[House Hearing, 110 Congress]
[From the U.S. Government Printing Office]

                      CREDIT CARD INTERCHANGE FEES



                               BEFORE THE

                          ANTITRUST TASK FORCE

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION


                             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
MAXINE WATERS, California            DANIEL E. LUNGREN, California
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

            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
                                     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


                           OPENING STATEMENTS

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, 
  New York
  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 
  Force..........................................................    87
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 
  Chabot.........................................................   149
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,
                                                    Washington, DC.
    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 
Ranking Member.
    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 
on this.
    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 
important matter.
    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 

               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 
not apply.
    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 
11,000 associates.
    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-
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. 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.


    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 
business plan.
    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 
more consumers.
    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 
profit opportunity.
    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 
can give.
    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 
other services.
    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 


    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.


    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.


    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.

                       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 
to pay.
    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.


    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 
Trade Commission.
    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.
    Steve Chabot?
    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 
with me.
    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 
extemporaneous guy.
    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 
talking about?
    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 
particular transaction?
    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 
the problem?
    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 
wasn't allowed----
    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 
individual item.
    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 
price arrangements----
    Mr. Cannon. Are they ever asked how much they think they 
are paying?
    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 
10 years.
    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 
credit card?
    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 
lowering them.
    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?
    Yes, sir?
    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 
structure overall.
    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 
credit cards.
    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 
the check.
    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.
    Yes, sir?
    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 
the record?
    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 
late 1990's.
    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 
too high?
    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 
for banks?
    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 
on, okay?
    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?
    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 
to us.
    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?
    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 
gain customers.
    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?
    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?
    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 
few points.
    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.
    Thank you.
    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?
    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 
the panel.
    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.
    Ric Keller?
    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 
far yet.
    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 
    Thank you.
    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 
wasteful spending.
    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 
minutes, please.
    Yes, sir?
    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 
what comes----
    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 
American economy.
    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 
accept them.
    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 
to keep.
    \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 
interchange fees.
    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.


    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 consumers.
    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.


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 
the bill.
    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 

competitive market.


    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 
addressing this
    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 
subsidize cardholders.
    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.

                             ANTITRUST LAWS

    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 

                            III. CONCLUSION

    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 
                             Member Chabot


     Letter from Brian E. Cartier, CAE, Chief Executive, National 
 Association of College Stores (NACS), to Chairman Conyers and Ranking 
                             Member Chabot


  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