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

                        CREDIT CARD FAIR FEE ACT OF 2008

    =======================================================================

                                    HEARING

                                   BEFORE THE

                        TASK FORCE ON COMPETITION POLICY
                               AND ANTITRUST LAWS

                                     OF THE

                           COMMITTEE ON THE JUDICIARY
                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED TENTH CONGRESS

                                 SECOND SESSION

                                       ON

                                   H.R. 5546

                                   __________

                                  MAY 15, 2008

                                   __________

                               Serial No. 110-179

                                   __________

             Printed for the use of the Committee on the Judiciary

          Available via the World Wide Web: http://judiciary.house.gov

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                           COMMITTEE ON THE JUDICIARY

                     JOHN CONYERS, Jr., Michigan, Chairman
    HOWARD L. BERMAN, California         LAMAR SMITH, Texas
    RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr.,
    JERROLD NADLER, New York                 Wisconsin
    ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
    MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
    ZOE LOFGREN, California              BOB GOODLATTE, Virginia
    SHEILA JACKSON LEE, Texas            STEVE CHABOT, Ohio
    MAXINE WATERS, California            DANIEL E. LUNGREN, California
    WILLIAM D. DELAHUNT, Massachusetts   CHRIS CANNON, Utah
    ROBERT WEXLER, Florida               RIC KELLER, Florida
    LINDA T. SANCHEZ, California         DARRELL ISSA, California
    STEVE COHEN, Tennessee               MIKE PENCE, Indiana
    HANK JOHNSON, Georgia                J. RANDY FORBES, Virginia
    BETTY SUTTON, Ohio                   STEVE KING, Iowa
    LUIS V. GUTIERREZ, Illinois          TOM FEENEY, Florida
    BRAD SHERMAN, California             TRENT FRANKS, Arizona
    TAMMY BALDWIN, Wisconsin             LOUIE GOHMERT, Texas
    ANTHONY D. WEINER, New York          JIM JORDAN, Ohio
    ADAM B. SCHIFF, California
    ARTUR DAVIS, Alabama
    DEBBIE WASSERMAN SCHULTZ, Florida
    KEITH ELLISON, Minnesota

                Perry Apelbaum, Staff Director and Chief Counsel
          Sean McLaughlin, Minority Chief of Staff and General Counsel
                                     ------

              Task Force on Competition Policy and Antitrust Laws

                     JOHN CONYERS, Jr., Michigan, Chairman

    RICK BOUCHER, Virginia               STEVE CHABOT, Ohio
    ZOE LOFGREN, California              RIC KELLER, Florida
    SHEILA JACKSON LEE, Texas            F. JAMES SENSENBRENNER, JR.,
    MAXINE WATERS, California            Wisconsin
    STEVE COHEN, Tennessee               BOB GOODLATTE, Virginia
    BETTY SUTTON, Ohio                   CHRIS CANNON, Utah
    ANTHONY D. WEINER, New York          DARRELL ISSA, California
    DEBBIE WASSERMAN SCHULTZ, Florida    TOM FEENEY, Florida
                                         LAMAR SMITH, Texas, Ex Officio

                Perry Apelbaum, Staff Director and Chief Counsel

          Sean McLaughlin, Minority Chief of Staff and General Counsel

                                C O N T E N T S

                                  ----------

                                  MAY 15, 2008

                                                                       Page

                               OPENING STATEMENTS

    The Honorable John Conyers, Jr., a Representative in Congress
      from the State of Michigan, and Chairman, Task Force on
      Competition Policy and Antitrust Laws..........................     1
    The Honorable F. James Sensenbrenner, Jr., a Representative in
      Congress from the State of Wisconsin, and Member, Task Force on
      Competition Policy and Antitrust Laws..........................     1
    The Honorable Lamar Smith, a Representative in Congress from the
      State of Texas, Ranking Member, Subcommittee on the Judiciary,
      and Ex Officio Member, Task Force on Competition Policy and
      Antitrust Laws.................................................     4
    The Honorable Darrell Issa, a Representative in Congress from the
      State of California, and Member, Task Force on Competition
      Policy and Antitrust Laws......................................     5
    The Honorable Steve Chabot, a Representative in Congress from the
      State of Ohio, and Ranking Member, Task Force on Competition
      Policy and Antitrust Laws......................................     6

                                   WITNESSES

    Mr. Thomas L. Robinson, Vice President of Regulations, National
      Association of Convenience Stores
      Oral Testimony.................................................     8
      Prepared Statement.............................................    10
    Mr. Joshua R. Floum, General Counsel and Corporate Secretary,
      Visa, Inc.
      Oral Testimony.................................................    32
      Prepared Statement.............................................    33
    Mr. Joshua Peirez, Chief Payment System Integrity Officer,
      Mastercard Worldwide
      Oral Testimony.................................................    71
      Prepared Statement.............................................    74
    Mr. John Blum, Vice President of Operations, Chartway Federal
      Credit Union
      Oral Testimony.................................................    80
      Prepared Statement.............................................    82
    Mr. W. Stephen Cannon, Chairman, Constantine Cannon, LLP
      Oral Testimony.................................................    93
      Prepared Statement.............................................    95
    Mr. Edward Mierzwinski, Consumer Program Director, U.S. Public
      Interest Research Group
      Oral Testimony.................................................   115
      Prepared Statement.............................................   117

                        CREDIT CARD FAIR FEE ACT OF 2008

                                  ----------

                             THURSDAY, MAY 15, 2008

                  House of Representatives,
               Task Force on Competition Policy
                                     and Antitrust Laws
                                    Committee on the Judiciary,
                                                        Washington, DC.

        The Task Force met, pursuant to notice, at 11:02 a.m., in
    Room 2141, Rayburn House Office Building, the Honorable John
    Conyers, Jr. (Chairman of the Task Force) presiding.
        Present: Representatives Conyers, Lofgren, Jackson Lee,
    Cohen, Sutton, Smith, Sensenbrenner, Chabot, Cannon, Keller,
    Issa, and Feeney.
        Staff present: Stacey Dansky, Majority Counsel; Perry
    Apelbaum, Majority Staff Director and Chief Counsel; Stewart
    Jeffries, Minority Counsel; Sean McLaughlin, Minority Chief of
    Staff and General Counsel; and Brandon Johns, Majority Staff
    Assistant.
        Mr. Conyers. We are going to start the hearing even though
    the Ranking Member of Antitrust isn't here. But since I have
    the former Chairman and the Ranking Member here, I think it is
    safe to begin. And I know he is on the way.
        But I am glad that everyone has come together this morning
    to examine together the Credit Card Fair Fee Act, which is H.R.
    5546.
        Last year, there was a hearing on the topic of credit card
    interchange fees. And I was surprised by the depth of the
    problem facing merchants. Members on both sides of the aisle
    seemed equally concerned about these fees and the effects they
    ultimately have on consumers.
        And so, after deliberation with Chris Cannon, we have
    brought together a bill to be examined this morning. We hope it
    will go a long way toward restoring some balance between
    retailers and the credit card companies.
        Now, just a couple of things, and then I am going to yield
    to some other Members for any remarks.
        We do not think that this is regulation of the industry. We
    think that this measure we are examining addresses potential
    anti-competitive aspects of interchange fees. We think that
    lower interchange fees will help merchants and consumers and
    lower prices.
        And, with that in mind, we want to hear what you all think
    about it.
        I would like to yield to the Chairman emeritus, Jim
    Sensenbrenner, for anything he might want to say.
        Mr. Sensenbrenner. Thank you very much, Mr. Chairman.
        First of all, I would like to ask unanimous consent that a
    statement by the Electronic Payments Coalition be placed in the
    record at this point.
        Mr. Conyers. Without objection.
        [The information referred to follows:]

        Mr. Sensenbrenner. Mr. Chairman, I am going to be very
    brief. Let me say I think this bill is a very ill-advised bill.
    It is going to have a lot of unintended consequences in the
    eyes of the Chairman and its supporters.
        One of the things that plastic has done to benefit
    merchants is that they don't have accounts receivable of their
    own. They get paid right away when people use a credit card to
    pay for their purchases. And the credit card company basically
    assumes the risk of somebody not paying their bill.
        When I started out practicing law, I represented a mom-and-
    pop grocery store, and there were a number of folks in town
    that never seemed to want to pay their bills. And, as a result,
    I had to try to collect the money and really wasn't very
    successful in doing so. And, as a result, the small-business
    operator ended up having to absorb the loss by basically being
    good people and extending credit to folks in town.
        The credit cards, in the way this is set up now, insures
    the small-business operator from having to deal with those
    kinds of losses. But nothing in life comes free, and part of
    that is paid for by the interchange fees that merchants that
    accept credit cards take.
        So I think that we are going to have to look at the impact
    on small business of this legislation, as well as the impact on
    consumers and on merchants that take the credit cards.
        And I think that the current situation is actually a big
    plus for both consumers who pay their bills as well as small-
    business operators. And I will talk a little bit more about
    that later.
        Mr. Conyers. Thank you, Jim.
        Could I turn now to the Ranking Member of the full
    Committee, Lamar Smith?
        Mr. Smith. Thank you, Mr. Chairman.
        Mr. Chairman, America has gone through a radical
    transformation in the way it pays for its goods and services.
    Ten years ago, almost 80 percent of all financial transactions
    involved checks or cash. Today, fewer than half of all
    purchases are conducted that way. And 3 years from now,
    consumers are projected to use credit and debit cards for over
    70 percent of all their purchases.
        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 collect airline miles, for example. 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 otherwise with cash or checks.
        Of course, this growth has not come without its cost.
    Consumer groups complain about credit card practices that they
    think are unfair or illegal. Merchants, too, have had their
    complaints.
        In 2005, the 2nd 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 offerings.
        Today, retailers continue to claim that Visa and MasterCard
    are charging excessive fees for the acceptance of their cards
    and that these fees are ultimately passed on to consumers. A
    group of retailers have brought a series of Federal antitrust
    suits challenging the way that Visa and MasterCard set these
    interchange fees, and that suit is pending in the Eastern
    District of New York now.
        For their part, the credit card companies 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.
        In considering this legislation, my primary concern is how
    it will affect the American consumer. Will the consumer pay
    less for goods and services if interchange fees are reduced for
    merchants? Will those lower prices be offset by reduced credit
    card benefits and higher charges and fees on credit cards?
        Retailers have raised some serious questions regarding Visa
    and MasterCard's business practices. For example, the credit
    card firms must answer who sets the interchange fee and how is
    it set. How much competition is there? Do merchants really have
    options when it comes to accepting Visa and MasterCard?
        In the end, though, the ultimate question is how this bill
    will help the American consumer.
        And, Mr. Chairman, I will yield back the balance of my
    time.
        Mr. Conyers. Thank you.
        Darrell Issa of California?
        Mr. Issa. Thank you, Mr. Chairman.
        And thank you for this continued process of evaluating what
    is, for me, a global competitiveness issue. As you know, in the
    current form I haven't signed on to the bill, but I have signed
    on to exactly what caused that bill to be brought.
        We have two interesting dichotomies here. On one hand, the
    efficiency of a global and universally accepted card system has
    benefited us and the rest of the world. On the other hand, the
    rest of the world has become convinced that the fees were too
    high and, in most cases, both Europeans and other nations have
    artifically lowered those rates.
        Recognizing that when we look at competition, if my Visa
    card represents 1 percent in Spain and 4 percent in the United
    States, American competitiveness is at stake.
        I deny no one--I repeat, no one--the ability to make as
    much profit as they can justify. But when you have, by
    definition, a monopoly--and I don't say that in a perjorative
    way; in fact, we need a universal system, we need a system
    that, in fact, is so complete as to have that kind of reach and
    power--you have a situation in which the United States
    government has an obligation to assert sufficient control to
    ensure that America is not put at an unfair disadvantage.
        To that end, I believe that the bill's attempt to have
    transparency is critical, to deal with competitiveness on a
    global basis is critical. I also believe that although it is
    well-intended, that there may need to be additional safeguards
    for two reasons: one, to make sure that this is an American
    solution and not simply an attempt to get to a global rate
    quickly; secondly, I believe that if Visa's rates, by an arm's
    length relationship equivalent, are to be lowered, as I am sure
    many of the authors would hope them to be, that it be a soft
    landing.
        So at the appropriate time, when this bill is mature, I
    intend on offering some input for amendments. But today I look
    forward to hearing from all the parties about how, in fact, we
    can find a situation in which countries are paying dramatically
    less for the same service with my same credit card.
        And last but not least, quite frankly, I will be asking one
    critical question, and that is, why is it that when I have
    discount rates of perhaps double between the highest and
    lowest, I cannot pass that on in any way, shape or form to the
    consumer? It is an all-or-nothing. I think that, in fact, has
    allowed competitiveness but not competitiveness that the
    consumer truly understands is being paid for by the merchant
    that he or she does business with.
        Mr. Chairman, thank you again. And I yield back and
    appreciate the time.
        Mr. Conyers. Thank you very much, Darrell Issa.
        Congresswoman Zoe Lofgren, Chair of Immigration.
        Ms. Lofgren. I don't have an opening statement, but when we
    are ready, I would like to introduce my constituent who is a
    witness.
        Mr. Conyers. All right.
        I turn now to the Ranking Member of the Antitrust Task
    Force, Steve Chabot of Ohio.
        Mr. Chabot. Thank you, Mr. Chairman.
        And I, first of all, want to apologize for being a couple
    minutes late. I am also the Ranking Member of the Small
    Business Committee and just came from a hearing there. A very
    interesting hearing, we were talking about the high price that
    the grocers, the restaurants, snack foods, you name it, how
    that is related to energy, how it is related to ethanol and
    requirements that a certain amount of ethanol be utilized
    nowadays. And very interesting hearing, but I do apologize for
    being late for this. That is why I was late.
        And I want to thank the Chairman, the very distinguished
    gentleman from Michigan, for holding this important hearing.
        And we have an expert panel of witnesses with us, and I
    know we all look forward to their perspectives. And, therefore,
    I am going to keep my remarks very brief.
        The hearing this Task Force held last year and the
    resulting bill that we are examining today demonstrate how
    technology has changed the way individuals, businesses and the
    markets interact with one another. Credit cards have brought
    consumers and merchants together in ways never thought
    possible.
        There are more than 14,000 card issuers in the United
    States today, with 1 billion cards in use. Experts predict
    that, by 2009, U.S. consumers will spend more than $5 trillion
    using electronic payment systems.
        In my district, in Cincinnati, I have heard from all
    sides--banks and credit unions and retailers and grocers and
    merchants of all types. So I know this is an issue that is of
    great interest to an awful lot of people and affects many
    Americans. So I know that all Members are interested in hearing
    all sides to this issue.
        As I have said in these hearings over the last year, in my
    view, Government intervention is not always the best remedy,
    and we must be very careful not to do more harm than good.
    Today's hearing is about whether the market for credit cards is
    flawed to the extent that Government intervention is warranted.
        And, again, as I mentioned, I have been trying to listen to
    every different party, individual, business that has an opinion
    about this, to make sure that, when this Member ultimately
    acts, will do so having considered all points of view.
        So, again, Mr. Chairman, I want to thank you very much for
    holding this hearing. And I will yield back the balance of my
    time.
        Mr. Conyers. Thanks, Steve.
        Go ahead, Zoe.
        Ms. Lofgren. Thank you, Mr. Chairman.
        I appreciate the opportunity to introduce two of our
    witnesses today, both from my part of California.
        First is Mr. Tom Robinson, who I have known for many, many
    years. He is the CEO of the San Jose, California-based Robinson
    Oil Corporation and has been with the company since 1974.
        Last year, Tom was named vice chairman of government
    relations for the National Association of Convenience Stores,
    which is the association for conveniece and petroleum
    retailing.
        He earned his bachelor's degree in economics from Santa
    Clara University at home. He is the past president of the
    Society of Independent Gasoline Marketers of America and is
    active in the California Independent Oil Marketers Association.
    He is also a member of the 25-Year Club at the Petroleum
    Industry.
        And he and his wife Lynn reside in Los Gatos. They have two
    adult daughters and an adult son, all of whom have followed him
    in the family business.
        And it is a pleasure to see Tom here in Washington.
        I also would like to introduce Josh Floum, who is also a
    native Californian and serves as the executive officer and
    general counsel of Visa, Incorporated, which is based in Foster
    City, California.
        Mr. Floum helped lead Visa through its recent merger,
    creating a global company and its IPO in March of this year.
    And that was the most successful IPO in U.S. history, despite a
    down economy.
        Mr. Floum is a former antitrust trial attorney. He is a
    graduate of the University of California at Berkeley. He earned
    his J.D. from Harvard Law School.
        He is a longstanding member of the Lawyers' Committee for
    Civil Rights and a senior legal advisor to Earth Island
    Institute, a nonprofit conservation organization.
        I am really very happy that these two individuals are here
    from California. They don't agree with each other on this
    subject, which just shows the value of our diverse community at
    home.
        So I yield back, Mr. Chairman.
        Mr. Conyers. Thank you.
        Welcome, gentlemen.
        Mr. Robinson, why don't you begin our discussion?

    TESTIMONY OF THOMAS L. ROBINSON, VICE PRESIDENT OF REGULATIONS,
               NATIONAL ASSOCIATION OF CONVENIENCE STORES

        Mr. Robinson. Chairman Conyers, Ranking Member Chabot, and
    Members of the Committee, thank you for the opportunity to
    provide my views regarding the Credit Card Fair Fee Act, H.R.
    5546.
        My name is Tom Robinson, and I am president of Robinson Oil
    Corporation. Robinson Oil operates 34 Rotten Robbie gas
    stations and convenience stores in northern California.
        I am here today representing the National Association of
    Convenience Stores, NACS, which represents an industry of more
    than 145,000 stores, of which more than 60 percent are owned by
    one-store operators.
        I want to thank you for holding this hearing today.
        Let me start by stating clearly: NACS fully supports this
    legislation and urges you to move swiftly toward enactment.
        Credit card interchange fees hurt my customers, who, in the
    end, pay for them and hurt my business. In today's market, many
    convenience stores will not survive without the action of this
    critical issue. The Credit Card Fair Fee Act will help fix this
    problem.
        Right now, there is no market for interchange fees. The
    fees are fixed by the banks, hidden from the public and forced
    on merchants in a take-it-or-leave-it offer. Right now, the
    banks act collectively but merchants cannot.
        The Credit Card Fair Fee Act would create a market for
    interchange fees for the first time by allowing merchants and
    the card associations to negotiate on equal footing.
        The card associations claim there is no problem with the
    current system. If I were able to fix prices with my
    competitors and make more than $40 billion per year doing it, I
    suppose I wouldn't think there was a problem either. Of course,
    just because the price fixers want to keep doing business the
    same way doesn't make it right.
        I am not an antitrust attorney; I am a businessman. But I
    know I cannot agree with my competitors to charge the same
    price. Yet that is precisely what the banks that issue credit
    cards have done for years.
        From my perspective, the best way to understand the
    antitrust problem is looking at what would happen if the same
    situation prevailed in my industry.
        NACS does not, and never has, set the prices or terms for
    which member companies charge the public. But let's just say
    that we set a default price for a gallon of gasoline at $9 and
    that every member of NACS across the country charged that
    default price.
        The speed with which this Committee and the Justice
    Department would haul us in front of them for agreeing to a
    default price would be dizzying. I would fully expect someone
    to fit me for a not-very-fashionable yellow jumpsuit.
        Yet that is precisely what Visa does with its banks and,
    separately, what MasterCard does with its banks. All these
    banks that are supposed to compete with each other charge the
    same default interchange fees, and the rest of us have no
    choice but to pay them because of the huge combined market
    power Visa and MasterCard wield with their banks.
        And don't just take my word for it. The Kansas City Federal
    Reserve has found that merchants like me have no realistic but
    to accept Visa and MasterCard.
        The impact on my industry is incredible. And, in fact, I
    think there are slides up there on the board. If you take a
    look at these charts, you will see that in 2006 the industry
    paid more to accept cards than it made in pre-tax profits, $6.6
    billion to $4.8 billion.
        The 2007 figures are simply incomprehensible. My entire
    industry made pre-tax profits of $3.4 billion. Note that our
    profits went down by more than $1 billion at the same time card
    fees increased by $1 billion, to $7.6 billion. And we received
    nothing more for this additional $1 billion or for the billions
    of additional dollars these fees increased in prior years.
        Processing the card swipe probably cost Visa and MasterCard
    less than before, but now we are paying far more than double
    our profits simply to accept cards. It is clear that the price
    for the cashless society is way too high if you let the credit
    card industry set the rate.
        Every time you buy gasoline, I ask you to remember this:
    The station you are buying it from is likely paying more than
    twice in much in fees than it is making, and every time gas
    prices go up, the card fees go up right with them.
        If you are concerned about prices at the pump, you need to
    be concerned about interchange fees. These fees have simply
    taken over our industry. My business is more for them than it
    is for me.
        I don't even time to describe the ways that Visa and
    MasterCard create anti-competitive and abusive rules to make
    the situation even more difficult for businesses like mine, but
    I am happy to answer questions regarding these abuses.
        The bottom line is that we need legislation to at least
    make this playing field level. The Credit Card Fair Fee Act is
    a critical first step to bringing market fundamentals to this
    nonexistant market.
        Critics of this bill say it is a Government price-fixing
    proposal. Nothing could be further from the truth. The bill
    provides merchants an opportunity to negotiate reasonable terms
    with the card associations. However, if a deal cannot be
    reached, there must be a way to resolve the differences.
        In the event a deal is not reached, each side will present
    a final offer. The bill simply identifies a decisionmaker to
    pick the offer that is closest to what is happening in the
    competitive market. At no point does this bill allow judges to
    independently come up with the price of interchange. They do
    the minimum necessary to say which side has the better offer,
    and that is chosen.
        This is just the type of approach that appeals to me as a
    businessman. I negotiate the prices and terms of nearly
    everything that happens in my business. This is the way
    American businesses operate. What I need is the ability to
    present myself to the card associations and to the banks in the
    same way they present themselves to me, as a group. The card
    associations should not be afraid to negotiate on an equal
    footing with merchants.
        Thank you for your time, and I would be happy to answer
    questions.
        [The prepared statement of Mr. Robinson follows:]
                    Prepared Statement of Thomas L. Robinson

        Mr. Conyers. Thank you very much.
        Attorney Floum, welcome.

      TESTIMONY OF JOSHUA R. FLOUM, GENERAL COUNSEL AND CORPORATE
                         SECRETARY, VISA, INC.

        Mr. Floum. Thank you, Mr. Chairman and distinguished
    Members of the Committee. My name is Josh Floum. I am an
    executive officer and the general counsel of Visa. I have
    prepared some written testimony, which I would request be
    submitted for the record.
        Mr. Conyers. Yes, yours and everyone else's as well,
    without objection.
        [The prepared statement of Mr. Floum follows:]
                     Prepared Statement of Joshua R. Floum

        Mr. Floum. Thank you, Mr. Chairman.
        There was also a report released just today from the GAO
    entitled, ``Credit and Debit Cards.'' May I also request that
    that be submitted for the record?
        Mr. Conyers. Without objection, it will be.*
    ---------------------------------------------------------------------------
        *The May 2008 GAO report, ``Credit and Debit Cards,'' has been made
    a permanent part of this record and is archived at the Committee on the
    Judiciary. The report may also be viewed on the Internet at the
    following address: http://www.gao.gov/new.items/d08558.pdf.
    ---------------------------------------------------------------------------
        Mr. Floum. Thank you.
        I appreciate the opportunity to appear before this
    Committee. And what I would like to focus on today are
    interchange fees. I am sure that this Committee will deliberate
    and take action based on the facts and only the facts, so let's
    get right to them.
        Electronic payments provide extraordinary value to
    retailers, to consumers and to the economy. Visa connects over
    29 million retailers, over a billion cardholders, and over
    16,000 large, small and very small financial institutions.
        What we do, what Visa does, is provide the backbone or
    provide a platform for innovation in electronic payments,
    products and services. What we do not do is issue cards; we
    don't extend credit. We don't set the rates and the fees to
    retailers and consumers, which have been the subjects of other
    hearings. That is not our function.
        What is interchange? And this is widely misunderstood.
    Interchange is a transfer fee from one back to another that
    enables millions of stakeholders to participate in the system.
        Interchange is not revenue to Visa. Interchange is not a
    fee to retailers. Visa has no incentive to set interchange fees
    too high or too low. It is not our revenue.
        The reason that we set interchange fees are to drive growth
    in electronic payments, which replace legacy systems such as
    cash and check, and we think that electronic payments are much
    more efficient and beneficial to consumers, retailers and the
    economy in general. That is why we set interchange rates; it is
    not our revenue.
        Now, let's dispell a rumor that we have heard a lot about
    interchange rates increasing. They are not increasing. They
    have remained flat for 10 years, even though today's payment
    services are much more valuable than they have ever been in the
    past.
        And, finally, our rates and processes are wholly
    transparent. We have answered all the calls for transparency.
    All of our rates, all of our rules, there are telephone books
    thick of them. They are available on the Internet. And we have
    done that largely in response to the merchants saying that they
    would like to look at them. We have made them all available.
        Now, I mentioned that our services have improved and become
    much more valuable. The chart up here depicts, on the bottom
    left, what we call the old knuckle-buster. Remember? That is
    how credit cards used to work. They were metal, you dragged it,
    you had carbon paper.
        And even though the rates have remained flat for all of
    this time, we have innovated into incredible new categories:
    Debit cards, they don't carry interest rates or late fees. They
    are an electronic access to your checking account. Debit is
    bigger for us now than credit. We have gotten into community
    cards: local universities, firemen's credit union cards, et
    cetera.
        All of that enabled by Visa. E-commerce couldn't exist at
    all without electronic payments. And we are going into mobile
    and contactless into the future.
        So our products are more valuable. The electronification of
    the point of sale--over 99 percent of transactions at the point
    of sale now are electronic instead of cash and check. We have
    reduced fraud rates. We have increased acceptance. And we have
    lowered cost relative to cash and check.
        Just today's GAO report, released today, the Government
    found that with respect to the Government, the Government has
    paid $380 million in acceptance fees for electronic payments in
    2006, and they have saved $1.7 billion. I am not saying this;
    this is the GAO. So you can see the cost savings by using
    electronic payments.
        We provide retailers with guaranteed payment. And, as some
    of you have commented, it is the card issuers who bear the
    credit risk, not the retailers.
        Now, let's just dispell this rumor once and for all, if we
    can. These are our rates; these are our interchange rates. And
    you can see, from 1998 to 2007, on an average blended basis,
    they have remained relatively stable at about 1.6 percent. So
    the rates have not been going up.
        What has been going up is the use of electronic payments,
    which, yes, it costs more in paying electronic payments
    acceptance fees, but retailers save more not having to handle
    cash and checks. And it is indisputable that the economy, as a
    whole, benefits from this efficiency.
        Now, what the price-control legislation--and it is price
    control. It takes rate-making out of the hands of the
    marketplace. It would give it to three judges. There are
    subpoenas and depositions. And it would take the free market
    and turn it into a regulatory proceeding.
        And we believe that that poses a triple threat to
    consumers. And I spoke to Mr. Mierzwinski about this yesterday.
    I want to have continuing discussions with the consumer groups.
    Because this is an anti-consumer bill, with all respect, Mr.
    Chairman. And I know you care greatly about consumers in your
    district. But what happens when interchange is artificially
    suppressed?
        We have seen it now twice in other jurisdictions. The
    retailers don't lower their retail prices. They simply keep the
    revenue at the expense of the local community banks. So that is
    threat number one to consumers.
        Threat number two to consumers is they pay more for cards,
    and they get fewer rewards. The Reserve Bank of Australia,
    there is a quote--they are the regulators. They found that
    themselves. And in today's GAO report, just released, on page
    36, the GAO concluded that lowering interchange in Australia
    meant that--this is a quote--``cardholders have experienced a
    decline in the value of credit cards, reward points for most
    cards, and an increase in annual and other consumer credit card
    fees.'' So consumers pay more; that is the second problem.
        And third, the retailers, they have sued us 54 times. And
    in their lawsuit, they want to impose additional checkout fees
    on consumers who use cards.
        So that is a triple hit to consumers.
        Now----
        Mr. Conyers. How much longer will you need?
        Mr. Floum. Two minutes, Mr. Chairman, if I may?
        Mr. Conyers. All right, without objection.
        Mr. Floum. Thank you.
        Retailers can and should negotiate their merchant
    discounts. And they should not pay the sticker price. There are
    16,000 financial institutions within the Visa system that would
    love to do business with Mr. Robinson, and they compete with
    each other to provide merchant discount rates in a very, very
    competitive marketplace.
        Now, I have up on here a Web page from Mr. Robinson's
    group, the National Association of Convenience Stores, telling
    gas station owners how to negotiate their merchant discount
    rates. And it says right on here that they offer interchange
    plus 6 cents. That would bring his rate from $2.50 down to
    $1.75. So I am not sure why they are not taking advantage of
    it.
        Finally--and we do have Mr. Blum from the community banks
    and credit unions here--default interchange provides very
    important protections for the 13,000 local community banks and
    credit unions who are able to issue cards in competition with
    the larger banks. Suppressing interchange would harm these very
    small local financial institutions.
        Thank you, Mr. Chairman.
        Mr. Conyers. Thank you, sir.
        We now turn to Mr. Joshua Peirez of MasterCard Worldwide.
    He has served as group executive for global public policy and
    associate general counsel, and formerly was a partner with
    Clifford, Chance, Rogers and Wells.
        Welcome to our hearing, sir.

      TESTIMONY OF JOSHUA PEIREZ, CHIEF PAYMENT SYSTEM INTEGRITY
                     OFFICER, MASTERCARD WORLDWIDE

        Mr. Peirez. Good morning, Chairman Conyers, Ranking Member
    Chabot, and Members of the Task Force. My name is Joshua
    Peirez, and it is my pleasure to appear before you today on
    behalf of MasterCard to discuss H.R. 5546.
        We are brought together by a basic commercial dispute.
    There are some merchants who would like to pay less to accept
    payment cards. We fully understand the desire to reduce the
    cost of doing business, and we have attempted to help them
    achieve this objective.
        Merchants are an essential part of our system, and we are
    deeply committed to addressing their needs. Let me repeat that:
    Without merchants, there is no payment system. And as a result,
    we have attempted to address all the issues raised by the
    merchants in this dispute.
        Merchants said that they did not have access to the
    interchange rates set by MasterCard. In response, we now public
    interchange rates on our Web site. These rates provide an
    extraordinary tool for merchants to use when negotiating with
    their banks.
        It is our hope that merchant groups will be encouraged to
    use this tool to better educate themselves and their members on
    the full range of negotiating opportunities that exist today,
    rather than seeking to arbitrarily lower merchant discount fees
    through Government intervention.
        Merchants have also said that they wanted to see our rules.
    In response, we posted all of the rules that apply to merchants
    on our Web site a few years ago, and we continue to publish
    more and more rules so that all of our operating rules will be
    available soon.
        Almost 2 years ago, gas station owners said that rising gas
    prices were adversely affecting their profits when they
    accepted our payment cards. In response, we have capped
    interchange fees on gas sales. In addition, MasterCard has
    lower rates for supermarkets, utilities and convenience
    purchases to encourage acceptance by these types of merchants.
        Merchants can use all of these tools to negotiate better
    terms. We would like to work with the Task Force to ensure a
    deeper understanding of the opportunities for negotiation.
        Our interchange cap for gas sales provides a good example.
    We announced the cap in September of 2006. We expected gas
    retailers to use this information to negotiate lower fees and
    to point to our initiative to lower the fees from our
    competitors. We have been disappointed that most gas merchants
    have not taken advantage of this opportunity.
        The merchant lobbying groups have made other statements
    that are patently false. For example, they have been saying
    that merchants cannot discount for cash. This is simply not
    true. Under our rules, merchants are permitted to discount for
    cash, and each merchant is free to choose the manner in which
    the discount is offered.
        They also state that merchants cannot tell card holders the
    fees they pay when they choose to accept a payment card. Again,
    this is not true. MasterCard permits any merchant to disclose
    its merchant discount fees to consumers. MasterCard also
    permits merchants to disclose their interchange fees to
    consumers.
        The merchant lobbyists have even claimed that MasterCard
    has a rule that requires a merchant that accepts MasterCard to
    accept it at every one of its retail locations. There is no
    such rule.
        We are concerned that the opportunities to negotiate are
    being cast aside for litigation and legislation. While the
    merchants seek legislation claiming that existing antitrust
    laws are inadequate, they are telling a different story in
    their litigation on these same issues.
        I would like to offer a quote from Craig Wildfang, the lead
    attorney representing the merchants in their litigation against
    MasterCard. He said in November of 2007, just recently, ``I
    actually don't think that the antitrust laws are in need of
    much reform. Although the Antitrust Modernization Commission
    considered many proposals and proposed a few, I don't think
    that anyone has really made a persuasive case that the U.S.
    antitrust laws are not working well to achieve their goals of
    enhancing and preserving competitive markets.'' We agree.
        And so did the Antitrust Modernization Commission, on which
    two of the merchant representatives sat, when it concluded that
    antitrust exemptions, like proposed here, should be strongly
    disfavored, as they ``undermine, rather than upgrade, the
    competitiveness and efficiency of the U.S. economy.''
        As the Task Force considers these important issues, please
    note that the parties in the litigation have agreed to
    mediation, which began last month. If a resolution is achieved
    through mediation, it will resolve the litigation and all the
    issues raised in this basic commercial dispute.
        In closing, Mr. Chairman, we deeply appreciate your
    concerns about this issue. We are committed to working together
    to fully address your concerns and resolve this commercial
    dispute without the need to move forward with legislation.
        While we agree with you that free-market negotiation
    provides the best way forward, we have concerns about price
    controls and the antitrust exemptions in the legislation that
    would enable the merchants to negotiate in ways that violate
    the antitrust laws today, rather than negotiating in a free
    market with the antitrust laws in place to protect consumers.
        I am prepared to answer any questions you may have. Thank
    you.
        [The prepared statement of Mr. Peirez follows:]
                      Prepared Statement of Joshua Peirez

        Mr. Conyers. Thank you very much.
        We have been called to the floor for--all right, we will
    try to get in one more witness.
        Mr. John Blum, vice president of operations for Chartway
    Federal Credit Union. He has 20 years of experience managing
    operations, both in retail and within the military.
        We have your statement, and we would like to hear from you
    now.

    TESTIMONY OF JOHN BLUM, VICE PRESIDENT OF OPERATIONS, CHARTWAY
                          FEDERAL CREDIT UNION

        Mr. Blum. Thank you. Good morning, Chairman Conyers,
    Ranking Member Chabot and Members of the Committee. My name is
    John Blum, and I am testifying on behalf of the National
    Association of Federal Credit Unions.
        I serve as the vice president of operations for Chartway
    Federal Credit Union, headquartered in Virginia Beach,
    Virginia. Chartway has more than $1.2 billion in assets and
    serves over 160,000 members.
        NAFCU and the entire credit union community appreciate the
    opportunity to participate in this hearing.
        The electronic payment system has proven to be one of the
    most important advances in the financial services marketplace
    and is tremendously beneficial to consumers as well as
    merchants. Retailers reap tremendous benefits in the form of
    increased sales, reduced costs for overhead, substantially
    fewer fraud losses, and immediate payment for goods and
    services.
        I would like to focus today on the benefits of the current
    system, specific to the credit union community, and our
    concerns with H.R. 5546.
        The electronic payment system is incredibly important to
    the credit union community. The system allows us to compete
    with the largest financial institutions. Credit and debit card
    products are important tools in developing and fostering
    relationships with our members. And interchange fee revenue
    helps cover the considerable cost of maintaining this system.
        Capping interchange fees would provide an advantage to
    large financial institutions at the expense of credit unions.
    We are much smaller than national banks. Consequently, the
    credit union community will find it more difficult to offset
    the losses from a cap on interchange fees. In contrast, large
    banks will be able to internalize the loss.
        H.R. 5546 authorizes a three-judge panel to set a single
    rate for a payment system. Credit unions have a higher per-
    transaction cost for processing card payments. Further, credit
    unions make up an extremely small percentage of the financial
    services market. This panel may be compelled to set the rate
    based on the cost for larger institutions, as they process
    significantly more transactions. Smaller institutions would
    then receive the lower cap rate even though their actual costs
    are much higher.
        And it will be doubly painful for credit unions. First, it
    will be more difficult to provide our members a credit or debit
    card without increasing costs elsewhere. Credit unions have a
    number of restrictions on their activities, as well as stricter
    capital requirements. As a result, credit unions have fewer
    avenues to offset any losses created by a cap on interchange
    fee income.
        Second, if credit unions cannot afford to offer card
    services to their members, they will lose an incredibly
    important relationship-building tool.
        For many financial institutions, interchange fees are not a
    huge income-generating engine. Last year, Chartway processed
    over 14 million transactions. The fees generated by each
    transaction are not pure profit. The system does not simply run
    itself. Chartway employs 11 people for debit card support, and
    we contract with a large service provider for our credit card
    portfolio.
        Interchange fees help offset the significant fraud losses
    associated with plastic cards. In 2006, there was over $1.1
    billion in plastic card fraud losses. In nearly all situations,
    the financial institution covers these losses. Chartway
    reimburses all members in full for any fraudulent transactions.
        We spend nearly $425,000 a year to cover fraud losses and
    related insurance. These statistics do not account for a number
    of other costs associated with each instance of fraud,
    including issuing new cards and time spent working with members
    who have been victims of fraud.
        It is important to note that debit cards and some credit
    cards generate little income outside of interchange. At
    Chartway, 34 percent of our active credit card accounts are
    paid in full at the end of every month. We do not receive any
    interest income on these accounts. In fact, Chartway is
    essentially providing these customers a short-term, unsecured
    loan at no interest. Interchange fees help cover these costs.
        In conclusion, NAFCU opposed H.R. 5546. The electronic
    payment system has been incredibly beneficial to merchants. We
    understand why retailers would like price controls. However, we
    are wary of the Government interfering with a valued product
    that is used by millions on a daily basis. Further, we do not
    think the Government should dictate prices between private
    parties.
        A cap on interchange fees will harm credit unions. As not-
    for-profit cooperatives, we will suffer, finding it more
    difficult to offer credit and debit card services to our
    members. Those credit unions that remain in the card business
    will have to adjust, by either raising interest rates,
    decreasing dividends or reducing services.
        As financial cooperatives, the ultimate cost of this
    proposal will be shouldered by the 90 million Americans who are
    member owners of their credit union.
        Thank you. And I would be happy to answer any questions the
    Committee may have.
        [The prepared statement of Mr. Blum follows:]
                        Prepared Statement of John Blum

        Mr. Conyers. Thank you, Mr. Blum.
        We have been called to the floor for several votes. I will
    leave you to the tender mercies of Andrea Culebras, who will--
    identify herself--so we can go back to the conference room. And
    if you want to go downstairs to the deli, you can get a quick
    lunch. And we will reassemble as soon as the votes are over.
        And so we stand in recess for a short period of time. Thank
    you very much.
        [Recess.]
        Mr. Conyers. The Committee will come to order.
        I would like to welcome Steve Cannon, chairman of the law
    firm of Constantine Cannon, an experienced antitrust lawyer.
    Served as senior vice president, general counsel, and secretary
    for Circuit City stores. Was responsible for FCC/FTC regulatory
    and antitrust matters.
        He was also a partner earlier in a firm where he
    concentrated in antitrust law. And he has also been chief
    antitrust counsel for the Senate Judiciary Committee from 1981
    to 1984.
        So you are familiar with the process.
        Mr. Cannon. Just a little bit, sir.
        Mr. Conyers. Welcome.

     TESTIMONY OF W. STEPHEN CANNON, CHAIRMAN, CONSTANTINE CANNON,
                                  LLP

        Mr. Cannon. Thank you.
        Mr. Chairman and Members of the Task Force, Ranking Member
    Chabot, thank you so much for the opportunity to appear before
    you today to testify on this issue of extreme importance for
    the millions of merchants in this country and the consumers
    they serve every day.
        We appreciate your leadership, in particular, on this bill.
    We endorse it enthusiastically and hope that the Committee will
    pass it at its earliest convenience.
        Mr. Conyers. Could you pull the mike a little closer,
    please?
        Mr. Cannon. Okay. Is that better? Oh, there we go. Do you
    want me to start over?
        Thank you, sir. We very much appreciate this. We represent
    today millions of merchants and obviously the consumers that
    they serve in this country every day. It is vitally important
    to the Merchants Payment Coalition. We applaud the bill. We
    think it is a terrific solution to a big problem. And we
    endorse it enthusiastically.
        You know, a few minutes ago, Mr. Floum told you that Visa
    doesn't really care about what the amount of interchange is
    because they get no revenue. Now, that raises a really
    important question, which is, who really should be at this
    table?
        And I will tell you, while we are hearing today from the
    small banks and credit unions, you really should not lose sight
    of, really, who Visa and MasterCard are. And while there are
    approximately 14,000 financial institutions of all sizes that
    issue some sort of payment cards, the top 10--the top 10--banks
    in this country control 88 percent of credit card receivables.
        These banks, Mr. Chairman, do not negotiate with merchants
    to set interchange rates, as you would expect in a competitive
    market. Rather, acting through their agents at Visa and
    MasterCard, the banks collude to set high rates and onerous
    terms, and they tell the merchants to take it or leave it.
        Governments around the world have scrutinized the conduct
    that you are looking at today, and their conclusions are the
    same as ours. Visa and MasterCard's interchange scheme is anti-
    competitive, it is certainly anti-consumer, and it needs to
    change. This system truly represents a market failure that
    needs an immediate fix.
        Contrary to what you hear, merchants do not want or need
    price controls or industry regulation. What they do need is a
    fair chance to negotiate market-based rates and terms, and that
    is exactly what H.R. 5546 provides.
        Merchants do not object to paying a competitive market
    price for the ability to conduct payment card transactions.
    They do, however, object to paying a price set by colluding
    banks.
        We set forth a pretty detailed analysis of your bill. We
    obviously think that it works, it works well. It is based on
    something that the Committee has blessed and worked on for many
    years in Title 17, involving sound recordings. And that is in
    great detail in my written testimony.
        But suffice it to say that this is not a price-control
    bill. The fate of the parties, under your legislation, is in
    their hands at all times from beginning to end. They have the
    ability to negotiate. They have the ability to give a final
    offer. And it is completely in their hands. So you will hear
    ``price control, price control, price control,'' but saying it
    a million times will not make it so.
        Let me address something today that everyone is going to
    focus on, which is the impact of this legislation on all of us
    as consumers. I can tell you, coming from Circuit City for 10
    years, there is no more brutally competitive industry than the
    retail industry.
        I remember when a plasma television at Circuit City sold
    for $35,000 10 years ago, and today that television sells for
    $1,000. Technology and competition does wonderful things.
        And on the banks' argument, the side of the banks have
    simply argued that if their cartel-set interchange fees are
    lowered, the banks will merely raise their fees to their
    customers. You know, this is a truly remarkable argument. No
    bank is entitled to the illegal revenues from high cartel
    prices. Visa and MasterCard banks around the world continue to
    issue cards even though interchange fees in many countries are
    significantly lower than they are in the United States.
        One more thing I would like to address, with your
    indulgence, Mr. Chairman, and that is that, listening to the
    prior panel and seeing Mr. Floum's chart, I would urge you not
    to be fooled by that chart. As you might note, it is in terms
    of percantages and not in terms of fees. And while a percentage
    may or may not go up a certain amount, fees have gone up by
    billions of dollars for doing exactly the same thing. So I
    would encourage you to think about this in absolute terms.
        And I also note that Mr. Floum said proudly that fees had
    not gone up much since the days of the knuckle-buster. I
    thought technology was supposed to drive prices down, not keep
    prices the same, especially when they have been developed in
    such an anti-competitive and anti-consumer form.
        So I see my time is up. I appreciate the Committee's
    indulgence and look forward to answering your questions.
        [The prepared statement of Mr. Cannon follows:]
                    Prepared Statement of W. Stephen Cannon

        Mr. Conyers. Thank you so much.
        Ed Mierzwinksi, are you an attorney?
        Mr. Mierzwinski. No, sir. Consumer advocate.
        Mr. Conyers. All right. We have that title. I was going to
    bestow another one on you, but I am not authorized.
        Mr. Mierzwinski. Okay. [Laughter.]
        Mr. Conyers. Mr. Ed Mierzwinski, consumer advocate in the
    office of the National Association of State Public Interest
    Research Groups. He has been testifying since 1989 and has been
    before Congress and the State legislatures on a wide range of
    issues.
        And we are very happy to have you here. And your written
    testimony is already in the record, and you may add any
    comments you would like at this time.

      TESTIMONY OF EDWARD MIERZWINKSI, CONSUMER PROGRAM DIRECTOR,
                  U.S. PUBLIC INTEREST RESEARCH GROUP

        Mr. Mierzwinski. Thank you very much, Mr. Chairman and
    Members of the Committee.
        As you said, I have been working here in Congress since
    1989 as a consumer advocate for the Public Interest Research
    Groups. And over that period of time, the consumer advocates,
    our group and other organizations, have tried to rein in the
    unfair practices of the issuing banks and other unfair
    practices of the card network associations. And it has been
    very difficult, over the years, to get any changes made.
        Lately, we have seen some progress. We are running a
    campaign on college campuses to go after unfair college credit
    card marketing. Recently, the Federal Reserve Board of
    Governors joined the consumer advocates' call to rein in the
    unfair practices of the card-issuing banks.
        And for years, the merchants have been trying through a
    number of strategies, litigation strategies, convincing the
    Department of Justice to investigate, to go after the anti-
    competitive practices of the bank networks, which, until
    recently, were owned and controlled by the biggest banks.
        And I am unconvinced, completely unconvinced, that there is
    any competition in this marketplace. The so-called 6,000
    issuers are really dominated by the very small number in the
    tight oligopoly of issuers that dominate the marketplace.
        For many years, those issuers have the Office of the
    Comptroller of the Currency at their back. They could do
    whatever they wanted. They could change the rates at any time,
    for any reason. They could impose mandatory arbitration on
    consumers, preventing us from getting any justice.
        And the merchants have faced the same problem. So when we
    look at this issue, it is a very significant issue for us.
    Consumers pay too much; merchants pay too much. And when the
    merchants pay too much, it affects consumers. Consumers pay
    more at the store and more at the pump, because of the
    collusive nature of the agreements that are forced on them with
    no negotiations, no transparency, by the bank associations.
        And I am very concerned for the unbanked. I am very
    concerned that the 27 million people who pay cash at stores are
    paying part of the cost of interchange. They are paying part of
    the cost of my rewards.
        And I believe that it is fortunate that your Committee is
    shining light on this important issue. And you have certainly
    got the attention of the industry, based on the size of the--
    the filled seats in the room.
        What we are very pleased with is that your legislation, the
    Credit Card Fair Fee Act, would create a non-price-control
    mechanism. It would force negotiation, increase transparency,
    without going to price controls.
        I have, you know, worked against the banks for many years.
    They do their polling. They know that ``price controls'' is an
    evil word on Capitol Hill, so they use it in almost every
    statement that they make about every piece of legislation.
        But I want to say that your bill is much more elegantly
    crafted than that. I believe it is a common-sense approach to
    the problem that will force the two sides to the bargaining
    table.
        I am unconvinced with the little pieces of the Australian
    report that have been extracted by the bank witnesses or by the
    network witnesses. I think the reports are much more complex
    than that. I think you see in Australia that there has been
    more competition developed. There are new kinds of lower-cost
    cards out there. Debit card customers are getting lower rates.
        And I think that the Committee, I am sure your staff, will
    take a very close look at what is really happening in the other
    countries that have restricted or banned or changed the way
    that the interchange system is forced on the merchants. And I
    encourage you to continue to do that.
        But we are simply not in any way convinced that the price
    to consumers will go up or that the merchants won't pass along
    any savings. There will be changes in the marketplace, but
    there are consumers that need to be considered, including the
    cash consumers and including the consumers who carry a balance
    and have the basic credit cards, the classic credit cards.
        If I carry a balance on a credit card, I shouldn't have a
    rewards card in the first place. One-percent rewards against up
    to 36-percent interest? That is not going to help me very much
    at all. And some consumers out there, the ones that I care
    about, are paying 36-percent interest under the unfair
    practices that many of the issuers are imposing upon them,
    although the Federal Reserve is trying to stop it.
        Again, we are very encouraged by sunlight being the best
    disinfectant, that your Committee is shining on this issue. We
    look forward to working with you to try to get the card issuers
    who have demonstrated market power according to the U.S.
    courts, that have prevented the merchants from negotiating
    fairly with them, that have raised the prices that all
    consumers pay--your legislation is important step forward. We
    look forward to working with you on it.
        Thank you.
        [The prepared statement of Mr. Mierzwinski follows:]
                    Prepared Statement of Edmund Mierzwinski

        Mr. Conyers. Thank you very much.
        I thank all of you.
        You heard the Members of Congress, and you have heard your
    fellow panelists at this witness table.
        Mr. Robinson, what say you now about the subject matter
    that brings us here? In other words, has anything deepened your
    resolve or made you wonder more or had you nearly blow your
    stack or what? [Laughter.]
        What are your feelings about the measure at this point?
        Mr. Robinson. I guess a couple of things.
        One, it has not reduced my resolve. And I think just to
    truly hit on a couple of points for me is that, one, I am not
    anti-plastic. I do recognize that they provide benefits. The
    concern that I have, which I think has been stated more than
    once and clearly stated, is that there is a complaint about
    anti-competitive behavior, which, you know, occurs with, you
    know, what we see in the high rates and some of the abusive
    rules.
        And, you know, we do hear the comments that this is some
    sort of price control, and I hope that that has come across
    clearly that this solution is not a price control mechanism.
        So those are just a couple of my thoughts.
        Mr. Conyers. Thank you.
        Attorney Floum?
        Mr. Floum. Yes, sir. Well, I am struck today hearing from
    Mr. Robinson and the other witnesses for the Merchants Payments
    Coalition. They acknowledge the value that electronic payments
    brings to them, but they want it for less money. Well, I guess
    that is the way of the world, but the way to handle that is
    through the marketplace and through negotiation.
        And I hope if we have dispelled anything today, it is that
    we and the acquiring financial institutions stand ready and
    willing and eager to negotiate. If we at Visa thought that
    lowering interchange rates would drive more volume, we would
    lower them tomorrow. So we would like to negotiate with the
    merchants so that they would prefer our products. That is the
    free market, not price controls.
        And with all respect to the witnesses, if you look at the
    bill, with subpoenas and depositions and three administrative
    law judges who would set a single price, that is not the free
    market. That is regulatory intervention setting prices.
        So I remain as concerned as when I started about the bill
    and what it would do, particularly to consumers.
        The final point, if I can, Mr. Chairman, is we hear about
    subsidization and the problem with cash spenders subsidizing
    card users. And we think that the subsidy runs in the other
    direction. I quoted from the GAO report where, with the
    increased use of electronic payments, the GAO, the Government,
    was saving more money. The use of electronics is cheaper for
    merchants than cash and check. And so, as the volume goes up,
    their savings goes up. If there is a subsidy, it runs in the
    other direction, and electronic payments drive efficiency.
        Thank you, Mr. Chairman.
        Mr. Conyers. Mr. Peirez, what say you?
        Mr. Peirez. Thank you, Mr. Chairman.
        I am actually encouraged, to a limited extent, in listening
    to my colleagues, Mr. Cannon and Mr. Robinson, in that I think
    the crux of their complaint is really about one thing and one
    thing only: a claim that there is some alleged anti-competitive
    conduct as a result of allegation of market power and that that
    causes an inability to negotiate. I think everything else
    becomes noise, but ultimately that is their core complaint.
        And the reason I am encouraged is, if that is really the
    crux of the complaint, luckily for us we have a very effective
    system of antitrust laws in this country that have proven to be
    able to address these types of things, including when Mr.
    Cannon's firm brought a case against us in the past, not just,
    as Mr. Cannon would have us believe, for past conduct but also
    in changing future conduct.
        Now, we don't think that that case will prove out to have
    any of the allegations that they make be true. But if, in fact,
    that is the crux of the complaint, then indeed the best defense
    against alleged anti-competitive conduct is enforcement of the
    antitrust laws for the purpose of free, competitive markets, as
    was found throughout the report from the Modernization
    Commission.
        And I gave one quote, but I will give one other: ``The
    antitrust laws stand as a bulwark to protect free-market
    competition. They prohibit anti-competitive restraints that
    harm consumer welfare.''
        So I think that enforcement of those laws, if, in fact,
    there is a problem, is the best recourse, rather than trying to
    set up an alternate process to address the same thing.
        Thank you.
        Mr. Conyers. Thank you.
        Mr. Blum?
        Mr. Blum. Thank you, Mr. Chairman.
        My concern, listening here today, is that perhaps we are
    using that noise a little bit to cloud the issue, and that for
    some reason we have some oversimplification of what I view as a
    very complex system.
        I think we are missing some of the transference-of-
    technology issues that we have talked about, where we seem to
    have a perception that it is as easy as swiping the card and
    then we somehow gouge some merchant for simply swiping the
    card.
        You know, I would just bring to everybody's attention that
    the transference of risk, the transference of float on the
    funds, you know, the transference of maintaining the system
    from a check-or a cash-based retailer to a card-based processor
    is moved over on my side.
        So I am just concerned that there is some
    oversimplification of that issue, that we are using the noise
    to speak about ``if technology has been that improved, why
    haven't costs gone down,'' I would challenge--the gas industry,
    as an example. I was surprised to hear that MasterCard capped
    the interchange on gas purchases.
        I think if this technology is so simplified, I would like
    to see the merchants apply it at the pump, so that when I use
    my MasterCard to fill up an SUV, that the price of gas, when I
    exceed whatever their cap is, begins to be lowered. I don't see
    the technological, you know, advances that they are using to
    challenge what we have done with the interchange income.
        Thank you, Mr. Chairman.
        Mr. Conyers. Thank you.
        Before I go to Mr. Cannon, Mr. Mierzwinski?
        Mr. Mierzwinski. Mr. Chairman, I think what is interesting
    to me as a consumer representative is that the tricks and traps
    that have been imposed on consumers seem to be paralleled in
    the merchant association relationship.
        The consumers don't always know and don't have the right to
    go to court. The consumers have their rates changed at any time
    for no reason. The kinds of ways that the banks have tried to
    expand the volume of sales on consumers through the use of
    rewards and other things--it just strikes me as a parallel.
        And I know that consumers have no ability to negotiate with
    the banks, and the merchants are saying they have no ability to
    negotiate with the card associations. I am not surprised.
        Mr. Conyers. Yes.
        Mr. Cannon?
        Mr. Cannon. Mr. Chairman, it is interesting, Mr. Floum, a
    few minutes ago, and Mr. Peirez, both of whom are friends of
    mine, keep talking about, ``We like to negotiate,'' or, ``We at
    Visa'' or ``We at MasterCard like to negotiate.'' But if you
    remember what Mr. Floum said at the beginning of the hearing,
    is Visa or MasterCard don't really get the benefit of
    interchange, but what they get is dues and assessments, is what
    it is called.
        So, again, the question we have is, who is the proper party
    to negotiate with? Now, what you don't see here today is
    Citicorp or Chase or one of the other very large banks that
    control the vast majority of credit card receivables in the
    country. And to my knowledge, Mr. Chairman, I don't know of
    anybody that has ever successfully sat down with Citicorp or
    Chase to negotiate an interchange rate.
        It is really not an issue of market power here. Your bill,
    obviously, has a screen there that talks about market power.
    The question here is, how did we get to be where we are today?
    How did these rates get to be as high as they are today?
        And the point is, we got this way because of a price-fixing
    agreement that goes on today between large banks. The fact that
    it is Visa and MasterCard that help control it and run it is
    important, but keep your eye on, I would submit, the most
    important players here, which really are not at this table.
        Mr. Conyers. We should have invited other witnesses? Is
    that what you are telling me?
        Mr. Cannon. I think it would have been a great idea; I
    think it would be terrific.
        Mr. Conyers. We may have to have a second hearing. I hope
    they would respond without the use of the processes that follow
    nonresponse. But we will see.
        Ranking Member Steve Chabot?
        Mr. Chabot. Thank you, Mr. Chairman.
        And I come from the philosophical perspective that less
    government is better and less regulation is generally better
    than more and that markets should be free and unfettered and
    unencumbered to the greatest degree possible and that
    competition is good for consumers.
        On the other hand, you know, I want consumers to pay less
    and be able to stretch their paycheck as far as possible and
    hopefully be able to, you know, save as much as possible, maybe
    invest a little, and better the family. And I want retailers to
    be successful and hopefully employ more people, especially in
    the 1st District of Ohio, in Cincinnati, which is my district.
        So if each one who would like to, if you could make your
    best case, your best argument as to why, in this particular
    case, it is appropriate for us to regulate more because of the
    various issues that we have discussed and in previous hearings.
    Because I think this is really a very important issue.
        Mr. Robinson, you would be welcome to go, and we will just
    go right down the line, anybody that wants to take a shot at
    it.
        Mr. Robinson. Thank you.
        I agree with you, I agree with you, that less regulation is
    better, especially when you have a competitive market. I think
    that our complaint is that this is not a competitive market.
    And so you have to do something to make it competitive.
        I have heard that we have the ability to negotiate. I think
    that negotiating ability is illusory. I mean, I don't think
    that exists.
        There is an example that was showed up there about NACS
    having negotiated this deal on the interchange fees. I think it
    is important to understand what NACS negotiated. NACS did not
    negotiate interchange. It only negotiated the processing fee.
    And if you were to use the example, it is kind of like having
    no ability to negotiate on the refrigerator, you just get to
    negotiate on the delivery charge. And that is the situation.
        So, you know, we would love to have the ability to
    negotiate. We would love to have a competitive market. And that
    is the reason that we think, since it is not--we don't have the
    ability to negotiate, we do not have a competitive market, and
    that is the reason that we are here talking to you today.
        Mr. Chabot. Okay. Thank you very much.
        Mr. Floum?
        Mr. Floum. Ranking Member Chabot, thank you for the
    question.
        There is no need to regulate or for the courts to determine
    that there is any kind of problem unless there is market
    dysfunction. That is the only reason that there would need to
    be intervention either by the legislature or by the courts.
        There is absolutely no evidence of market dysfunction. If
    Visa was a monopolist, as the merchants like to claim because
    it is very rhetorical, what we would be doing is we would be
    lowering output and raising prices. That is what monopolists
    do. But instead, as I have mentioned, our rates have not gone
    up over 10 years, and over 30 years they have gone down
    significantly.
        Diners Club was the first credit card network. It charged a
    7-percent merchant discount rate. Today's average Visa merchant
    discount rate is a third of that. And our interchange rate has
    remained flat at 1.6 percent.
        So we are not raising prices. And we are not restricting
    output, because everyone wants to use our cards and millions of
    more merchants are accepting the card. So there is no indicia
    of market dysfunction.
        My colleague here says, ``Well, the volume goes up, so the
    rates should come down.'' That is what they are saying today.
    But, again, that ignores the incredible innovation in our
    business. It is not the same Visa product; it is not at all.
    Fraud rates have come down. It is much more automated. It works
    a lot better. And instead of one product, we have 10.
        So the fact that we have held rates flat I think is quite
    remarkable, given the innovation in our products and the
    tremendous benefits that we drive to consumers, retailers and
    the economy in general.
        Thank you.
        Mr. Chabot. Thank you.
        Mr. Peirez?
        Mr. Peirez. Thank you.
        First, I am further encouraged that Mr. Cannon still
    considers me a friend as we continue through these hearings.
    So, more good news.
        But I would like to take off on the refrigerator example
    for just a second, because I think it is very illustrative. And
    I would say that what is really at issue here is negotiating
    about the refrigerator versus the condenser, the ice tray, the
    shelving inside, and the other pieces like the power cord.
        Ultimately, merchants negotiate for MasterCard acceptance
    the fee that they will pay. They negotiate that every day, and
    no witness has ever claimed they don't, with the hundreds of
    merchant banks that are out there and independent service
    organizations that are out there that provide those services.
    And those fees have gone down over time, as you would expect
    them to.
        That is no different--and I think this is a very important
    point--than the way that merchants negotiate with American
    Express. No merchant has claimed that they must accept American
    Express. They can't say that they have monopoly power, as we
    have heard, or now, you know, Mr. Cannon saying it is not
    simply a question of market power, it is a cartel. Okay, fine,
    same issue, antitrust at its core. They can't claim AmEx is a
    cartel or ever has been. We don't believe we are either. But
    they can't claim it as to AmEx. They have always negotiated
    with AmEx; they say that all the time. And they pay more for
    AmEx than they pay for MasterCard and, I believe, for Visa.
        At the end of the day, the merchants can negotiate the fees
    they pay. They also have the ability to negotiate certain
    interchange fees. There are examples I would be happy to go
    through with any Members of the Task Force, those examples, in
    great detail.
        But separate and apart from that, they negotiate the
    merchant discount fees they pay every day. They pay less for
    our system than a system that doesn't have all the alleged
    antitrust problems that they are claiming here in American
    Express.
        And I would also point out that merchants are the ones who
    initially invented credit cards. And it costs merchants much
    more money to run their own system than to use ours.
        And there is nothing that prevents merchants today from
    keeping their own cards, creating their own cards, offering
    cards together for acceptance. Many of them are utilizing rails
    built by companies that are just coming into the market, like
    Tempo and others, today. Merchants invited Discover. Sears
    invented it; ended up selling it. But there is no reason why
    merchants can't do that, as well.
        So there are many opportunities for them to change costs,
    reduce costs, or otherwise. But ultimately they pay less for
    our cards than if they did it themselves. They pay less for our
    cards than they do for AmEx, where they don't allege any
    antitrust problems and they don't allege an inability to
    negotiate. And I will leave it at that.
        Mr. Chabot. Thank you.
        Mr. Chairman, do the other witnesses have time to answer,
    or should I yield back?
        Okay, if the last three could maybe make it relatively
    brief, because I think they have covered a pretty wide range
    there, but if you could maybe make it short.
        Mr. Blum. Thank you, Ranking Member Chabot.
        My concern on any kind of legislation is that, you know, if
    enacted, from a credit union perspective, the adverse or
    unintended consequences are not necessarily visible here in
    this bill.
        First of all, I have heard about protecting the consumer.
    Nowhere in this bill, in this regulation, says that once the
    three-judge panel decides on some sort of capped rate that the
    consumer benefits directly from it. There is no legal
    requirement for that reduced, if you will, interchange to be
    passed on.
        Secondly, I think that if you were to cap a component, from
    a credit union position, of interchange, you would also have to
    cap my fraud. You would have to cap my responsibility for fraud
    losses by, you know, another large retailer's disclosing
    information that cost me money. You would have to cap my cost
    of overnight funds for those immediate settlements and my back-
    end processing costs. And if you don't regulate those as well,
    you are attempting to regulate a component of the industry that
    is, as I said, very complex.
        Thank you, Mr. Chabot.
        Mr. Cannon. Mr. Chabot, all I would add is that you would
    legislate when you have a market dysfunction, as you say, or a
    market failure. What is the market dysfunction here? It is the
    collusion and it is the price-fixing that has gone on over a
    large number of years. That is the market failure; that is the
    market dysfunction.
        I would also have to add, for Mr. Floum, one more time, he
    needs to talk about what his increase in revenue or fees are,
    not what his increase in his rates are. There is percentage,
    and then there is absolute revenue, and that is a very
    important distinction.
        The other thing I would also say is, in terms of the
    merchant discount fee, that is true, the merchant discount fee
    is both interchange and processing fee on top of that. But I
    will tell you, by comparison, processing fees is like
    negotiating for the flea on the tail of the dog. It is a very
    small part of this, and they know it.
        And they know that negotiation is not possible on
    interchange. And I have never heard of anybody who has gone to
    a bank like Citibank or Chase and said, ``We have successfully
    negotiated interchange rates.''
        Mr. Mierzwinski. Thank you, Mr. Chabot.
        Mr. Cannon and Mr. Robinson have pointed out that there is
    no ability to negotiate anything other than the merchant
    processing fee. I have no information to dispute that.
        As a result of your hearings, the merchants are finally
    starting to see little bits of the industry's paper and their
    rules. They kept those hidden for years and years. They are
    trickling them out now. They may be available.
        So I think there is just a clear example of market failure
    here. The companies have market power; they are abusing it.
        But I want to point out just another example. It was
    pointed out earlier that debit cards have no interest on them,
    so we only need the revenue from interchange to make money on
    the debit cards.
        There are a lot of unfair practices related to debit cards
    and consumers. The cheapest and safest, most secure kind of
    debit card is when you use your pin. Some companies charge you
    a fee to use your pin and give you a reward to use the
    unsecure, signature-based debit card.
        They are also gaming the system of how much money you have
    in your checking account. We have heard about the $42 billion
    they make in interchange. $17 billion a year goes to the banks,
    in terms of tricking consumers into using their debit cards
    when they don't have any money in their accounts, allegedly.
        So I think there are just a lot of unfair practices out
    there. And, again, I will just say what is happening in the
    merchant universe seems parallel to what has happened in the
    consumer universe. We have the Federal Reserve stepping in on
    the consumer side, in the consumer universe, and I think it is
    fortunate that the Judiciary Task Force is stepping in on
    behalf of the merchants.
        Mr. Chabot. Thank you very much.
        And thank you to all the panel members.
        Mr. Conyers. Thank you very much, Steve Chabot.
        I turn now to Sheila Jackson Lee, the distinguished
    gentlelady from Texas.
        Ms. Jackson Lee. Mr. Chairman, thank you very much.
        I want the audience to recognize that there has been a
    series of these very important Task Force hearings that I
    really believe shed light on crucial and important issues.
        I hope the witnesses will take to heart the interest of the
    Members in ensuring that the legislative fixes, which we happen
    to believe have merit, are in fact an effective pathway.
        So I want to thank the Chairman for his initiative. And I
    hope the witnesses will take this as an opportunity, as I have
    seen that you have done, to be instructive.
        Mr. Robinson, my question to you is why, in the marketplace
    as it is now postured, you cannot survive or you cannot find a
    remedy on the interchange fees, in terms of some mutual
    agreements.
        Mr. Robinson. Let me be clear. Are you asking me why they
    won't negotiate with me?
        Ms. Jackson Lee. I am asking you why the market is not
    helping you at this point. So you can answer it in any way you
    so desire. Why do you need the legislation?
        Mr. Robinson. I believe that we need the legislation
    because the banks and the credit card companies have a, sort
    of, favored situation, where they have the ability to set rates
    and they can give us those rates in basically a take-it-or-
    leave-it type of a situation.
        We do get to negotiate with them on things like the
    processing fee. I used the delivery charge on the refrigerator
    analogy, and Mr. Cannon used the flea in the dog analogy--that
    is probably closer to a better analogy.
        So the reality for us is that we do not have the ability to
    negotiate with them currently. And, you know, they keep saying
    that we have the ability to negotiate, but just because they
    say it doesn't make it so.
        So that is why I believe that we need this legislation.
        Ms. Jackson Lee. Mr. Cannon, build on that. Why do you not
    have the ability to negotiate? Interchange fees are represented
    by the industry to pay for their risk, pay for their processing
    and paper. They represent that there is some market discussion
    of retailers who, every day, can shout out to them and get
    relief. What is your response to that?
        Mr. Cannon. Ms. Jackson Lee, first, let me thank you on
    behalf of the merchants for cosponsoring the bill. We
    appreciate that very much.
        But, secondly, it is important to focus on what this means.
    There is so much discussion about negotiation. And it is
    important to understand this tiny little bit and then the rest
    of it, which the bulk of this is the interchange fee, set by
    and between banks with Visa and MasterCard.
        Ms. Jackson Lee. The bank of the merchant and the bank of
    the issuer?
        Mr. Cannon. No, ma'am. No, ma'am. All of the banks--the
    banks that all get the interchange fee are the issuing banks.
    So that is the Citis and Chases. And, as I said earlier----
        Ms. Jackson Lee. And some of them may be banks of
    merchants?
        Mr. Cannon. Oh, banks of merchants--oh, sure. Well, if you
    are an issuing bank and you issue a credit card, then that
    interchange comes back to you, absolutely, no doubt about that.
        But the point there is that is not negotiated. And----
        Ms. Jackson Lee. So you are suggesting that the merchant's
    bank--I happen to go to Joe Smith Bank. It is my friendly
    neighborhood bank. They have been knowing me, I have been
    having mom-and-pop grocery store for 20 years. You are
    suggesting that that bank who has issued me a card will not
    advocate for me, the merchant?
        Mr. Cannon. Oh, that is absolutely true.
        Ms. Jackson Lee. You need to make it clear on the record.
    That bank is the bank of the merchant.
        Mr. Cannon. Oh, sure. Well, it is the merchant's acquiring
    bank. That is where----
        Ms. Jackson Lee. I understand.
        Mr. Cannon. You are a merchant, you have to have a banking
    relationship or a credit card--so you have that bank be your
    acquiring bank. That is fine. That bank can also be an issuing
    bank. And it is the issuing banks that get the interchange. And
    that is how that works.
        So you have to understand--and there are banks all over
    this country that are both issuing banks and----
        Ms. Jackson Lee. And acquiring banks. All right.
        Mr. Cannon. They certainly are.
        Ms. Jackson Lee. So let's go to the point of why the market
    does not work. You are saying the merchants are put at a
    disadvantage. Let's see if we can get it precisely why.
        Mr. Cannon. The market does not work because, as the system
    exists today, there is no ability for the merchants, the
    merchant community, to negotiate, to try to do something in the
    marketplace.
        Now, retailers, as a whole, and certainly Tom, they are
    used to negotiating for every single thing, every aspect of
    their business, every day, except when it comes to credit card
    acceptance. And they have learned long ago that that just
    simply is not a possibility.
        And the reason it is not is because of how this has
    developed over time. Because you have all of these banks, which
    over the years have essentially gotten together and agreed,
    this is going to be the amount that we are going to charge each
    other. And, as you know, there is litigation on this today,
    there are 50 lawsuits in New York, that are alleging that that
    agreement constitutes price-fixing, good old-fashioned price-
    fixing, getting together.
        I worked at Circuit City. I knew that Circuit City and Best
    Buy couldn't get in a room and decide what the price of TVs are
    going to be. However, you have these independent entities,
    these independent banks that get together----
        Ms. Jackson Lee. With no intervention. With no oversight,
    no intervention.
        Mr. Cannon. Well, you know, Visa and MasterCard is
    obviously a private entity. These banks are private entities.
    In the end, these are rooms full of competitors. And I can't
    get in a room with my competitors and fix the price of
    anything. And that is what has occurred over the years.
        And so we have today a situation where we have enormously
    high interchange fees, as we believe it--by the way, one study
    showed that, in terms of the amount of money that it cost to
    actually provide the service, is 13 percent of the total of
    interchange. That means that is a roughly 87-percent profit
    margin. I would love to have that, but I can tell you that----
        Ms. Jackson Lee. Let me give equal time to Mr. Floum.
        Mr. Floum, look precisely at the legislative fix or the
    legislative structure, which, in laymen's terms, I believe,
    simply opens the door to the retailer or the merchant to sit in
    the room and to give antitrust immunity or to be able to
    protect that discussion where you can come out with a rate that
    is fair.
        What Mr. Cannon said seems to be shocking, that you have an
    80-percent turnaround on profit. And I respect the fact that
    you have paper, machines, you have risk. What is wrong with
    having this kind of protection for you to have a discussion
    that just includes a third party and a protection against
    antitrust laws?
        Mr. Floum. Thank you for the opportunity to respond,
    Congresswoman.
        There is nothing wrong with negotiation. That is the free
    market, and I think everyone at this table is in favor of the
    free market and the opportunity to negotiate.
        What is wrong with the bill is it is a negotiation with
    subpoenas and depositions and a three-judge tribunal that would
    ultimately determine the rate, and that is not the free market.
        Now, if I could just explain about interchange, because I
    think that there is a complexity to this which is important to
    understand. Again, the interchange rate is an interbank
    transfer fee. It is not what the merchants pay. The merchants
    pay merchant discount rates. And they should and can negotiate.
        Now, as to this--I have heard at least 10 times, it is
    price-fixing, it is a cartel, it is competitors getting in the
    room. There have been four courts in the United States that
    have looked directly at this issue, whether interchange is
    unlawful under the antitrust laws in the United States. Every
    single one of those courts has found that interchange is pro-
    competitive and is lawful.
        You couldn't have a system without interchange. Because we
    have 16,000 banks--and you might go to Joe Smith Bank and buy
    something, and your bank is Joe Smith Bank, and you might buy
    something from a merchant who banks with Chase, in order for
    that transaction to happen instantaneously, securely at the
    point of sale, there needs to be a rate that is predetermined.
    That is what interchange is.
        Nobody has suggested, that I am aware of, in the world that
    interchange should be abolished. Instead they are saying it
    should be lower. And----
        Ms. Jackson Lee. If you would yield to me for a moment?
        Mr. Floum. Yes, ma'am.
        Ms. Jackson Lee. I need to put on the record that I think
    the magnitude of the profit and the return that you are
    getting, 641 million credit cards and growing, $1.7 trillion--
    so even if this is a competitive fairness, meaning that you are
    already competitive, the returns are enormous and the retailers
    are suffering.
        But I understand that, as the legislation is structured,
    there is an arbitration, there is a first step. There probably
    could be an agreement without yielding to the legislative fix
    if it would work, if you would work and let it work in the
    marketplace by listening to the merchants and the retailers.
        The problem we saw was that the only people that were part
    of the interchange--and you have right risk that should be
    addressed--was enormously one-sided. We couldn't find a way to
    get in the door. You haven't shown us the way to get in the
    door.
        We would be happy if you would have a structure, a private
    market structure for these individuals to get into the door.
    This gives them the door opening.
        And we want to look for a way that this works. But I think
    the fact that there is an arbitration first and then the court
    gives you some relief. And I hear what you are saying, and I am
    not unsympathetic. But I am very sympathetic to a sector of the
    marketplace that seems to be shut out.
        If you want to finish the sentence.
        Then I will yield back, Mr. Chairman.
        Mr. Floum. Thank you again, Congresswoman, for the
    opportunity.
        I am not sure if you were in the room----
        Ms. Jackson Lee. Probably in another hearing.
        Mr. Floum [continuing]. When I mentioned that interchange
    revenues do not come to Visa or MasterCard. We don't receive
    those revenues. We set interchange to try to grow our system.
        Now, with respect to negotiation, I would love to talk to
    Mr. Robinson right after this hearing or any other merchant who
    would like to discuss how they can drive volume to our network
    in return for incentives and other ways that they can offset
    their costs. So we are very much in favor of those discussions.
        Ms. Jackson Lee. Just one sentence, Mr. Chairman.
        I hear you, Mr. Floum--I am sorry if I am saying it
    incorrectly. But let me just say this. The banks and the card
    have--I don't want to use this very strong word of
    ``collusion,'' but they certainly have an opportunity to speak
    to each other.
        And I think that is the crux of our concern. And I will
    allow you to think about that, as others question you, to be
    able to clarify that point for us.
        Mr. Chairman, I thank you very much, and I yield back.
        Mr. Conyers. Thank you so much.
        The Chair recognizes the distinguished gentleman from
    Florida, Ric Keller.
        Mr. Keller. Well, thank you very much, Mr. Chairman.
        And, Mr. Robinson, I understand your stores operate under
    the term Rotten Robbie? Is that right?
        Mr. Robinson. That is correct.
        Mr. Keller. Did Visa and MasterCard give you that nickname
    of Rotten Robbie, or how did that nickname come about?
    [Laughter.]
        Mr. Robinson. You really want that story?
        Mr. Keller. Well, if you can tell it in about 10 seconds,
    because I have about 20 other questions for you.
        Mr. Robinson. Well, as a small marketer, we needed
    something that was catchy and that somebody would remember
    without having a major oil company budget. And so we picked
    that name because people would remember it.
        Mr. Keller. All right. Well, thank you. I am known as
    Rotten Ricky, but for different reasons. [Laughter.]
        Mr. Robinson. They might be the same.
        Mr. Keller. Yes.
        Mr. Floum, I am going to start with you.
        And I am going to ask you all some questions on both sides,
    so if it seems rough at times, it will be easier later for both
    of you, time permitting.
        You made a statement that I thought was pretty surprising.
    Some stuff I could agree with, but the one statement that
    really surprised me was, ``Interchange rates have not increased
    over the past 10 years.''
        And before this Committee, on July 19, 2007, we have Steve
    Smith, the CEO of Food City, from Virginia. And he testified
    that in the 1990's his grocery stores were paying 1 percent
    interchange fees and now they are paying 2 percent, more for
    premium cards. He seemed like a pretty credible witness to me,
    frankly.
        Last week, on May 7, 2008, Bill Douglas, the CEO of a
    convenience store chain called Douglas Distributing, testified
    that 10 years ago they were paying 1 percent interchange fees
    and now they are paying 2 percent on average, more for premium
    fees. He seemed pretty credible to me.
        Do you agree with me, sir, that, in fact, the Visa
    interchange reward-based premium cards have gone up over the
    past 10 years?
        Mr. Floum. Congressman Keller, yes. And if I could take a
    minute to talk about rewards cards, I think it might be
    instructive for the Committee. I would just ask my colleague to
    put up a chart, if I may, that discusses reward cards.
        Our blended, average interchange rates have remained flat,
    as I mentioned, over the past 10 years. We have introduced
    debit cards that have lower interest rates, pin debit----
        Mr. Keller. Right. And I have your chart. And I only have 5
    minutes, so let me say, if you look at that chart, back in
    2002, you only had, like, 13 percent of people using these
    premium cards and now you have 63 percent, or two-thirds of the
    credit market is these premium cards, right?
        Mr. Floum. Correct.
        Mr. Keller. Okay. And so, if now you have two-thirds of the
    market with premium cards, and premium prices have gone up,
    then, in fact, these folks like Mr. Smith and Mr. Douglas were
    telling the truth when they are saying they are having to pay
    more for credit card interchange fees.
        Mr. Floum. For rewards cards, yes, Congressman.
        But I would just like to highlight that what Visa has done
    is gotten into a market niche that was occupied by American
    Express. These are high spenders. Typically they have rewards
    cards, travel and entertainment, jewelry stores, high-end
    merchandise. And look at our rates compared to American
    Express. They are 60 basis points lower. So it is less
    expensive for the retailers, thanks to the fact that we have
    gotten into this space.
        Mr. Keller. They have gone up over 10 years, especially
    with premium cards. And the fact of the matter is, the guy
    sitting next to you, Mr. Robinson, with his small convenience
    store, is absolutely required to accept the Visa premium card
    along with the basic Visa cards, correct?
        Mr. Floum. Yes, that is correct.
        Mr. Keller. Okay. And if the solution here is that he has
    the ability to negotiate with Visa and MasterCard under the
    free market principles, as has been suggested by you and
    counsel for MasterCard, and 10 years ago the interchange fees
    were significantly less, around 1.2 percent according to one of
    your charts, then would you agree today that Mr. Robinson and
    his company will only, going forward, have to pay 1.2 percent
    interchange fees?
        Mr. Floum. No, Congressman. And it depends--again, we have
    brought debit cards to Mr. Robinson and amazingly electronified
    his business so that he can operate on the low margins. We have
    enabled his business to prosper. And the debit cards are
    lower----
        Mr. Keller. I agree totally about the debit cards; you are
    100 percent right.
        But my point is, this guy doesn't have the ability to
    negotiate with you, because Wal-Mart is the biggest employer in
    the whole country, Fortune 1 on the Fortune 500, and they had
    to bring a suit, resulting in a $3 billion settlement, because
    they themselves don't have the ability to negotiate.
        And so, if they don't have the ability to negotiate with
    you to get lower rates, how the heck is a small, mom-and-pop
    convenience store in a position to negotiate lower rates on
    these premium reward cards that Visa offers?
        Mr. Floum. Well, Congressman, I showed before this is Mr.
    Robinson's organization. This is NACS, and this is how to
    negotiate with first data for a low merchant discount rate. So
    he can and does negotiate through the National Association of
    Convenience Stores, which sell, I think, 85 percent of the
    retail gas in the country.
        Mr. Keller. Okay.
        Mr. Chairman, my time has expired, but let me just say to
    Mr. Floum, I have a lot more questions and lot more that you
    will like to answer, other than those. And I want to get to the
    other side, too, to be fair. And hopefully, as time goes by, we
    will have a chance to get to the rest of them.
        We have important folks waiting, so I will yield back the
    balance of my time, Mr. Chairman.
        Mr. Conyers. Thank you very much, Ric Keller.
        The Chair recognizes Lamar Smith, Ranking Member of the
    full Committee.
        Mr. Smith. Thank you, Mr. Chairman.
        Mr. Cannon, let me direct a couple of questions toward you.
        If this bill, H.R. 5546, passes, what I want to know is
    what you think the consequences of the bill might be. Which is
    to say, how much--and presumably the rates would be lowered as
    a result of the bill. How are you going to benefit? How are
    consumers going to benefit? Is it going to mean an increase in
    profit to you, or is it going to be lower prices to consumers?
    Who is going to benefit if this bill passes?
        Mr. Cannon. Well, I can tell you, Mr. Smith, right now the
    merchant community, and I believe justifiably so, believe that
    rates today are wildly beyond competitive rates. And if, in
    fact, you got to a----
        Mr. Smith. Could you answer my question, though?
        Mr. Cannon. Yes, sir.
        Mr. Smith. My question is, are consumers going to benefit?
    And if so, why and how?
        And, by the way, I don't mind that you would make more
    profit. I have nothing against profits. But I am just trying to
    get an answer as to who would benefit. Are consumers going to
    benefit from lower prices, or are you going to benefit from
    higher----
        Mr. Cannon. Well, Mr. Smith, in this country, and coming
    from a retail background, as you know, I have seen this every
    day for 10 years. And all I can tell you is, of course
    retailers can't agree what they are going to do or not going to
    do among each other; that would be a violation of the law. But
    I cannot fathom that, as brutally competitive as retail is
    today, that somehow merchants would be able to keep a certain
    amount of benefit, of money, and not see that enter the
    competitive fray. Just knowing what I know about it, to me it
    seems really impossible to fathom.
        However, I will say this. I think that, in terms of how
    this should be viewed, that it is absolutely going to be pro-
    consumer and that these benefits will flow into consumer
    pockets.
        Mr. Smith. Obviously, benefits go to merchants from using
    credit cards. You get instant payment, you get more business,
    you don't have bounced checks, you get timely payment and so
    forth. Why isn't that worth a cent and a half on every dollar?
        Mr. Cannon. Oh, Mr. Smith, you are not going to have
    merchants tell you that there is not a benefit here. You know,
    the credit system today is certainly a benefit.
        Mr. Smith. Right.
        Mr. Cannon. But the question is, it may be a benefit, but
    why are we paying the rates we are paying today? Is it a result
    of a competitive marketplace, or is it a result of an antitrust
    violation and a market failure?
        Mr. Smith. So you don't think you are getting your money's
    worth?
        Mr. Cannon. I think that is an understatement, sir.
        Mr. Smith. Okay, thanks.
        Mr. Floum, let me go to you. The appearance here, with Visa
    and MasterCard controlling 80 percent of the market, is that
    there is not enough competition. At least, that is the optics
    on it.
        Is there a time that you can point to where Visa has
    lowered its rate on a merchant or a group of merchants because
    they threatened to use another credit card or they threatened
    to use cash or they did use cash or they did use another type
    of credit card?
        Mr. Floum. Absolutely, Congressman. There are all kinds of
    examples of where we have lowered rates, particularly to drive
    increased use in certain market segments. Supermarkets, we have
    lowered our rates dramatically. Gasoline, we are lowered our
    rates over time. Utilities, which was not a sector that worked
    for payment cards, we introduced low rates to drive volume.
        Quick-service restaurants--here is an example. We hear
    about how retailers can't live without Visa or MasterCard.
    Well, McDonald's and other fast-food companies did very well
    without credit cards for years and years and years. Now they
    are using them. Why? Because it drives even more benefits to
    those retailers.
        So we have rates that go down, rates that go up--it is very
    complicated--in order to drive usage in particular sectors.
        Mr. Smith. Okay, thank you.
        And can you, Mr. Floum, or can any other member of the
    panel today tell me a breakdown of how interchange fees are
    used? In other words, I have been told that about 13 percent of
    the fees go to processing, maybe 44 percent go to benefits,
    something like that. Is that generally accurate, or can you--
    and the rest would be profits. Can someone give me a breakdown
    on where those interchange fees go and how they are used?
        Mr. Peirez. Congressman, I can try to explain it in a very
    simple way, which is the interchange fee revenue that is
    received by the issuing bank is far, far, far less than the
    fully loaded cost----
        Mr. Smith. What I would like, though, is some specifics. I
    gave you some percentages; are those percentages accurate, or
    are they not accurate?
        Mr. Peirez. They are not accurate because there are no----
        Mr. Smith. Okay. What are the accurate percentages?
        Mr. Peirez [continuing]. There are no direct--from an
    accounting perspective, there is no direct way to equate----
        Mr. Smith. You can't tell me what the cost of processing
    is? You can't tell me what the cost of benefits are, how those
    fees are used?
        Mr. Peirez. What I can tell you is that any individual bank
    that receives the fees can account for it in many different
    ways. But it is their costs of loans, the cost of funds, as you
    heard Mr. Floum say----
        Mr. Smith. Okay, well, what is the average? If you can't go
    by specific--I mean, if you want to go by specific industry,
    forget that. Go by the average. Give me an order of magnitude.
        Mr. Peirez. I would say that you could take the entire
    amount of interchange fees and it won't cover the full cost of
    lending and float.
        Mr. Smith. What part of interchange fees are used for
    processing?
        Mr. Peirez. I don't believe that interchange fees are
    directly used for processing. And I would be happy to walk
    through----
        Mr. Smith. I thought that was one of the arguments made.
        Mr. Peirez. It is one of the arguments that the merchant
    side is making.
        Mr. Smith. So you are saying that none of the interchange
    fees are used to pay for the cost of processing.
        Mr. Peirez. What I am saying is that interchange fees----
        Mr. Smith. Well, didn't you just say that or not? Did I
    misunderstand something?
        Mr. Peirez. No. What I am saying is that the interchange
    fees are used by the issuing banks in order to cover some of
    their costs.
        Mr. Smith. Right.
        Mr. Peirez. Different issuing banks may use it for
    different things, but it ultimately is far exceeded by their
    costs of lending, their cost of float, their cost of credit
    risk assumption, their cost of fraud, as Mr. Floum laid out.
        Mr. Smith. I know I have some more time, because the
    precedent has already been set. So I want to yield Mr. Keller a
    couple of minutes. [Laughter.]
        But having said that, I am disappointed you didn't answer
    my question.
        I will yield the balance of my time, at least 2 or 3
    minutes, to the gentleman from Florida, Mr. Keller.
        Mr. Conyers. Who said you had any more time? [Laughter.]
        Mr. Smith. I was going by the precedent set by my colleague
    from Texas, Mr. Chairman.
        Mr. Conyers. Okay.
        Mr. Keller. I can wait another round, Mr. Chairman.
        Mr. Conyers. Oh, no. Go ahead.
        Mr. Smith. Just 2 minutes.
        Mr. Conyers. Go right ahead, Ric.
        Mr. Keller. Okay.
        Mr. Floum, let me go back to you. You made a statement
    earlier about prior case law said that you guys haven't
    violated antitrust laws. Correct?
        Mr. Floum. Yes, sir.
        Mr. Keller. And, in fact, I pulled the most recent
    decision, the 9th Circuit case of Kendall v. Visa, just handed
    down, March 7, 2008. And you are certainly correct in that. And
    I want to walk through the gist of what that says for our
    nonlawyers.
        MasterCard, Visa and some banks were accused of essentially
    engaging in price-fixing, conspiracy and collusion. And the
    court gave the plaintiffs a chance to amend their complaint to
    be more specific and tell us the details. And they came back,
    and they, after deposing a couple key witnesses, had no
    details, just legal conclusions. And the court said, I am
    throwing it out. It is not enough just to make legal
    conclusions. They said, specifically, tell us who did what to
    whom, where and when?
        Is that a fair summary?
        Mr. Floum. Yes.
        Mr. Keller. Okay. I then pulled the most recent class
    action litigation in the Eastern District of New York against
    Visa and MasterCard. This is a 98-page complaint. You are
    familiar with this certain litigation?
        Mr. Floum. I am.
        Mr. Keller. Well, I decided to spend all night reading this
    98-page complaint from cover to cover, and what I found was, in
    fact, more just legal conclusions.
        And I will give you a quote: They collectively fixed
    interchange fees. These are illegal. MasterCard and Visa, by
    agreeing separately and together to establish and implement and
    maintain a price-fixing scheme whereby they fixed
    supercompetitive credit card interchange fees, nothing more
    than legal conclusions once again.
        Is that a fair summary?
        Mr. Floum. I think that is very fair.
        Mr. Keller. Okay. With that as the basis, let me just ask
    you--and I am going to ask you directly, Mr. Peirez, as well,
    with your high position at MasterCard--Mr. Peirez and Mr.
    Floum, have you ever had conversations, or anyone between
    MasterCard and Visa, where you talked about acting together to
    fix the interchange fee rates at a certain amount?
        Mr. Floum. Absolutely not.
        Mr. Keller. Have you ever conspired with each other or with
    banks to raise interchange fee rates?
        Mr. Floum. No, sir.
        Mr. Peirez. No.
        Mr. Keller. Have you ever colluded either with MasterCard
    or any bank on the planet to set interchange fee rates?
        Mr. Floum. No, sir.
        Mr. Keller. Okay.
        Mr. Mierzwinski, do you have any evidence, in terms of
    disgruntled employees, witnesses, documents, letters, anything
    that would contradict the testimony of MasterCard and Visa that
    they have never engaged in illegal price-fixing, conspiracy or
    collusion?
        Mr. Mierzwinski. The consumer groups don't have anything
    like that. I don't know whether the merchants do.
        Mr. Keller. Mr. Cannon, do you have any specific evidence,
    as requested by the 9th Circuit Court of Appeals, to contradict
    what you heard today?
        Mr. Cannon. Well, Mr. Keller, a couple things about that.
        Number one, the issue here isn't alleged conspiracy between
    MasterCard and Visa. I don't think there are allegations about
    that.
        Mr. Keller. Well, that is actually--that is the issue.
    Trust me, I didn't need my Ambien for this----
        Mr. Cannon. Let me put it this way. From the merchants'
    perspective, the question here that we raise is the
    conversations, agreements, et cetera, between the banks. And
    that is the Visa system and the MasterCard system. And, in
    fact, that is what this legislation is directed to do and
    pointed at doing, is making sure that that negotiation--excuse
    me, the agreement on that side is somehow eliminated and that
    negotiations start with this legislation.
        But the point is, on Kendall, as you know, virtually no
    discovery done on that. Really, a motion to dismiss----
        Mr. Keller. Depositions were taken of MasterCard and Visa.
        Mr. Cannon. I believe that is correct.
        Mr. Keller. All right. Massive amounts of discovery, I
    believe, in New York, at this point. To my knowledge, I don't
    even believe that Visa or MasterCard or the parties in that
    case have even raised Kendall as determinative of--that case
    would have been dismissed----
        Mr. Cannon. I am thinking you are going to see it, down the
    road, raised.
        Mr. Keller. Since you brought up this legislation, you are
    a fan of it, let me ask you this about this legislation. One
    thing is very different in this Conyers bill than the Copyright
    Royalty Board, and that is this: When this three-judge panel
    hears the decision--and let's say it is Mr. Robinson's little
    company versus the big banks and MasterCard and Visa--they are
    bound by what each side makes as their final offer.
        So, for example, if Mr. Robinson says, ``I want the 1-
    percent interchange fee rate that we used to have 10 years
    ago,'' and MasterCard and Visa and the banks say, ``No, we want
    a 5-percent interchange rate,'' that judge panel is required to
    take either 1 percent or 5 percent. He cannot pick something in
    the middle like 3 percent.
        Is that correct?
        Mr. Cannon. He would have to pick whatever comes closest to
    the standard----
        Mr. Keller. But is that a correct statement?
        Mr. Cannon. Yes, sir, absolutely.
        Mr. Keller. Okay. And that is the difference in the
    copyright royalty situation.
        Mr. Cannon. Sure, that the judges on the CRB are
    essentially allowed to make their own decision. The whole idea
    behind the legislation, as I understand it, is you wanted to
    make sure that the fate were still in the hands of the parties.
    And so, therefore, you would assume that perhaps negotiation
    offers would come fairly close to each other. You don't know
    for sure.
        Mr. Keller. I just wanted to clarify that.
        And I will get to other questions later, Mr. Chairman.
    Thank you for indulging us, and we yield back the balance of my
    time for now.
        Mr. Cohen. [Presiding.] The gentleman from Utah?
        Mr. Cannon of Utah. I thank the Chair, but I had to miss
    part of this hearing because I had some War College people in
    my office, and I needed to spend time with them.
        Mr. Issa has been very patient. I would appreciate it if
    you would pass me over and give time to Mr. Issa.
        Mr. Cohen. All right.
        Mr. Issa?
        Mr. Issa. I thank the Chairman since I have the Army War
    College next.
        I think because this is an antitrust Task Force, I should
    start off by full statement. I do know Mr. Cannon. I did sell
    to Best Buy and Circuit in my last profession. And they do hate
    each other, and they do fight bitterly to the bottom. The only
    sad truth is that when they can't make a profit after they have
    beat down the prices, they usually come back to the
    manufacturers or suppliers like myself. So my experience makes
    Steve a friend and an acquaintance sometimes.
        For the rest of the panel, I am sure I would have loved you
    all if I would have been a vendor, equally. [Laughter.]
        Mr. Robinson, I am going to work with you for a moment,
    because I view myself and I view everyone on this dais--we are
    on the board of directors, not the executive committee, but the
    board of directors of the United States of America, Inc. We
    have an absolute responsibility to make sure that we do
    everything we can to maintain the opportunity for America to be
    competitive around the world.
        And the antitrust laws, since the time of Teddy Roosevelt,
    have been all about making sure that America is competitive,
    because in the long run competition makes America do better
    globally.
        I am going to ask you, if you could have the so-called 1-
    percent rate that is available in Spain and you could open a
    bank account in Spain and run your millions of dollars through
    that account at that rate, knowing that it is a global market
    and those funds would be transfered for a de minimis amount
    back into U.S. dollars, would you do that today?
        Mr. Robinson. Yes.
        Mr. Issa. So the absence of a global market in which other
    countries' merchants--the gas station in Madrid--has a lower
    cost of a transaction, even if it is my credit card, my premium
    United Airlines Mileage Plus card, even if it is that card,
    they have a lower cost of transaction than you do. Is that your
    understanding?
        Mr. Robinson. That is my understanding.
        Mr. Issa. Okay. I have a ``no'' next to you from Visa, so I
    want to be fair.
        My understanding is that some countries, many countries
    around the world have set rates, and the rates are lower than
    what Mr. Robinson pays today.
        Mr. Floum. Thanks for the opportunity to respond,
    Congressman.
        Mr. Issa. You are welcome.
        Mr. Floum. The merchants pay a merchant discount rate to
    accept cards. And the merchant discount rate in the United
    States is not higher than many countries in the world. It is
    right about the middle of the pack. The interchange rates have
    been reduced by regulation in certain places like the U.K. and
    Australia. But that, again, is not the price that merchants
    pay.
        So I think Mr. Robinson's, if he did compete with gas
    stations, maybe he does, in other parts of the world, their
    acceptance costs are about the same as his. So it is not the
    case that acceptance costs are lower in other parts of the
    world.
        The interchange rate may be, but, again, that is just an
    indirect cost, not the costs that they merchants pay to their--
    --
        Mr. Issa. I appreciate that, but I never had an indirect
    cost that I didn't consider when I went from my top line to my
    bottom line. Tell me why that doesn't make Mr. Robinson more
    competitive if he is able to avail himself of a lower
    difference between selling price and net cash.
        Mr. Floum. Oh, certainly, Congressman, that would help him.
    Again, but his cost is his acceptance cost, which he pays to
    his acquiring financial institution----
        Mr. Issa. That is now in Spain.
        Mr. Floum. That is what he wants lowered. That is what he--
    --
        Mr. Issa. Right. So he is going to go to Spain, and he is
    going to work out a deal with the Bank of Madrid. And he is
    going to accept people at his gas stations in dollars, okay, on
    U.S. credit cards like mine, but, in fact, it is going to be
    transported back electronically in real time every 2 hours,
    batched, through the Internet, and he is going to receive U.S.
    dollars transfered on a daily basis for the few dollars it
    takes, $10 for a wire transfer, of millions of dollars a day.
        Now, what in the world, in a global market, is he not able
    to avail himself of that? And wouldn't that make him more
    competitive? He thinks it would.
        Mr. Floum. Can we put up the chart on the different
    countries? Because I think that might help, Congressman----
        Mr. Issa. Well, the point, though, is that there is a
    difference in these rates. And, look, I only care about America
    being competitive and markets working. If a market works in
    China or in Australia or in Spain or anywhere in the European
    Union--we are talking about particularly in developed
    countries--and it works more efficiently, in that you accept
    the transaction for less money, and it would make his business
    more competitive or more profitable, whichever, then I think he
    has a right to avail himself of it.
        And that is not what the bill is about. That is one of the
    reasons I haven't signed on to the bill, is I am trying to deal
    with global competitiveness, because that is the
    responsibility--so, as I am trying to dissect this, what I see
    is somebody somewhere gets a better rate, even with my credit
    card today, than he gets.
        And in a normal market--and Steve Cannon, obviously, is
    very aware that the products sold at Circuit City come from
    anywhere in the world and they come de minimisly into the
    United States, as far as exchange fees, if you will, in order
    to give him the absolute best product at the lowest price on a
    global basis.
        My question to you--and I am going to indulge the Chair
    like some of the previous ones, but this is important--is, this
    Committee, as we are considering legislation, regardless of
    whether the draft legislation becomes law, why shouldn't we
    ensure that the most favored price you give to any like company
    is available to his?
        And we are talking about based on a cost basis, not
    necessarily based on your target markets, because target
    markets are kind of a monopolistic thing. Cost and
    profitability tends to be more a free-market-type decision, and
    certainly on a global basis.
        So, as I looked at all these things--and, look, I want to
    be a fan of every one of your interests, and the only way to do
    that is to ask the tough question here, which is, if you could
    work for less in Spain, why can't you work for less for Mr.
    Robinson or for Circuit City or anyone else if, in fact, in a
    normal global market they could simply open a bank account in
    Spain?
        Mr. Floum. Well, Congressman, it is a very important
    question. We are a global company, and it is very important to
    us, as well.
        I apologize. I don't think I have Spain on--oh, I do have
    Spain on this chart. So you can see that, in the United States,
    the overall acceptance costs are slightly higher than----
        Mr. Issa. But what is the lowest one on the far left? I
    can't see it from here.
        Mr. Floum. That says Denmark.
        Mr. Issa. Okay. He is now doing business in Denmark, is in
    a global market---- [Laughter.]
        I got to tell you, he skipped Spain, he went right to
    Denmark. And, by the way, he picked up cheese on a premium with
    every transaction.
        Mr. Floum. Again, the acceptance costs are set by the
    acquiring banks in these different countries. The interchange
    rate is just a part of that. And, for the most part----
        Mr. Issa. But if he went to Denmark and put a bank account
    there, he would do better.
        Mr. Floum. He would do better, in terms of the acceptance
    costs in Denmark, that is correct. But he would do worse than
    in the Netherlands.
        Mr. Issa. And I am going to close out, and I am only going
    to say that I would like to hear just short answers from the
    others.
        When I look at Denmark and I look at--or Belize or anywhere
    in the world, but I will pick Denmark--if everybody in the
    United States today skipped their U.S. bank, went to Denmark
    and said, ``How low will you go in total cost?'', knowing that
    the interchange fee starts off low and knowing that they can
    put hundreds of billions of dollars in transactions through
    Denmark, do any of you believe for a minute that, in fact, you
    wouldn't find banks there willing to operate on an incredibly
    thin sliver to give Mr. Robinson and Circuit City and Best Buy
    and all the other companies a more competitive rate when they
    are trying to offer the lowest price to the consumer?
        I will give you all the time to answer, and then that is
    it. I have run out of time to ask.
        Mr. Floum. I can't argue your point, Congressman. But if
    you look at Australia, which I believe is on--maybe it is not--
    or the U.K., where there has been regulation, consumers are
    paying more on the other side of the equation. So interchange,
    in part----
        Mr. Issa. That is why I am going to Denmark.
        Mr. Floum. Okay. Well, in Denmark, we have to look at what
    consumers pay in Denmark.
        Mr. Issa. Yes, sir?
        Mr. Peirez. Sir, what you will see, Congressman, is, if, in
    fact, all the U.S. merchants started contracting with a bank in
    Denmark in this scenario, what you would see is U.S. consumers
    paying more on their cards, you would see less cards made
    available to U.S. consumers, you would see rewards or other
    benefits go away from any of those consumers, you would see the
    period of float time go away or be charged for, you would see
    interest rates increase, and many other things which are
    detailed as a result of exactly what happened in Australia in
    the study I have submitted with my testimony.
        So, yes, for a short period of time maybe it would appear
    like things are doing better, but the long-term impact would
    ultimately be that you would end up in a situation where credit
    cards here--and if you look at all these markets that are on
    Mr. Floum's chart, this is the one market that has the most
    robust, competitive marketplace for cards, the most consumers
    benefits and the best products available, the most diverse set
    of products.
        So I think it is very important not to just look at one
    piece of the equation and say, ``Well, that fee would be driven
    down.'' There would be consequences, and we are seeing them
    play out in some markets today.
        Mr. Issa. Mr. Blum?
        Mr. Blum. Thank you, Congressman.
        I think, in your example, as a Federal credit union not
    authorized to operate in Denmark, I would lose significant
    market share and membership and, you know, the member services.
    I certainly wouldn't applaud or encourage any of my members to
    move away from me, to move overseas.
        And my only concern here would be the currency transactions
    fees, the volatility of the currency market, what might happen
    switching their U.S. dollars to the Danish krone and back to
    U.S. dollars multiple times.
        Mr. Issa. Mr. Cannon?
        Mr. Cannon. Mr. Issa, I believe that merchants in the
    United States would be delighted to take the Denmark rate
    today.
        Mr. Mierzwinski. One point that hasn't been made yet, Mr.
    Issa, is that the credit card industry is the most profitable
    form of banking by far. And that is according to the Federal
    Reserve, not me. So I think the banks could absorb this. And I
    think if the merchants went to Denmark, they would figure out a
    work-around.
        But right now, consumers in the United States are paying an
    awful lot for their credit cards, whether or not they get these
    so-called rewards.
        Mr. Issa. Well, thank you.
        And thank you, Mr. Chairman.
        I very much believe that we need to make sure that we
    maintain a robust and efficient system in the U.S. So lest
    anyone think I am inviting them to move their dollars offshore,
    I am not. But I do want to make sure that all of us realize
    that USA, Inc., has to be the most competitive in the world.
    And that is a goal, I think, of all of us on the dais.
        And, with that, I yield to the gentleman from Florida for
    another 2 minutes. [Laughter.]
        Mr. Keller. I will let the gentleman from Utah go, and then
    if we do another round of questions, I will take it afterwards
    and seize one of them, the principals here. But thank you, Mr.
    Issa, for yielding. I do have some questions, but I will let
    him go first.
        Mr. Cohen. Mr. Cannon?
        Mr. Cannon of Utah. I think, Mr. Chairman, that is the last
    time I am going to defer to Mr. Issa. [Laughter.]
        Not because his concerns are not interesting, but because
    other matters press on us all.
        Mr. Peirez, you were talking about all the competitiveness
    and the options that we have in the American market, and that
    is true. But it is not because of the interchange fee or the
    way we regulate it as opposed to other markets. It is because
    America is a more robust place to do business. So we actually
    really want to keep that environment where we are.
        But you listed a series of fees that are going to go up.
    There is a dramatic difference between the fees you just
    listed--and I think others, Mr. Floum and others, have talked
    about those fees--and the interchange fee. That is, if you are
    going to add a fee on a credit card, the person who decides to
    use that credit card will understand those fees because they
    are explicit, as opposed to the interchange fee, which, really,
    nobody ever gets to talk about.
        Isn't that the case?
        Mr. Peirez. Thank you, Congressman. I think that is a very
    important question.
        I think that whenever a consumer goes to a merchant and
    uses any form of payment, there are costs inherent in----
        Mr. Cannon of Utah. But please just answer the question.
    The question is, is there not some benefit from having explicit
    costs versus hidden costs?
        Mr. Peirez. Again, Mr. Congressman, I don't believe there
    are hidden costs. I believe that when a consumer goes to a
    merchant and chooses how to pay for a good or service, there
    are many costs involved. And I think as Mr. Floum stated
    earlier, it is our belief that many other forms of payment,
    like using a card from the retailers, American Express----
        Mr. Cannon of Utah. Pardon me. Let me just get in here,
    sir. You listed a series of alternative costs that could be
    imposed on that transaction. The one thing that is very
    consistent about those alternative costs is that they are
    understood, or at least available for understanding, by the
    consumer. Whereas, the consumer has no idea about what or how
    much the interchange fee is, and he has no way of accessing
    that, and the merchant has no way of negotiating that. That is
    a hidden cost.
        But regardless of the term we are using here, is there not
    something better about costs that are more transparent?
        Mr. Peirez. We absolutely have no problem with transparency
    and encourage merchants to go ahead and tell consumers exactly
    what those costs are for them when they are making----
        Mr. Cannon of Utah. And when did you start encouraging
    merchants?
        Mr. Peirez. We have always allowed that. We have never----
        Mr. Cannon of Utah. You have always allowed that? Did you
    have a practice of telling merchants they can't offer cash
    discounts, they can't tell what the cost is?
        Mr. Peirez. We do not have a practice----
        Mr. Cannon of Utah. Ever?
        Mr. Peirez. Ever.
        Mr. Cannon of Utah. We had a panel some time ago where two
    merchants were surprised that that was the case, because they
    had been told somewhere in the system--is it Visa that is doing
    that, and not you guys?
        Mr. Peirez. I honestly don't know what Visa does. You can
    ask Mr. Floum.
        But I can say that we do not and have not disallowed
    discounts for cash. We were surprised to hear that merchants
    actually thought they couldn't do it, and we are encouraged now
    that we can tell them they can.
        Mr. Cannon of Utah. Thank you.
        You said in your earlier testimony that--you talked about
    several things that you are making public, like you are posting
    rates on your Web site, you are publishing ``more and more,'' I
    think was the term you used, of your rules.
        When did you start doing that?
        Mr. Peirez. Well, we have always, again, permitted the
    banks that contract with merchants to provide the merchants
    with----
        Mr. Cannon of Utah. No, no, no. I am asking--you took
    actions that you touted a few minutes ago----
        Mr. Peirez. About 4 years ago was the first time that we
    did it.
        Prior to that time, we had a rule that required the banks
    that contracted with merchants to provide the rules to those
    merchants in their merchant agreements. We were made aware by
    merchants that they did not feel that they had access to those
    rules. So 4 years ago, we published what we believe to be the
    set of rules that were covering merchants.
        We were told by merchants and asked by merchants for other
    things, which we have now published. And we are now going to
    publish all of our operating rules and are in the process of
    doing so.
        Mr. Cannon of Utah. Good. And when did you ramp up the rate
    at which you began publishing?
        Mr. Peirez. Well, we have published the first set 4 years
    ago. We published another set about 3 or 4 months ago. And then
    we have been starting, in recent days, to now get the rest of
    the materials ready to be published.
        Mr. Cannon of Utah. And when did you start publishing your
    fees?
        Mr. Peirez. We started publishing the fees in the fall of
    2006.
        Mr. Cannon of Utah. Good. I think the discussion over this
    bill and in the direction of the bill has actually had a
    salubrious effect on the transparency of this market. We
    appreciate that.
        Mr. Floum, I just wanted to be fairly clear. You have been
    very clear and very consistent in talking about your fees and
    those fews--the percentage of that fee has been stable over the
    last 10 years. During that same period of time, the amount of
    transactions has skyrocketed.
        Mr. Floum. Yes, sir.
        Mr. Cannon of Utah. And, therefore, the gross income, the
    revenue, has skyrocketed.
        Mr. Floum. Yes, sir.
        Mr. Cannon of Utah. And at the same time, virtually all
    other electronic transaction processing fees have plummeted. So
    I suspect that the actual cost of accounting for the
    transaction--that is, processing the transactions--has become a
    lesser part of the interchange fee, has it not?
        Mr. Floum. Again, Congressman, the rates have remained the
    same, and the value of those products has increased
    exponentially----
        Mr. Cannon of Utah. But you have contractors out there,
    Visa, I believe, has contractors out there who process
    transactions.
        Mr. Floum. We process them over VisaNet. We own many
    computers, and we have a----
        Mr. Cannon of Utah. But you also have subcontractors out
    there that do--I got approached last weekend by somebody who
    does it and was concerned about the effect of this bill. So you
    have other people that actually perform services for you.
        Mr. Floum. On the card-issuing side and on the acquiring
    side, there are many third-party processors, yes.
        Mr. Cannon of Utah. So what do they do in relationship to
    what Visa does as its processing?
        Mr. Floum. Well, we are the central switch, so the
    transaction between the acquiring bank and the issuing bank,
    that is what we do, we switch the transaction and we settle
    between those two banks.
        Mr. Cannon of Utah. Okay. So the acquiring banks or the
    merchant banks have processors that prepare information for
    you, and then they take it to your central process.
        Mr. Floum. Well, for example, First Data is a large
    merchant processor, yes.
        Mr. Cannon of Utah. And there are also some small merchant
    processors.
        Mr. Floum. Yes, sir.
        Mr. Cannon of Utah. Have the costs that those people have
    been reimbursed, First Data or smaller operators, have they
    declined?
        Mr. Floum. I need to answer your question directly. It
    really depends on the type of transaction. For a standard
    transaction, perhaps. But they are much more complicated today,
    with automatic authentication, clearing settlement, fraud
    control, verification of the risk and so forth. So I can't say
    that, in all instances, it has gone down.
        Mr. Cannon of Utah. But has it had a tendency to decline?
        Mr. Floum. If you are looking at it as just a scale
    business, you could make that argument. But, again, because it
    is a different product and service, I don't think that is an
    apt analogy, with all respect.
        Mr. Cannon of Utah. Well, in other words, you have more
    service involved. You have a better product, a higher-quality
    product that is happening, and so there is some tendency to
    raise the value because of that quality.
        But you are not suggesting--I mean, you are having a hard
    time saying this, but, in this regard, almost all prices have
    been falling where you have had automated transactions.
        Mr. Floum. What we have done in recent years, Congressman,
    is we have paired together our products and our processing
    services. They are one. And so, to that extent, I can't say
    that the cost has declined, just because of all the added value
    that comes with the product and the processing sevrices.
        Mr. Cannon of Utah. Of course, price declines tend to occur
    more readily where there is competition and transparency. I
    don't think there is any question about that.
        The record ought to note that Mr. Floum has nodded in
    agreement.
        Mr. Floum. I agree with you, Congressman.
        Mr. Cannon of Utah. Thank you.
        Mr. Chairman, I am not sure where we are on the light. Has
    it gone red and off?
        Mr. Cohen. Your light never goes off, sir. [Laughter.]
        Mr. Cannon of Utah. The problem is it doesn't go on either,
    right? [Laughter.]
        Let me just ask one other question to Mr. Floum and
    probably also to Mr. Peirez.
        One of the principal complaints about H.R. 5546 is that it
    is a price-control bill. If we amended the bill to remove the
    three-judge panel but still kept the antitrust exemptions in
    it, maybe adjusted those a bit, for the merchants and banks to
    negotiate the interchange terms, would that be acceptable to
    you?
        Mr. Floum. We would have a problem with imposing an
    antitrust exemption, because the merchants----
        Mr. Cannon of Utah. It would not be imposing; it would be
    allowing an exemption to people if they wanted to get together
    and negotiate.
        Mr. Floum. And today they can get together and negotiate,
    Congressman. And there are many examples of that, and I have
    cited several of them, the----
        Mr. Cannon of Utah. But my question was not what they are
    doing now, but if we change the law and allowed them to
    negotiate as a group, is that something that would remove your
    opposition to this bill?
        Mr. Floum. We would certainly--it would certainly improve
    the bill. We would need to study the antitrust exemption.
    Again, the negotiation is basically between the merchant
    community and the acquiring community, and I have seen----
        Mr. Cannon of Utah. But that is because the interchange fee
    is outside the scope of the acquiring community. Isn't that
    right?
        Mr. Floum. Acquirers can negotiate interchange with
    issuers, and often do.
        So what we do is we set default interchange rates. We allow
    negotiation of those rates. Those rates are frequently
    negotiated between issuers and acquirers. The default rate
    protects people like Mr. Blum, the small credit unions, who
    aren't able to effectively negotiate in the same way that the
    larger financial institutions can.
        Mr. Cannon of Utah. How many institutions actually
    negotiate? I suspect that Wal-Mart does. How many others
    actually effectively negotiate that?
        Mr. Floum. Well, the acquirers that have business
    relationships with large merchants or large groups of small
    merchants negotiate with issuers over the interchange rates in
    return for driving volume toward that particular card program.
    It happens all the time, Congressman.
        Mr. Cannon of Utah. Are there any of your thousands of Visa
    banks, or any of your thousands, Mr. Peirez, of your MasterCard
    banks, that offers a published interchange rate that is lower
    than the rate that is set by Visa and MasterCard?
        Mr. Floum. A published merchant discount rate? I am not
    aware of any that are lower than interchange. I am aware of
    many that are very, very close to the interchange rate, such as
    the NACS, which is interchange plus 6 cents.
        Mr. Cannon of Utah. Thank you.
        Mr. Peirez, could you answer that question also, the prior
    question that I had asked Mr. Floum?
        Mr. Peirez. Sure. We would definitely see an improvement in
    the bill were it to remove the price control setting by the
    three administrative law lawyers.
        But as far as antitrust exemption goes, I will simply quote
    from the Modernization Commission as to why we would still have
    a problem with that, which is that, ``They should be
    disfavored, and they should be granted rarely and only where it
    is necessary to satisfy a specific societal goal that trumps
    the benefit of a free market to consumers and the U.S. economy
    in general.''
        So it is not that you offer an antitrust exemption,
    according to the Modernization Commission, to deal with an
    antitrust problem. It is that, in fact, you offer an antitrust
    exemption in lieu of, and in fact to the detriment of, what the
    antitrust laws would otherwise enforce. So it is our belief
    that----
        Mr. Cannon of Utah. That balancing act would sort of be
    implemented by a vote of the House and the Senate.
        Mr. Peirez. Sure, absolutely. And we think that, from our
    perspective, what that would do is harm competition and harm
    consumers. Because, whether the prices went up or down as a
    result of that, when we set our default interchange rates, we
    do so to maximize the output of our system. We do it to
    increase the number of merchants that accept our cards. We do
    it to increase the number of cards that are issued. And we do
    it to increase consumer usage of our cards. And we think we are
    doing it incredibly effectively and legally today.
        Mr. Cannon of Utah. Isn't all of that done within--I am not
    anti-profit. I love profit. I think you guys should be
    profitable. But isn't all that done within--the three things
    you just stated are done in the context of how you optimize
    your profit. So you say, how do we continue to grow, et cetera,
    while still making the most profit.
        Mr. Peirez. Absolutely. And legally.
        Mr. Cannon of Utah. That is a unilateral decision in a
    marketplace that has no way to affect that portion of that
    decision.
        Mr. Peirez. We make a decision as to a default rate. It is
    not unilateral, in the sense that there are many, many actors
    who choose to participate or not participate or to go to Visa
    or to American Express or to PayPal or to many other payment
    systems that are available, many new ones that are coming out.
    So it does not exist in the abstract and standing alone. There
    are many competitive forces that play into how we set those
    rates.
        Mr. Cannon of Utah. Do you have any banks that actually
    publish an interchange rate that is different from the default
    rate?
        Mr. Peirez. I am not aware of any banks that publish any
    interchange rates. But I am aware of banks that have negotiated
    interchange rates in connection with cobranded cards, in
    connection with ``on-us'' traffic, in connection with many
    other instances.
        I would be happy to sit down with your office and go
    through many examples that are confidential and I would not
    want to speak about in depth here.
        Mr. Cannon of Utah. Let me just ask--before I yield back
    the vast amount of time remaining, I think that--Mr. Keller,
    did you want me to yield a couple of minutes to you?
        Okay, then I yield back.
        Mr. Cohen. Thank you.
        Does the lady from Texas seek recognition?
        Ms. Jackson Lee. I do.
        Mr. Cohen. You are recognized.
        Ms. Jackson Lee. I thank the gentleman.
        And I thank the witnesses.
        Let me just focus on two lines of questioning, if I might.
    Mr. Floum--and I won't--if Mr. Peirez and Mr. Blum want to
    answer--if you would answer this question: If interchange
    tithes do not generate profit to the credit card companies,
    what purpose do they serve?
        Consumers are paying for the convenience of many credit
    cards, with the security protections, et cetera. We understand
    that. I think I have said that on the record before. Should
    consumers have to pay extra to pay for a good, functioning
    credit card or a good usury that a credit card may have? I
    would just put that on the table.
        Mr. Cannon, can you give us a sense of how final-offer
    arbitration works in the private sector today and how you
    expect it to work under the context of the new legislation? In
    light of that system, do you view the legislation as Government
    price controls?
        Let me yield to the three gentlemen who might want to
    answer about the interchange fees. I think in your testimony
    you have been representing that they are not profit. Then what
    are they?
        And maybe I have missed it; maybe you have already conceded
    that you are willing to engage in the kind of marketplace
    negotiation that would give relief to these retailers.
        Mr. Floum. Congresswoman, thank you for the question.
        We are absolutely willing and eager to negotiate, as I have
    said before, at any time. My phone line is always open, as are
    our merchant representatives.
        Interchange, again, is not----
        Ms. Jackson Lee. And would that mean that you would bring
    the interchange fee down if Mr. Robinson asked you, along with
    a number of others?
        Mr. Floum. We would certainly negotiate with anyone about
    driving volume to Visa in return for lower rates, absolutely.
        Now, with respect to the interchange question, again,
    interchange is not revenue to Visa. And we don't set it with
    the purpose of making profits to Visa. It doesn't come to Visa
    or Mastercard. It goes to the issuing bank----
        Ms. Jackson Lee. Well, and I think one of the elements is--
    and I appreciate what you have said, and that is on the record,
    and we will be posing these serious questions to banks. But
    allow me to just ask you the question, from your perspective,
    it is profit, is it not, to the banks? I mean, you can continue
    to answer, but someone is gaining a profit.
        Mr. Blum. Congresswoman, perhaps as a credit union, I can
    give you an example in Chartway.
        I placed in my testimony that I did 14 million transactions
    last year, that it is not a windfall; it is not, in fact, a
    profit. You will see in my written testimony that I named it at
    24 cents per transaction.
        And that is net of some of my costs that, you know, we
    didn't include. We didn't include in that net, if you will,
    return to our shareholders or our members the cost of
    marketing. We didn't include in that the cost of brand repair
    when there is a compromise, when our members go out and attempt
    to use their credit card at a restaurant and it has been closed
    because there has been a tragic, you know, large data breach,
    and in order to protect a relatively small financial
    institution I have had to block a card. My members didn't
    recall that to be T.J. Maxx or to be B.J.'s. It was,
    ``Chartway's card was closed,'' or, ``Chartway did that,'' or,
    ``Chartway did this.'' They expect a card to work when they
    want to use it, 24/7. Some of those costs associated with that
    pull into that 24 cents.
        More importantly, years ago, those 14 million transactions
    equate to a little over $500 million that was transacted
    electronically in 2007 for Chartway. If we take it bank 10
    years to when it was a check system, and prior to this larger
    surge 20 years, Chartway would have enjoyed 2 more days, on
    average, of those funds to be in our institution, where I could
    invest them at an overnight rate. The immediacy of that payment
    system, that interchange recovered for me, if you will, a
    small, a relatively small portion of what I lost by immediately
    debiting those funds and moving them out of my----
        Ms. Jackson Lee. And, you know, we have worked with credit
    unions. Are you suggesting to me that there is no profit that
    you gain through the interchange fee?
        Mr. Blum. There is an advantage. I mean, as a credit union,
    I don't use the word ``profit.'' You know, I am able to----
        Ms. Jackson Lee. But it goes back into your shareholders.
    You must be getting something from----
        Mr. Blum. It certainly goes back in higher dividends and a
    lower loan rate----
        Ms. Jackson Lee. Right.
        Mr. Blum [continuing]. So there are extended services. So
    there are advantages.
        Ms. Jackson Lee. Well, would you be willing to sit down and
    negotiate in the marketplace a response to the interchange fee
    and lowering it?
        Mr. Blum. In negotiating in the marketplace, as a credit
    union, again, we are not staffed to be in that position to go
    out and work what I would perceive to be a rather extensive and
    ongoing ``who are we going to meet with today.''
        Again, our service focuses on our membership. We need these
    credit and debit cards in order to compete with larger
    financial institutions. And I would poll the Committee: How
    many Committee Members would do business with a financial
    institution as their primary institution if that institution
    could not provide them credit or debit card services?
        Ms. Jackson Lee. I appreciate that.
        Let me move quickly to Mr. Cannon. And, Mr. Peirez, I am
    not going to leave you out, and I will let you finish last.
        Mr. Cannon, I asked you a question. Do I need to repeat it
    for you, or are you----
        Mr. Cannon. Sure, I guess the question is, as I recall, the
    benefits of the arbitration, how it would work or how this----
        Ms. Jackson Lee. How it works today and how it will work
    in----
        Mr. Cannon. Sure.
        Ms. Jackson Lee. It has been described as being onerous and
    burdensome.
        Mr. Cannon. Well, I can't fathom that. Mr. Floum talked
    about negotiation with subpoenas. I don't think we are reading
    the same bill, because that has nothing to do with it. If, in
    fact, negotiation is successful, that is the end of it and
    there is no proceeding. And they understand that.
        This whole process is known, as you know, Congresswoman, as
    baseball arbitration, which just says, the parties, all having
    negotiated, if they can't come to an agreement, then they just
    simply each decide a final offer. And then you give this panel,
    in this particular legislation, the authority to make a
    decision using a standard as to, essentially, which offer comes
    closest to a competitive market rate.
        That is not very hard to understand. I think it is going to
    be simple to administer. And I will tell you, the great thing
    about it, I think it will get the parties together, because
    they will all understand what will end up being a competitive
    rate.
        Ms. Jackson Lee. Mr. Peirez?
        Mr. Peirez. Thank you, Congresswoman. I guess I am going to
    answer the first question that you had asked about the profit?
        Ms. Jackson Lee. Yes, sir.
        Mr. Peirez. What I can say is the interchange fees are
    absolutely revenue to the banks that receive them and the
    credit unions that receive them. As to whether they are profit,
    of course, you would have to look at all of their revenues and
    all of their costs.
        If you took just interchange revenue, took all other
    revenue out, and looked at that relative to the costs of
    running the card businesses that the banks run, they would not
    have a profit, they would have a loss, because their costs of
    running it far exceed the interchange revenue.
        And the perfect example of that is the fact that, for
    American Express to run this system themselves, they charge a
    higher fee to merchants than our system does, because they use
    that money to subsidize the running of their card business.
        And when merchants run their own card systems, it costs
    them much more than it costs them to take our cards, which are
    much more cost-effective for them and consumers than the cards
    that they issue directly to consumers, which is why they have
    ended up using our systems or co-branding their existing cards
    with our systems or outsourcing the management of their card
    programs to the banks that run our card systems.
        Because, between lending, credit-risk-worthiness
    determinations, monthly compliance requirements, and
    statementing and the like, acquiring new accounts, looking at
    losses, costs of funds and all the other costs that are
    associated with running a card program, they are far in excess
    of what is received on interchange revenue.
        So, yes, card businesses are profitable, and, yes,
    interchange fees are a component of the revenues that are added
    up to make them so, but that profitability is also competed
    away every day when American consumers receive the vast away of
    product offerings that they can choose from from a credit union
    like Mr. Blum's up through the largest banks in the country.
        Ms. Jackson Lee. Well, I would just ask that you submit for
    the record a total of those fees that you have just represented
    orally, that I think you indicated that the cost of the card
    itself, what the card company has to expend, or the bank.
        Mr. Peirez. We can provide you some averages, and
    particular banks would have to give you their specific numbers.
        Ms. Jackson Lee. But if you could bring it on the----
        Mr. Peirez. We can give you what we have.
        Ms. Jackson Lee [continuing]. Card, I would greatly
    appreciate it.
        I do believe, again, to close, that the 671 million cards
    and $1.7 trillion revenues, whether it is merchants, cards,
    and/or issuers, which are the banks or credit unions, that we
    can find some way to resolve what I think has come about
    because of the status of our economy. We have to find relief.
    And, frankly, I welcome your discussion on this point.
        And I yield back.
        Mr. Cohen. Thank you.
        The gentleman from the State of Florida and Vanderbilt
    University?
        Mr. Keller. Thank you very much.
        Mr. Floum, I did go to Vanderbilt Law School. I was this
    close to going to your alma mater, Harvard Law. That is how
    thick my rejection letter was, if I can recall. [Laughter.]
        But I was very happy to stay in Tennessee.
        Mr. Floum. Isn't Harvard the Vanderbilt of the East?
        Mr. Keller. Something like that.
        Let me ask you, Mr. Floum, about market share, because we
    have heard that. I went and pulled the Forbes magazine and the
    Nielsen Reports, and it says that the market share,
    collectively, of Visa and MasterCard is 75 percent, with Visa
    at 44 percent and MasterCard about 31 percent.
        Does that seem right to you?
        Mr. Floum. If you are just talking about cards, that sounds
    accurate.
        Mr. Keller. Okay. So we have a market share of 75 percent
    with you two; also, AmEx, 20 percent, according to them; and
    Discover, 5 percent.
        Visa does set the default interchange rates, is that
    correct?
        Mr. Floum. Yes, sir.
        Mr. Keller. What is the single lowest default interchange
    rate available right now from Visa?
        Mr. Floum. I believe it is around 1.2 or so. I might be off
    a little bit, Congressman, but that order of magnitude, in the
    supermarket sector, would be one of our lowest rate.
        Mr. Keller. Mr. Peirez, what is the single lowest default
    interchange rate currently set by MasterCard in the supermarket
    sector?
        Mr. Peirez. Solely in the supermarket sector?
        Mr. Keller. Yes, sir.
        Mr. Peirez. It is around that 1.2----
        Mr. Keller. 1.2. Is that a coincidence, that MasterCard and
    Visa both have 1.2 percent as their single lowest default
    interchange rates in the supermarket sector?
        Mr. Peirez. I think it is competition, just like if you go
    to the corner and there are four gas stations, they are all
    going to charge the same price for a gallon of regular.
        Mr. Keller. And what if, tomorrow, Visa decides to go to
    1.3 percent as their single lowest default interchange rate for
    supermarkets, what would be the response of MasterCard?
        Mr. Peirez. We would have to carefully consider whether we
    had an opportunity to drive more volume by not changing our
    rates or by lowering them. We would look at it similar to the
    way we did in the gas cap situation, where we said, you know,
    there may be an opportunity for us here. We would have to take
    a look at other competitive factors like what American Express
    is charging in that segment, whether ACH is gaining traction.
    There are multiple other factors.
        Mr. Keller. Okay. If that is the case, you look at the
    competition and you know that Visa is charging a 1.2-percent
    default interchange rate for the supermarket sector, why don't
    you lower yours to 1.1 percent to take competitive advantage of
    the lower rates?
        Mr. Peirez. Again, where we think we can do that, as we did
    with the gas cap, we do. We have also recently--when you say
    the lowest rate, it is going to depend on the transaction size.
    But for gas, for example, if someone does fill up an SUV, for a
    $90 tank, that may well be our lowest rate. We have a 75-cent
    flat-fee rate published, I believe, for----
        Mr. Keller. All right. Let me get to some more things here.
    I appreciate that. And I will stick with you, Mr. Peirez,
    because I want to give you a chance to talk about some other
    stuff. I have been asking Mr. Floum a lot of questions here.
        If, over at Rotten Robbie, Mr. Robinson decided to place a
    sign next to his cash register and says, ``If you use cash, we
    will give you a discount on some of the items here,'' would he
    be allowed to do that?
        Mr. Peirez. Yes.
        Mr. Keller. Would he be able to provide a discount if his
    customers used a debit card discount over the credit card?
        Mr. Peirez. Under our current rules, I believe not.
        Mr. Keller. And why is that?
        Mr. Peirez. Because we do not allow our form of payment to
    be discriminated versus others in the electronic space. On the
    cash side, we have always allowed and continue to allow the
    discount for cash. But when it comes to between different
    electronic forms, we do not allow that.
        Mr. Keller. Would he be allowed to put a sign there in
    front of his cash register that said, ``Please use your debit
    card instead of your credit card''?
        Mr. Peirez. Yes.
        Mr. Keller. He would.
        Mr. Floum, do you concur in that? Would he be able to first
    have a sign that says he can offer a cash discount?
        Mr. Floum. Absolutely, Congressman.
        Mr. Keller. Would he be able to have a sign that says he
    can offer a discount over the credit cards if you use your
    debit card?
        Mr. Floum. Yes. Under our rules for pin debit, he could
    also offer a discounted price.
        Mr. Keller. Okay.
        You have said that you don't think that the retailers would
    pass along their savings if they did get a lower interchange
    fee. Is that correct?
        Mr. Floum. That is what the evidence would suggest, yes,
    sir.
        Mr. Keller. The evidence in Australia, correct?
        Mr. Floum. Yes, and also in a litigation settlement,
    interchange rates were lowered, the Wal-Mart settlement, and
    there was no passing along of those increased retailer profits
    to consumers.
        Mr. Keller. All right. I would think Wal-Mart would think
    they offer a pretty good deal. I mean, they are doing pretty
    well. But we will let them speak for themselves; they are big
    boys.
        Mr. Robinson, you heard that you are not going to pass
    along any of the savings to your consumers. Let me just ask you
    point-blank, if you have a favorable result, either through
    legislation or litigation, where you pay lower interchange
    fees, are you going to pass along the savings to consumers, or
    are you going to take all the money and put it in your pocket
    as additional profits?
        Mr. Robinson. Petroleum retailing is a fiercely competitive
    business. Generally when costs go up, generally when costs go
    up, we increase our prices. And generally when costs go down or
    benefits increase, we pass those along to the consumer also.
        Mr. Keller. Let me just be crystal-clear. Let's say you are
    paying 2-percent interchange fees now, and the Conyers bill
    passes, and you go to the arbitrator, and the arbitrator says,
    ``I agree with 100 percent with Rotten Robbie, and it is going
    to be 1 percent,'' will Rotten Robbie customers get a discount
    when they go to buy donuts or gasoline or Coca-Cola as a result
    of that taking interchange fees from 2 percent to 1 percent?
        Mr. Robinson. Well, I don't think the marketplace works
    exactly like that.
        Mr. Keller. But your whole argument----
        Mr. Robinson. But, ultimately, ultimately, the answer to
    your question, the consumer will benefit.
        Mr. Keller. Okay. That is the $64,000 question, because
    your whole argument is you want lower interchange fees because
    it is better for consumers. And so that is why I want to give
    you the chance. He is saying it is not going to benefit
    consumers. Is it going to benefit consumers or not?
        Mr. Robinson. There is not a businessman that doesn't
    attempt to keep the margin. But the competition always drives
    it back out. And when you have a competitive market--and we
    definitely have a competitive market, unlike some others--those
    benefits will go back to the consumer.
        Mr. Keller. All right. My time has expired. Let me just
    give you one last question. You said over and over you are a
    businessman and not a lawyer, and I really respect that. But I
    am going to ask you sort of a legal question here anyway.
        And that is, when you look at this lawsuit, one of the big
    things in bold that you see is ``jury trial demanded.'' And
    there is a reason for that, as someone who spent many years as
    a litigator, often on the side of the big companies, in the
    interest of full disclosure. But the little guy wants to have a
    jury. Often, the big guys would rather not have a jury; they
    would rather have a judge or an arbitrator and other folks, so
    you don't have the possibility of massive, inflated verdicts
    from emotion and that sort of thing. And there are always
    exceptions, but that is the general rule.
        You are seeking legislation that is going to put you in
    front an arbitrator that is binding, not a jury. And, in fact,
    if you say you want a 1-percent fee and Mr. Floum's Visa client
    says, no, we want 5 percent, you are taking a real risk that
    this binding arbitrator may go with his side.
        Are you comfortable taking that gamble and putting yourself
    in that forum, as opposed to the jury trial situation?
        Mr. Robinson. The short answer is yes.
        As we looked at the problem in trying to do something about
    the anti-competitive behavior of Visa and MasterCard, we looked
    at the various options. We looked at the option of breaking it
    up like AT&T. We looked at it dealing with it like a utility.
    And we felt that this was a competitive marketplace solution
    that, quite frankly, we might not do better with.
        I have a hard time believing that we will not.
        Mr. Keller. But the gist of it is you are willing to take
    that gamble?
        Mr. Robinson. Yes.
        Mr. Keller. Okay.
        Issues have been raised about whether or not you have
    bargaining power. Have you ever worked with a merchant bank
    that was willing to negotiate a lower interchange fee rate?
        Mr. Robinson. No.
        Mr. Keller. Have you ever attempted to negotiate a lower
    interchange fee rate with a merchant bank?
        Mr. Robinson. We don't even know who to talk to. So, no, to
    answer your question, no.
        Mr. Keller. Well, your own bank you can talk to, right? I
    mean, the acquiring bank you can talk to?
        Mr. Robinson. Yes. And we negotiate--the acquiring bank, we
    negotiate processing. And it is interesting, on the processing
    side, that is fiercely competitive. I mean, it is amazing how
    aggressive the processing banks. So you have a processing
    rate--and they have negotiated a processing fee, and that has
    come down because of competition.
        Mr. Keller. So you are able to negotiate with the banks, in
    terms of the acquiring bank, lower processing fees. But you are
    not sure who to talk to in terms of the issuing bank,
    negotiating lower interchange fees. Is that a fair summary?
        Mr. Robinson. Yes. We do not negotiate interchange fees.
        Mr. Keller. Have you ever tried to negotiate with Visa or
    MasterCard, in terms of getting them to set lower interchange
    fees?
        Mr. Robinson. It is not--I mean, it is not an option.
        Mr. Keller. You are sitting right next to two pretty big
    players, and they said they are going to talk to you. Do you
    feel any optimism? Are you going to try?
        Mr. Robinson. I can't wait for this hearing to be over, to
    do that.
        Mr. Keller. Okay. You have heard the criticism from
    MasterCard and Visa saying that this is price control, because
    you are having the three-judge panel set the rate. Some folks
    think it is only price control if you are having the
    Government, itself, or bureaucrats set the rate or Congress.
    But they would dispute that. But others may think that you are
    living under a price-control system now, since you have these
    two companies with a 75-percent market share, and they are
    telling you, here is the default interchange rate that they are
    giving to the banks, and take it or leave it.
        Do you feel that you have a price-control situation now?
    And if you feel that it is not price controls under the new
    scheme, tell me why.
        Mr. Robinson. I would basically call the existing system a
    price-fixing system, not necessarily a price control. But the
    result is effectively the same. So that is the existing
    situation.
        And I think that when you set up an opportunity to provide
    for the parties to negotiate and yet you have something that
    holds their feet to the fire, that at some point in time they
    can't just stonewall the negotiation process, I consider that a
    competitive system.
        Mr. Keller. Mr. Floum, let me go back with the bargaining
    power and negotiation issue. You have heard, essentially, that
    the little guys can negotiate with the acquiring banks to get
    lower processing fees, at least in the mind of Mr. Robinson. Do
    you think that is a true statement, they do have the power to
    at least negotiate with the acquiring banks?
        Mr. Floum. Absolutely. And I believe they are charged a
    single fee for acceptance. The processing fee is a component of
    that. But, yes, absolutely, they can bargain with their
    acquirer.
        Mr. Keller. My next question is, I come into Rotten Robbie
    and I use my credit card, which I think is the local credit
    union here in the building. Does he have the ability to
    negotiate a lower fee with my credit union, the so-called
    issuing bank?
        Mr. Floum. He does. And his group, the National Association
    of Convenience Stores, I would think, would have quite a lot to
    say about driving volume to either Visa or one of our
    competitors. That is competition in return for favorable terms.
    So I am very happy right after this to sit down with Mr.
    Robinson and we can talk about.
        Mr. Keller. So you are saying, not only can he negotiate
    with the acquiring bank, he can also, through some sort of
    organization like the convenience stores trade group, negotiate
    with a variety of issuing banks as well as MasterCard or at
    least Visa?
        Mr. Floum. Yes, sir. And, again, it is a very competitive
    environment, and we would be looking for something that would
    drive volume in return for lower rates.
        Mr. Keller. Let me just--my time has expired, and I think I
    am the last person now, so let me just do a short question to
    you, Mr. Robinson.
        What percentage of your customers at Rotten Robbie use
    credit cards, would you estimate?
        Mr. Robinson. Right now, cash represents, total company,
    just a little over 25 percent. We have some locations where we
    are almost 90 percent plastic.
        Mr. Keller. Okay. Well, in those locations where you are 90
    percent plastic, I understand you are upset about the
    interchange fees that you are paying to the credit cards. Why
    don't you just put a sign up and say, hey, if you use your
    debit card, I would appreciate it or may even give you a
    discount, since that apparently is at least allowed with Visa?
        Mr. Robinson. Basically doing some sort of a cash discount
    type of a----
        Mr. Keller. Or debit card. Why don't you just tell them,
    hey, you know--when they hand you a card that can be used debit
    or credit, why don't you just tell them, can you use this as
    your debit instead?
        Mr. Robinson. There is a number of considerations.
        Number one, the rules that Visa and MasterCard have make it
    more challenging to be able to do that. You do run into some
    issues relative to the State weights and measures. A challenge
    that you run into--I mean, we would prefer to say yes to our
    customer, not no. And trying to do something where you have
    different pricing is confusing to the customer.
        It is very interesting, if you are a credit card user,
    oftentimes you will not perceive that as a discount for cash;
    you will consider it a charge for credit.
        Mr. Keller. Right, but you are listening to what these
    smart guys are saying, and they are saying, hey, if you don't
    like the credit card fees, just tell them to use the debit
    card, because that is still a pretty good deal. And it seems
    common-sense to me.
        If I were you, I would probably be saying, well, I can't do
    that with everybody because, for a debit card, you have to have
    money in the bank and, credit card, you don't need the money in
    the bank. So it is not a perfect solution.
        But I just wanted to give you the chance to respond to
    that, because that is what you are hearing.
        Let me go on and ask you this: If you decided today that,
    ``I am mad as heck, and I am not going to take it anymore, and
    I am not accepting MasterCard and Visa at Rotten Robbies,''
    what would happen to your business model?
        Mr. Robinson. Oh, I don't think that is an option. I mean,
    when you are dealing with whichever number that I said, whether
    it be 60 percent, 80 percent, 90 percent, and you have that
    much business in plastic, you not accepting it just really
    doesn't work.
        Can I just answer or make a----
        Mr. Keller. Yes, but you are saying you would go out of
    business if you stopped taking MasterCard and Visa?
        Mr. Robinson. Well, probably.
        Mr. Keller. Okay. Yes, go ahead.
        Mr. Robinson. One of my options is to push the debit side.
    What is very interesting is, if you look at all the
    advertisement, you know, for pin debit versus signature debit,
    if you come in with your debit card and you don't use the pin,
    you don't use the thing that makes the card more secure, that
    product doesn't go through the debit card network; that goes
    through the credit card network. I am charged credit card rates
    if you use your debit card.
        Mr. Keller. All right.
        Mr. Robinson. So one of the things that gets a little bit
    challenging is, if you want to have a discount for debit, it
    really depends on how it is used.
        Mr. Keller. Thank you.
        I have been told to wrap up. Just, in fairness, Mr. Floum,
    on this whole debit card issue, do you have anything that you
    want to respond to about encouraging folks to use debit if you
    are worried about the high interchange fees for credit card?
        And that will be my final question. I will let you respond.
        Mr. Floum. Thank you, Congressman.
        Just to clear up any confusion, discounting is permissible.
    It doesn't require to label separately every item in the store,
    as we have heard from merchants. So that would certainly be a
    solution for retailers that want to try to drive their costs
    down by steering--it is permissible, under our rules--to
    different forms of payment.
        Mr. Keller. Thank you.
        And I thank you, Mr. Chairman, for your indulgence. I will
    yield back.
        And I just want to thank the witnesses so much for being
    here and being patient. We appreciate you doing that.
        Mr. Cohen. Thank you, Mr. Keller.
        I just had one question. Is there a Visa Triple Crown this
    year?
        Mr. Floum. I don't think that we still sponsor the Triple
    Crown.
        Mr. Cohen. The interchange fees weren't high enough to be
    able to afford it? [Laughter.]
        Mr. Floum. I am not going to respond to that. [Laughter.]
        Mr. Cohen. I didn't know if Big Brown was going to have to
    pay part of his winnings out of that or not.
        Thank you. I would like to thank our witnesses for their
    testimony.
        Without objection, Members will have 5 legislative days to
    submit any additional questions. And we would ask that you
    answer those questions as promptly as you can, which we will
    forward on to you, and they will be made part of the record.
        Without objection, the record will remain open for 5
    legislative days for the submission of any other additional
    materials.
        The hearing is adjourned.
        [Whereupon, at 2:34 p.m., the Task Force was adjourned.]