small businesses being hurt? Are they
being ripped off? Are they being caused to go out of business,
not to be able to have the inventory that they need because
they are being gouged?
Mr. Buhrmaster. Yes, thank you. I would like to respond to
I deal with small businesses every day. My bank was the
number-one small business lender in New York state for a bank
our size. Small businesses have a variety of costs of doing
business. They have insurance; they have lawyers; they have
accountants; they have waste removal.
When I look at a financial statement for a typical small
business, you know, that accepts credit cards, what I am
finding is, on average, insurance is more, it costs more for
insurance, waste removal is fairly equivalent to the cost of
your interchange fees, and legal and accounting is less. So it
is a cost of doing business. It is built into their pricing
I don't believe they are being gouged. I think they are
getting a good service for it. You know, these are people that
have to--these are merchants that have to reach the people. And
right now, the most popular means of making payments is through
And if you take a look at the national savings rate, it was
negative the first time, it is because people are getting used
to putting thing on their credit cards. And I don't think it is
anything that is on Visa or MasterCard's advertisements that is
doing it; I think it is people's desire for now.
Ms. Waters. Aside from the convenience for the customer and
the merchant, what else does the merchant get for this fee?
Mr. Buhrmaster. For its fee?
Ms. Waters. For this interchange fee that they pay.
Mr. Buhrmaster. Well, first of all, the merchant has the
fraud protection system, which is built into the system, that
if someone comes in with a fraudulent card, if they don't have
that system there, they might accept that for payment and end
up taking the loss later. However, by running it through the
system properly, if they do everything properly, they are
covered, and that is a valuable thing. You can't have that with
With cash, of course, cash is king, but not everybody
carries cash anymore. I mean, if you poll everyone in this
room, how many people really have a lot of cash in their
wallets? Most of us rely on those cards that are in our wallet
to go to McDonald's or to the beverage store.
Ms. Waters. Well, that is why the merchants are at the
mercy of the issuers, because most people do rely on credit
cards. I wish we did not have to, but you can't travel in this
country, you can't get lodging in this country, you can't do
anything without a credit card, so we are at the mercy of the
credit card companies.
Mr. Smith. Congresswoman, if you assume this is the cost of
doing business--which I wouldn't disagree with--it is an
uncontrollable cost of doing business. It is one we can't
negotiate. I can negotiate with the folks that are going to
pick up my trash, and I can find the one that gives the best
service and the best price. I can negotiate with a bank, if he
is going to take my checks. I can negotiate prices on check
processing. I can negotiate every one of my costs of doing
business, but I cannot negotiate that cost of taking credit
Ms. Waters. How would you recommend we could help you?
Mr. Smith. I wish I had a simple solution, because it is
somewhat of a complex thing. I think that, when people compete,
just as we compete in the retail grocery business, the consumer
benefits. And that is what I hope that this group, along with
Food Marketing Institute and some other participants in the
Merchants Payment Coalition, can get together and come up with
some very good solutions.
Ms. Waters. Yes, sir?
Mr. Mierzwinski. Representative, if I could just add one
quick point, the market power of the two card associations
forces merchants to accept their product on the terms that are
offered. And the terms that are offered are very, very complex,
as you have heard.
And I spoke to one small business woman--a doctor,
actually, a solo practitioner--and she cannot find out until
she gets her bills back from her third-party processor that
some of the cards that she has accepted are these rewards cards
with the much higher fees that she pays. They look like Visa
cards to her, and they go through her machine just like Visa
cards. They are all the same, but these new types of cards that
are being offered are these rewards cards, these signature
And I would submit that the fraud detection and everything
else is a cost of the companies--are doing for any of the cards
and that you are not getting better fraud detection. You are
simply paying for more rewards, but you don't have any idea
what you are paying. You have no choice in the matter, because
of the market power of the company.
Ms. Waters. Yes, sir?
Mr. Muris. Ma'am, could I just make two points in response?
One, I would like to submit for the record a letter from the
Small Business and Entrepreneurship Council, which opposes what
the merchants want to do, if I could submit that for the
Mr. Conyers. Without objection.
Ms. Waters. Before you--are you going to accept that for
Mr. Conyers. I did. You don't want to?
Ms. Waters. Well, I wish I had been able to object to that.
Mr. Conyers. You didn't want to----
Ms. Waters. Because I want to see it. Because I can't
imagine merchants sending a letter up here saying, ``Don't help
Mr. Conyers. Well, we have accepted it for the record so
you can examine it now.
Ms. Waters. All right.
Mr. Muris. And my second point is, in terms of small
merchants, Visa and MasterCard are two of the greatest things
that ever happened for the small merchants in America.
Ms. Waters. My time is up. Thank you.
Mr. Muris. If you don't want to hear the answer, that is
Ms. Waters. No, no, no, I don't.
Mr. Conyers. I was afraid to tell her, her time was up.
So now that she acknowledges it herself, I mean--the Chair
is pleased to recognize the Ranking Member of the full
Committee from Texas, Lamar Smith.
Mr. Smith of Texas. Thank you, Mr. Chairman. Mr. Chairman,
I assume that the gentlewoman from California has, in fact, set
the precedent and the standard for time allotted for questions?
Mr. Conyers. You may not make that assumption. [Laughter.]
Mr. Smith of Texas. Mr. Chairman, first of all, I would
like to ask unanimous consent to have an opening statement made
a part of the record.
Mr. Conyers. Without objection.
Mr. Smith of Texas. And I would like to also that I
apologize to our witnesses for being slightly late today. I was
over participating in a Conference Committee over on the Senate
side on the 9/11 bill, and that was the first meeting and
somewhat mandatory. And, unfortunately, I have got to return as
soon as I finish my questions to that Conference Committee.
Mr. Muris, let me address my first couple of questions to
you. And some of these questions are really follow-ups to
questions related that you have been asked already. But how
does Visa and Master Charge actually set their interchange
rates? What factors go into those specific rates?
Mr. Muris. Well, they recognize that this is a two-sided
market, and it is a two-sided market where the consumer is
king. The consumers get tremendous value. They get the rewards
Mr. Smith of Texas. How are the actual rates set? Say it is
roughly 2 percent.
Mr. Muris. The rates have been set in part by competition.
In fact, we have heard a lot of talk about rates going up. The
merchant discount rates haven't gone up since the late 1990's,
and they did go up. And one of the reasons--Mr. Keller asked
what happened--one of the reasons was----
Mr. Smith of Texas. Actually, let me go back to my
question. What factors do you consider in setting those rates?
Mr. Muris. That is what I am saying. Competition between
Visa and MasterCard to get banks to dedicate themselves to them
was one of the factors that caused the increase in rates in the
Mr. Smith of Texas. Is there an overhead factor? Is there
an expense factor? Is there a cost factor?
Mr. Muris. But in a two-sided market it is frequent that
one side gets subsidized. If I go on eBay, the seller pays it
all and the buyer pays nothing. I mentioned newspapers when you
weren't here. In newspapers, the readers are subsidized by the
In payment cards, the cardholder gets a very good deal, and
the merchants bear most of the costs. And that happens
throughout in these so-called two-sided markets.
Mr. Smith of Texas. Okay. You have gotten some criticism
today about anti-competitive behavior. How do you--if the fees
are so similar, if you talk about an individual going into a
store and buying the same merchandise with the Visa and the
Master Charge, the fees are going to be pretty similar, why
isn't that anti-competitive behavior?
Mr. Muris. Well, as Mr. Keller mentioned, in competitive
markets, it is quite frequent that the prices are similar or
even identical. But here prices, in fact, are different.
American Express, which is a smaller company, has a higher
merchant discount of 2.5 percent. Discover has a lower merchant
The size of the merchant discounts, is related to the type
of the card and with what happened--of the need to attract
merchants, as compared to consumers. There are antitrust cases
going on. Those cases do not involve American Express and
Discover because they are single entities.
Through historical accident, because Bank of America could
not have multi-state banking, we ended up with the system that
we have now. MasterCard and Visa have, in fact, moved to a
system that now will look much more like American Express and
Mr. Smith of Texas. Mr. Duncan, why do you think the
interchange fees are too high? And you have been asked several
times today about a solution, and I heard one about arbitration
and that a bill has been introduced to, I gather, compel
arbitration. I assume you are opposed to price controls, but
what other answers are there out there if, in fact, you can
show that the fees are too high?
Mr. Duncan. Sure, let me start with just suggesting to you
how fees are fixed. As Mr. Buhrmaster said in his testimony,
and I think I referenced in my testimony, what happens is a
group of big banks with Visa get together and they set the fee.
They then take it back to the Visa, and Visa blesses it, and
all of the banks then charge that fee.
Mr. Smith of Texas. Just because they have gotten together
doesn't necessarily prove the fee is too high. Why is the fee
Mr. Duncan. The fee is too high because it is set the way a
fee would be set by a monopolist. In any other market, as we
see growth, as we see computerization, as we see improvements,
prices go down. After all, this was originally a fee for
processing a transaction, and now we see that only 13 percent
of it goes to processing.
Mr. Smith of Texas. And what would you propose as an
Mr. Duncan. There is a couple of parts to that. First of
all, because this system is governed by a privately regulated
set of rules, the first thing we have to have is some
transparency. We have to be able to see the rules of the game
to know how you are going to fix this thing.
Look back. A few years ago, we had Ma Bell, and you could
get any phone you wanted as long as it was black, white or
ivory, and you paid two dollars a minute for long-distance
calls. The courts got involved, and there was tumult. Finally,
Congress came around and said, ``You know, this is a problem
that we have to fix. We have to look at it, study it, and come
up with a solution.''
We have an analogous situation here. The courts are
involved, but only Congress can come up with a nuanced response
to make this work. It may be as simple, for example, as looking
at the ``honor all cards'' rule, the rule that says, ``If I
sign it to take this 1 percent traditional card, I have got to
take this 3 percent business rewards card,'' and allowing a
merchant to say, ``No, I don't want to take these business
rewards cards or these high-flying extra cards.''
Mr. Smith of Texas. Okay.
Mr. Chairman, I would like to have an additional minute.
And if granted, I am going to yield it to the gentleman from
Florida, Mr. Keller.
Mr. Conyers. Very good.
Mr. Smith of Texas. Thank you.
Mr. Keller. Thank you.
Mr. Duncan, what is to keep Visa and MasterCard, since they
have an 80 percent market share, for determining, ``You know,
instead of having 2 percent interchange fees, we are going to
have 3 percent or 4 percent''?
Mr. Duncan. Frankly, the only thing I think that stops that
from happening is because they are monopolists, and monopolists
will price maximize. It has been a number of years since
economics, but there is a market-clearing competitive price,
and there is a much higher price that monopolists charge if
they can profit maximize.
Mr. Keller. Mr. Muris, would that be a good thing, if the
interchange fees went up to 3 percent?
Mr. Muris. Well, if they had the power that Mr. Duncan says
they have, obviously the fees wouldn't be where they are now.
But it is important to understand that----
Mr. Keller. But isn't your position ``when interchange fees
increase, cardholders benefit''?
Mr. Muris. Yes, but interchange fees are set in this
process, this balancing process. It is clear that one of
Mr. Keller. So if the ATM fees go up, that is good for me?
Mr. Muris [continuing]. What happens with interchange is
that cardholders received better cards. Most of us have four or
five cards in our wallets, believe it or not. If interchange
went down, like has happened in Australia, what happens is,
annual fees become an issue. With annual fees, people would
carry far fewer cards.
You might believe that people are wrong to carry four or
five cards. I personally don't, but there is a direct relation
between the size of the interchange fees and the quality of the
Mr. Keller. Thank you. I think my time has expired. I yield
Mr. Mierzwinski. Mr. Chairman, could I just add one quick
comment on the Australia? I mean, the consumer groups would be
happy to submit for the record that we disagree with the card
associations' interpretation of the Australia experience, and
we think that actually, overall, consumers are paying lower
fees, and there are more entrance in the market, and it is a
much more competitive system.
Mr. Conyers. We would be pleased to accept any information
in that regard.
The Chair recognizes Chris Cannon.
Mr. Cannon. Thank you, Mr. Chairman. I appreciate that.
And let me pick up from where I was with Mr. Smith. You
were talking about some focus groups you had done. Do you have
anything that you can share with us, any written reports on
those focus groups or anything that would indicate something we
could look at as a Committee?
Mr. Smith. No, no, sir, I don't here with me today. I could
provide that with you in the future.
Mr. Cannon. If something is done already, I would
appreciate that. That would be interesting.
Mr. Smith. Yes, sir.
Mr. Cannon. In that process, did you ask people what they
thought fees currently are?
Mr. Smith. And I don't recall exactly the exact line of
questioning, because obviously I wasn't doing the questioning,
but the questions had to do with payment methods. Which payment
methods do you prefer? Is it debit, credit, check, et cetera?
And it kind of weaved back around to the question, you know,
what fees do you think are associated? Do you think any fees
are associated with these cards? And that is where we
ascertained the information that most consumers do not think
there are fees associated with cards.
Mr. Cannon. Did you then take it beyond that to say
globally how much profit is built into those transaction fees
Mr. Smith. No, sir, because we were very careful not to
disclose things we are not supposed to, according to the rules.
Mr. Cannon. Can you tell me about the rate you pay or the
rates--for instance, does one size fit all or are there
multiple rates that you end up paying as a merchant?
Mr. Smith. Well, actually, I have a rate sheet right in
front of me here. We pay 64 different rates to credit card
companies. I would be happy to share this. At this point, I am
probably not allowed to.
Mr. Cannon. Well, I ask unanimous consent that that be
included in the record.
Mr. Conyers. Without objection.
Mr. Cannon. Thank you.
Mr. Smith. I am not sure that I can do that in accordance
and not be in violation of my Visa and MasterCard----
Mr. Muris. It is public information.
Mr. Smith. I would be happy to supply you with that. But
there are 64 different rates that are on this sheet. And if you
look at MasterCard's rate sheet, as I understand it--now, this
is not just for our industry; this is for our stores--but
theirs was 106 pages long for all of the industries that they
do business with.
Mr. Cannon. But this sheet reflects your fees?
Mr. Smith. Sixty-four different rates.
Mr. Cannon. And they are different rates, and therefore,
presumably, some ability to push people to use rates that are
higher? Do you find that banks are--in other words, we have
talked a lot about different kinds of cards. And some cards
have extra fees because they are specialty cards, and a
merchant ends up paying more, but do you find that there is
pressure by banks in the system to encourage people to use
cards that result in higher fees for you?
Mr. Smith. There is no question to that, sir, yes.
Mr. Cannon. Do you push back on that at all?
Mr. Smith. There is no way we have the ability to push
back. We have to take all cards. We can't discriminate on any
type of cards. And even if we could, with 64 different payment
structures, I don't know how that would be possible in a retail
Mr. Cannon. Given this policy, I appreciate that.
There is one other--I have many questions, but one I want
to direct to Mr. Muris. You talked about the benefit of the
system and some of the robustness of it and how merchants have
a choice--I think you mentioned Costco doesn't take some cards.
Costco, I think, is a little unique.
But however you consider the market for merchants today,
how do you deal with the online environment? What does the
merchant do who is online, where a customer has a different set
of choices? Is it not more important for someone online to have
the ability to process a credit card than it is, say, a store
down the street?
Mr. Muris. Absolutely. And I would submit that, without
payment cards, we wouldn't have the vibrant online economy that
we have. And the key to the functioning of payment cards has
been their ability to balance these two sides of the market.
Interchange rates could be higher online, because the fraud
possibilities are higher, but I think the Internet makes the
case for payment cards, not the opposite.
Mr. Cannon. Well, so my point here is not that it is
enhanced--I mean, I believe that it has. And Mr. Duncan earlier
talked about profit, and I think actually profit is a wonderful
motive. It gets people to do things they might never have
thought of doing, like getting out and working. So there is
nothing critical in this question.
But the question more that I am asking is, is there a
disproportionate bargaining position on the part of the credit
card companies when they are dealing with people online?
Mr. Muris. In many ways, I don't think so. PayPal and other
people are trying to come up with different kinds of payment
systems. Again, we have a variety of--we have four credit card
payment systems. It is quite frequent. I don't know how you
much you purchase online, but when I purchase online, most of
them seem to take all the major systems.
Although there has been a tremendous benefit, there is
competition in this business, and I think that competition acts
like it acts otherwise, to protect the consumer.
Mr. Cannon. I only buy things online in D.C., where I don't
think I have to pay sales tax on them. You have to remember
everything you buy in Utah and declare that on your sales tax,
another issue for one of the Subcommittees of this full
Committee to deal with at another point in time.
Mr. Chairman, I recognize my time is expired, and thank
you, and yield back.
Mr. Conyers. Thank you very much.
Mr. Darrell Issa?
Mr. Issa. Boy, it is hard to know where to begin. We are
not the courts, and, Mr. Chairman, I respect the fact that we
have certain limited jurisdiction. So let's assume for the
moment that it is the courts' job to decide if you are a trust,
if, in fact, Visa and MasterCard are operating as monopolies.
But, Mr. Muris, I guess since you are the apologist for the
credit card companies here today, to use a technical term I
think we use from time to time here at the dais, why in the
world within our powers shouldn't we have a piece of
legislation that says that, from a contractual standpoint,
since it is very clear that credit cards have monopolistic
power as a group, then why is it that it wouldn't be
appropriate for us to sponsor legislation, on a bipartisan
basis, that would simply allow those taxes to be added, 64
different--and, by the way, Mr. Smith, I am assuming you will
answer affirmatively that your stores could have a computer
that would add the exact amount of those 64 different rates so
that whatever card I chose, I got the effective tax rate back
to me, as a pass-through, no profit, just a pass-through--why
in the world shouldn't we sponsor legislation that says that?
And then, secondly, and probably even more importantly, why
in the world should this Committee allow a gag rule to be in
place that prevents the public from knowing what is being added
to the cost of the product, particularly when a gallon of
gasoline has more profit in it for your companies than it has
for any of the people they are buying from?
Mr. Muris. Well, I am speaking--although I have done work
for Visa, I am speaking, as I always do in front of Congress,
for myself. I decided 40 years ago that I wanted to be active
in public policy issues and speak my mind, and that is what I
am doing today.
Mr. Issa. Oh, okay. So when your firm advertises that as a
lobbyist organization, that you are the premiere one in
Washington, that it has nothing to do with that? You are doing
this on your own dime for free, not for a client?
Mr. Muris. No, what I am saying is that this is not my
full-time job. I am a college professor, as well, and I am
doing other things. I only speak in public and I only represent
people in whose cases I believe. In fact, Discover came to me
in 1990 in a case against Visa and wanted to hire me to work
for them, and I said Visa was right.
Mr. Issa. Okay, well, in that case, I think I will switch
to Mr. Buhrmaster. As a small banker--I will ask you the
question--why in the world do you believe that you only have
essentially two people you can deal with and both of them, Visa
and MasterCard, guarantee you a profit, even though your
various banks are on the back end, the smaller end, but they
set the price high enough that the smallest of banks still make
a profit on it? Why do you think that occurs?
Mr. Buhrmaster. Well, I don't believe they set the price. I
do believe that the price is set by the marketplace. When a
merchant comes and sits down at my desk and says, ``I am
interested in this product,'' chances are they spoke to someone
else. And I disagree with Mr. Smith when he says there is no
competition here, there is no negotiation.
Mr. Issa. Well, let me switch. I will switch, but I want
you--just double check--I want you to have your banker's hat
Mr. Buhrmaster. Certainly.
Mr. Issa. If I came to you tomorrow with a product that
cost 25 cents per $100, 0.25 percent as a transaction fee, and
that is all you had to pay, and then you could price your
amount on top of that for a merchant, let's say another 0.25
percent or another 0.5 percent, so that for 0.75 percent,
instead of 2 percent or 2.5 percent, you could provide a
merchant with this transaction, no frills, would you for a
minute not take that 0.25 percent, add your 0.25 percent or
0.50 percent, and undercut the existing competitors of Visa and
MasterCard? If that was available today, is there any reason
you wouldn't take that?
Mr. Buhrmaster. When I look at a product I am buying--and
that is one of my jobs at the bank; I examine new products--I
want to know the same thing my customers ask when they walks in
here: Where am I going to get the best service and the best
If I made my decision solely based on the best price, I
would probably not be in business, because I have gotten some
great deals thrown in front of me that turn out pretty bad.
Now, that said----
Mr. Issa. Okay, well, let me rephrase that.
Mr. Buhrmaster. But, no, I know what you are saying.
Mr. Issa. Let me re-ask the question one more time, because
the time is limited, and I think we have to get the basic
question of: Is there an absence of an a-la-carte for a reason?
If Visa or MasterCard offered you the transaction separate from
all the other things that go in it, the 0.25 percent rate,
which would be about what I guess is the 13 percent of the fees
that are going on, just my arithmetic, if they offered that,
would there be any reason in the world that you would not use
that, at least with merchants who wanted it as a competitive
Mr. Buhrmaster. I want the best deal I can get for my bank
and my customers, so if someone is offering me a better rate
and I am used to their service, and I can verify their service,
and I can make sure I am getting the value for my price, I
would take it. Now, that said----
Mr. Issa. I am assuming that, if that were offered by Mr.
Buhrmaster, that you would take that rate of about half what
you are paying and put the rest of it either into savings or,
perhaps, eking out a profit. Is that roughly correct?
Mr. Smith. I think that would be fair to say. We would
enjoy having a lower rate and competition to get there.
Mr. Issa. So it is the absence of competition and the
absence of disclosure that we are dealing with here today
within our jurisdiction?
Mr. Buhrmaster. I have to disagree with that. That is been
said a number of times here, and we are talking about an
absence of competition. There is not an absence of competition.
As a merchant acquirer, there is not.
I have people coming into my office--out of my 160
merchants, we have people that come in and say--I had a guy
come in, and he showed me his business card. On the back of it,
it says, ``I can give you this rate.'' Well, I say, ``All
right, what services are they offering?'' There is competition.
Every day, there are people in my merchant shops trying to
offer them a better rate.
I price the way I feel I can make a profit and I can
deliver good service. I don't want to do both. I don't make a
big profit on this. I deliver good service.
Mr. Issa. But Mr. Buhrmaster--and my time is up, and I
don't want to take too much of the indulgence of the Chairman,
but since I am, oddly enough, the only member of a public
company's board, and my company does about $40 million of
transactions a year, and I am the former CEO, with all due
respect, I have been at the negotiation table on behalf of my
company with the various banks. And it simply isn't true.
Yes, you can negotiate over 0.02 percent or so. You cannot
negotiate beyond that. We are dealing here today, with the
Chairman's leadership, on the portion that is, in fact, the
price-fixing portion. And I would hope that, in the future,
that the kinds of hearings we have continue to expose the fact
that there is an absence of competition and a gag rule in place
in America today.
And, Mr. Smith, thank you for your leadership and the rest
of you that helped flesh this out.
Thank you, Mr. Chairman, for your leadership. I yield back.
Mr. Conyers. I thank you so much.
Mr. Chabot. Thank you, Mr. Chairman.
I just have one final question that I would like to put to
both sides. To the banks-credit card folks, obviously you have
been on the receiving end of the more probing questions. And my
question to you is: Are there any misimpressions that you have
heard here, that the Committee may have received? Is there
anything that you would like to clear up? Is there any other
criticism that you have heard that you think is unwarranted? I
would like to give you both a last shot to make your best case
And then, to the retailers, if you could comment as to
why--oftentimes, a lot of us believe that you don't necessarily
want Congress getting involved in something that marketplaces
can kind of take care of things, but that is not always the
case, and sometimes we do need to step in and regulation is
appropriate. Would you tell us why this is an area that ought
to be probed further and that we ought to look into and how we
could be involved to the extent that we can be helpful and not
screw up the marketplace out there, as Government is sometimes
apt to do?
And I don't care who goes first. We can just go down the
line, however you want to do it. Why don't we go, Mr. Smith, if
you would like to? And we will just go right down the line. And
if you could keep your comment to perhaps a minute or so,
because I have only got 5 minutes.
Mr. Smith. Well, thank you, Mr. Chabot.
I think that the thing that we look at in our business is
we are the purchasing agent for our consumers. It is our
responsibility to make sure that we can bring food to the table
of our consumers as inexpensively as we can with quality
merchandise. The problem we have got, when you see a 2 percent
fee for credit cards and a 1 percent profit margin, you must
understand that there is a pass-through to the consumer.
Our concern is, as it has gone up 117 percent, we don't
know where the end is. We have credit card fees that are going
up faster than our health care, faster than any other expense
that we have in our business.
I don't know that I have a solution for you here today. I
wish I did. But I what I do think works and what I have
experience with is being in a free market enterprise system,
one where competition is readily available, and folks vie for
your business each and every day. And I hope that is what we
can work with this Committee to come up with.
Mr. Chabot. Thank you.
Mr. Buhrmaster. Well, I enjoyed the probing questions, and
I wish you would have asked me more. I came here, and I enjoy
asking the questions for you folks.
I feel that we have missed something here. There is
competition in this business. From where I sit, I sit at a
desk, in a small bank, in a small town, in a small community,
and I have my merchant customers bombarded with people coming
in and offering them better deals. There is competition out
The base price may be set, but that is what allows a bank
like ourselves to be in the business. You know, we can compete
with the Bank of Americas. We may add on what our cost is so
that we can be competitive. But it is so important to note:
There is competition out there. And I do lose customers, and I
Second is just don't forget the small banks in this
equation. You can't forget that we are driving the economy of
this country and that this is an important part of our driving
the economy. We have to have these payment options for our
people, for our consumers, and for our merchants and our small
businesses. It is important.
And if legislation is put forth that restricts our ability
to compete with the large banks, you will lose the small banks
in the payment acceptance arena, and it will be dominated by
large players that traditionally have not looked out for the
consumers the way small banks do.
Mr. Chabot. Thank you.
Mr. Mierzwinski. Thank you, Mr. Chabot.
The first thing I would like to say is simply that the
consumer groups care about all consumers, not only cardholders.
And if cardholders represent 50 percent of the business of a
store and the cost is 2 percent added on across all 100 percent
of the store's customers because of unfair interchange rates,
well, then everybody is paying 1 percent more, regardless of
how we pay, with a card or without a card. So that is the first
issue out there.
Second, in terms of the unfair practices, one thing that we
haven't pointed out is that the cheapest form of interchange is
actually PIN debit. There are statistics out there and there
are facts out there that show that many banks are now starting
to impose a PIN debit fee on consumers to drive them to
signature debit, which is the higher cost debit. And that is
why you have all these rewards programs. They put the rewards
programs on the signature debit only, just like on credit
cards, because they want to drive you to that, because they
make more money from the merchants.
Rewards, by the way, we think are overrated, particularly
on credit cards. Most people don't redeem them. And if this is
what we are paying for, it is a ridiculous system.
Then, finally, you asked, what else should you be looking
into? The final point of my testimony was that, in addition to
this system of interchange being broken, we believe that the
issuer system is an oligopoly and that there are bad practices
that companies engage in, because of those anti-competitive
practices at the issuer level, and we would encourage a second
hearing just on issuer competition.
Mr. Chabot. Thank you.
Mr. Muris. Thank you very much. And let me submit for the
record that I have heard a lot of facts--many more than I could
talk about now--that I thought were wrong. Just let me make a
First of all, regarding rewards cards, I like my rewards. I
don't think it is the job of Government to tell people what
kind of products they should take.
Second, fees are not out of control. And let me submit for
the record data I obtained from Visa involving supermarkets,
which show that the increase in volume explains, virtually
percentage point for percentage point, the increase in
interchange that supermarkets have paid to Visa in the last 7
Next is, despite what we have heard, merchants can discount
for cash. They can disclose all this information. They can
steer. They can have people use debit. They can have people use
Discover. There are lots of things they can do.
Next, what we heard from both Mr. Smith and Mr. Duncan when
they were asked for remedies shows that, if this were really an
antitrust case, they wouldn't be here. An antitrust case would
simply end the price fix. By asking for a complicated AT&T
break-up kind of remedy, that is clearly an implicit admission
this is not the cartel case they claim.
Finally, consumers do know that merchants pay. In fact,
two-thirds of them know that merchants pay to use the cards.
Mr. Chabot. Thank you. If we could get some follow-up on
that, because there have been some discrepancy this afternoon
from both sides. We would like to get--I think, I am sure we
all would--just to verify it one way or the other.
Mr. Muris. Yes, sir.
Mr. Chabot. Thank you.
Mr. Duncan. Yes, first, I guess what I would like to say is
that what we have here is a market failure. We don't have a
market. We have prices that are regulated privately and
supported by a secret set of rules. So that is not a
functioning market; that is not the definition of a market.
Now, the courts--as Tim points out--the courts are very
good at deciding liability, and they can determine damages. But
if we are talking about fixing this, we are talking about
prospective remedy, that is not something a court is very good
at. So it is really the prerogative of Congress to come up with
the kind of nuanced solutions we need to help correct an anti-
competitive market. I would suggest that one of the first
places we look is at these rules.
Mr. Chabot. Okay, thank you very much.
Mr. Chairman, I want to thank you for having this hearing
and just say that I think both the witnesses on both sides here
were very, very good. And I think they had great presentations,
handled the questions very well on both sides, so thank you to
Mr. Conyers. But there is a lot of conflicting testimony
here, sir. Somebody is less correct than somebody else, which
is our job to determine.
Mr. Keller. Thank you, Mr. Chairman.
And I want both sides to know that I have read everything
you have had to say, I have listened to every word you have had
to say, taken notes on everything you have had to say, and
really hope we have given you a fair shake, both sides, and
will continue to do that.
Following up on what Chairman Conyers said, I am going to
try to create order out of chaos just a little bit. I have
found six factual inconsistencies between you--one side said
one thing; one said the other--and one area of agreement. And I
will go through that and see if we can at least get the
The retailers say, ``We just want to be able to see these
Visa and MasterCard operating rules, and they are kept secret
from us and the public.'' Mr. Muris, on behalf of the credit
card companies, banks, ``No, we don't keep them secret. They
are right there on the Web site. Anybody can see it.''
Retailers said, ``We can't advertise or offer cash
discounts or debit card discounts; in fact, Visa threatened
some California gas station for offering lower cash prices.''
Mr. Muris said, ``Not true. You can offer lower prices, cash
discounts, offer debit card discounts, advertise it if you
The retailers said, ``We don't have the bargaining power to
deal with these credit card companies. It is take-it-or-leave-
it, and we have to take it, since they have got 80 percent
market share, companies like MasterCard and Visa.'' Mr. Muris
says, ``Not so. Costco cut a deal with American Express, using
their bargaining power, and American Express typically had a
higher merchant rate, 2.5 percent, more than MasterCard and
Visa, so just cut your deal.''
Retailers say that, ``When interchange fees increase, it
hurts consumers and cardholders.'' Mr. Muris says, ``When
interchange fee increase, cardholders benefit. Higher
interchange fee revenues to issuing banks result in increased
benefits to users of payment cards, such as increased rewards
and lower fees. These benefits come not only in the form of air
miles, but also include rebates.''
Retailers say, ``We don't want price controls. We want
competition.'' Mr. Muris says, ``Critics, including the
merchants, want the Federal Government to impose price
Mr. Smith, on behalf of the retailers, is the CEO of Food
City and the president of food marketing, says the supermarkets
are hurting. Mr. Muris pulls out a letter and says supermarkets
are doing great. They are not hurting.
Well, here is my one area of agreement that I have seen: It
seems that people at least agree, pursuant to these operating
agreements that Visa and MasterCard issue, if there is a
company such as Mr. Smith's company, Food City, and they agree
to accept Visa, and someone comes along with one of these Visa
premium cards, with lots of bells and whistles, like airline
miles and rewards and rebates, and it has a much higher
interchange rate, you have got to take it, just like the more
basic one. And Mr. Muris hasn't disputed that.
And one of the solutions--in fact, the only solution I have
heard today that Mr. Duncan has offered is maybe that should be
changed, maybe you should have the freedom to turn down some of
these big-ticket premium reward cards that are charging you
very high interest rates. Is that essentially your idea, Mr.
Mr. Duncan. That would be a first step.
Mr. Keller. Mr. Muris, have I accurately laid this out, or
am I mistaken?
Mr. Muris. Yes, what you have done is destroyed the value
of Visa and MasterCard as a brand, because what that means----
Mr. Keller. I didn't know I was that powerful. [Laughter.]
Mr. Muris. Well, that is what your remedy would do, because
what that means is--the value to me is I can take my Visa card
and it will be honored anywhere. And what you are saying is,
no, the merchant can pick and choose. So you really would hurt
the value of the brand.
Mr. Keller. But you would agree with the statement--and I
don't want to quarrel with you; I just want to make sure I am
getting my facts right--that, if someone enters into a Visa
agreement, such as Food City, and you agree to take the Visa
cards, you have got to take all the Visa cards, the premium
ones and the basics? Is that right?
Mr. Muris. Absolutely. I think you are doing a superb job
of summarizing. I was just saying the implications of what you
want would have disastrous consequences.
Mr. Keller. Thank you, Mr. Chairman. I will yield back the
balance of my time.
Mr. Conyers. My commendations to you, because that is
precisely what we are going to have to do after this hearing,
is what you have already initiated. I thank you very much, Ric.
Steve Cohen, were you just passing through the Rayburn
building, wandered in here, or do you have a purpose?
Mr. Cohen. Mr. Chairman, I was going through the payphone
return coin places to try to get some money to pay my credit
card bill, and I hadn't come up with enough yet, but I did stop
by. Thank you, Mr. Chairman.
I am interested in this issue, and I have had an interest
in consumer issues for some long time. And I am afraid I am not
as maybe up to speed as Mr. Keller and some of the others,
having listened to the testimony.
But one of the things that--and it is just shocking to see
that these rates have continually gone up, and the United
States is appearing to be the only country in which credit card
interchange fees are increasing, and has far higher fees than
almost any other industrialized country. And I guess that is--
whose testimony is that from, or is that just the gospel?
Mr. Duncan. That is the gospel.
Mr. Muris. Well, it is not true. You know, it is another
fact I will dispute, but we could----
Mr. Cohen. Is it the gospel according to Ed?
Mr. Mierzwinski. The statistics we have seen,
Representative Cohen, are that the U.S. has the highest rates.
The retailers and the consumer groups agree on that.
Mr. Cohen. And, Mr. Muris, which countries have higher
Mr. Muris. Well, I will submit for the record two pieces of
evidence, one from Aite, which shows that what merchants pay is
lower in the United States than most places; another from the
European Union that shows what merchants pay in the United
States for Visa is right in the middle of other countries.
Mr. Cohen. But Visa is different. We may be talking about
Mr. Muris. Well, no, I believe Visa and MasterCard are very
Mr. Cohen. They are very similar.
Mr. Chairman, may I ask a question? I may be confused.
Wasn't this about antitrust?
Mr. Conyers. Well, this is the Antitrust Task Force of the
Judiciary Committee, yes.
Mr. Cohen. So is this an admission that Visa and MasterCard
are kind of doing something together?
Mr. Conyers. Well, no, wait a minute. We haven't gone that
Mr. Cohen. Okay, I am sorry.
Mr. Chabot. Would the gentleman yield?
Mr. Cohen. Yes, sir.
Mr. Chabot. I thank the gentleman for yielding.
Mr. Muris, if you have evidence to the contrary or there
are studies out there, I would like to have that material. I
think we all would, again. You know, otherwise, if there isn't
something, then I would tend to accept that. You know, if there
is something that is inconsistent, then I would like to see it.
Mr. Muris. No, I will submit the information for the
record, but the truth is, in competitive markets, firms tend
to--and I believe it was Mr. Keller who pointed that out--when
you walk into stores, close competitors have similar prices.
That is what often happens in competition.
Mr. Conyers. Well, that is also possible price-fixing, too.
Mr. Muris. Sure, it is a possibility of price-fixing,
monopoly, or competition.
Mr. Chabot. And I am talking specifically about whether the
United States has the highest rates.
Mr. Muris. Oh, yes.
Mr. Chabot. That is what I was talking about.
Mr. Muris. Yes, and I have--and I will submit two different
pieces of data for the record.
Mr. Chabot. Yes, I mean, I would be very interested in
seeing it, but I haven't seen it, other than what Mr. Cohen has
referred to, so I am assuming that that is the case, unless I
see something different. Then I would look at the source of
Mr. Cohen. Sure, that is on page three here of the consumer
group testimony on credit card--let me ask this question. Mr.
Muris, are you with a credit card company?
Mr. Muris. I am testifying today, as I always do--we had a
little exchange about that--I am----
Mr. Cohen. I think I heard that one. You are a citizen, and
you only come out for folks you like? I heard that. Between
telephone booth places, I did hear a little bit of that.
Mr. Muris. I have spent 40 years doing this. I have had six
jobs in the Federal Government. I have had a lot of other
policy jobs. I only speak and work for people in whose cause I
believe, and I am proud of that, sir.
Mr. Cohen. Do you have any reason to know why the credit
card companies continually send out all these requests for
people to get credit cards? I live in a house for 19 years, and
there is still soliciting the people who died before I moved in
and saying, because of their good credit rating, they are
entitled to get this card. They have been dead for a long time.
Mr. Muris. Sure, and it is one of the----
Mr. Cohen. They are debt-free.
Mr. Muris. It is one of the ways that people get credit
cards. One of the things that I suspect you helped us with,
when I was chairman of the Federal Trade Commission, we made it
easier for people to opt out of those solicitations. It was not
like--we did the National Do-Not-Call Registry when I was
chairman, and Americans overwhelmingly signed up for that.
Americas overwhelmingly don't----
Mr. Cohen. But these people are dead. They can't opt out.
Mr. Muris. But I am saying that, if you wanted to, sir, you
can opt out. But like me, you probably don't, because most
people--it is very easy to sift through their mail. And, in
fact, I have accepted credit cards based on the mail
solicitations. But if I wanted to, I could opt out.
And thanks to you and the other Members of Congress, a few
years ago, you made it easier for people to opt out, and I
thought that was a good thing.
Mr. Cohen. But the cost of sending that letter to make you
opt out and then to make you opt out cost all this money that
we then charge in fees. And then to make money, we have to
charge more money even.
Mr. Muris. Sure, advertising and marketing----
Mr. Cohen. So why you can't be more selective in who you
pick, who really is somebody that deserves and has good credit?
Isn't there some way to--because it bothers me as a consumer,
and it bothers me as somebody who invests, that is such
Mr. Muris. Again, I would be glad to help you exercise your
right to opt out.
Mr. Cohen. I think we have a volunteer here. End of my 5
Mr. Buhrmaster. As a credit card issuer, everybody has a
different way they do business. And I am speaking as a small
bank, but there are other large banks that their way of doing
business and getting credit cards into the hands of consumers
is the mass mail. To my grandmother who passed away several
years ago, we still get mailings for her, but that is the way
they choose to pick their customers.
Other banks, other issuers choose other ways. It is just in
the business model. It has nothing to do with the interchange
debate. It probably has more to do with the shrinking margins
that the banks are experiencing because of the rate
environment. They are looking for ways to find more ways to
lend to people.
The money they are making off of people with bad credit
come from these interest rates that are high. So----
Mr. Cohen. Right. And, apparently, according to this
information, there are nine billion unsolicited credit card
offers sent just this last year, nine billion. Even in China,
that is a lot of people.
Mr. Buhrmaster. But I get more requests for charitable
donations than I do for credit cards.
Mr. Cohen. That is different.
Mr. Buhrmaster. It is different. It is different. But it is
Mr. Cohen. And you are apparently quite wealthy and
Mr. Buhrmaster. I wish I were.
Mr. Cohen. Thank you, sir.
Mr. Buhrmaster. Thank you.
Mr. Cohen. Thank you, Mr. Chairman.
Mr. Conyers. Well, this has been a very conflicted set of
testimonies we have received, but then that is what we are here
for, isn't it?
I thank all of the witnesses. I know you will be
submitting--if you keep your promises, we will be getting more
statements to build up into this record than we usually
normally receive. And we have 5 days--you may get questions
from us, and we will get answers back from you. And then we
will have concluded the first hearing.
What is important is, what are we going to do in the second
hearing, or maybe even the third? It has not escaped my notice,
Mr. Keller, that solutions to this problem are pretty few and
far between, so it is going to test the skills and competency
of this Judiciary Committee a great deal.
But you have got to start it, and you have opened up this
testimony in a very fine way. We thank you very much.
And the hearing is now adjourned.
[Whereupon, at 4:16 p.m., the Task Force was adjourned.]
A P P E N D I X
Material Submitted for the Hearing Record
Prepared Statement of the Honorable Lamar Smith, a Representative in
Congress from the State of Texas, and Member, Antitrust Task Force
Mr. Chairman, today we consider an issue that is vital to the
America has gone through a radical transformation in the way it
pays for its goods and services. Ten years ago, almost 80% of all
financial transactions were made with checks or cash. Today, less than
half of purchases are conducted this way. And three years from now,
consumers will use credit and debit cards for over 70% of all their
Properly used, credit cards offer many benefits for consumers and
businesses alike. For consumers, they offer fraud protection, payment
flexibility, the ability to track purchases and airline miles. For
merchants, they offer guaranteed, faster payment and the opportunity to
expand businesses through Internet and phone sales.
Some studies have shown that consumers who use credit or debit
cards at the time of purchase are likely to spend more than they would
Of course, this growth has not come without its costs. Consumer
groups have complained for years about credit card practices that they
think are unfair or illegal. Merchants, too, have had their complaints.
In 2005, the Second Circuit affirmed a settlement in which VISA and
MasterCard paid $3 billion. The settlement arose from a case brought by
a group of retailers who claimed that VISA and MasterCard had illegally
tied the acceptance of their credit cards to their debit card
This resulted, among other things, in the imposition of fees on the
banks that issue credit cards that were higher than they would have
been in a competitive market.
Today, retailers continue to claim that VISA and MasterCard are
charging these higher fees for the acceptance of their cards, and that
these fees are ultimately passed on to consumers. A group of retailers
has brought a series of federal antitrust suits challenging the way
that VISA and MasterCard set these interchange fees and they are
pending in the Eastern District of New York.
At the same time, retailers complain that VISA and MasterCard do
not make available to them all of the rules that govern their
transactions. They cite examples of merchants that have been assessed
fines by the credit cards for rules that they did not know existed.
For their part, the credit card companies insist that they have
provided all the relevant information to merchants. They also maintain
that the setting of credit card interchange fees is a necessary part of
their business that maximizes the number of consumers who are willing
to carry their cards and the number of merchants who are willing to
Retailers have raised some serious questions. For example, who sets
the interchange fee, and how it is set? How much of the interchange fee
is passed on to merchants and, ultimately, the American consumer?
What are interchange fees used to finance? Who makes the rules the
merchants must abide by, and who enforces those rules? Which of these
rules have been made available to the merchants and which have not? And
if those rules have not been made available, why have they not?
As for the retailers, I would like to know what is the remedy that
they would really like out of these hearings? What is the information
that they feel that they are not getting from the credit card companies
and why is that actually important to them? What are the benefits that
they receive from the credit card payment system? Are those benefits
outweighed by what they have to pay in interchange fees?
Prepared Statement of the Honorable Sheila Jackson Lee, a
Representative in Congress from the State of Texas, and Member,
Antitrust Task Force
Prepared Statement of the Honorable Steve Cohen, a Representative in
Congress from the State of Tennessee, and Member, Antitrust Task Force
Credit card interchange fees represent a hidden cost to consumers
because merchants will pass on these fees to consumers. These fees may
be all the more harmful to consumers because the major credit card
companies may be colluding to fix the fees charged to merchants,
thereby imposing higher costs on consumers than the market might
otherwise. Such conduct, if in fact it were occurring, would constitute
anticompetitive behavior in my view. I look forward to learning more
about the issue from today's witnesses.
Letter from Timothy J. Muris, Of Counsel, O'Melveny & Myers LLP to the
Honorable John Conyers, Jr., enclosed with attachments
Prepared Statement of the National Association of
Convenience Stores (NACS)
Chairman Conyers and Members of the Antitrust Task Force, I am Hank
Armour, the President and Chief Executive Officer of the National
Association of Convenience Stores (``NACS''). Prior to taking my
current job, I owned and operated fifty-nine retail facilities in
Washington, California and Oregon. I am pleased to submit for the
record this testimony on behalf of the NACS.
Founded in 1961, NACS is an international trade association
representing more than 2,200 retail and 1,800 supplier company members
in the United States and abroad. NACS is the pre-eminent representative
of the interests of convenience store operators. The convenience store
industry in the United States, with over 145,000 stores across the
country,\1\ posted $569.4 billion in total sales in 2006, with $405.8
billion in motor fuel sales. Overall, eighty-two percent (82%) of the
motor fuels (gasoline and diesel fuel) sold in the United States is
purchased at the more than 114,000 convenience stores that sell fuel.
And, to give some perspective on the issues being discussed today, the
industry posted $4.8 billion in profits last year--which includes both
profits at the pump and inside the store--but paid $6.6 billion in
credit and debit card fees on its transactions. The next time you stop
for a fill-up, keep in mind that more of the money you are paying goes
to the card companies than the retailer selling you gasoline will get
\1\ More than 70,000 stores are operated by NACS members. NACS
members include forty-nine (49) of the fifty (50) largest companies in
the industry, but seventy-three percent (73%) of members operate ten
(10) or fewer stores.
Last year was the first in which card fees exceeded profits
industry-wide, and they did so by a large margin. These changes have
made interchange fees the top issue for our industry. The rapid
increase in fees is unjustifiable and unsustainable. We cannot thank
the Task Force enough for agreeing to look into this issue and we look
forward to working with you throughout your review.
To raise awareness of the many problems caused by interchange fees
and their impact on everyday consumers, NACS has worked with many in
the retail industry to establish a broad collection of voices known the
Merchants Payments Coalition (``MPC'' or the ``Coalition''). The
Coalition's member associations collectively represent about 2.7
million locations and 50 million employees. These merchant associations
account for more than 60 percent of the non-automotive card based
transaction volume in the United States. The MPC includes 22 trade
associations representing many of the retailers in your districts--the
very grocery stores, drug stores, restaurants and shops that you and
your constituents frequent daily. The MPC represents a diverse group of
interests who often disagree on many issues, but who have banded
together to challenge the unfair and unjustifiable practices of Visa
and MasterCard. The MPC is fighting for a more competitive and
transparent card system that works better for consumers and merchants
There has not been nearly enough information and discussion about
interchange fees in the past and we applaud the Task Force for its
willingness to examine them. These fees have escalated to the point
that they are now the third highest operating cost to my industry--
behind only payroll and rent. Of the many types of fees charged by
credit card companies, interchange fees are the most pernicious because
they are arbitrary, excessive, are not disclosed to retailers or
consumers, and ultimately, they drive up the cost of all products. This
is a burden that is borne by both credit card users and non-users
alike. And retailers have virtually no choice but to accept them, as
Visa and MasterCard leverage their dominant market power to force them
upon an unwitting public.
The collective setting of interchange fees represents an ongoing
antitrust violation by the two leading payment card associations, Visa
and MasterCard. These antitrust violations cost merchants and their
customers tens of billions of dollars annually. This system is
anticompetitive in several ways. First, these fees have been fixed by
banks that compete to issue payment cards to consumers or to sign up
merchants to accept Visa and MasterCard cards. No matter which Visa or
MasterCard member bank issued the card that is used to make a purchase
or which Visa or MasterCard member bank signed up the merchant making
the sale, the same uniform fixed interchange rates apply. This system
also cements Visa's and MasterCard's substantial individual and joint
market power. The higher the interchange fees charged by Visa or
MasterCard, the more attractive that card system becomes to banks
compared to other card systems. Thus, the member banks have every
incentive collectively to ensure that the card system sets high
We hope that the following discussion provides the Committee with
some insight into the opaque and costly world of interchange fees, so
that it may better understand the challenges thrust upon our small
businesses by Visa and MasterCard and the need for greater disclosure
of interchange fees.
INTRODUCTION TO INTERCHANGE FEES AND THEIR CURRENT USE
Interchange fees are the fees credit card companies and banks
charge merchants every time a credit or debit card is used to pay for a
purchase. The fee is a percentage of each transaction that typically
varies with type of card, size of merchant and other factors--but it
averages approximately 2 percent for credit card and signature debit
transactions. Interchange fees are set by the collective action of
MasterCard and Visa member banks (which include most banks in the
United States) and are imposed on merchants by the banks to which
merchants submit credit card transactions for payment. Merchants must
then treat the interchange fee expense as a higher cost-of-doing-
When a consumer buys an item with a Visa or MasterCard credit or
debit card, the merchant does not receive full face value from the bank
to which it submits the charge. The difference between the face value
of the customer's purchase and the amount the merchant actually
receives is called the ``merchant discount,'' the vast majority of
which is the interchange that is paid to the bank that issued the
customer's card. As these interchange fees increase and card use
expands, merchants are naturally forced to pass these costs along to
consumers in the form of higher prices for all products.
The average consumer has no idea that this fee is imposed every
time he or she makes a purchase with a Visa or MasterCard card. In this
way, interchange acts as a hidden sales tax on U.S. commerce, raising
both merchant costs and ultimately the price of goods and services sold
To make matters worse, interchange fees are not tailored to Visa's
and/or MasterCard's cost of processing the transaction. While there may
have been some reasonable basis for the size of these fees decades ago,
the proliferation of card transactions has driven down per transaction
costs. In fact, a bank consulting firm reported last year that the cost
of processing transactions was only 13 percent of the interchange fees
charged. As described in greater detail below, interchange fees are now
an arbitrary revenue source on top of already significant interest
fees, late fees, over-the-limit charges and other fees charged by Visa
and MasterCard. How can Visa and MasterCard get away with this
practice? To put it bluntly, it is because they have market power and
exercise that power in ways that violate the antitrust laws.
Interchange fees are set in secret by Visa and its member banks.
MasterCard and its banks do the same. Visa member banks all agree to
charge the same fees and this collusion (as well as the separate
collusion engaged in by MasterCard member banks) is a massive antitrust
violation. Not only that, Visa and MasterCard rules make it virtually
impossible for merchants to disclose the fees to the public. The rules
run more than a thousand pages, governing every detail of electronic
transactions. Retailers must contractually agree to abide by all of
these rules in order to accept Visa and MasterCard, but retailers do
not get to see those rules. Visa and MasterCard make excerpts
available, but that is not good enough as retailers often have problems
with rules that are not covered by these excerpts. Visa now allows
retailers to view the full set of rules only if they sign a non-
disclosure agreement and only after they sign a contract agreeing to
abide by the rules.
PROBLEMS WITH INTERCHANGE FEES
1. Interchange fees are a product of dominant market power and
retailers have no choice but to accept them
Credit and debit card transactions are a large and growing part of
retailers' business. In the convenience store industry, approximately
65 percent of motor fuel sales are paid for with credit or debit cards,
and when prices rise, retailers tell us this rate can reach 80 percent
in many markets. In fact, across all industries in the United States,
the number of electronic payments--most of which are credit and debit
card payments--now exceeds the number of payments by check. The average
U.S. consumer carries a limited amount of cash at any given time, and
experience shows that when consumers want to buy something that costs
more than about $20, the transaction is likely to go on a credit or
debit card. In this environment, NACS members simply must accept credit
and debit cards--if they do not, these merchants would quickly lose
customers to nearby competitors that accept all forms of payment.
Visa and MasterCard dominate the card market. Accordingly, most of
the buying public holds Visa- and/or MasterCard-branded cards, and the
two companies enjoy greater than 80 percent market share in the
electronic payment industry. Our judicial system has acknowledged the
vast market power enjoyed, and scrupulously maintained, by Visa and
MasterCard. In 2003, the Second Circuit Court of Appeals held in the
U.S. Department of Justice's case against Visa and MasterCard that the
two card associations, both jointly and separately, had market
power.\2\ This is consistent with other cases and with retailers'
\2\ United States v. Visa U.S.A., Inc., 344 F.3d 229 (2d Cir.
Perhaps the ubiquity of Visa- and MasterCard-branded cards has
something to do with the fact that U.S. consumers receive well over 5
billion mail solicitations for credit cards each year. That is more
than 20 solicitations for every man, woman and child of all ages every
year. And, frankly, exorbitant interchange fees are fueling the over-
saturation of consumers by these direct solicitations. Regardless of
the reason for the boom in cards and card usage, it is clear that
cards, especially those issued by Visa and MasterCard, are so
commonplace that retailers are effectively forced to accept them.
Visa and MasterCard protect their market share with the complex web
of rules alluded to above. Retailers are often prohibited by these
rules from presenting pro-consumer pricing solutions such as offering
cash discounts to customers, even though they cannot prohibit cash
discounts under the Truth in Lending Act. Recently in California, some
retailers began to offer cash discounts for gasoline purchases. If a
customer chose to purchase using cash, he would receive several cents
off each gallon purchased. This discount was to incentivize consumers
to pay with cash so that the retailers would save on the interchange
fees and the savings could be passed along to consumers. Unfortunately
for consumers, Visa unilaterally determined that such practices
violated their rules and threatened to fine some retailers $5,000 per
day for such ``infractions.'' Because Visa could not simply prohibit
the discounts, it argued that these retailers could not call the higher
price offered the ``credit'' price. Visa suddenly decided that doing so
turned these cash discounts into credit surcharges which Visa does not
allow--even though this method had been used by gasoline retailers to
describe cash discounts for decades. Instead, Visa directed retailers
to call the higher price the ``full'' or ``regular'' price. Visa pushed
these terms even though the state of California determined that the use
of those terms for gasoline purchases would confuse consumers and break
California law because full serve and regular fuel are often used to
describe other aspects of gasoline pricing. Visa thereby presented
retailers with a Catch-22 situation: either break Visa's rules and face
stiff fines or break California law and face its penalties. Of course,
what Visa really wanted was for retailers to abandon the discounts so
no one noticed the huge costs associated with credit cards.
2. Interchange fees lead directly to higher costs for merchants and,
ultimately, for consumers
As discussed above, interchange fees act as a tax on the American
consumer. When merchants incur fee after fee, ultimately they are
forced to pass some of the cost to the consumer in the form of higher
prices for goods and services. In fact, the average American family
pays $331 in interchange and related fees every year. And that is true
whether or not that family uses a single credit or debit card. Because
these fees are hidden in the cost of virtually everything we buy, even
cash-paying consumers ultimately pay for them.
In the aggregate, retailers and their customers paid $36 billion in
interchange fees last year. When all of the other fees on credit and
debit transactions are included, the tab increases to over $40 billion.
And this figure does not include the many other fees collected directly
from consumers such as annual fees, late fees, interest, etc. According
to a report by the Government Accountability Office, for every $100 in
credit card purchases, credit card companies collect $2.50 in
interchange and processing fees.
Last year, in fact, convenience stores paid more fees for accepting
cards than they made in profits. Card fees paid by the industry rose 22
percent last year so that the industry paid $6.6 billion while making
$4.8 billion in profits. Think about that the next time you fill-up.
Card fees are the second largest operating expense in our industry--
behind only labor costs. If you are concerned about gas prices, these
out-of-control fees are the place to start.
The statistics regarding the growth of interchange fees are
astounding. In 2001, Visa, MasterCard and their issuing banks collected
$16.6 billion in credit card interchange fees. They have now ballooned
by 117 percent to $36 billion--more than all the late, over-the-limit
and other fees we all know about combined.
The United States enjoys the highest volume of credit card
transactions in the world (see Figure 1). Theoretically, this should
lead to significant economies of scale and lower interchange rates. We
also have the best technology for processing these transactions and we
have very low, and decreasing, rates of fraud. Yet, somehow, U.S. rates
are higher than corresponding rates in other countries. In the United
Kingdom, interchange fees average 0.7 percent, and in Australia, they
stand at 0.45 percent--well below the 2 percent charged in America.
Even more troubling, our rates are rising, while most other countries'
rates are flat or declining. Visa and MasterCard are putting the weight
on their worldwide business on the backs of American consumers. About
sixty percent of all of the interchange in the world is paid by
American consumers and that is wrong.
Not only have interchange fees been historically exorbitant, but
there is little hope that the fees that are drowning America's small
businesses will recede any time soon. Visa and MasterCard compete by
raising, not lowering, their interchange rates. When they raise their
rates, Visa and MasterCard induce their bank members to issue more of
their cards. Higher interchange rates mean those banks, in turn, get
more money from transactions put on those cards. These practices create
perverse incentives that actually reward fee increases, as normal
competitive market dynamics are inverted and consumers are left footing
For example, in May 1998, Visa announced that it would increase a
debit card interchange fee by about 20 percent. The increase was to
take effect in April 1999. In November 1998, however, MasterCard
announced a 9 percent increase (also to take effect in April 1999) that
was enough to keep its fee higher than Visa's. In most competitive
markets, Visa's price increase would have presented an opportunity for
MasterCard to hold or lower prices to gain market share--but apparently
not when both card brands enjoy merchant acceptance of over 98 percent.
In fact, those increases were just the start. In January 1999, Visa
announced it would increase its fee by an additional 6 percent. Then
MasterCard announced another increase five days later. All of these
increases were made before the first rate increase even took effect.
When the dust finally settled, Visa's rates went up 26 percent and
MasterCard's went up 17 percent. Overall, these increases alone cost
U.S. consumers an additional $300 million per year.
Unfortunately, without healthy and competitive market forces, we
lack the necessary checks and balances to prevent rates from rising to
stratospheric levels. The shear market power of the credit card
companies combined with the straitjacket of anti-competitive rules they
maintain inhibits retailers from refusing to take cards in general or
declining to take a card with higher interchange rates. And in a non-
transparent market, these practices go unchallenged.
3. Interchange fees and their impact are not disclosed to consumers
It is not surprising, given the nature and cost of interchange
fees, that Visa and MasterCard go to great lengths to ensure that
consumers remain in the dark about these fees. The efforts of credit
card companies to keep interchange hidden drives up costs. Without any
price cues, it appears that credit card use is costless and consumers
are deprived of the opportunity to choose lower cost options. It is in
this shroud of darkness that Visa, MasterCard and their member banks
collect literally billions of dollars from unwitting consumers.
Furthermore, it is not just consumers who are left in the dark;
Visa and MasterCard refuse to fully disclose their operating rules to
retailers as well. The card associations have a complex matrix of
interchange rates ranging from about 5 cents plus 1.15% for each
transaction to 15 cents plus 2.95% of the transaction. But it is hard
for retailers, particularly small mom-and-pop stores, to figure out why
they fall into a particular rate category. Plus, retailersare charged
different rates within the course of the same business day. Corporate
cards, rewards cards, fleet cards and others carry very high rates
while basic cards can have lower rates. Other factors can change the
rates as well. For example, if a card swipe doesn't work and the
retailer needs to call to get authorization, the transaction then falls
into a different risk category and a different interchange rate is
charged. And if the phone call doesn't go through, then again, a higher
rate is charged.
MasterCard has put its rates on its website--and the document is
100 pages long. These rates are 100 pages long. Visa's rates are also
very confusing. Retailers simply are not given the clear,
understandable and timely information they would need to accurately
inform consumers about the rates being charged. And Visa and MasterCard
make no effort to inform consumers--instead, as I noted, they actively
try to keep the fees hidden in the overall prices of goods.
As this Congress moves forward on this issue, it is imperative that
transparency of interchange fees be improved. Without adequate
disclosure, true competition is impossible and interchange fees and
consumer prices will continue to climb upward.
4. Interchange fees are without justification and priced without regard
to the cost of transactions
The volume of electronic transactions has increased dramatically in
recent years. Since 2001, debit card use has surged by more than 20
percent a year. Economies of scale, competition, plummeting computer
costs, low interest rates and low inflation, however, are not driving
down payment fees. In fact, the fees are up 117 percent just since
Banks and card companies acknowledge the fees are not based solely
on processing costs. In fact, the fees help subsidize marketing efforts
to entice consumers to use more cards, to use them more frequently and
to purchase goods and services in greater amounts. In fact, many of
these marketing efforts are specifically designed to drive consumers to
higher fee transactions. Solicitations for corporate and rewards cards
are becoming more common and Visa in particular has aggressively
promoted consumers signing for debit transactions. Using a signature
rather than a PIN code on a debit transaction not only results in far
higher interchange fees, but also is a far less secure method of
transacting. Just last year, a bank industry consulting firm estimated
that only 13 percent of the interchange fee covers processing costs,
while 44 percent pays for rewards programs and the balance goes to
marketing, advertising, services, profits and other items (see Figure
\3\ A New Business Model for Card Payments, Diamond Management &
Technology Consultants, 2006.
It is troubling that interchange fees continue to increase while
they should be declining due to decreased costs. When evaluated in the
context of their market power, these rates are nothing less than
CONCLUSION: ACTION IS NEEDED
Congress, the executive branch, and the courts have, at times,
looked into the interchange pricing system. Meanwhile, interchange
rates increased again in April of this year. Some of the new rates are
now more than 3 percent when the percentage rate and fixed fee are both
calculated. In addition to increasing rates, Visa and MasterCard are
pushing more consumers into the higher-rate premium cards and away from
lower-rate standard cards.
When Visa and MasterCard act with the false imprimatur bestowed by
duopolistic market power, we can expect that these activities will
continue unabated. In other words, without immediate intervention,
their exploitative pricing and policies will surely persist. NACS is
pleased that this Task Force is taking an active role in examining an
industry long in need of reform and increased disclosure. Hopefully,
this hearing will be the first critical step toward leveling the
playing field for the small business owners and consumers of America.
Prepared Statement of the National Grocers Association (NGA)
The National Grocers Association (N.G.A.) greatly appreciates the
opportunity to submit this statement for the record of this important
hearing before the U.S. House of Representatives Committee on the
Judiciary Antitrust Task Force. N.G.A. thanks Chairman Conyers and the
Task Force for holding today's hearing on interchange, a matter of
great antitrust importance to consumers and the retail community.
N.G.A. is the national trade association that represents
exclusively the interests of independent, community-focused grocery
retailers and wholesalers. An independent, community-focused retailer
is a privately owned or controlled food retail company operating in a
variety of formats. Most independent operators are serviced by
wholesale distributors, while others may be partially or fully self-
distributing. A few are publicly traded, but with controlling shares
held by the family and others are employee owned. Independents are the
true entrepreneurs of the grocery industry and are dedicated to their
customers, associates, and communities. N.G.A. retail and wholesale
members accounted for over $200 billion of U.S. grocery sales last
year. N.G.A. is a founding member of the Merchants Payment Coalition
that is made up of trade associations representing supermarkets,
retailers, convenience stores, restaurants, drug stores, gas stations
and other businesses that are concerned about increasing and unfair
interchange fees charged by credit card companies and banks.
An interchange fee, usually in the form of a percentage of the
transaction, is charged to the merchant by the card issuing bank and
the card association. N.G.A. believes that there are major antitrust
problems with the current interchange fee system, causing profound harm
to consumers and merchants. For the benefit of the American consumer,
federal governmental agencies and members of Congress must exercise
oversight of debit and credit card interchange fees and the lack of a
I. INTERCHANGE: A MARKET FAILURE THAT HARMS CONSUMERS AND MERCHANTS
Interchange fees charged by MasterCard and Visa, and the rules
under which they are levied, are nothing more than a hidden tax on
retail grocers and the consumers they serve, including customers using
other payment methods who indirectly subsidize cardholders. Interchange
fees are hidden from consumers by credit card companies, but consumers
ultimately pay them because costs are passed along in the form of
higher consumer prices. Visa and MasterCard rules require that the fees
be collected from the merchants, not directly from the card users.
These card-based fees are the single most profitable source of income
for banks. These fees now exceed $36 billion annually (up over $10
billion from 2006 reports) with contracts that actually prohibit
merchants from disclosing the cost of interchange fees to their
customers who use the cards.
In a competitive marketplace when costs go down, rates should fall.
Interchange fees have increased precipitously even though fraud is down
and transaction volume is up significantly. This is because debit and
credit card systems and their interchange rates are a private,
unregulated money system that has exceeded cash and checks as the
favored means of paying for goods and services since 2004. The debit
and credit card interchange rates of Visa, MasterCard and their member
banks are established collusively by the competing banks that
constitute the boards of directors of Visa and MasterCard. This is a
clear violation of federal antitrust laws. As a result, interchange
rates can be increased at will; they bear no relation to any legitimate
charges that arguably should be imposed on merchants and consumers.
The interchange system is a clear example of a market failure. No
competitive forces exist to pressure the card associations to lower
rates. Rather, competition raises interchange fees, as Visa and
MasterCard compete for bank issuers by offering them higher and higher
payouts from interchange fees.
Few issues have received the attention of retail and wholesale
grocers, as well as all other retail merchants, as that being given to
the high and increasing cost of interchange that retailers must pay to
Visa and MasterCard for accepting their debit and credit cards. The
United States has the highest credit card interchange fees of any
industrialized country, and interchange rates have continued to
increase in the United States even while costs of processing and fraud
have declined. In contrast, interchange rates internationally continue
to decline dramatically. The international precedents for antitrust
investigation and government intervention are persuasive and demand
serious review and appropriate action by this Committee.
A recent Morgan Stanley report found that the weighted average for
Visa and MasterCard interchange had increased from 1.58 percent in 1998
to 1.75 percent in 2004 (an increase of 10.8 percent) and is forecast
to grow to 1.86 percent in 2010 (an additional increase of 6.3 percent
over 2004 and 17.7 percent since 1998).
The recent ``Diamond Study'' of interchange examined, among other
issues, the costs presently being borne by consumers and merchants
under the present interchange system. The study found that the largest
single use of interchange paid directly by merchants and indirectly by
consumers is cardholder rewards--a 45% slice of the interchange pie.
There is no justification for this charge, but there is an
explanation--the exercise of unbridled market power by VISA, MasterCard
and their banks. On two levels, the charge is also unfair, first,
because merchants cannot negotiate their rates, and they are forced to
pay these rates to the issuing banks, without viable alternative
options. The rewards programs are arrangements between the issuing
banks and the cardholders. Second, the cardholders who receive the
benefits are not the only ones who pay for them in the form of higher
prices. All customers pay the same prices, regardless of how they pay,
and those prices include the cost of interchange. So everyone pays for
the rewards. This burden falls heaviest on the poorest consumers, who
are least able to absorb the higher prices. Consumer rewards must no
longer be part of the interchange rate.
The next largest slice of the interchange pie is ``other issuer
costs'' and profit, set at 35% by the Diamond Study. One estimate
places more than half of this amount--20%--on the cost of direct mail
solicitation of new cardholders--more than six billion pieces of mail
in 2005! All that was said about cardholder rewards can be repeated
about direct mail solicitations as well as another 3% slice of the pie
that Diamond refers to as ``network branding expenses,'' also known as
advertising. So, bank solicitations and Visa and MasterCard advertising
are roughly 23% of the pie. Add the 45% represented by cardholder
rewards, and by any rational approach, 68% of today's interchange fees
should disappear. While not separately identified in the Diamond Study,
part of the remaining 15% of other issuer costs is likely to include
fraud and interest revenue foregone due to the cardholders' interest
free period. The interest is merely another cardholder benefit, which
is not a proper charge to merchants and all consumers. Fraud losses
have been disallowed in most of the countries that have acted on the
interchange issue. In addition, the system in which the fraud is
perpetrated is the system that Visa, MasterCard and the banks designed
and created, a system that is ripe for picking, and they want merchants
and consumers to bear the cost of their mistakes.
The vast majority of grocers do not have the ability to overcome
the market power of Visa and MasterCard in order to negotiate lower
rates. The results of the recent settlement in 2003 of the Wal-Mart
lawsuit against the credit card companies clearly illustrate the
anticompetitive nature of the interchange system. Visa and MasterCard
agreed to pay the plaintiff retailers more than $3 billion, but
immediately increased credit card interchange rates to cover the cost
of the settlement--and then some.
Except for the very largest merchants, efforts to negotiate lower
interchange rates have been rejected, even when retailers have
attempted to aggregate. The vast majority of merchants, therefore, have
no control over this discriminatory cost of doing business, because it
is set by a cartel.
The issue here is about the need for competition, and when it does
not exist, then solutions must be pursued to correct the unfairness and
level the playing field. In November 2005 N.G.A., together with some of
its members, Affiliated Foods Midwest, Coborn's Inc., and D'Agostino's
Supermarkets, filed a class action suit against Visa, MasterCard and a
number of banks, alleging the named defendants conspired to fix the
interchange fees that are charged to retail grocers and ultimately
consumers in violation of the Sherman Act. This action was consolidated
in the U.S. District Court for the Eastern District of New York with
over 47 other actions filed.
One must ask why the United States lags behind other countries in
important issue. Australia in 1998 passed its Payment Systems
(Regulation) Act 1998 after an investigation by the Australian
Competition and Consumer Commission found against the collective fixing
of interchange fees. Consequently, on August 27, 2002, the Reserve Bank
of Australia adopted a new cost-based approach to interchange fees and
eliminated the no surcharge rule, which prevents retailers from
directly charging consumers the cost of interchange when they pay by
card. The purpose is to ensure that the setting of interchange fees in
designated credit card systems is transparent and promotes efficiency
and competition. In the Bank's view, interchange fees in the credit
card systems were not subject to the normal forces of competition which
pushed fees up, not down. The Reserve Bank of Australia reported in
August 2005 that, ``Prior to the reforms, this fee averaged 0.95
percent of the amount spent; it now averages around 0.54 per cent.''
The Reserve Bank of Australia also found, ``In total, as a result of
the Bank's reforms, merchants' costs of accepting credit and charge
card payments were around $580 million lower than they would otherwise
have been. Given the competitive nature of Australian business, these
cost savings are finding their way into lower prices for goods and
services, or smaller price increases than would have otherwise have
taken place.'' On November 25, 2005, the Reserve Bank of Australia
announced further amendments that became effective on July 1, 2006.
Some observers predict rates will drop to .35 per cent.
On September 6, 2005, the United Kingdom Office of Fair Trading
(OFT) found that a collective agreement between members of MasterCard
UK Members Forum (MMF), including most banks, setting the multi-lateral
interchange fee paid on virtually all purchases using UK-issued
MasterCard credit and debit cards between March 1, 2000, and November
18, 2004, restricted competition and infringed Article 81 of the EC
Treaty and the Chapter 1 prohibition of the Competition Act. It gave
rise to a collective agreement on the level of the multilateral
interchange fee and resulted in unjustified recovery of certain costs.
The OFT found the inclusion of extraneous costs provided a large
flow of revenue to card issuers and the incentive to induce customers
to hold and use MasterCard cards, for example, through loyalty schemes,
advertising and funding the interest-free period. The fee was passed on
to the retailers by the merchant acquirers through higher merchant
service charges. The OFT stated, ``Consumers, including those who do
not use MasterCard cards, ultimately picked up the cost for the higher
interchange fee through higher retail prices.'' Sir John Vickers, OFT
Chairman, said, ``This unduly high interchange fee was like a tax on UK
Although the OFT consented to the Competition Appeal Tribunal's
setting aside of the OFT's September 2005 decision, the investigation
will continue and will include Visa. OFT chief executive John Fingleton
stated in June 2006: ``We still believe that the interchange fee
arrangements that are now in place could infringe competition law and
are harmful to consumers, who pay higher prices as a result of these
fees. Continuing to defend appeals against the original decision before
the Competition Appeal Tribunal diverts us from dealing most
effectively with the overall problem of interchange fees. Our resources
are better spent in reaching decisions on MasterCard's and Visa's
current interchange fee arrangements rather than continuing with these
appeals that concern only MasterCard's historic arrangements.''
In September 2000, the European Commission challenged Visa's
anticompetitive multilateral interchange fee, and Visa agreed in 2002
to lower the weighted average fees in stages to 0.7 per cent in 2007.
Numerous other countries, such as Sweden, Italy, Netherlands,
Switzerland, Spain, Israel and Mexico have addressed the anti-
competitive nature of interchange.
Other countries have addressed and reduced anticompetitive
interchange fees, and now it is time for Congress and federal agencies
to do the same.
The current interchange system is inherently flawed and presents
gross inequities for both retailers and consumers. Transparency is a
must. All parties involved, especially consumers and merchants, should
be made aware of the interchange fees charged to merchants, and
ultimately consumers. The consumer has a right to know how interchange
fees affect the prices of goods and services from merchants. Retailers
are charged increased interchange fees to cover the incentives given to
consumers to use the cards carrying the highest interchange rates.
Those incentives by any objective standard should not be part of every
consumer's grocery bill; they should be absorbed by Visa, MasterCard
and their card-issuing banks, which reap the majority of the huge
financial benefits. It is time to end this ``hidden tax'' on merchants
and consumers, including customers who pay by cash or check and thereby
The present system has another major antitrust flaw in addition to
interchange rates: anticompetitive card association rules and
procedures. For example, imagine yourself as a retailer who wishes to
accept Visa and MasterCard as a means of payment by your customers. You
sign merchant agreements in which you agree to abide by all of these
associations' rules, but a wall of secrecy and nondisclosure hides them
from retailers. Those rules must end.
II. COLLUSIVE SETTING OF INTERCHANGE FEES AND OPERATING RULES VIOLATE
In the Department of Justice case against Visa and MasterCard, the
U.S. Court of Appeals for the Second Circuit found that when Visa and
MasterCard pass rules, that it is the collective action of a cartel of
banks that compete to issue cards or sign up merchants to accept Visa
and MasterCard U.S. v. Visa U.S.A., Inc., 2003 WL 22138519 (2d Cir.
Sept. 17, 2003). It follows that the setting of interchange rates by
those same Visa and MasterCard banks also work as a cartel in the
setting of interchange fees and violates Section 1 of the Sherman Act.
The existing system eliminates any incentive for card issuing banks to
lower interchange fees in response to the demands of the merchant
community, consumers and other participants in the marketplace.
Visa's and MasterCard's complex system of rules amplify the power
of this cartel to maintain supra-competitive pricing by restricting
merchants' ability to disclose fees to consumers or charge cardholders
a different price based on differences in interchange fees for various
cards. For example one rule requires merchants to accept all Visa and
MasterCard credit cards despite the fact that interchange rates vary by
as much as 100% based on the type of card (Platinum Plus(r), Visa
Signature(r), corporate, small business etc.). The sad consequence of
this system is that all consumers, regardless of form of payment, end
up subsidizing the rewards of select cardholders. This type of cartel
rate setting and rule making are clearly in violations of the Sherman
N.G.A. strongly believes that action by Congress and federal
agencies is needed to end the anticompetitive and illegal price fixing
and discriminatory establishment of interchange rates and card
association rules. Interchange fees should be set by competitive
forces, not by collusion. In addition, anticompetitive rules which harm
merchants and consumers and maintain the market power of card
associations must be ended, and retailers must be informed in advance
of the rules to which they will be subjected.
N.G.A. applauds the Committee for holding this important hearing
and urges Congress to continue to investigate and correct the
unfairness of the current interchange system.
Letter from John Gay, Senior Vice President, Government Affairs &
Public Policy, National Restaurant Association, to Chairman Conyers and
Ranking Member Chabot
Letter from G. Kendrick Macdowell, General Counsel and Director of
Government Affairs, National Association of Theatre Owners (NATO), to
Chairman Conyers and Ranking Member Chabot
Letter from Randy Schenauer, Chairman, Government Relations Committee,
Society of American Florists (SAF), to Chairman Conyers and Ranking
Letter from Brian E. Cartier, CAE, Chief Executive, National
Association of College Stores (NACS), to Chairman Conyers and Ranking
Letter from Lisa J. Mullings, President and C.E.O., NATSO, Inc., to
Chairman Conyers and Ranking Member Chabot
Letter from Darrell K. Smith, President, National Association of Shell
Marketers (NASM), to Chairman Conyers and Ranking Member Chabot
Letter from Heidi M. Davidson, Vice President, Global Public Policy,
MasterCard Worldwide, to Chairman Conyers, with enclosed news releases
Letter from the Petroleum Marketers Association of America (PMAA) to
Chairman Conyers and Ranking Member Chabot