[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.]

                                 
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