    [House Hearing, 111 Congress]
    [From the U.S. Government Publishing Office]

                        CREDIT CARD FAIR FEE ACT OF 2009

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

                                    HEARING

                                   BEFORE THE

                           COMMITTEE ON THE JUDICIARY
                            HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 SECOND SESSION

                                       ON

                                   H.R. 2695

                                   __________

                                 APRIL 28, 2010

                                   __________

                               Serial No. 111-101

                                   __________

             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            DANIEL E. LUNGREN, California
    MAXINE WATERS, California            DARRELL E. ISSA, California
    WILLIAM D. DELAHUNT, Massachusetts   J. RANDY FORBES, Virginia
    STEVE COHEN, Tennessee               STEVE KING, Iowa
    HENRY C. ``HANK'' JOHNSON, Jr.,      TRENT FRANKS, Arizona
      Georgia                            LOUIE GOHMERT, Texas
    PEDRO PIERLUISI, Puerto Rico         JIM JORDAN, Ohio
    MIKE QUIGLEY, Illinois               TED POE, Texas
    JUDY CHU, California                 JASON CHAFFETZ, Utah
    LUIS V. GUTIERREZ, Illinois          TOM ROONEY, Florida
    TAMMY BALDWIN, Wisconsin             GREGG HARPER, Mississippi
    CHARLES A. GONZALEZ, Texas
    ANTHONY D. WEINER, New York
    ADAM B. SCHIFF, California
    LINDA T. SANCHEZ, California
    DEBBIE WASSERMAN SCHULTZ, Florida
    DANIEL MAFFEI, New York
    [Vacant]

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

                                C O N T E N T S

                                  ----------

                                 APRIL 28, 2010

                                                                       Page

                                    THE BILL

    H.R. 2695 the ``Credit Card Fair Fee Act of 2009''...............     3

                               OPENING STATEMENTS

    The Honorable John Conyers, Jr., a Representative in Congress
      from the State of Michigan, and Chairman, Committee on the
      Judiciary......................................................     1
    The Honorable Lamar Smith, a Representative in Congress from the
      State of Texas, and Ranking Member, Committee on the Judiciary.    15
    The Honorable F. James Sensenbrenner, Jr., a Representative in
      Congress from the State of Wisconsin, and Member, Committee on
      the Judiciary..................................................    28

                                   WITNESSES

    Mr. Dave Carpenter, President, J.D. Carpenter Companies, Inc., on
      behalf of the National Association of Convenience Stores
      Oral Testimony.................................................    33
      Prepared Statement.............................................    35
    Mr. Edmund Mierzwinski, Consumer Program Director, U.S. Public
      Interest Research Group
      Oral Testimony.................................................    48
      Prepared Statement.............................................    50
    Mr. John Blum, Vice President of Operations, Chartway Federal
      Credit Union, on behalf of the National Association of Credit
      Unions
      Oral Testimony.................................................    62
      Prepared Statement.............................................    64
    Mr. Douglas Kantor, Government Affairs and Public Policy, Steptoe
      & Johnson, LLP, on behalf of the National Association of
      Convenience Stores, the Society of Independent Gasoline
      Marketers of America, and the Merchants Payments Coalition
      Oral Testimony.................................................    75
      Prepared Statement.............................................    77

                        CREDIT CARD FAIR FEE ACT OF 2009

                                  ----------

                           WEDNESDAY, APRIL 28, 2010

                              House of Representatives,
                                    Committee on the Judiciary,
                                                        Washington, DC.

        The Committee met, pursuant to notice, at 10:15 a.m., in
    room 2141, Rayburn House Office Building, the Honorable John
    Conyers, Jr. (Chairman of the Committee) presiding.
        Present: Representatives Conyers, Scott, Watt, Jackson Lee,
    Delahunt, Johnson, Quigley, Chu, Sanchez, Wasserman Schultz,
    Maffei, Smith, Sensenbrenner, Coble, Goodlatte, Lungren,
    Forbes, King, Gohmert, Poe, Chaffetz, and Rooney.
        Staff present: (Majority) Eric Tamarkin, Counsel; Anant
    Rant, Counsel; Brandon Johns, Clerk; Reuben Goetzl, Clerk; and
    Stewart Jeffries, Minority Counsel.
        Mr. Conyers. Good morning. The Committee will come to
    order.
        Today we are examining a bill that we passed out of
    Committee a couple years ago, and it is a bill--I am going to
    thank Jim Sensenbrenner for his comments, which I reread before
    we introduced this new bill, H.R. 2695, that permits merchants
    to collectively negotiate with banks and payment card networks
    concerning the rates and terms for access to the--to these
    interchange fees, credit card costs, hidden charges, that have
    resulted in us having more than two credit cards for everybody
    in the United States of America and still counting.
        Well, for those that may not be familiar with how easy it
    is to get a credit card, wait until your son gets to college
    and he gets one that is active in the mail, and all you have to
    do is start using it, and explain to dad later as to the
    necessity that caused him to plunge his parent into near
    bankruptcy.
        And so, what we do in this bill that we are going to
    examine and listen to our witnesses today is to create a
    limited antitrust exemption that would allow the merchants--
    many of them small--to be able to negotiate with the banks and
    credit cards as to how these rates can be contained.
        We cut back on the court business for a lot of reasons--the
    main reason was because we couldn't get it through anyway,
    knowing the other body and how they operate. We might not have
    gotten it through the House.
        So we are looking critically at these credit card
    companies, especially the big ones, the occasional violators of
    the law. There is a huge class action consumer suit pending in
    New York regarding the legality of payment card companies'
    ability to suddenly change fees in the first place. And so this
    is a--this idea today is an effort to reign in the abuses by
    the credit card industry.
        My colleague, Peter Welch, Vermont, has introduced another
    measure which would prohibit credit card networks from
    restricting merchants from steering consumers to particular
    payment methods. Carolyn Maloney, of New York, has a Credit
    Cardholder's Bill of Rights that became law last year. The
    leader in the Senate--has a bill on the same subject.
        And so we want to hear from our distinguished witnesses,
    and we think that we may have gotten a different and a better
    proposal for us to examine here today.
        And I turn now to my friend, Lamar Smith, for his comments.
        [The bill, H.R. 2695, follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   __________
        Mr. Smith. Thank you, Mr. Chairman.
        Mr. Chairman, in the last Congress this Committee conducted
    two hearings on the issue of credit card interchange fees. We
    also reported the Credit Card Fair Fee Act of 2008 by a vote of
    19-16 with 10 Democrats and nine Republicans supporting the
    bill, and eight Democrats and eight Republicans opposing the
    bill.
        While that result may represent a model of bipartisanship,
    it did little to enhance the prospects of passage on the floor.
    In fact, the bill did not come up for a vote in the full House
    in 2008.
        A recent Government Accountability Office report said that
    credit card interchange fees have gone up over time. GAO noted
    that while merchants would benefit from lowered interchange
    rates, the effects of those rate decreases could be small.
        GAO also predicted that any merchant savings that resulted
    from interchange reform would likely not be passed on to
    consumers. GAO noted further that any effort at interchange
    reform would result in significant compliance cost.
        If there is a problem in the setting and amount of credit
    card fees, this bill may not be the appropriate solution. It
    grants an antitrust exemption to thousands of banks and
    hundreds of thousands of merchants, possibly enabling collusion
    on a gigantic scale.
        A group of merchants have brought a series of Federal
    antitrust suits challenging the way that Visa and MasterCard
    set these interchange fees. Those cases are pending in court in
    the eastern district of New York now. While I recognize that
    the remedy that the merchants are seeking here today could not
    be granted by a court, I do think the court should decide on
    the basic question of the credit card liability before we move
    forward.
        Mr. Chairman, I would like to ask unanimous consent to
    have--to be made part of the record the following letters: one
    from the American Bankers' Association, a letter from the
    Electronic Payments Coalition, and a letter from the Credit
    Union National Association.
        [The information referred to follows:]

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                                   __________
        Mr. Smith. Also, as I did in the last Congress, I wrote the
    Department of Justice and the Federal Trade Commission on April
    15, 2010, to request their views on this legislation.
    Unfortunately, only the FTC responded to my request in a timely
    manner. I thank them and would like to submit their record--
    their letter for the record as well. As in the previous
    Congress, the FTC raised concerns about granting such a large
    antitrust exemption.
        [The information referred to follows:]

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                                  __________
        Mr. Smith. I would also like to introduce into the record a
    letter from the previous Administration's antitrust division
    that expressed similar concerns about granting antitrust
    exemptions. I am hopeful that we will get an updated letter
    from this Administration soon on the same subject.
        [The information referred to follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   __________
        Mr. Smith. I thank you, Mr. Chairman. If I could have all
    those documents made--be made a part of the record I would
    appreciate it.
        Mr. Conyers. Be pleased to include them in the record.
        Mr. Smith. All right. Thank you, Mr. Chairman. I yield
    back.
        Mr. Conyers. Anybody else on the Committee have a brief
    opening comment?
        Mr. Sensenbrenner. Mr. Chairman?
        Mr. Conyers. Jim Sensenbrenner?
        Mr. Sensenbrenner. Mr. Chairman, first I would like to ask
    unanimous consent that this statement for the record from the
    Financial Services Roundtable in opposition to this bill be
    included in the record.
        Mr. Conyers. Absolutely.
        [The information referred to follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   __________
        Mr. Sensenbrenner. Mr. Chairman, I don't think this bill is
    much better than the previous bill, and I hope that this
    Committee defeats it. No merchant is required to accept credit
    cards. Some merchants avoid interchange fees altogether by
    issuing their own store cards, and Macy's and Nordstrom's have
    been very successful in doing that by offering their customers
    better perks than Visa and MasterCard offer, and as a result
    they avoid the interchange fees.
        But I would like to point out that the interchange fees
    actually give the merchants a benefit. Before plastic was
    invented many stores had store accounts of various formality
    and informality, and if a customer did not pay their store
    account that had to be written off by the merchant.
        With plastic, the interchange fees pay for the bank or the
    issuer of the credit card having to absorb any nonpayment, and
    as a result, the merchant gets paid in full and the credit card
    issuer either gets stiffed for that amount or has to go through
    the cost of collection. And I think that that is very valuable
    for the merchant and they also ought to be required to pay for
    it.
        And I am afraid that when I have been showing up at the
    convenience store I am seeing these petitions that they have
    got on the table. It is apparent to me that the merchants don't
    want to pay for it, number one; and number two, they are giving
    the impression that if the interchange fees go away then prices
    will go down. Anybody who believes that, I have a bridge in
    Brooklyn to sell at a very reasonable price once the hearing is
    over with.
        I yield back.
        Mr. Conyers. I don't think I have been very successful over
    the last couple years.
        Anybody else want to comment?
        Steve, do you want to--Steve King, you want to introduce
    the first witness?
        Mr. King. I would very much appreciate the opportunity to
    do so, Mr. Chairman.
        All right, it is--our first witness, it is my pleasure to
    introduce a fellow Iowan at today's hearing, that is Dave
    Carpenter. He is a true Hawkeye.
        And he has a degree in business from the University of
    Iowa. He is the president of J.D. Carpenter Companies,
    Incorporated.
        Dave is the owner and president of ShortStop. It is a chain
    of six convenience stores that are located throughout Des
    Moines and eastern Iowa.
        In 2002 Dave also became owner and board director of
    Liberty Bank. He may not know this, but some years ago they
    essentially bought my line of credit during a bank crisis, so--
    but he brings an interesting perspective to this hearing
    because of his background in retail and in banking, and I
    welcome today Dave Carpenter.
        And I look forward to your testimony.
        Thank you, Mr. Chairman, and I yield back.
        Mr. Conyers. Thank you. That is a pretty good introduction
    for a person that didn't support the bill last time. Maybe you
    can do a better job.
        Welcome to the hearing.

        TESTIMONY OF DAVE CARPENTER, PRESIDENT, J.D. CARPENTER
       COMPANIES, INC., ON BEHALF OF THE NATIONAL ASSOCIATION OF
                           CONVENIENCE STORES

        Mr. Carpenter. Chairman Conyers, Ranking Member Smith, and
    Members of the Committee, thank you for your inviting me to
    share my views regarding credit card swipe fees.
        And thank you to Congressman King for your kind
    introduction.
        My observations are based on my experience both as an owner
    of a chain of six convenience stores in Iowa and part owner of
    a large community bank, also in Iowa. I am testifying today on
    behalf of the National Association of Convenience Stores, of
    which I am a member.
        In the last 6 months, NACS has delivered petitions with
    more than 3.7 million signatures from our customers asking
    Congress to create transparency and competition for swipe fees.
    We and our customers are hoping Congress is listening.
        Five minutes is not enough time to tell--for me to tell my
    story, so I urge you to read my written testimony, which
    explains our problems with interchange fees. My community bank
    has more than $1.2 billion in assets. We issue cards, but the
    value to our bottom line is de minimis.
        I do not understand how any bank the size of mine or
    smaller could make any money from interchange fees. Most small
    banks have to outsource card operations. The big banks are the
    only ones that make money on interchange. If interchange is
    reduced it will not have a material effect on my bank, and a
    more competitive market might even give us a chance to compete
    and do better.
        What happens with the gasoline market is a great example of
    how competition should work here. I negotiate every day on
    wholesale prices for the fuel I buy, but I cannot negotiate
    interchange with MasterCard and Visa. Therefore, I fully
    support the Credit Card Fair Fee Act of 2009 and other efforts
    to help reign in swipe fees.
        When various major expenses are compared to our six stores
    it can clearly be seen that credit card fees are our second-
    largest expense. Only labor costs us more.
        For some of my stores credit card fees exceed even labor.
    For one of my stores, the amount we pay in credit card fees is
    twice what we pay for rent, four times more than utilities, and
    30 times more than health insurance. Six stores even paid
    $130,000 last year in card fees on the amount we collect in
    state fuel tax.
        We did one analysis to demonstrate just how much it takes
    in card fees for us to sell fuel. We found that it takes more
    than half of the gallons we sell and the associated margin just
    to pay the card fees. Overall, for the ShortStop chain,
    interchange fees have grown more rapidly and significantly than
    all of our other expenses.
        An especially problematic aspect of interchange fees hikes
    we have seen in recent years is that they are completely
    unpredictable. We are able to predict most of our costs
    accurately. Approximately 80 percent of ShortStop sales are
    paid by credit and debit cards, and we have no other options.
        Policymakers truly need to see payment cards as a new form
    of currency, because 80 percent of our sales--and growing--that
    is what payment cards have become and will be in the future.
    With lower interchange fees I would lower prices and would have
    more capital to invest in providing jobs for my community.
        Turning to the community bank, of which I am a part owner,
    in 2009 the amount of revenue the bank earned on interchange
    accounted for less than 1 percent of our total revenue. The
    amount of profit in the bank that interchange accounted for was
    zero.
        The reason we issue payment cards is purely for the
    convenience of our customers. Many small banks outsource card
    issuance, a model likely to yield little or no profit. This is
    why I disagree with the contention that efforts to bring
    interchange fees under control will harm community banks. If
    interchange is cut we would continue to offer cards to our
    customers as a service.
        In fact, changes to the system might help. Right now we
    compete with other banks for customers in every other part of
    our business on the basis of price and service, but there is no
    price competition on interchange.
        If there were, we might have more ways to attract customers
    and increase this part of our business. But the way it is, the
    huge banks make big money on interchange and market heavily to
    our customers through direct mail and otherwise. There is not
    other aspects of the bank's operation in which we charge the
    same set of default rates--default fees or prices as all of our
    competitors.
        I am an entrepreneur and believe in free markets, and what
    I know is this: Legal or not, the interchange market isn't
    free. It is rigged to guarantee big money for the largest
    banking institutions without helping banks like mine.
        I see the effects of card swipe fees from the perspective
    of a retailer as well as a community banker. These fees are out
    of control. All we are asking for is the ability to negotiate
    these fees.
        Thank you.
        [The prepared statement of Mr. Carpenter follows:]
                      Prepared Statement of Dave Carpenter

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   __________
        Mr. Conyers. Thank you, Dave Carpenter.
        Ed Mierzwinski is a long-time witness before us, consumer
    advocate associated with the Public Interest Research Group,
    PIRG, has received some awards for his advocacy.
        And we welcome you here again.

      TESTIMONY OF EDMUND MIERZWINSKI, CONSUMER PROGRAM DIRECTOR,
                  U.S. PUBLIC INTEREST RESEARCH GROUP

        Mr. Mierzwinski. Thank you. Thank you again, Chairman
    Conyers, Mr. Smith, Members of the Committee. It is a privilege
    to testify before you on this important matter.
        The matter of credit card interchange fees is a very
    important one for consumers. Because merchants can't negotiate
    these fees all consumers pay more at the store and more at the
    pump, even if they pay with cash at the store.
        Further, the subsidy runs in the wrong direction.
    Interchange fees are used by the issuing banks to pay for
    rewards. My miles, my dollars, my other kinds of points that I
    receive are paid for by the cash customers, many of whom can't
    afford credit cards or even bank accounts. So the market is
    broken.
        The courts have found that Visa and MasterCard have market
    power. They have the ability to set prices. That is wrong.
        That is why creating a method of collective bargaining that
    will help merchants to negotiate with the banks could lower the
    fees, and we believe, as Mr. Carpenter said, that because the
    retail market is competitive, that those fees will be--result
    in lower prices for consumers, that the savings will be passed
    along. Retail is so competitive for all the studies that I have
    seen that I believe that that would be the result. And we will
    certainly, as consumer advocates, monitor if that is the
    result.
        I am very troubled, when I talk to merchants about these
    issues, that they are prevented by the rules--now, the industry
    will tell you that the rules do not prevent this, but the
    merchants actual problems with the rules defy what the banks
    tell you, and that is that they are prohibited by the rules
    from telling consumers they can have a better deal if they
    offer a lower-price payment mechanism, as Mr. Welch's bill
    would provide for.
        They are threatened with thousands of dollars a day in
    penalties if they challenge any of the contract rules that Visa
    and MasterCard impose on them. So I don't like the fact that
    the banks have that much power that they can threaten the
    merchants.
        The kinds of problems that extend in this market, as you
    noted, also extend to the issuance market. The power that the
    banks have--the biggest credit card companies have--over the
    marketplace allows them to impose unfair practices on consumers
    as well, and those unfair practices were limited by
    Representative Maloney's credit card act, the Credit Card Bill
    of Rights, that the President signed just almost a year ago
    now, May 2009, but in order to protect consumers and merchants
    I think we need a strong agency to enforce that new law.
        We certainly can't in any way rely on the current bank
    regulators--the regulators who supposedly surveilled over the
    system that failed and allowed the credit card companies to get
    out of control. We need a strong consumer financial protection
    agency, one with the power to enforce rules over the banks and
    over the credit card companies and to make the system work for
    consumers.
        I think we also need to reinstate consumer private rights
    of action to enforce the law. The merchants are trying to take
    the credit card companies to court. In some cases they have
    been successful.
        But it is very difficult for a consumer to take a credit
    card company to court, and that is partly because of the unfair
    forced arbitration clauses that are included in consumer credit
    card contracts. While the CFPA would be given the authority to
    ban those arbitration provisions in both the House version and,
    in a weaker way, the other body's version of the CFPA, we would
    prefer that the bill sponsored by your Committee, the
    American--I am sorry, the Arbitration Fairness Act, by Hank
    Johnson, and you, and 110 other Members of Congress--is the
    better way to go to ban arbitration.
        One point that I want to make that is not in my testimony,
    the--in detail, a couple of years ago plastic transactions
    passed cash transactions, and I am astonished to hear that in
    fact, in retail convenience stores, plastic is 80 percent--I
    had thought it was somewhere around 55 or 60 percent of
    transactions.
        But it is going to even get worse because the banks are
    switching and trying to substitute government payment
    mechanisms onto prepaid debit cards, so they are trying to use
    their market power to get the lowest-income Americans to use
    debit cards to receive their government benefits. That is going
    to make things even worse.
        Again, it is going to result in a system where prices in
    the stores go up, the banks have too much power. So we support
    your bill and urge you to pass it.
        Thank you.
        [The prepared statement of Mr. Mierzwinski follows:]
                    Prepared Statement of Edmund Mierzwinski

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                                   __________
        Mr. Conyers. John Blum, veteran, officer in the Army for
    many years, vice president of Federal Credit Union Chartway, in
    Virginia Beach, Virginia. He has been senior manager at Home
    Depot and Haynes Furniture, and now has a business with 55
    branches in 10 states--200,000 members that he provides
    financial services to around the world, as a matter of fact.
        We welcome you here to the hearing.

    TESTIMONY OF JOHN BLUM, VICE PRESIDENT OF OPERATIONS, CHARTWAY
    FEDERAL CREDIT UNION, ON BEHALF OF THE NATIONAL ASSOCIATION OF
                             CREDIT UNIONS

        Mr. Blum. Thank you, Mr. Chairman, Ranking Member Smith,
    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 do serve as vice president of operations at Chartway
    Federal Credit Union, in Virginia Beach, Virginia. We represent
    200,000 members now, with over $1.5 billion in assets. We
    operate 55 branches in 10 states and provide financial services
    to those members across the globe.
        My responsibilities at Chartway include the operational
    performance of our credit and debit card portfolios. The
    electronic payments system has proven to be one of the most
    important advances in the financial services marketplace in the
    last century.
        Retailers reap tremendous benefits in the form of increased
    sales, reduced costs for overhead, and guaranteed payment for
    goods and services while the financial institution assumes the
    risk of nonpayment and fraudulent activity. This proposal would
    allow merchants to negotiate in an anticompetitive manner in
    order to shift their payment card acceptance cost to others.
        While we appreciate allowing credit unions to opt out of
    the negotiated settlement mechanism in the bill, we find this
    language troublesome because it could create a system where
    plastic cards from credit unions are viewed differently by both
    merchants and consumers. It is with these concerns in mind that
    we pose a--we oppose the bill in its current form.
        The current interchange fee structure allows credit unions
    to compete with the largest national banks. Credit union
    members know their card is substantially the same as what they
    would receive from a big bank and that it will work in all the
    same places. It is critical that credit unions continue to be
    able to compete in this market.
        There are several fundamental misconceptions about the
    interchange fee system that need to be addressed. First, the
    interchange fee is not a hidden tax on consumers. Just like the
    cost of labor, electricity, gas, rent, or insurance,
    interchange fees are a cost of doing business.
        Any increased revenue merchants earn as a result of paying
    lower fees for card services is unlikely to result in lower
    prices for consumers. If the Committee is intent on moving this
    legislation forward it should include provisions requiring
    merchants to pass any and all savings that they receive due to
    reduced rates on to consumers.
        Second, the interchange fee is one of several costs
    associated with the final retail product, the merchant discount
    fee. This system is no different from any other retail product.
    For example, consumers do not get to negotiate the price their
    local diner paid for the eggs in their omelet even though being
    able to do so might result in a cheaper breakfast.
        Interchange fees do not generate as much income as
    merchants would have you believe. Clearing a payment through
    the system is only one of the number of costs associated with
    issuing plastic cards and processing payments. The system does
    not simply run itself.
        Chartway employs 11 people internally for debit card
    support, and we contract with a large service provider
    externally for credit card support. These substantial costs are
    necessary to ensure our debit and credit card portfolios are
    operating smoothly and that our members are satisfied with
    their service.
        Interchange also helps offset the significant costs
    associated with direct fraud, which amounted to $8.6 billion in
    the U.S. last year. More ever, there are additional costs
    associated with each instance of fraud which are not captured
    by the statistics, nor are they covered by insurance.
        Employees must contact and work with members to resolve
    problems, accounts need to be shut down, new account numbers
    and new cards need to be issued. In nearly every situation it
    is the financial institution that covers fraud losses--neither
    the customer nor the merchant share in the risk.
        I find it particularly troubling that merchants are seeking
    to regulate my income even as I experience mounting fraud
    losses. If the Committee wants to help protect our Nation's
    consumers with this legislation I recommend adding provision
    that would hold those who fail to protect sensitive data
    responsible for the full cost of any losses that may occur as a
    result.
        In conclusion, NAFCU strongly opposed H.R. 2695 in its
    current form. If mandatory negotiations force new caps on
    interchange fees they will enrich merchants while harming
    credit unions and consumers. Additionally, if credit unions opt
    out of this new service they may find themselves in a situation
    where their plastic cards are viewed as inferior.
        The electronic payment system has proven incredibly
    beneficial to merchants. Retailers, however, want all of the
    benefits of the system while at the same time they are asking
    Congress to simply cut their cost of doing business.
        As a businessman, I certainly understand why retailers
    would like to reduce their cost for processing transactions. As
    a consumer, however, I am weary of the government interfering
    with a valued product that has been incredibly successful, and
    which I use on a daily basis.
        Finally, lowering interchange fees are unlikely to be
    translated into cheaper prices for consumer. The one thing that
    is clear, that the passage of H.R. 2695 in its current form
    will hurt credit unions and their 92 million members.
        Thank you, Mr. Chairman.
        [The prepared statement of Mr. Blum follows:]
                        Prepared Statement of John Blum

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                                   __________
        Mr. Conyers. Our final witness is Douglas Kantor, a partner
    at Steptoe & Johnson, and he represents the National
    Association of Convenience Stores, the Society of Independent
    Gasoline Marketers, and the Merchants Payments Coalition. He
    has also worked at the Department of Housing and Urban
    Development as chief of staff.
        And we welcome you to the Committee.

      TESTIMONY OF DOUGLAS KANTOR, GOVERNMENT AFFAIRS AND PUBLIC
       POLICY, STEPTOE & JOHNSON, LLP, ON BEHALF OF THE NATIONAL
     ASSOCIATION OF CONVENIENCE STORES, THE SOCIETY OF INDEPENDENT
            GASOLINE MARKETERS OF AMERICA, AND THE MERCHANTS

        Mr. Kantor. Thank you, Chairman Conyers.
        Thank you, Ranking Member Smith and Members of the
    Committee, for having me here today and giving me the
    opportunity to testify on the subject of interchange fees in
    the Credit Card Fair Fee Act. I am counsel to the Convenience
    Stores Association, the Gasoline Marketers, and the Merchants
    Payments Coalition, which includes more than 20 national trade
    associations and 80 state trade associations, all of whom are
    very concerned about the interchange fees that they pay each
    and every day on credit and debit cards.
        There are a couple of problems I would like to describe for
    you which cause these issues for merchants around the country.
    The first is that what happens with this system is that Visa
    and MasterCard centrally set the interchange fees that the
    banks that issue the cards charge--not the fees that Visa and
    MasterCard themselves charge, it is what the banks charge. And
    what we find is, all of those banks that are supposed to be
    competitors--Bank of America, Citibank, JPMorgan Chase, you
    name it, the largest of the large--do charge the same schedule
    of fees to merchants.
        This is price fixing; it is centralized price fixing. Those
    banks compete on all the other aspects of their business, but
    not on this one. And the result is quite predictable. The
    result is, these fees have grown out of control and are at
    anticompetitive levels.
        But that is not the only problem here. The other part of
    the problem here is that Visa and MasterCard also set a series
    of terms and rules that constrain the marketplace and ensure
    that there is no price competition here, and that consumers who
    make the ultimate choice of what card to use can't make market-
    based decisions on those choices.
        So, for example, the most egregious one of these rules that
    both Visa and MasterCard have is that they prohibit merchants
    from offering their consumers a discount if those consumers
    will agree to pay with a card that has cheaper fees. It would
    be easy if merchants could say, ``Hey, Discover Card is a
    little cheaper for me; I will give you a dollar off if you will
    use your Discover Card,'' or, ``I will give you 1 percent
    off.''
        But that is prohibited by Visa and MasterCard. On the
    threat of fines to that merchant there cannot be that type of
    competition.
        Imagine for a moment, if you will, if Coke and Pepsi each
    had a rule that said, ``You can never sell my competitor's soft
    drink for anything less than you sell mine or I will fine you
    for it or take away your ability to sell Coke or Pepsi.'' This
    Committee and the Department of Justice would be quite upset at
    that, and, not surprisingly, the cost of those soft drinks
    would go up precipitously, but that is just what we face on the
    interchange fee.
        The problems that this causes across the marketplace--and
    this combination of things causes--is profound. The fees were
    $48 billion in 2008. They have gone up faster than any other
    business expense for these merchants.
        For most merchants across the Nation, including what Dave
    Carpenter reported from his own business' results, this is the
    second-highest operating expense they have after only labor,
    and in some cases it is pushing labor and giving it a run for
    its money. These fees have gone up faster than any other
    expense including health care costs.
        Just to give you an example, Robert Shapiro, the former
    undersecretary of commerce for economic development, put out a
    study earlier this year, and he found that just based upon the
    amount he estimated merchants were passing through to consumers
    of these fees and just based upon the amount above the cost of
    processing and a rate of return, if you took that out of the
    system consumers would have nearly $27 billion more to spend
    across the economy, and that that stimulus would result in the
    creation of 242,000 jobs across the country.
        When prices are higher people buy less and there is less
    economic activity. That flows through the whole economy of
    suppliers all the way down to the merchants and everyone gets
    affected.
        Consumers, as Mr. Mierzwinski pointed out, are deeply
    affected by this, too. They pay higher prices at the store and
    at the pump, and there is a regressive cross-subsidy, where
    lower-income people pay more to pay for some of the rewards and
    other frills that higher-income people get.
        That is not right from where we sit; it is not right for
    consumers. And consumers don't get the basic disclosures that
    tell them what is here.
        So we are very much in favor of the Conyers-Shuster
    legislation that is before the Committee, and that it would
    give us a chance to negotiate both the fees and the rules that
    constrain the system and begin to bring some market pressures
    to this system where no market pressures currently are allowed
    to go.
        I thank you for your consideration.
        [The prepared statement of Mr. Kantor follows:]
                      Prepared Statement of Douglas Kantor

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                                   Exhibit 1

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                                   Exhibit 2

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                                   __________
        Mr. Conyers. Thank you.
        John Blum, we are all against class warfare, but it seems
    like this is big guys versus little guys. What free advice or
    counseling would you give the other men at the table here this
    morning?
        Mr. Blum. You know, in direct response to that, you know,
    big guy versus little guy, you know, as--even with that--the
    caveat, if you will, the exclusion for a credit union, I cannot
    imagine that any adjustment or payment or additional tier to a
    payment industry--I mean, there is an interchange rate; there
    are interchange rate tables. I think if we have private
    agreements, modifications, if you will, to it, we yet have
    another table, then we have another table, and then we have
    another table.
        I cannot imagine the payment card industry absorbing the
    compliance technology management costs for managing an even
    more complex set of rules and tables without passing it on to
    the end-user. So I don't think that I am excluded from the
    costs of this bill.
        Mr. Kantor. Mr. Chairman, if I could say one thing about
    this, it is not necessarily the case that anything in the
    legislation makes these fees more complex. In fact, merchants
    would very much like for it to be a simpler system. The
    Government Accountability Office, in their study that was
    published last year on this, found that this system over the
    last 15 years has become remarkably more complex and that the
    rates have become remarkably higher.
        In 1995, 15 years ago, MasterCard, for example, had four
    different rates on their rate schedule. Today that number is
    263. That makes it very difficult for merchants to know what
    they are paying when they pay and predict what their costs are
    going to be.
        The GAO said, in fact, that of those rates a huge
    percentage of them--the new rates introduced are higher than
    what they were before. So we would like to simplify the system.
    We would like to be able to sit at the table and negotiate it
    and see what happens. Nothing in the bill dictates what the
    outcome of those discussions would be.
        Mr. Carpenter [continuing]. Simple points that, you know,
    as retailers, I mean, our net profit margin in our industry is
    2 percent. The credit card industry is over 40--the two big
    players, Visa and MasterCard. So we are a very transparent
    industry, very competitive industry.
        And I would also like to add that we are not in the
    financial institution business--financing business. We don't
    issue credit to people. This isn't our business. We are simply
    giving the card companies a venue for their customers to use
    their product.
        We aren't in the business of financing customers and giving
    them credit, whether it be good or bad. We don't sit at the
    table and determine what kind of credit those customers get.
    All we do is give them a place to swipe their card so they can
    use it, because if they didn't have a place to swipe it they
    wouldn't have a business.
        You know, so 15 years ago we were actually a larger
    company--my company, my family business. We took cash and
    checks. Cash was cash and checks were traded at par. Fifteen
    years later $900,000 to accept payment. It is unbelievable.
        You know, one of my stores has fees of over $220,000 a year
    in fees. Drive by a gas station, three-quarters of an acre
    property, look at it, and think, ``It is paying nearly $20,000
    a month to accept credit cards at it.'' Our rent, the person
    who built that store and owns the land and rented it to us, was
    $138,000.
        You know, we can afford to pay for the processing, which we
    do a significant portion of it--we pay for the satellite
    systems and all the machines to accept it. We can't pay for
    their business of financing customers, giving them credit,
    absorbing their fraud. That is not the business we created. We
    simply sell gas and convenience items.
        Mr. Conyers. Is it accurate that interchange fees have
    tripled over the last 10 years?
        Mr. Carpenter. Yes, in a couple ways. Interchange has gone
    up. They follow the prices; they are percentage-based, so they
    all know when gas prices go up it is--if gas is $1 interchange
    is two cents, if gas is $4 it is eight cents.
        Our average margin on fuel for my company is 12 cents. So
    when gas 2 years ago was at $3.50 and $4 it ate up a
    significant portion of my--well, the majority of my margin.
        The other reason it is going up is because we are now at 80
    to 85 percent of our business is paid for with credit. I mean,
    to us it is just a currency. I mean, we used to take checks. If
    15 years ago, when we were taking simply cash and checks, and
    you came to me and said, ``We have a system where now your
    people can pay with credit, would you pay $900,000 for that
    service?'' The question would be unequivocally, ``No. We
    couldn't, can't, won't do it.''
        Mr. Conyers. Steve King, this is the best witness you ever
    brought out of Iowa. [Laughter.]
        If you have got any more we would be happy to schedule them
    in the future.
        Mr. King. We have about 3 million.
        Mr. Conyers. Then I probably won't be seeing you much more
    than--you call--if you have got that many that are like
    Carpenter.
        Lamar Smith?
        Mr. Smith. Thank you, Mr. Chairman.
        Mr. Carpenter, just to follow up on that last answer, you
    say you pay $20,000 a month in interchange fees. That would
    translate into, would it not, over $1 million in business every
    month, of which--from which you are paying the $20,000? Is that
    correct?
        Mr. Carpenter. That would be correct.
        Mr. Smith. Okay. I just want to put it in perspective.
    $20,000 sounds like a lot, but if it is--but it is still only 2
    percent of over $1 million in business----
        Mr. Carpenter. It would be less than $400,000 in margin.
    The number sounds like a lot on the sales, but from a revenue
    margin standpoint it is very small as----
        Mr. Smith. I understand that.
        Mr. Carpenter. Right.
        Mr. Smith. Mr. Blum, a question for you: What constraints
    now exist on credit card companies that would prevent them or
    discourage them from raising interchange fees?
        Mr. Blum. I can't testify for Visa or MasterCard as far as
    what constraints that they have out there. You know, quite
    simply, as I understand the interchange fee structure, you
    know, as a financial institution it is an offer to me as well
    to participate in the system and saying, ``You know, if you
    participate in this system, if you accept these costs, if you
    accept this risk, then this is, if you will, the interchange
    fee that you could possibly earn. Now, you have to pay for all
    your risks, you have to pay for all your costs.''
        Interesting, I think someone testified that interchange
    fees have tripled in the last 3 years, or doubled--I am not
    quite sure what that number was. I can tell you that our net
    income has dropped, actually, while volume has increased. My
    fraud is exorbitant on it. $800,000 in fees is a wonderful
    thing; I would like to have that limitation on the fraud on my
    portfolio.
        I would also like to comment, I believe Mr. Carpenter, from
    the bank side, testified that interchange was not--there was
    not profit. Interchange provided not a penny of profit to his
    bank. That would reason me to believe that the best case is
    that it is a break even function and any reduction in it would
    actually cause a loss to the financial institution if
    interchange fee is providing no profit to him.
        Mr. Smith. Okay. Thank you, Mr. Blum. I think there may be
    some profit involved with some of the institutions, but
    appreciate your answer.
        Mr. Kantor and Mr. Mierzwinski, I have the same question
    for you all, and that is, if this legislation were enacted,
    would the savings to the merchants be passed onto consumers? If
    so, how and why, and how would that be enforced?
        Mr. Kantor. I appreciate you asking the question----
        Mr. Smith. Sure.
        Mr. Kantor.--Congressman. Mr. Sensenbrenner was not kind
    about my views on this earlier. It would be fair for him to be
    not kind about me personally, but I actually think my views on
    this are well established.
        We believe that the American competitive market system
    actually works, and here is how it works: It works in that
    there is an incentive for businesses, especially at the retail
    level--convenience stores, department stores, and others--to
    reduce their prices as much as they can to attract more
    customers. And so what they do is they make sure they can
    survive as a business--that means they have to cover their
    costs and have some rate of return--but otherwise they try to
    keep those profit margins narrow.
        And I have included with my testimony a couple of exhibits
    that show across retail industries profit margins are very
    narrow and stable. They are from 1 to 3 percent, give or take.
    In some of these industries--convenience stores, grocery
    stores--they are very narrow.
        Mr. Smith. Are you basically saying there would sort of be
    a free market balance here--maybe some additional profits and
    some savings to the consumers both?
        Mr. Kantor. That is exactly right. Now, I don't know that
    there would be additional profits or not. The Department of
    Energy's 2003 study they did looking at gasoline markets and
    pricing, and what they determined, in fact, is that there is
    100 percent pass-through of cost increases and of cost
    decreases in the--to the business--in the form of prices to the
    consumer. One hundred percent.
        Now, gasoline markets are particularly competitive because
    people put their prices out on the street, but that is
    indicative of the type of competition that goes on today. In
    fact, I think most business owners today will tell you that
    these fees have gone up so dramatically over the last period of
    several years that right now they haven't been able to fully
    pass through the increases. They are passing through as much as
    they can but they are eating some of that--those increases.
        And so if the market turned the other way might they
    recover some of the losses they are suffering now? Possible,
    but there is no doubt the majority of it would go through in
    consumer savings. And frankly, if folks don't believe that then
    they must believe there is a market failure and the competitive
    markets here don't work and we ought to get to that problem.
        Mr. Smith. Thank you, Mr. Kantor.
        Mr. Mierzwinski, can you respond very quickly?
        Mr. Mierzwinski. Certainly, Representative, and I would
    concur with Mr. Kantor's comments. I believe that the savings
    would be passed on. I believe the market would enforce that
    mechanism because I believe retail is much more competitive
    than people give it credit for. I would be happy to provide
    some independent comments on that for the record.
        Mr. Smith. Thank you all for your answers.
        I yield back, Mr. Chairman.
        Mr. Conyers. Subcommittee Chairman Bob Scott?
        Mr. Scott. Thank you. Thank you, Mr. Chairman.
        Mr. Kantor, how much variation is there in price between
    MasterCard, Visa, American Express, and Discover?
        Mr. Kantor. Visa and MasterCard are very, very close. I
    couldn't tell you the exact figures, but we could provide that
    to you later. American Express is a little bit higher and
    Discover Card is a little bit lower.
        One of the problems here--that rule I pointed to earlier
    causes this real problem: We know that some of the smaller
    players, like a Discover Card, are quite eager, some might say
    desperate, for more market share here. They have been for a
    long time.
        One of the bases, usually, that a company would use to gain
    more market share is they would cut their prices and try to
    gain more market share that way. But Discover Card cannot do
    that here because if they cut this fee the consumer doesn't see
    that and can't make choices based on it because merchants are
    prohibited by Visa and MasterCard from giving the discount for
    use of the Discover Card. And so that fee remains very close,
    although a little less, but very close to what Visa and
    MasterCard's fee is, and there is no incentive for them to drop
    that fee further and----
        Mr. Scott. Some merchants accept Visa and MasterCard but
    not American Express or Discover. If they have a lower fee,
    would not the merchant be more likely to accept Discover and/or
    American Express?
        Mr. Kantor. As I said, American Express' is a little bit
    higher, so yes, some merchants don't take them. The primary
    reason is they don't have the power in the marketplace Visa and
    MasterCard do. Visa and MasterCard combined are more than 80
    percent of this market, and what merchants respond to is what
    their customers want, and that is what they take.
        Mr. Scott. If the price of MasterCard and Visa are so close
    why would that not be antitrust violation?
        Mr. Kantor. Well, I think you would have to--to find that
    itself to be an antitrust violation I think you would have to
    find some degree of collusion or the concept of conscious
    parallelism, something like that between Visa and MasterCard.
    We don't know whether that is the case or not and haven't made
    that contention. Our problem here is that under the umbrella of
    Visa and MasterCard all of these banks who are, indeed,
    competitors agree to charge that default schedule of rates and
    the same rates, and that is a problem where the banks aren't
    competing.
        Mr. Scott. Well, you have a provision that you have to--you
    cannot give a discount for various--for using somebody else's
    card. Why would that not be a restraint of trade?
        Mr. Kantor. We believe it is.
        Mr. Scott. Has it been litigated?
        Mr. Kantor. It is currently the subject of litigation in
    the eastern district of New York.
        Mr. Scott. And that would include cash discounts?
        Mr. Kantor. Cash discount is slightly different in that the
    Federal law, Truth in Lending Act, tells Visa and MasterCard
    they cannot prohibit a cash discount. The credit card companies
    do, however, make it very difficult and create a number of
    hurdles for merchants to be able to discount for cash.
        I have included with my testimony a story from the
    publication Oil Express where one of these--there are many of
    these conflicts--but one of these blew up and made its way into
    the press where Visa was threatening to fine one store operator
    $5,000 per day for offering a cash discount, and in fact was
    pressuring him to advertise his prices in a way that violated
    California state law, and that is in the testimony. It is a
    problem, but it is a little bit different because they don't
    simply have a blanket prohibition on the cash discounts.
        Mr. Scott. Mr. Blum, what portion of the interchange fees
    go to frequent flyer rewards and other kinds of incentives that
    some credit cardholders get and many don't?
        Mr. Blum. You know, there is a portion of it, Mr. Scott,
    that goes to it. I don't know the exact number. Within the
    credit union I have been on the debit card portfolio; I do not
    offer a rewards program.
        On most of the credit card programs they are also reward-
    free. I do have one credit card bin that has a cash-back
    program of 1 percent that members have asked for, and I have
    given it. And I will be truthful with you: On that 1 percent
    cash-back portfolio the credit union is upside down. It costs
    me more to have that portfolio than it has to have any of my
    other portfolios.
        Mr. Scott. Well, is there some industry average of how much
    of interchange fees go to the reward programs?
        Mr. Blum. You know, not to my recollection. I can find that
    answer out for you, though, and submit it to you.
        Mr. Scott. Thank you, Mr. Chairman.
        Mr. Conyers. Bob Goodlatte, Chair of the--former Chair,
    vice--Ranking Member of the Agriculture Committee is
    recognized.
        Howard Coble?
        Mr. Coble. Thank the gentleman from Virginia, Mr. Chairman,
    Jim Schiff, but I will be glad to respond.
        Good to have you all with us, gentlemen.
        Mr. Kantor, I am going to put a two-part question to you:
    How has the Merchants Payments Coalition come to the
    determination that interchange fees are too high, A? And B, can
    comparisons be made to the interchange rates that are charged
    in other developed countries?
        Mr. Kantor. Thank you for the question, Congressman. It is
    an interesting one, and I think these two questions are tied
    together.
        I have provided in my testimony a chart showing interchange
    rates in countries around the world. The United States and
    American consumers are paying the highest rates in the
    developed world right now of about 2 percent.
        If you take a look, for example, in Europe, the cross-
    border rate that MasterCard, for example, has agreed to on
    credit is 0.3 percent as opposed to the 2 percent we pay here.
    Australia, they did a study of this and regulated their fee at
    what they thought was reasonable; it is half of 1 percent, as
    opposed to the 2 percent here.
        But if you look at the list it is very interesting. There
    are countries around the world, including developing nations,
    that pay less than us and have not regulated this marketplace
    in any way.
        Why is that? The reason for that, as far as we can see, is
    this combination both of the market power that Visa and
    MasterCard have developed in the United States and the
    anticompetitive practices that we have described.
        And so we see that they are vastly inflated. One banking
    consultant, for example, said that only 13 percent of the
    interchange is the cost of processing.
        I have also put in my testimony information from Cards and
    Payments. That publication says that 60 percent of the
    interchange is profits.
        Now, that is a remarkable figure, given what Mr.
    Carpenter's testimony and what I have put in about retail
    profit margins. Retail profit margins are 1 to 3 percent, and
    so for 60 percent of this to be profit, that strikes us as
    anticompetitive, overinflated, and much too high.
        And Mr. Blum's point is actually right, I agree with him.
    It is a very good one. For small institutions--credit unions,
    community banks--that is not the case. They don't have the
    economies of scale to spread these costs out over a larger
    cardholder base. They are not making big money, as far as we
    can see, on this.
        But the largest institutions--10 banks--make 80 percent of
    the interchange. Those 10 banks are making huge profits and are
    guaranteed huge profits because they don't have the price
    competition from other competitors, large or small.
        Mr. Coble. Thank you, sir.
        Mr. Blum, let me ask you a simple question. It may induce a
    complicated answer. Why are interchange fees important to your
    credit union?
        Mr. Blum. The interchange fees provide us an opportunity
    actually to play these card programs. The consumer, our
    members, want the card payment system. They want it. They are
    tired of standing in line trying to process a check or walking
    into a place that doesn't accept checks, or, you know, going
    into a small retailer--maybe even a large chain I can think
    of--paying with a $20 bill and then waiting 45 seconds for the
    little vault to open so that they can get the little three
    tightly rolled $5 bills back.
        Obviously it is a lot faster for them, it is more efficient
    for them to have this. And in order for me to have that program
    I have got to be able to generate, if you will, some revenue to
    pay for it.
        So that interchange fee pays for the card, it pays for that
    phone center staff that receives the call in the middle of the
    night when the consumer looks at the statement and sees that
    there is a $10,000 charge to Best Buy and they didn't make it.
    They are not calling Best Buy to get their money back; they are
    calling me.
        I have to staff that, I have to process that $10,000, I
    have to write that $10,000 down and absorb it, I have got to
    reissue a card. I usually have to send it out overnight mail
    for that consumer along with new checking products, new
    checking account, new numbers in order to protect that member
    from further fraud losses.
        So that interchange fee, sir, is just a component of what I
    use to be able to pay for that system that the consumers ask
    for.
        Mr. Coble. I thank you.
        I want to beat that red light, Mr. Carpenter. Mr.
    Carpenter, how much of the interchange is passed on to
    consumers at your stores?
        Mr. Carpenter. It depends by market--that is a tough
    question. In my market, so I only can speak for myself, the
    majority of it gets passed on at certain times; certain times
    it doesn't. Markets are very competitive. We have huge
    competition. You know, three chains in my market--one has 1,500
    stores; one has 550; one has 450--they market all over the
    country. I have six.
        So, you know, we compete in markets where, you know, we
    don't want to all compete on the same level. So sometimes it
    does, sometimes it doesn't. It depends on the time and the
    complexity of the market you operate in.
        Mr. Coble. I thank you, sir.
        Mr. Chairman, I see my red light has illuminated so I will
    yield back.
        Mr. Conyers. Mel Watt, North Carolina, senior Member?
        Mr. Watt. Thank you, Mr. Chairman. I am not as senior as my
    Republican counterpart who just asked questions, either in age
    or in longevity of service, but I will take the compliment.
        I kind of hate to sound like my friend, Mr. Sensenbrenner,
    but I haven't quite been convinced of the value of the bill
    either, Mr. Chairman. I would have to say I have either the
    benefit or the burden of serving on both Judiciary Committee
    and the Financial Services Committee, and was a supporter of
    Ms. Maloney's bill to regulate the credit card industry because
    it identified specific practices that we thought were
    unacceptable in the marketplace and outlawed them. And I think
    to the extent we can identify unacceptable practices in the
    interchange fee space we should outlaw those unacceptable
    practices, some of which Mr. Kantor has referred to.
        If we think it is unacceptable for there to be a
    prohibition against cash discounts we ought to say that it is
    unacceptable for that to be a prohibition. If we think it is
    unacceptable to--for there to be a prohibition against discount
    for lower-cost cards we ought to say that and outlaw that.
        But I kind of live by the proposition that I learned from
    my mother a long, long time ago that two wrongs don't make a
    right, and to grant one part of an industry an exemption from
    antitrust laws just seems to me to not be an appropriate way to
    deal with somebody who appears or may be violating the
    antitrust laws on the other side. It just doesn't seem to me to
    be an appropriate way to proceed.
        So having said that, I keep coming to the hearings to learn
    more about what the new version of this bill will be. I don't
    think granting an exemption to a group of retailers is the
    answer here, and I don't see how we can enforce the passage of
    that end savings that would result, if you assume that there
    are savings, along to consumers, and I think there may be some
    ways that we could do that if we just said it is illegal to
    enter into a contract that says you can't advertise and accept
    a lower-cost card or have a discount--have a cash discount,
    which apparently is already illegal.
        I like Mr. Mierzwinski's--I may be messing up his name--
    testimony about the consumer financial protection agency. I
    have been one of the strong proponents of that in the Financial
    Services Committee. And that agency might well have the
    capacity to identify some of those unacceptable practices, and
    I hope we will get a robust consumer financial protection
    agency in the Senate bill when it comes out so that we can have
    that.
        I like his suggestion about private rights of action
    because I think if enough consumers litigated about some of
    these issues that, in and of itself, would be a cost-effective
    approach--or it would be so burdensome on the system that a lot
    of these practices would terminate, although I am sure some of
    my Republican colleagues would object to any kind of litigation
    or private rights of action.
        So I think there are ways we can get at this, I am just not
    sure that the approach that we are using in the Chairman's mark
    is the appropriate approach.
        Mr. Carpenter, I guess I ought to ask one question since I
    have given my opening statement. Any of your stores still
    accepting checks?
        Mr. Carpenter. Yes, we do.
        Mr. Watt. What is the default rate on--or failure to pay
    rate on a check?
        Mr. Carpenter. We pay five cents to process a check.
        Mr. Watt. And sometimes they bounce?
        Mr. Carpenter. Very rarely today. We have ways to scan that
    check. But historically, back when we took checks, you know,
    many checks versus credit cards, that fee on a comparable
    amount of business, we may take in $30,000 or $40,000 a year in
    bad checks.
        Mr. Watt. So you are saying that fee would have been
    substantially less than you are paying in interchange fees?
        Mr. Carpenter. You know, Mr. Kantor is much better at
    knowing the specifics, but I can tell you that--the debit card,
    which is like cash--it is an electronic form of cash, which
    should be cheaper because you are not sending checks to
    customers, you are not writing them, the banks not sending them
    back to the customer--the electronic version should be cheaper
    and it costs anywhere from eight to 15 times more for us to
    take electronic debit versus a check, depending on the price
    of----
        Mr. Watt. I am not sure you have answered my question. I am
    trying to figure out the loss ratio for checks.
        Mr. Kantor, you know the answer to my question?
        Mr. Kantor. I am afraid I don't know the figure. Usually,
    though, what merchants do is they pass through to the consumer
    where there are those lost check fees, and so for merchants the
    check problem, where checks are----
        Mr. Watt. Nobody is sitting under the illusion that
    interchange fee costs are not being passed through to
    consumers. I mean, we all understand that.
        Mr. Kantor. But that gets passed through--the difference,
    Congressman, is--to every single consumer in the prices that
    you pay. It is a very different thing to say to one consumer,
    ``You bounced a check. Hey, there is a fee we have when you
    bounce that check,'' than to have to raise all of your prices
    across your store, and that creates an impact in the market--as
    I said, fewer sales. Lots of people won't come in the store,
    won't buy something as a result.
        Mr. Watt. I understand that intellectually and
    academically, but as a practical matter I think the cost of a
    bounced check was being passed along to customers who paid in
    cash also.
        Mr. Carpenter. I think I can--you know, we typically--back
    when I said we take in, you know, approximately $40,000 in bad
    checks, we usually paid for that loss in the form of bad check
    of expense back to that consumer. So it was a neutral event for
    us to take checks.
        Mr. Watt. All right.
        Mr. Chairman, I didn't mean to be negative on your bill, I
    just--I am just negative on your bill. [Laughter.]
        I didn't mean to be. But I just am not convinced that
    giving an antitrust exemption doesn't double the wrong here as
    opposed to correcting the wrong, I guess is the problem I am
    having.
        I yield back.
        Mr. Conyers. Randy Forbes, Virginia?
        Mr. Forbes. Thank you, Mr. Chairman.
        Gentlemen, thank you all. You are all good men. You are
    doing a good job and you are trying to fight for your
    businesses. A lot of good men and women are behind you, all of
    whom would like to be at this table giving their input.
    Unfortunately, they are not there.
        And I understand that there are good points on both sides.
    Sometimes a talking point can kind of stretch your imagination
    just a little bit. I start with the premise that credit cards,
    I think, have destroyed some people's lives. The marketing we
    do is terrible, but that is not the issue that we have here
    today.
        And, Mr. Carpenter, when I heard you suggest that you guys
    were having stores so that the credit card companies could use
    their product that is kind of like the builder saying he is
    building homes so the mortgage company can exercise and sell
    its products. I mean, the reality is that when you talk about
    the size of the payments you are making and the reality of the
    situation a lot of your customers couldn't buy your products if
    they didn't have the credit card capability to use. And
    sometime when you suggest the fees that you are paying that
    just shows how valuable those credit cards actually are.
        But here are my two questions: Mr. Blum, first of all, for
    you, you talked about the difficulty of keeping up with
    differences if you had the different interchange fees. You guys
    are masters of software programs. I can be halfway across the
    globe and you can tell me how much I have got in my account
    exactly. You can tell us if we are a day late on a payment, and
    you can increase our fees on that.
        I would like for you to tell me what is wrong with just
    having the ability to negotiate these fees--and I am not
    talking about a court enforcement, you know, if it doesn't
    happen, but why shouldn't they have just the ability to sit
    down with you and negotiate these fees? And I am not totally
    sold on the fact you guys couldn't create the software to
    manage it.
        But before you do it, Mr. Carpenter, I want you to be
    thinking about this question for you: If Microsoft were to come
    up with an incredible program that all of your stores and
    stores across the country had to have for inventory control and
    you said, you know, ``We have just got to have this program
    because it is the best program in the country,'' what would
    give you the right to come in and say to them that they needed
    to reduce the licensing fees that they had for you? How is that
    any different than the credit card----
        So, Mr. Blum, if you would go first, then, Mr. Carpenter,
    we will come back to you.
        Mr. Blum. Thank you. You know, most of all--you know,
    overall, if you are asking me how can I figure out how to have
    everybody come to me, if you will, directly negotiating and
    create a software system that can run it, there is one out
    there. I couldn't afford it if I had to build it today--the
    current payment system that spans globally. I think it might be
    just a little bit more complex than we are letting it be.
        You know, and I commented that there are tiered rates on
    the interchange, and those rates have to do with volume. They
    also have to do with fraud losses from that merchant category
    and from--and times from that merchant.
        Back up that the merchant can negotiate--they can't
    negotiate the interchange fee, which is, if you will, mine,
    okay? They can negotiate with their processing bank, you know,
    the overall, the total package, the discount fee, what their
    bank is paying, to simply pass all the risks, the liabilities,
    and the financial, you know, requirements on to me. So that
    component, if you will, is negotiable.
        But I will point out that I do happen--Chartway does happen
    to have a business partner where we have a branded rewards
    card, if you will, specifically for that business that tracks
    the members' spend in that business and returns rewards to that
    member that they must use in that business. The complete
    interchange received on that--on all those transactions in
    those businesses is, in fact, returned to the consumer in a
    form that they must--a store gift card, if you will, for that
    store; they can only use it back in that store.
        So merchants have the ability to come to institutions and
    create, if you will, specific rewards programs. In fact, I
    believe that there are a number of merchants that are in the
    rewards program business, where they offer the rewards--Home
    Depot, you know, gift card as a reward; the airline miles as a
    reward. If you, you know----
        Mr. Forbes. Mr. Blum, I don't want to cut you off but my
    time is just about up. Can I just get to Mr. Carpenter--and I
    would love to listen to more of that response, and not trying
    to cut you off. I only have 5 minutes.
        Mr. Carpenter?
        Mr. Carpenter. Thank you. First of all, with six stores I
    am no Home Depot, so we certainly don't have the ability to
    create our own card and our own card network.
        You know, we look at everything, as any business should,
    from a financial point of view. And I want to be very clear:
    The processing of credit cards, the use of plastic, I think is
    a good thing. The system works well.
        Did we have any idea 15, 20 years ago, when it first was
    introduced to us and most transactions were passed close to
    par--it was 5 or 10 percent of our business within a few
    years--did we have any idea that two of the players would
    control 80 percent of the business, 85 percent of our customers
    would be paying using that card, and it would cost us an
    enormous amount of money that we have, you know--he says we
    don't have the ability to negotiate interchange. Well, that is
    90 percent of the cost of this cost to us----
        Mr. Forbes. My time is up. Can you just address the
    Microsoft example? Why would that be any different if it was a
    software program that you just had to have? You didn't think
    when you began to use it you were going to use it that much,
    but now you are using it so much you are dependent upon it----
        Mr. Carpenter. If Microsoft came to me today with some
    technology to help us sell gas and it was going to take 50 to
    60 percent of our margin to do it----
        Mr. Forbes. That is not what I am asking. I am saying, if
    Microsoft came to you with an inventory program and you became
    so dependent on it because it was such a good program, and all
    of a sudden you looked and you were using it so much your
    licensing fees were a huge amount of money, what would give you
    the right--you could walk away from it--but what would give you
    the right to say to Microsoft, ``No, no. You can't charge that.
    You have got to----''
        Mr. Carpenter. If it became that prevalent in our industry,
    where 80 or 85 percent of my competition had it as well, I
    would hope that we also became strong enough to have a voice to
    go to Microsoft and negotiate that fee down. And at some point
    Microsoft may have a competitor who could then compete with
    Microsoft, who would then lower that price.
        Mr. Forbes. Mr. Chairman, thank you for your patience.
        Mr. Carpenter. So that is how it works. It is not working
    that way in this case, by the way.
        Mr. Conyers. Dan Maffei, New York?
        Mr. Maffei. Thank you, Mr. Chairman.
        I just want to ask a couple of quick questions. One is--I
    am still confused about the risk discussion, because it seems
    that, to me, both sides are the last holders of the risk.
        So I guess I will ask Mr. Carpenter, Mr. Blum, and then if
    those answers are incomplete, we will ask others, who--if
    somebody comes in and has a card, and it is a a fraudulent
    card, and purchases something in your store--do you still get
    the money? Or do you have to--what kind of risk is that to you?
    Obviously, you don't know it is happening at the time.
        What--what do you see as a loss later on?
        Mr. Carpenter. If it is a fraudulent card, as long as we
    have followed the process, either, you know, acquired a PIN or
    a signature, we typically would not get charged back for that.
    I can tell you from our bank's standpoint, a quarter of a
    percent of our transactions are fraud. And the reason for that,
    our bank has a higher level of credit score and credit rating
    that you must pass to obtain credit. And so we have some
    control over, you know--that would be more in the form of
    charge backs, but yes.
        Mr. Maffei. Okay.
        Mr. Blum, is it your credit union that would take the loss?
        Mr. Blum. Yes, sir.
        Mr. Maffei. And how does that work? You just eat it? I
    mean, what----
        Mr. Blum. You know, basically I have to eat it. I mean, I
    have to follow the same rules. If it was a properly authorized
    transaction, regardless of whether or not it was a fraudulent
    card, I end up eating it. The consumer, you know, makes a
    statement that they did not make that charge. I then follow the
    rules and give them credit.
        You know, interesting, just a couple of weeks ago we
    received a couple of captured cards out there--these are
    fraudulent card numbers that we have identified as fraud and we
    have put a capture code on them. They were returned to me.
        All four of them were white plastic with absolutely no
    writing on them; all it had was a magnetic stripe. I mean,
    there wasn't even an attempt to disguise that it was just a
    piece of plastic somebody had created--fraudulent activity.
    Yet, not only did I pay the capture fee for those cards, I paid
    for the fraud on those cards, I paid to restore the members'
    accounts, I paid for the new cards that are being processed--
    that had to be developed, I had to pay for the statements that
    had to be sent out, if you will, or the PINs, the notices, my
    staff that handles just the fraud.
        And I pay a significant amount of money to a very robust
    antifraud engine where I pay for half of the fraud they stop
    because it is less expensive to me than to pay for the fraud.
        Mr. Maffei. I will come back to you, Mr. Kantor.
        Mr. Mierzwinski?
        Mr. Mierzwinski. Yes. Congressman, there is a third party
    here, and that is the consumer. And the consumer, in fact, is
    increasingly paying for the cost of fraud because banks are not
    honoring the laws that require them to do reinvestigations and
    pay consumers when they are victims of fraud. Credit cards,
    in----
        Mr. Maffei. Stop there. I don't quite understand. Are you
    saying that Mr. Blum is not accurate?
        Mr. Mierzwinski. No, no, no, no. I am saying it is a three-
    sided dispute. The merchants sometimes pay if they don't follow
    the rules; the banks pay if the merchants follow the rules; but
    the banks also argue to consumers that we didn't follow the
    rules and that we should pay sometimes.
        Mr. Maffei. How do you mean we didn't follow the rules?
        Mr. Mierzwinski. I know we don't have time for a long,
    detailed discussion, but the Truth in Lending Act limits
    consumer liability to $50 on a credit card. The debit card law
    is different. It was originally written for PIN-based
    transactions. But because the banks wanted to make so much
    money on interchange, they wanted to use the credit card
    network, they began to allow the cards to be used on signature
    transactions.
        So there is much more fraud. Banks are saying that
    consumers are subject to a higher liability, even though the
    law says--I am sorry, their contract says zero liability, but
    the law provides for even up to all the money in your account
    can be lost by the consumer in certain circumstances.
        That is why consumers believe that the Electronic Fund
    Transfer Act needs to be amended, so the consumers have the
    same protections in all transactions.
        Mr. Maffei. Well, we will look at that at another hearing,
    but thank you for your comment.
        Mr. Kantor, I will let you have the rest of my time, but I
    want to add a follow-up question. Or actually a somewhat
    different question, which is--I think you mentioned it
    earlier--or somebody mentioned earlier--that there was a case
    going on in the Eastern District of New York where the
    merchants were trying to get Visa and MasterCard to--basically
    suing Visa and MasterCard for not allowing competition.
        Why shouldn't we just wait to see where the case goes? I
    mean, if the current laws already are sufficient, if that case
    is decided, should--should we not wait for the end of that
    case?
        Mr. Kantor. Thank you, Congressman, for--for both
    questions. On the fraud question, I think, it is important
    here--I included with my testimony a letter from the owner of
    The Catch Seafood Tavern in your state, Port Jefferson, New
    York. And they described a situation that is all too common,
    which is he, in a given month, had five of these so-called
    charge-backs from his credit card provider. The charge-back is
    where the bank refuses to pay the merchant the money for the
    transaction--but that is what they call it, the charge-back.
        These were all because of--supposedly fraud had gone on in
    the transaction. He went back to the bank, over time, and--and
    gave them information about why he thought he had done
    everything right, why he thought they were, in fact, good
    legitimate transactions. All described in his letter. And
    finally, after weeks of haggling with the bank, they agreed--
    ``You are right''--all the transactions were right, there was
    no fraud here. He got his $78 back.
        And the bank said, ``But to resolve each of these disputes,
    there is a fee, $15.50 for each of these disputes.'' There is a
    fee, of course, of $15.50, for each of the five disputes. So
    they charged him $77.50 in order to determine that he could get
    his $78 back.
        Now, that is not a payment guarantee, and it happens over
    and over again. There are dozens of pages of rules Visa and
    MasterCard both have about when they can charge back the
    merchant.
        And many banks--typically not the smaller institutions like
    Mr. Blum's--but many banks are quite aggressive about them.
    LexisNexis and Javelin Strategy did a study last year. And they
    determined that merchants absorb almost ten times the amount of
    fraud that the banks absorb. That is a staggering figure.
        Mr. Maffei. All right, I am--I am out of time. We will look
    at that document.
        And I agree with Mr. Watt that I think--part of the work
    that we are doing in Financial Services is probably more akin
    to that.
        Do you have a quick two-sentence answer to my question? Why
    we don't just wait for the case and see what happens?
        Mr. Kantor. I do. These cases take an incredibly long time
    to play out. And there are some things the courts are good at
    and some things they are not as good at, and where Congress
    ought to assert it's own perogatives.
        The Court is very good at figuring out, ``Is this a
    violation of law?'' and assigning some monetary value to the
    losses that may have occurred, if there is a violation of law.
    But the terms of figuring out what this structure ought to look
    like going forward, whether there are regulatory changes that
    ought to happen, or how the system ought to work so that it is
    fair, we think Congress is in a much better position to do
    that, as they were in the telecom----
        [Crosstalk.]
        Mr. Maffei. Thank you very much. I thank the Chair and the
    Committee for its indulgence.
        Mr. Conyers. Steve King?
        Mr. King. Thank you, Mr. Chairman. I should clarify my
    response earlier. We do have 3 million excellent witnesses in
    Iowa; we don't have another one like Dave Carpenter, however.
        And while we are talking about states and loyalty, too, I
    regret Mr. Sensenbrenner wasn't able to stick around because it
    occurs to me that the fees on credit cards at $48 million, that
    is seven times the value of all of the beer that is brewed in
    Wisconsin. They should think about that as well. It is a large
    number.
        But this, for me, comes down to--and a little bit different
    way of asking questions. I don't think I have heard this
    approach at all in this testimony, but we have contracts that
    one apparently can't divulge publicly, or at least can't
    reflect the costs of doing business in the retail, can't offer
    a discount that reflects or is comparable to the cost of doing
    business with particular credit cards.
        I am a guy who has done a lot of markup and taken my hit
    in--I bid a lot of projects in the construction business and I
    have my itemization and my spreadsheet, and I put my margin in
    there, and I reflect my costs in everything that I do. And it
    is an easy equation once they come out with spreadsheets.
        So it would occur to me that when Mr. Forbes asked a
    question about what if Microsoft comes up with a software plan
    that would be so good at doing your inventory tracking that it
    would essentially dominate the market, and you would have to
    have that plan working for you in order to be in business in
    the retail price, financial world, I just ask this question:
    Clearly, if one had information on all of this testimony that
    is here, it would be possible to draft a software plan that
    would reflect exactly the costs of doing business with each of
    the credit cards in regard to each of the pieces of inventory.
        It may cost a lot more to put a pack of gum on a piece of
    plastic for credit than it does, say, $100 purchase worth of
    other items off the shelf, but I would think that could all be
    tracked by inventory item by cost, and I would think that you
    could tell me the cost of doing business for an individual
    inventory item, whether it would be paid for by cash, check,
    debit, or credit card, for a pack of gum versus a gallon of gas
    versus $100 worth of groceries, for example.
        If someone produced that software package would anybody in
    the retail business--and I will go first to Mr. Carpenter--be
    interested in taking that up and having that software package
    reflect the cost of doing business and have it be a plus-up,
    depending on whether it would be cash, credit, debit, or check?
        Mr. Carpenter. Just to be clear, you are suggesting that we
    would have some program that would charge the customer based on
    how they pay for those various--if they had a higher rewards
    card they would pay a higher price for that pack of gum?
        Mr. King. Exactly. A plus-up or a discount, depending on
    which way you wanted to present it as a retailer.
        Mr. Carpenter. We have 4,000 items in our store. I mean, I
    can't fathom how that would--you know, our consumers think
    their credit card is like cash. And we talk about a discount--
    even if we did give a discount, the customer doesn't understand
    where that money goes.
        If we said, ``It is 10 cents more for this,'' they would
    think that was just a windfall profit for the retailer. They
    have no ability to determine that that is going to interchange,
    to a bank; they don't understand that, so to get a customer to
    explain--understand that a pack of gum has four different
    prices, I think, would be just--I don't know how you would even
    advertise a price on your, you know----
        Mr. King. I get your general response to this. Could you
    also do a calculation on a range of prices? For example, if
    your transaction is under $5 then reflect the cost of cash or
    credit in proportion to the size of the transaction? And then
    could you also separate that according to Visa, MasterCard, and
    the other cards?
        Mr. Carpenter. I suppose anything is, you know, possible
    from a technology standpoint.
        Mr. King. Because what I am getting at is--now, this
    testimony that I am hearing today is that you can't actually
    reflect the cost of doing business in your price because you
    might be fined if you offer that kind of a discount by the
    credit card companies. I am also hearing ``threaten to fine,''
    but I am not hearing testimony of actual fines.
        I think maybe I should turn that over to Mr. Kantor, as my
    clock ticks down, and see if he can answer that question. Is
    anybody fined, or are they threatened to be fined?
        Mr. Kantor. There is both, Congressman. These do occur
    quite often.
        I will tell you, though, that in most instances the threat
    of the fine is plenty. Take the instance where I included the
    article in my testimony of the single-store operator in
    California. He was threatened with a fine of $5,000 per day
    that he was out of compliance with this rule and discounting
    for cash----
        Mr. King. But I am interested----
        Mr. Kantor. The average per store profit----
        Mr. King [continuing]. Actual fines.
        Mr. Kantor. But understand, the average per store profits
    in the industry are $35,000 for the entire year----
        Mr. King. I do understand that.
        Mr. Kantor [continuing]. So most people--you know, this
    individual actually, he called me and said, ``I am taping over
    my sign. Even if the state comes after me I don't care. I can't
    risk that fine.'' So there are both----
        Mr. King. I am just going to ask you, in the aftermath of
    this hearing, if you could present some documentation of actual
    fines, just for my personal use here, because I would like to
    know about the actual as opposed to the threatened.
        But I don't bring this up to diminish your argument; I
    bring this up because I am thinking in terms of, if there are
    negotiations and you are able to sit at the table, will part of
    those negotiations be allowing the retailers to reflect the
    cost of doing business in their pricing by either a plus-up or
    a discount, and would you support that, Mr. Kantor?
        Mr. Kantor. Absolutely. The legislation, as it stands,
    allows negotiation over the price and the terms and rules
    around which the system works----
        Mr. King. And the transparency.
        Mr. Kantor [continuing]. And the transparency. And we are
    very interested in engaging on those issues.
        Mr. King. And, Mr. Carpenter, is that mostly your goal,
    too, is to be able to reflect those costs of doing business----
        Mr. Carpenter. We simply want to be able to sit down at the
    table and negotiate like we do with all of our vendors. We want
    to be transparent. That is all we are asking--the ability to
    negotiate this fee. That is it.
        Mr. King. I am going to accept that as a conclusion for my
    questioning, and I thank all the witnesses here today and the
    Chairman for calling this hearing. Appreciate it, and I yield
    back.
        Mr. Conyers. Debbie Wasserman Schultz?
        Ms. Wasserman Schultz. Thank you, Mr. Chairman.
        Mr. Chairman, at the outset I want to say that I supported
    the Credit Cardholder's Bill of Rights and was a cosponsor of
    it because it, I felt, addressed the abusive practices of the
    banking--bank issuing credit card companies as well as the
    credit card industry.
        But throughout the discussion over the last 2 years in this
    debate over interchange fees it continues to be hard to wrap my
    mind around several things: One is, in this version of the
    bill, why, in this economy, we are talking about giving an
    antitrust exemption to anyone, banks or merchants; two, that
    this legislation still does not ensure consumers that the
    savings that would perhaps be realized by merchants in these
    negotiations in this legislation would actually be passed on to
    them. We attempted to put that language in this legislation
    last year and it doesn't appear to have successfully remained
    in the bill in the presentation of the bill this time.
        My question, Mr. Chairman, and I would like to address Mr.
    Carpenter to start off with, you are the owner of a retail
    establishment, correct?
        Mr. Carpenter. Correct.
        Ms. Wasserman Schultz. And you are here testifying on
    behalf of the National Association of Convenience Stores?
        Mr. Carpenter. Correct.
        Ms. Wasserman Schultz. Are you also testifying on behalf of
    the retail stores that you own?
        Mr. Carpenter. Correct.
        Ms. Wasserman Schultz. Okay. To quote you a few minutes
    ago, you said that you are not in the financial institution
    business. You also said that you are not in the business of
    deciding credit, except that you are. Are you also the director
    of a bank?
        Mr. Carpenter. Yes.
        Ms. Wasserman Schultz. Okay. What is the bank's name?
        Mr. Carpenter. Liberty Bank of Iowa.
        Ms. Wasserman Schultz. And your bank issues Visa cards?
        Mr. Carpenter. Yes.
        Ms. Wasserman Schultz. Are you testifying on behalf of the
    bank today?
        Mr. Carpenter. No.
        Ms. Wasserman Schultz. Are you testifying on behalf of a
    bank trading association?
        Mr. Carpenter. No.
        Ms. Wasserman Schultz. Are you testifying on behalf of
    anyone in the financial services area?
        Mr. Carpenter. No.
        Ms. Wasserman Schultz. So when you state your opinions
    regarding the impact of interchange on Liberty Bank or
    community banks you are not stating the position of Liberty
    Bank or community banks, correct?
        Mr. Carpenter. I am giving you the information from our
    bank only.
        Ms. Wasserman Schultz. So Liberty Bank disagrees with all
    the credit--and the industries testifying here today--the
    banking industry, the----
        Mr. Carpenter. What I am here to tell you, that credit card
    interchange and the card business to our bank, which is on the
    larger end of community banks, is not material to the revenue
    and/or profit of our business. The argument has been made that
    this is a material effect to the business of community banks.
        Ms. Wasserman Schultz. Does Liberty Bank disagree with
    those trade associations testifying here today on the position
    of interchange fees--Liberty Bank as a banking institution?
        Mr. Carpenter. I am not here as a representative of our
    bank to tell you whether we----
        Ms. Wasserman Schultz. Okay. I would imagine that is
    because they don't. Can you please----
        Mr. Carpenter. I can't answer that, and neither can you.
        Ms. Wasserman Schultz. Okay. Can you please describe
    whether you have any conflict of interest today when you
    indicate that Liberty Bank or community banks in general won't
    be harmed by the interchange legislation that is before us?
        Mr. Carpenter. I am not here to say either of those things,
    other than it is not a material portion of our business when it
    is made----
        Ms. Wasserman Schultz. You are sort of on both sides of the
    issue here, so that is my concern, is----
        Mr. Carpenter. Say that again?
        Ms. Wasserman Schultz. You are sort of on both sides of the
    issue here. You own a number of convenience stores while you
    are also the director of a bank----
        Mr. Carpenter. True.
        Ms. Wasserman Schultz [continuing]. That issues credit
    cards.
        We hear from a variety of small banks and credit unions and
    every single one of their trade associations that interchange
    legislation will hurt them, and Congress hears from one single
    bank director who owns retail outlets that interchange won't
    hurt community banks and credit unions. Who are we supposed to
    believe?
        Mr. Carpenter. Well, I would add that I didn't know what
    our bank made in interchange and how it would--if it had a
    material effect to our bank until 3 weeks ago when I sat down
    with the head of our credit card department. Our information at
    our bank was absolutely identical to the bank information that
    they had produced that at banks of less than $1 billion
    interchange makes up to zero percent of their profit.
        Ms. Wasserman Schultz. Okay. I might also point out that
    your bank is owned by a chain of 400 convenience stores, so the
    conflicts here are really just popping out from every corner.
        Mr. Chairman, I want to conclude my questioning with Mr.
    Mierzwinski, who I have a tremendous amount of respect for and
    whose organization I have worked with for a very long time.
        But, Mr. Mierzwinski, can you help me understand, for
    consumers shopping in stores how would an antitrust exemption
    for the banking industry and for merchants help them?
        Mr. Mierzwinski. Well, very simply, Congresswoman, the goal
    here is to force the banks to negotiate with the merchants to
    make these prices transfer----
        Ms. Wasserman Schultz. But why isn't U.S. PIRG insisting
    that this legislation include a passing on of those savings to
    consumers? That is counter to every experience I have ever had
    with U.S. PIRG in an 18 year career.
        Mr. Mierzwinski. If there were an amendment on the floor to
    do that we would consider supporting it. We would have to look
    at how it would work.
        The problem here is that we are trying to move this along--
    that is one thing--but the second thing is, I really do believe
    that the market doesn't require Congress to order that kind of
    a result because I think that result happens anyway. I believe
    that this is a place, the retail industry, where the market
    works; I believe that interchange is a place where the market
    doesn't work, so that is the reason that it is not necessary
    that----
        Ms. Wasserman Schultz. Honestly, Mr. Chairman, the bottom
    line--and I have tremendous respect for you; I know this is
    your legislation and this is perhaps my last meeting as a
    Member of the Judiciary Committee, and I have really enjoyed my
    service on the Committee--but I would urge the Committee, as
    you move forward, to please, if this bill does get marked up at
    some point, to incorporate a passage of savings to the consumer
    in the event that we create this transparency that the bill
    would call for, because that is the overall drive--it should be
    overall driving concern: How does the consumer benefit? Not the
    merchants, not the banks, but the consumer.
        Thank you. I yield back the balance of my time.
        Mr. Conyers. Well, if you stay on the Committee we will put
    it in. [Laughter.]
        Ms. Wasserman Schultz. I think that could be negotiated,
    but it is a couple stages above my pay grade. Thank you.
        Mr. Conyers. Judge Poe?
        Mr. Poe. Thank you, Mr. Chairman.
        I want to thank my friend from Iowa for putting this in
    perspective with Wisconsin beer. I think during my 5 minutes if
    you would calculate how much the savings would be, or how much
    it would cost in perspective to Texas barbeque, and then I can
    relate to how much we are talking about.
        Anyway, I got two--I want to talk to two of you on a couple
    of issues, Mr. Carpenter and Mr. Blum. I am a big fan of
    convenience stores. Their margin of profit is very small. Back
    in the days when I was a judge and convenience stores dealt
    mainly in cash we called those places ``stop-and-robs'' in
    Houston because they had a lot of money. Now they don't have a
    lot of cash, and security is better, and robberies are down,
    which is good.
        But let's talk about cash, and checks, and credit cards.
    What is the margin when you are using cash and checks versus
    credit cards? Can you explain it to where it is simple?
        Mr. Carpenter. On average we make 12 cents a gallon on a
    gallon of gas--you pay with cash our margin is 12 cents; if you
    pay with credit and gas is nominally $3 our profit is four
    cents.
        Mr. Poe. All right. Let me ask you this question: What is
    the cost of dealing in cash and with checks versus your cost in
    dealing with credit cards? That is really my question.
        Mr. Carpenter. Well, cash we receive immediately,
    obviously, when it trades hands from the customer to ours----
        Mr. Poe. You don't have more security because of cash,
    dealing with cash? You don't have issues with checks?
        Mr. Carpenter. No. We have great bank vault systems that
    are electronically controlled. And we still take a lot of cash.
    Don't get me wrong. So cash is very easy to take. Checks, I
    think we pay five cents to process a check. It gets deposited
    in the bank that day with the----
        Mr. Poe. So you are saying that the cost is less----
        Mr. Carpenter. Significantly less.
        Mr. Poe [continuing]. If you are dealing with checks. How
    much significantly less?
        Mr. Carpenter. Well, I think I said earlier in a statement,
    you know, to process a check is approximately five cents at our
    bank, and an electronic form of a check, which is a debit card,
    depending on the size of the transaction, could cost 20, 25,
    30, 35 cents, you know. It depends on the price of the product.
        Mr. Poe. Let me ask you this: Am I wrong or not? You are
    dealing in cash the threat of a crime being committed against a
    convenience store is up because the bad guys know, ``Oh, they
    are holding a bunch of cash back there even though their sign
    says, `We don't have change for anything more than a $20 bill.'
    '' Is that true or not?
        Mr. Carpenter. We have been in the business since 1935 in
    my family and we have had one robbery in 75 years.
        Mr. Poe. Do you own any stores in Houston? [Laughter.]
        All right. Mr. Blum, I have a lot of credit unions, and
    during this financial mess our credit unions helped the Texas
    economy because they didn't go out of business, they didn't
    make bad loans, they did everything, I think, right under this
    whole financial issue. But I hear from them that they are
    concerned that the interchange fees--without the interchange
    fees they could--you know, they would have a--might have to go
    out of the whole business of the credit card industry if we
    don't have the interchange fees. Is that a valid fear or not--
    with the credit unions only?
        Mr. Blum. I don't know. I would tell you that if I didn't
    have the interchange fees that I have right now--and again, the
    interchange fees that are significant happen to be on the debit
    side of the portfolio versus the credit card side of the
    portfolio--we would have to think real hard about whether or
    not we could continue to offer that debit card, I mean, to be
    quite honest.
        On the credit card side, the interchange fee--and I just go
    back to the fraud, I go back to costs and go back to concerns
    over legislating what is perceived to be as my income, and
    capping it with no similar cash on my expense. I mean,
    legislate my fraud. Share it with me. Split it down the matter
    50/50. Do all those things.
        I mean, if you took away the interchange fee, if you
    reduced the interchange fee, if you made it more costly in any
    manner for me to conduct business as a credit union it would
    impact me, and it would impact me significantly. It would
    impact the consumer. I mean, there is no profit in a credit
    union. It is passed on.
        I may have to reduce the savings rate. I may have to
    increase the interest rate.
        Mr. Poe. Because credit unions provide credit cards for
    people in many cases that don't--wouldn't get a credit card
    from someplace else. They go to the credit union.
        Mr. Blum. I can only speak for Chartway, and I will tell
    you that at times it has proceeded to be very difficult to get
    a credit card from a credit union. You know, we have fairly
    high credit standards and we are not afraid to tell a consumer
    no, that you shouldn't be doing this, you should not be
    extending yourself. So I think the concept that I couldn't get
    a credit card anywhere else so I went to a credit union, not
    necessarily, you know, a true statement based on----
        Mr. Poe. Well, I didn't mean that because of financial
    issues. People go to credit unions because that is what is in
    the neighborhood is a credit union; they belong to an industry
    that has a credit union. Teachers' credit union, police
    officers' credit union----
        Mr. Blum. In that matter I would say that people absolutely
    flock to the credit union. Certainly, we are regulated. We have
    the usury rate. I mean, our default rate can't be any higher
    than 18 percent and is significantly lower than the credit card
    industry. We don't charge balance transfer fees. You know, the
    number of fees that aren't charged--no, it is a simple tool to
    access a line of credit. I mean, we use the tool. And when you
    use that tool there is a cost to using that tool.
        And I think Mr. Carpenter even mentioned that he is a small
    six-store chain. He couldn't afford to set up his own payment
    card industry. And I think that is what we are really talking
    about.
        We are talking about an infrastructure that is extremely
    complex that has been set up to facilitate payment and move it
    around. It comes with it some gives and takes. I have to take
    fraud. It has to become my responsibility. In that return I get
    this interchange rate. That is up front.
        I don't know--you know, you talk about not being able to
    determine what I am going to get, I can't tell you what my
    interchange net after I pay for fraud will be next week, next
    month, because I don't know when that fraud will appear.
        Mr. Poe. All right. Thank you very much.
        I yield back, Mr. Chairman.
        Mr. Conyers. Judge Hank Johnson?
        Mr. Johnson. Thank you, Mr. Chairman.
        Economists have disagreed about whether the increased use
    of debit and credit cards actually increases costs for
    merchants. What I would like to know is, are there any ways
    where private--or, excuse me--are there any ways that the
    public could determine or measure the extent to which merchants
    increase retail prices to account for the cost of accepting the
    cards? I will ask that question of Mr. Carpenter and then of
    Mr. Kantor.
        Mr. Kantor. Go ahead, Dave.
        Mr. Carpenter. I think, again, to be clear, we are asking
    for simply transparency and the ability to negotiate, where
    today we don't----
        Mr. Johnson. Well, I know what you are asking for----
        Mr. Carpenter [continuing]. And for the customer to be able
    to see--I guess I am not sure--you are asking, how is it
    possible for the customer to see the cost?
        Mr. Johnson. Yes. And how is it possible for me, as a
    congressman, to see what your actual costs are for accepting
    these cards? Or is that proprietary information and we just
    have to trust you?
        Mr. Carpenter. The point of purchase, when you are
    purchasing a product right then and there?
        Mr. Johnson. Yes.
        Mr. Carpenter. I mean, obviously, certainly we could
    certainly post prices for all 4,000 items inside our store.
        Mr. Johnson. I mean, but, yes, you can price list, but
    actually transparency to where we could actually look at your
    actual costs.
        Mr. Carpenter. If you are asking if we could provide that,
    yes.
        Mr. Johnson. But no independent, say, audit----
        Mr. Carpenter. Sure. You can come in and audit--you know,
    if you sign confidentiality agreements you are welcome to come
    in and look at our books and see what--is that what you are
    asking?
        Mr. Johnson. That is not really a practical way, though, of
    being able to determine your costs. And I guess if we are
    looking at costs from the banking institution, if we want to
    say that they are charging too much for the interchange fee and
    that needs to be regulated, that we could also use that same
    logic to impose regulations on, say, retailers to provide on
    every category of goods sold to give us detailed information.
    Would that be something that you would be in favor of?
        Mr. Carpenter. We do compete, and we do--it is transparent.
    Like I said, we have 30 different options every day in our
    market to buy fuel from different suppliers. You know, as a
    bank--even if I put the bank hat on, we can't negotiate
    interchange with the bank with Visa and MasterCard. So, you
    know, this is simply a--if you look at our costs, if you look
    at the written testimony, over time the cost for accepting
    credit and/or debit has risen dramatically, and----
        Mr. Johnson. I know we can make those conclusions, or we
    can utter those conclusions, but how can we really determine
    whether or not this legislation will benefit consumers?
        Mr. Carpenter. Go ahead.
        Mr. Kantor. Congressman, if I could, on your question
    there, a couple of things that may be instructive here. One is,
    I referred to the study that Robert Shapiro, Sonecon, put out
    earlier this year, and what they concluded is that the amount
    that consumers are paying that has been in fact passed through
    to them and that is over, above, and beyond the cost and a
    reasonable return on that cost of processing the transactions
    is nearly $27 billion every year. So that is them.
        The Hispanic Institute did a study they put out in November
    of last year, and they, in fact, determined that over time not
    only did they take a look and say there is a regressive wealth
    transfer from low-income to high-income people, but they found,
    based on the data they analyzed with the University of
    Pennsylvania economists, that in fact, when interchange fees
    were lower that translated into lower consumer prices; when
    interchange fees were higher that translated into higher
    consumer prices. That was their finding, the Hispanic
    Institute----
        Mr. Johnson. Okay, you are giving me some information from
    a private entity which I don't know who controls it, but I will
    say, how can we determine that passage of this legislation
    will, in fact, benefit consumers? How can we guarantee that?
        Mr. Kantor. Well, the answer, as Mr. Mierzwinski pointed
    out, is that you have got on the retail side a competitive
    marketplace that does return those things. As I said, we are
    happy to put into the record the Department of Energy study on
    cost pass-through, the Hispanic Institute study showing that
    interchange itself is passed through, and Robert Shapiro's
    study showing how it is passed through.
        Mr. Johnson. I mean, when expenses are passed through we
    can accept that, but how can we determine that a savings will
    be passed on?
        Mr. Kantor. Because the Department of Energy looked at
    precisely that question, and they found that when there were
    cost savings to businesses those reductions were passed through
    at 100 percent. That is the Department of Energy, and we are
    happy to provide that report to you; you can make of it what
    you will.
        But there is a reason, for example, that when gasoline not
    too long ago was $4 a gallon it went back down to about $2 a
    gallon; now it is back up again. The reason is, as businesses
    have lower costs the competition means they have got to reduce
    their prices to try to attract business. And the opposite is
    true: If they get higher costs they try not to have to increase
    prices to keep business, but at some point they need to do
    that.
        Mr. Johnson. Thank you.
        Mr. Blum, your response?
        Mr. Blum. You know, you are asking how do you guarantee it?
    I would ask the question now--I think the example we were just
    given, 12 cents was the profit, but if it is paid with a credit
    card I think it dropped to four cents, so there is an eight
    cents per cash transaction saving that I assume that you pass
    on to the consumer. I mean, that savings when they pay with
    cash they buy their gas for eight cents a gallon less. I mean,
    that is the same--that is, I think, the guarantee that you are
    asking for.
        I am not sure I see it in the market now. If the credit
    card interchange cost of doing business is so high I see
    examples--big stores, I will use Walmart as an example--has a
    proprietary card that, in fact, discounts the consumer at their
    gasoline pump if they use that card. Surprisingly, though
    Walmart doesn't extend that discount to the consumer if they
    come and shop in the store. So they are picking and choosing
    where they want to push this--you know, use the examples. You
    can use the gasoline station and the 12 cents a gallon; I am
    not certain in my mind that explains the $1.69 I paid for a
    Coke in one of these convenience stores.
        But nonetheless, the transparency in it and the cost of
    it--they discount for cash. I see some gas stations doing it. I
    can't answer the question as to why all of them aren't doing
    it. As a consumer I certainly would make the decision whether
    or not I paid for it with a card.
        By paying for a transaction with a card, I might add, that
    the consumer receives certain protections that they don't get
    with the cash. They now have the power and strength of Visa or
    MasterCard or American Express or Discover should there be some
    service that isn't, you know, as portrayed, there is some sort
    of problem, there is a dispute with the vendor. They have a
    larger voice when they pay with Visa and MasterCard.
        And I believe that there are a number of consumers that
    understand that and elect to use that card just for that
    protection. The cash or the check doesn't offer that.
        Mr. Kantor. Congressman, could I add just one quick thing
    here? One thing I would say to Mr. Blum's point, we have tried,
    in many different forms, to have the ability to discount,
    whether it is for cash, or cheaper cards, or what have you, and
    this bill is part of that. It would give us the ability to try
    to negotiate that.
        The banks have consistently lobbied against our ability to
    provide those discounts. So if they are willing to say with us,
    ``We ought to be able to give those discounts,'' we would be
    quite pleased.
        Frankly, you could make it mandatory. Make it mandatory
    that every merchant across the country must provide a discount
    for cheaper cards or for cash. You know what? Throw us into
    that briar patch because I think the banks will be quite
    appalled at the idea that consumers would actually see the cost
    that is being imposed every day.
        Mr. Johnson. I will tell you, I don't think that anyone
    wants to get into the business of micromanaging pricing issues,
    and that is kind of like it has been a--with this legislation.
        So I yield back. Thank you, Mr. Chairman.
        Mr. Conyers. Jason Chaffetz, Utah?
        Mr. Chaffetz. Thank you, Mr. Chair.
        Mr. Conyers. Jason Chaffetz, Utah?
        Mr. Chaffetz. Just Jason will be fine. Thank you, Mr.
    Chair.
        Mr. Kantor, let me be crystal clear here. Would you support
    legislation for us mandating, by Federal law, that 100 percent
    of the discounts--or, the savings and discounts--be passed
    through to consumers?
        Mr. Kantor. There are a couple of things. We are----
        Mr. Chaffetz. Yes or no? I mean, you were pretty adamant
    about saying, ``Oh, throw us into that briar patch.'' Is that
    your position?
        Mr. Kantor. The briar patch is, require us to provide a
    discount based on cheaper payment methods. So, for example, if
    you said we must have a different price Visa versus Discover
    versus cash or something along those lines, you know what?
    Consumers could see it; they could react----
        Mr. Chaffetz. Would you support 100 percent of that
    discount being passed to the consumers--100 percent? Yes or no?
    100 percent----
        Mr. Kantor. Right now----
        Mr. Chaffetz. One hundred percent, yes or no?
        Mr. Kantor. Can I answer your question?
        Mr. Chaffetz. Yes or no, yes you can. Yes or no?
        Mr. Kantor. Merchants like Dave Carpenter right now are----
        Mr. Chaffetz. Okay, we will move on. We will move on. I
    think it is a very disingenuous thing to say because you do
    have the ability under current law and current structure.
        Mr. Carpenter, what is the discount--if I go to your store
    right now and I pay cash, what is the discount?
        Mr. Carpenter. There is no discount.
        Mr. Chaffetz. Why not?
        Mr. Carpenter. First of all, I think we have discussed
    often about the limitations on being able to give cash
    discounting. We are not allowed to do cash discounting. There
    have been fees.
        Mr. Chaffetz. I am in disagreement with you on that. I do
    believe you are allowed to give a cash discount. We won't take
    the five--I only have 5 minutes here so I want to keep going.
        Help me understand the difference between 12 cents and four
    cents. Assuming a gallon of gas is $3, why is there an eight
    cent differential between the two?
        Mr. Carpenter. Well, the credit card fees on average charge
    approximately 2 percent interchange plus a slight----
        Mr. Chaffetz. Two percent on a $3 gallon of gas is six
    cents.
        Mr. Carpenter. Yes.
        Mr. Chaffetz. But why is there an eight cent differential?
        Mr. Carpenter. Well, I think I just didn't do the math
    right on that particular example, but, so, you know, but it is
    $3.50--it changes every time. So the point being, cash is zero
    to accept cash, and gas----
        Mr. Chaffetz. You are talking about your margin, right?
        Mr. Carpenter. Right.
        Mr. Chaffetz. Between cash----
        Mr. Carpenter. So if the margin was 12 cents--our retail
    margin was 12 cents----
        Mr. Chaffetz. Right.
        Mr. Carpenter [continuing]. And you pay with a credit card,
    six cents of it goes to pay for credit.
        Mr. Chaffetz. Right.
        Mr. Carpenter. If you pay with cash we keep the 12 cents.
        Mr. Chaffetz. What about the four cents? You came up with
    four cents if----
        Mr. Carpenter. I think you are, you know--that example--I
    didn't use the right math, right, but----
        Mr. Chaffetz. Okay. But there is clearly----
        Mr. Carpenter. It is the same result, essentially.
        Mr. Chaffetz. The net here is, though, that there is a
    differential between credit card and cash----
        Mr. Carpenter. We have to sell half of the gallons we sell
    to pay for credit.
        Mr. Chaffetz. What percentage of the transactions do you
    have right now and is that representative of----
        Mr. Carpenter. Eighty-five percent of our transactions are
    paid for with credit.
        Mr. Chaffetz. Okay. So when you actually do get an increase
    in your margin by accepting a cash transaction you are not
    passing any of that back to the consumers. You are passing zero
    percentage of----
        Mr. Carpenter. I think you can go back and look at our
    history, and our fuel margins aren't based on a percentage of
    the fuel price, their cents per gallon. If you go back and look
    at our industry data our industry data stays pretty darn
    consistent over----
        Mr. Chaffetz. Well, the credit card transaction fee is
    based on a percentage.
        Mr. Carpenter. Right.
        Mr. Chaffetz. And so assuming, based on today's----
        Mr. Carpenter. I would love for either Wallace or our trade
    association to get together and determine that all gas stations
    are allowed to charge a margin versus cents per gallon, but
    that would be antitrust.
        Mr. Chaffetz. I guess the point I am trying to make is that
    when you were given the opportunity, when you did have an
    increase in your margin because your costs were less, you
    didn't pass that on to the consumer.
        Mr. Carpenter. We didn't have an increase in our margin.
        Mr. Chaffetz. You do when you accept 15 percent of your
    transactions----
        Mr. Carpenter. The higher the price of retail fuel the less
    margin we make.
        Mr. Chaffetz. But when you are accepting that, you know,
    well--when you are accepting--because there are a lot of
    variable costs in there, because if 85 percent of your
    transactions are still charged at 2 percent you--there is
    clearly a differential--and I guess the point I am trying to
    make is what you hear all the time for the convenience stores
    and what not, is, well, yes, we need the--we will pass that
    right back to the consumers. I am not buying it because I don't
    see the examples of that. It is a Phillips Conoco station,
    correct?
        Mr. Carpenter. Right.
        Mr. Chaffetz. And do you use Phillips Conoco to do your
    credit card processing?
        Mr. Carpenter. Yes.
        Mr. Chaffetz. Okay. In September of 2006, effective in the
    beginning of 2007, MasterCard announced a cap on the
    interchange at around the $50 level. In other words, once a
    customer purchase reached that level there was no further
    accumulation of the interchange fee. But what I am not seeing
    is that being passed on to the consumers----
        Mr. Carpenter. We pay interchange on every dollar we sell.
    There was no cap on interchange fee as far as a dollar sale.
        Mr. Chaffetz. We are going to have to go back and explore
    that, because I think that is the case. And I don't think it
    was passed back onto the consumers. I think this is a very
    hollow, shallow argument, as Mr. Blum said.
        Now, let me ask you about this: Going back to your bank,
    you said that it is essentially break-even, that it is de
    minimis. One of the unintended consequences or concerns is that
    if you are driving down the price or the fee that goes to these
    small community banks, the larger community banks, the other
    banks, what is going to be the net result? If you suddenly went
    to your--I mean, I am kind of surprised that as a director you
    didn't even know what the costs were--but if you went to them
    and said--and the guy came back and said, ``We are losing
    $50,000 a month,'' what would you do with your credit card
    program? Are you telling me you would keep it just because you
    are a good guy?
        Mr. Carpenter. Yes, likely. We view it as a service. We
    just aren't able to----
        Mr. Chaffetz. But there is value to it. There is value to
    it.
        Mr. Carpenter. You know, for a small select of our
    customers we were just not able to compete in that business, as
    it shows in the bank. Any bank with less than $1 billion in
    assets just can't----
        Mr. Chaffetz. But you do participate in it.
        Mr. Carpenter. Right. And we absorb that cost. And in fact,
    we lose some money. Last 2 years we have lost money in that
    business, and we consider it because we allow--we give business
    customers, which are a majority of it, we have their loan for
    their business, we get their checking accounts, we have 401k,
    we have investment people, and we consider that a portion of
    our entire package. And----
        Mr. Chaffetz. Thank you. I have to cut myself in deference
    to the Chairman here.
        Mr. Chairman, I think one of the unintended consequences of
    this bill is that you would have fewer players in this industry
    because the biggest of the big banks can handle this, but if
    you were to reduce these fees you will see even a good, healthy
    community bank like this, you start to reduce the amount of
    money that they are going to be able to collect just to break
    even, and even lose a little bit of money, the unintended
    consequence here is you are just going to have fewer players.
    There is going to be more systemic risk and you are going to
    have fewer players.
        You are going to hurt community banks; you are going to
    hurt banks all across this country. And I don't think that is
    the intention----
        Mr. Carpenter. Most banks smaller than us outsource to the
    big banks anyway because they cannot have their own internal
    credit card program.
        Mr. Chaffetz. Thanks, Mr. Chairman.
        Mr. Conyers. Judy Chu?
        Ms. Chu. Thank you, Mr. Chair.
        Mr. Mierzwinski, let's just say I had three different
    cards--a card that was a frequent flyer card, a premium card,
    and card that was not a premium card, just a plain old card.
    Could I find out what the interchange fees are?
        Mr. Mierzwinski. If you were a consumer who wanted to be
    very persistent you could find it probably on some MasterCard
    site, but I don't think that would help you very much.
        Ms. Chu. And why is that?
        Mr. Mierzwinski. Well, because----
        Ms. Chu. Why is it so hidden?
        Mr. Mierzwinski. Well, I don't know why you would want to
    know that by finding it that way. I think it would be easier if
    the merchant was able to tell you that this frequent flyer card
    is causing the costs of everything to go up, and this plain,
    classic debit card is the best way for you to pay if you want
    to keep your overall prices low. And right now the merchants
    don't have that ability to provide you the information, so
    right now you have got to go to some Web site of MasterCard,
    find out that the interchange on the rewards card is 3 percent,
    the plain debit card is 1.9 percent, and it doesn't do you any
    good right now.
        Ms. Chu. Would there be a positive effect, Mr. Kantor, if
    you did know?
        Mr. Kantor. Congresswoman, if consumers had some disclosure
    we do think there would be a very positive effect. Right now
    these fees are very complex. You can find them on the Visa and
    MasterCard Web sites, but as a consumer if you go there it is
    very hard to know which card category your card falls into.
        MasterCard's schedule of rates has 263 different categories
    and it is over 100 pages long. It is very hard to know where
    your card falls in that.
        You also have to know: one, what type of store you are
    shopping at, because it is different based on that; and you
    have to know for some places what the volume of business that
    store does and for others what the security rating they assign
    that business is. And so that is pretty much impossible for any
    consumer to know. But it would be very helpful if consumers
    knew these--what these costs were and that they were able to
    see, in the form of a discount or otherwise, what impact that
    had on their transactions.
        Ms. Chu. Now, Mr. Mierzwinski, I noticed in your testimony
    that you talked about different countries. Does every country
    have interchange fees?
        Mr. Mierzwinski. Representative, I don't know if every
    country does but I think that all of them do, and I understand
    that Mr. Kantor has a chart that the U.S. interchange fees are
    the highest and have maintained themselves as among the highest
    by quite a bit. So I think all the countries with cards have
    fees; in many countries they are much, much lower.
        Ms. Chu. And in the countries where there is a lower fee,
    how are the cards still able to make profit?
        Mr. Mierzwinski. Well, I think that is the $64 million
    question that relates to the entire financial system in this
    country. How do the companies continue to raise the prices,
    come up with more complex products, and not have anything that
    is innovative that lowers prices and that creates real
    competition?
        They are making money in Europe; they negotiated much, much
    lower fees; they accepted lower fees in Europe through
    negotiations. But they continue to resist lower fees in this
    country, I think, simply because they can.
        Ms. Chu. Well, let's talk about Europe. So, in Europe they
    have lower interchange fees. It was negotiated. Was this passed
    down to the consumers?
        Mr. Mierzwinski. I don't know that there are any studies
    that have shown that yet, but I would be happy to look and get
    back to you.
        Ms. Chu. Mr. Kantor, do you have--the same comparison with
    any country?
        Mr. Kantor. Yes. The Reserve Bank of Australia has
    concluded that their reduction of interchange resulted in a
    savings of $1.1 billion Australian dollars that was passed
    through to consumers. That is the statement of the Australian
    Reserve Bank.
        Now, the bankers have pointed to their own privately-funded
    studies that contradict that, or they have pointed to language
    where the Reserve Bank said, ``It is hard to measure. This is a
    difficult thing, as there is inflation and other things
    affecting prices, to figure out exactly what is passed through,
    what isn't, what other factors are going into pricing.'' But
    the Reserve Bank said $1.1 billion in savings passed through.
        Ms. Chu. And what were the mechanics that allows for that
    to be passed on to the consumers, because people are raising
    questions here whether there would actually be savings to the
    consumer?
        Mr. Kantor. Again, that is market economics, that when
    there are lower business costs those businesses compete by
    reducing prices to try to get more customers. They keep those
    margins as low as they can.
        And I would point out, frankly, the merchant industry in
    Australia is less competitive and much more concentrated than
    it is in the United States. In the United States there is a
    very, very competitive retail marketplace across industries
    that has kept the profit margins--come high costs, come low
    costs, whatever the marketplace is doing on other things and
    other business costs, those margins have remained very, very
    low in retail. And in fact, I would say in the convenience
    store industry I represent, over the last 4 years in a row the
    convenience store industry has paid more in card fees by
    billions of dollars than they have made in total pre-tax
    profits.
        Ms. Chu. Thank you.
        I see my time is up. I yield back.
        Mr. Conyers. Judge Gohmert?
        Mr. Gohmert. Thank you, Mr. Chairman.
        Appreciate the witnesses being here today.
        I wonder, Mr. Blum, do any of rest of your organizations
    get to have any input at all in the negotiations between the
    financial institutions and Visa or MasterCard?
        Mr. Kantor. No.
        Mr. Blum. No.
        Mr. Carpenter. No.
        Mr. Gohmert. Question with regard to the machines on the
    gas pumps that read the cards, charge the cards: Who pays for
    those on the pumps?
        Mr. Carpenter. We do.
        Mr. Gohmert. We being----
        Mr. Carpenter. Retailer.
        Mr. Gohmert. Yes. Okay. Is there any pressure not to have a
    cash slot in those machines?
        Mr. Carpenter. There are cash acceptors available.
        Mr. Gohmert. I have just never been--well, I am sorry, in
    Tyler, where we have got no--no telling how many of the
    stations--there is only one that accepts cash, and that is
    completely unmanned. But I just don't ever stop at a store that
    has a place where I could put in cash, otherwise I would.
        Mr. Carpenter. Right.
        Mr. Gohmert. But the convenience--and my friend, Mr.
    Johnson, over in Georgia, says he has not ever seen one, but I
    would just to save me from--I am usually in a hurry--sticking
    the card so I don't have to run into the store, unless I am
    going in to get a Dr. Pepper. But otherwise I would just as
    soon, you know, pay cash.
        But it is more convenient to use the card, and so I am
    basically lured into using my card instead of cash. And, of
    course, one of the advantages, I do get a receipt, and that
    helps.
        But I have listened with interest to the testimony, and I
    heard a great deal of it back here. I wasn't sitting in my
    chair, but--I am perplexed on some of these issues. I see the
    points that everyone is making, and so what I would like to ask
    is, if you were in charge and could get Congress to do just
    whatever you want, just in two sentences, what one or two
    things would you ask us to do immediately--including nothing.
    And start with Mr. Kantor.
        Mr. Kantor. Well, there are a couple of pieces of
    legislation--Mr. Conyers has this bill with Mr. Shuster before
    this Committee which is very important----
        Mr. Gohmert. Okay. That is more than two sentences.
        Mr. Kantor. Okay.
        Mr. Gohmert. I am not wanting to know about bills. I just
    want to know, these are two--one or two things that are our
    priorities.
        Mr. Kantor. This legislation, Mr. Welch and Mr. Shuster's
    legislation that gets rid of some of the rules that are a
    problem, and doing something about debit fees--those ought to
    be cleared in the same way that checks are.
        Mr. Gohmert. Okay. Thank you.
        Mr. Blum?
        Mr. Blum. You know, just in regards to this bill alone, I
    think that no action.
        Mr. Gohmert. But I am also asking about anything--not just
    this bill, but anything.
        Mr. Blum. I happen to have been a strong proponent of the
    Fair Credit Act that went in last year. I think that ultimately
    the efforts to protect the consumer----
        Mr. Gohmert. Okay. But that went in place, so we are back
    to no action, then? Okay.
        Mr. Mierzwinski?
        Mr. Mierzwinski. I agree with what Mr. Kantor said, and
    also enact a strong consumer financial protection agency.
        Mr. Gohmert. So you want more government. Okay. Thank you.
        Mr. Carpenter. Very simple: transparency and the ability to
    negotiate on these fees.
        Mr. Gohmert. Transparency----
        Mr. Carpenter. We want to know the complete system, how it
    works, the----
        Mr. Gohmert. You get to know what goes on with Visa and
    MasterCard----
        Mr. Carpenter [continuing]. How they set those fees. I
    mean, it is behind closed doors how they set. But mostly all we
    are asking for in this bill----
        Mr. Gohmert. Well, it sounds like in one of those things
    you want more than transparency, is perhaps some input into
    that process.
        Mr. Carpenter. We want the ability----
        Mr. Gohmert [continuing]. The basis of your agreement?
        Mr. Carpenter. We want the ability to negotiate like we do
    with all of our other vendors.
        Mr. Gohmert. Okay. All right. Thank you.
        And thank you very much, Mr. Chairman.
        Mr. Conyers. Sheila Jackson Lee?
        Ms. Jackson Lee. Mr. Chairman, thank you. I am just trying
    to refresh my memory of whether or not we have gone this route
    before, and I hope maybe we will gather the steam and be able
    to do what is right and do what is just.
        I have had the opportunity to hear from a number of
    different groups, and I think I had the same opportunity a year
    or 2 ago on the same go around. And I guess while we are in
    that circle things deteriorate.
        So let me ask these questions in the backdrop of a new
    climate. Goldman Sachs, yesterday, could find nothing wrong
    with anything that they had done.
        Mr. Chairman, I hope we will have an opportunity, maybe, to
    have a hearing on the actions of Goldman Sachs. I think it
    would be appropriate for this Committee and I thank you for
    your leadership on so many of these issues.
        I have a year or 2 of having tried to utilize the TARP
    monies to help bail out entities that were too big to fail, and
    every time I go home I keep hearing from small businesses and
    homeowners that they can't--homeowners can't seem to get
    foreclosures stopped. It is hard-working two-salary members of
    the family and they can't seem to get any consideration for
    their foreclosure being--not the foreclosure, but to be--their
    mortgage to be reformulated.
        And then you have small businesses coming and saying, ``I
    thought you gave TARP monies to the bank that I am banking
    with, and I can't get a loan. I can't get a loan to expand.''
    So we had a different climate about a year or 2 ago, Mr.
    Chairman, if my memory recollects, in terms of this bill. We
    just have a sheer pounding of the consumer.
        And I am trying to find out what the angst is, and I would
    like to be balanced as well. And I am going to start with Mr.
    Kantor, who may have a perspective that is to help the
    consumer, and if there is a perspective that says that this is
    literally going to shut the doors of those who want the fees to
    be maintained I will welcome that exchange as well.
        But please be aware, it is difficult to turn away anything
    that now is going to help consumers, because there seems to be
    a blind eye or deaf ear without any commentary on those who
    suffer those ailments in actuality.
        But after yesterday's testimony that some of us were able
    to glimpse it seems an atrocity--it seems to be a full lack of
    understanding about what we are needing to do to percolate the
    economy. Part of it is to use credit cards and credit, but part
    of it is to get people to use it and to get our small
    businesses and our stores to be open, many of whom have fallen
    upon hard times.
        I just don't understand it. And I am sorry that if I have
    gotten sidetracked on Goldman Sachs, but I had nightmares from
    yesterday and I am still seeing a panel sitting here and I am
    not even in the hearing room--acknowledging nothing.
        So, Mr. Kantor, can you tell me how the present discussion
    that we are now having in the legislation about the interchange
    fee is going to impact positively on those that you might be
    speaking about, and maybe you might throw in the economy? And I
    know you are a lawyer and I know you are here for a particular
    legislative initiative, but you might share your thoughts,
    please, sir.
        Mr. Kantor. Sure. Thank you for the question,
    Congresswoman. This is an important point and I pointed earlier
    to the Robert Shapiro study on this, and he----
        Ms. Jackson Lee. And as you do that--because the Chairman
    has been kind--let me just pinpoint to make sure that I get an
    answer from those who find this to be a difficult hurdle.
        And with that, Mr. Blum? Mr. Blum, are you opposed?
        All right. So we welcome any others, but let me make sure
    Mr. Blum is heard.
        Yes, Mr. Kantor?
        Mr. Kantor. So, what Mr. Shapiro found is that by dealing
    with the interchange fee and just the amount that is not
    justified above the processing and rate of return and is, in
    fact, passed to consumers now, dealing with this could put
    almost $27 billion in consumers' pockets to spend, additional
    stimulus, and would create----
        Ms. Jackson Lee. If the fees did not----
        Mr. Kantor. That is right.
        Ms. Jackson Lee [continuing]. Go up.
        Mr. Kantor. And we would create 242,000 new jobs.
        The other thing that we haven't had a chance to talk about
    today--and I appreciate you asking it for this reason--is Mr.
    Mierzwinski has pointed to this as his Adam Levitin, the
    professor at Georgetown, is that for the large banking
    institutions, they make 60 percent profit margins on these
    fees.
        The large amount of these fees of $48 billion has created
    an incentive for them, and the incentive is for them to look at
    the consumer not as a customer to whom they lend who they want
    to do well so they will pay back the loan, but as a fee-
    generating machine.
        And so the incentive is, generate these fees, find other
    fees--late fees, over-limit fees, you name it--find more fees
    that we can pile on the consumer and worry less than they
    should about the consumer's ability to absorb that and pay the
    money back. From our perspective it leads to a predatory
    lending-type cycle, where they want people to use those credit
    cards even if they can't afford it to keep those fees coming,
    and don't worry about the longer-term consequences.
        Now we are here, and as you point out, Congresswoman, we
    now see those longer-term consequences; we have seen dramatic
    rises in the number of people who cannot pay, and that hurts
    all of us and has been a tremendous problem for all of us. But
    that is the economic incentive that has been created here.
        And Chris Dodd has pointed to this, and others: It is too
    much to resist, and so many banks now--not the smaller banks
    and credit unions who you see here today, but the top 10
    largest banks who charge more than 80 percent of interchange
    fees--those are the ones we are concerned about that are
    creating this dynamic.
        Ms. Jackson Lee. And you think this bill is grounded in a
    legal premise as well, that it has passed the muster of legal
    standards, a ritual cannot be considered interfering with a
    business relationship?
        Mr. Kantor. That is right.
        Ms. Jackson Lee [continuing]. And/or retail or bank?
        Mr. Kantor. That is right, Congresswoman, because right now
    we don't have a competitive market for these fees. We don't
    have a free market system. This would allow some market
    dynamics to come into the system for the first time.
        This legislation does not dictate outcomes. It doesn't say
    fees will be lower; it doesn't say they will be higher. It says
    there will be a negotiation, and let's see what happens.
        And importantly, what Mr. Conyers has done in this bill,
    which is very helpful, is they have said for the smaller
    banking institutions you have two forms of protection: You can
    opt out of these negotiations if you choose. If you are in the
    negotiations there is a provision that says the agreements
    cannot disadvantage the smaller banking institutions, and that
    is important.
        It does so for the smaller merchant businesses as well.
    That is a key protection in the legislation that we are very
    much in favor of.
        Ms. Jackson Lee. Thank you.
        Mr. Blum, let me just say that I am strongly in favor of
    credit unions and small banks. I represent them and fight for
    them. Would you just want to comment on this legislation?
        Mr. Blum. Certainly. And thank you.
        The problem that I see is, again, the differentiation and
    the possible differentiation. The opt-out is a wonderful
    provision but it moves the credit union industry backwards. We
    have worked very, very hard to establish ourselves as a
    financial institution of choice, on par with a big bank. And we
    don't welcome any kind of differentiation in that regard that
    might disadvantage us by having us, you know, some card that
    might be perceived by the merchant or the consumer to be, you
    know, less friendly to a merchant, carved out or not.
        I think some of the other points that I make, that, you
    know, I am in basic disagreement with is, the GAO study says
    that there will be significant compliance costs. I am concerned
    that these significant compliance costs are going to be passed
    across the entire network and are going to be impacted upon me.
        Furthermore, just the basic premise that everybody is
    perceiving the interchange to be a profit. I think my written
    testimony has said it is not. There is profit in it; I
    acknowledge that.
        However, if you want to legislate, if you will, the income
    side and somehow reduce that, then I believe that you must also
    legislate the corresponding cost side. You have to legislate
    that the fraud has to be reduced and you have to enforce that
    legislation. You have to legislate that my processing costs and
    my payroll costs, that my card production costs--all the costs
    associated with delivering that program need to be able to move
    in conjunction with whatever legislation or restriction that is
    placed upon it.
        I don't see that provision. So ultimately, while being
    carved out, while sitting here as a credit union, I am
    concerned for the impact of this bill----
        Ms. Jackson Lee. Well, I think you heard Mr. Kantor say
    that the bill does not dictate outcomes, but certainly you have
    made some points that can be looked at. I think the carve-out
    is a gift, but as we look at how the impact is I think the
    comment and testimony that you have today--I would characterize
    it not as an opponent as much as it is someone who wants to be
    sure that they are still standing and still made whole in the
    scheme of structure.
        I mean, your credit union--or the premise of credit unions
    is consumer-friendly, and that is what I hear from all of your
    customers--and small banks as well. And unless I hear something
    more different, these fees are not consumer-friendly, and this
    legislation is not an attempt to make good guys and bad guys,
    but it is an attempt to even out the playing field. There are a
    lot of small businesses that are involved in this.
        And I am going to end on this: I just want to--Mr. Kantor,
    you said $27 billion to consumers and you said jobs--what was
    that number?
        Mr. Kantor. 242,000.
        Ms. Jackson Lee. 242,000 to save or create?
        Mr. Kantor. Create.
        Ms. Jackson Lee. Okay. I need 242,000 jobs. Anyone here
    just want to comment quickly--retail--quickly, please?
        Mr. Mierzwinski. Congresswoman, I would just say that I
    concur with Mr. Kantor. I look at this bill, though, the same
    way you do, as it is forcing the banks to the table, forcing
    them to negotiate to make things better. But all the points you
    made--the banks are not negotiating on putting people back into
    their homes; they are actively sabotaging the President's work
    and the Congress' work on trying to help homeowners save their
    homes. Goldman Sachs is actively trying to change the
    historical record to preserve their casino economy that hurts
    the real economy.
        And on the Senate side, Mr. Delahunt, as you know, the
    Senate is under tremendous pressure to eviscerate your proposal
    for a consumer financial protection agency. We hope they reject
    it.
        Mr. Delahunt. The proposal to eviscerate it.
        Mr. Carpenter. Quickly, just to point out again, we get all
    over the place here, but again, all we are asking for is to be
    able to sit down at the table and negotiate these fees. If
    Walmart and Target controlled 80 percent of the retail dollars
    in the country would you not be concerned? MasterCard and Visa
    control 80 percent of credit cards in this country. The top
    eight banks in the country control 80 percent of the credit
    cards, you know.
        So all we are asking is for the free market to work. Today,
    I am a customer of theirs. I have no ability to negotiate.
    None. That is all we are asking for.
        Ms. Jackson Lee. You want the squeaking to be heard?
        Mr. Carpenter. Yes.
        Ms. Jackson Lee. You are a little squeak, but you want that
    squeak to be heard.
        Mr. Carpenter. I don't know if we will be able to lower
    them; we just want to try.
        Ms. Jackson Lee. Mr. Chairman, let me thank you for
    indulging and moving the hearing on this important--very
    important issue. And I hope that we will see Goldman Sachs and
    relevant parties before this Judiciary Committee. I yield back.
        Mr. Conyers. Bill Delahunt?
        Mr. Delahunt. Thank you, Mr. Chairman.
        I just dropped by to listen; I didn't really intend to ask
    any questions. But I heard the figure 60 percent profit.
        Mr. Kantor. That is correct, Congressman.
        Mr. Delahunt. Does anyone on the panel disagree with that
    number?
        Mr. Blum. Yes.
        Mr. Delahunt. What number would you give to me?
        Mr. Blum. You know, the 60 percent profit--this
    interchange--I would argue----
        Mr. Delahunt. Just give me a number. Give me a number if
    you know it. I am not trying to----
        Mr. Blum. No. I don't know the specific number--nowhere
    near 60 percent.
        Mr. Delahunt. Give me a range.
        Mr. Blum. I believe the net of expenses last year was
    somewhere in the neighborhood of 8 or 9 percent of the
    interchange was retained and placed into the bottom line. I
    think Mr. Carpenter testified that none in his bank went to the
    bottom line.
        Mr. Delahunt. Eight or 9 percent. Now, that is a real
    disparity.
        Mr. Kantor. Congressman, if I might----
        Mr. Delahunt. Sure.
        Mr. Kantor [continuing]. The difference here is, as I said,
    there are 10 banks in the country, and most of them you know
    right off the top of your head--Bank of America, Citibank,
    JPMorgan Chase--just 10 banks get more than 80 percent of all
    this money. Now, the small institutions--the credit unions, the
    community banks like Mr. Carpenter have--they are not getting
    much of this money, and they can't spread out the costs of
    running--in the same way.
        So they may make only 8 or 9 percent; I don't doubt that
    for a moment. But industry-wide, that means their larger
    competitors are making even more than 60 percent, because that
    is--we are happy to give you the data. It is from Cards and
    Payments. The data is out there. People can make of it what
    they want----
        Mr. Delahunt. That is a very interesting point.
        And I would hope, Mr. Chairman, that we could have staff do
    some research for us to corroborate those numbers, because it
    does--it just simply makes sense that the smaller the
    institution, the cost presumably somewhat fixed, and the profit
    margins, rather than 60 percent, might be 65 percent or 70
    percent for the larger banks. Interesting.
        Mr. Carpenter. Congressman, if I could just add to that, as
    a small bank, I mean, Mr. Kantor is correct in the fact that--
    and I empathize with Mr. Blum. I mean, the problem is--the
    argument that has been made that this is going to hurt if not
    destroy small banks and credit unions--Congresswoman, I think,
    Wasserman Schultz, is her name, who I believe is also in the
    banking business--the point is, it is an insignificant,
    nonmaterial part of our revenue and income.
        I am not here to say, you know, that, I mean, credit cards
    are bad and we don't want to have credit cards in our business.
    What I am here to tell you, that there is a certain hurdle-rate
    you have to get over to be able to have a credit card
    department. Small banks can't do that.
        He mentioned he has 11 people. I mean, for a bank to have
    enough staff and to oversee an actual credit card department
    you have to be pretty big. And so only the large banks are able
    to do this. They mass market; they sponsor, you know, all kinds
    of events and shows; you get direct mail; you see, you know, TV
    ads. Small banks can't do that.
        Mr. Delahunt. Mr. Chairman, I would hope that we--that you
    would schedule a markup, and obviously there would be, I am
    sure, amendments that will be proffered. But, you know, I think
    there is--we should have a sense of urgency, and I think that a
    markup, a vote, and moving legislation to the floor in the few
    remaining months of the legislative calendar is important. And
    I yield back.
        Mr. Conyers. Steve King?
        Mr. King. Thank you, Mr. Chairman. I appreciate the
    opportunity to do a little follow up and the clean up here.
        One I would ask the witnesses to do, if you could, after
    the hearing, to present the list of the eight to 10 banks that
    control 80 percent of the market. It would be helpful to me to
    understand who they are in that fashion.
        I wanted to go back and clarify the testimony of Mr.
    Carpenter that I think was declarified by the gentleman from
    Utah, and that would be that roughly the 2 percent interchange
    fee--if you do that on $3--three gallons of gas at a 12-cent
    margin that becomes six-cents cost, but if it is 2 percent on
    $4 gas that is the eight-cent cost, which I think is what Mr.
    Carpenter was referring to. And you have referred in your
    testimony earlier in the day, before Mr. Chaffetz was here,
    talked about $4 gas. So I think that is where that got crossed.
        Let's just go up to $5 gas, 10 cents; $6 gas, 12 cents.
    That would be to break even, then, with the 12-cent margin per
    gallon. Correct, Mr. Carpenter?
        Mr. Carpenter. It is correct.
        Mr. King. On $7 gas you would lose two cents a gallon in
    the----
        Mr. Carpenter. Our margin, unfortunately, does not go up
    with the price of gas; it gets less.
        Mr. King. You have a per-gallon margin that has this track
    historically back through decades.
        Mr. Carpenter. I mean, unfortunately, I mean--when they ask
    will it pass on to the consumer, unfortunately for, I guess,
    myself and my industry, we are not very good at holding on to
    the money. It is so competitive that even if I choose that I
    would like to hold on to some of it, if the guy across the
    street doesn't, down it goes.
        Mr. King. And we recognize here implicitly that gas is a
    lost leader, but it is still, that is the way the market works
    in the retail gas market.
        Also, I wanted to explore this thought that when I go in
    and use my credit card I get free credit for that month, and I
    get frequent flyer miles, I get--well, maybe I could get some
    free luggage, or trip, or whatever out of all of that. The
    credit card user that pays their bill every month and ends up
    with a different effective retail price than the person that is
    paying cash or paying by check or paying by their debit card,
    and we haven't explored that in this discussion.
        I noticed--and I thought of this when Mr. Johnson was
    asking his questions--his concern about the consumer. I have an
    unfair advantage if I pay my bill every month, and that can't
    be reflected in your pricing either. And I think that needs to
    be brought into the discussion as we either do or do not move
    forward with this piece of legislation that we are discussing
    here today. And I make the point--I don't know that it needs to
    be explored; it just needs to be made.
        And then I wanted to come back to a statement by Ms.
    Wasserman Schultz with regard to the witness, Mr. Carpenter,
    her statement that conflicts are popping up here everywhere
    with regard to your retail outlets for convenience stores and
    your investment in the Liberty Bank ownership group and on the
    board of directors. And I think she said flat-out that the bank
    is owned by 400 retail outlets. It seems to me that you compete
    with those 400 retail outlets out there to sell gas and
    convenience items.
        But I want to make the point that there is no conflict of
    interest when you bring an expert witness before this Committee
    that has expertise in more than one subject. That is the
    benefit of Mr. Carpenter, here, testifying today. He can speak
    with authority, here is how it affects the bank with roughly $1
    billion in deposits, and also with authority on how it affects
    the convenience store outlook. So I don't think it is a
    conflict of interest at all. I think it gives us a double
    benefit of hearing the testimony.
        And I appreciate the viewpoints on both sides of this, and
    I have heard very strongly from them--from our smaller banks
    that we have--but I haven't heard very much from the big banks.
    They haven't knocked on my door, and that is why I am
    interested in the names of those banks.
        But I appreciate the Chairman bringing this hearing today.
    It has been one of the more interesting ones that I have sat in
    on, and the focus of the people in the audience also would
    testify to that.
        And you witnesses have been very attentive, and the Members
    have participated well. And so I just thank the Chairman and I
    yield back the balance of my time.
        Mr. Conyers. Maxine Waters?
        Ms. Waters. Thank you very much, Mr. Chairman. First, let
    me apologize for not being here at the beginning of the
    Committee. I had to Chair my Subcommittee on Housing and
    Community Opportunity over in Financial Services, but I would
    just like to take up my statement.
        And thank you for organizing this hearing to discuss
    interchange fees. While we have yet to reach a consensus on
    this issue, I am concerned most with the impact interchange
    fees have on working families and American consumers.
        The Visa and MasterCard competition in the card business
    has become more about pleasing the banks that actually issue
    the cards rather than the consumers who use them. Visa and
    MasterCard set interchange fees that merchants must pay the
    cardholder's bank.
        Accordingly, higher fees mean higher profits for banks even
    if it means that merchants shift those costs to the consumers.
    Today, as debit cards have become more commonly used,
    MasterCard and other rivals have raised fees on certain debit
    card transactions in order to entice banks.
        Therefore, I am increasingly alarmed by reports that
    suggest banks may now be coercing their customers into signing
    for debit card purchases rather than entering a PIN code.
    Despite the fact that in any debit card purchase the money will
    be withdrawn from an individual's checking account, the banks
    are now encouraging customers to sign their debit purchases so
    they can charge the merchants higher interchange fees.
        Just last week in an article in The American Banker it was
    reported that JPMorgan Chase is advising its customers to use
    their signatures rather than their PIN code when making debit
    card purchases, although experts say PIN debit transactions are
    more secure than signature debit purchases.
        In a recent mailing issuing Chase banded debit cards to
    former Washington Mutual customers, the banking company
    strongly suggested the clients always select credit when paying
    with their debit card. While JPMorgan assured its customers
    that the cards were not credit cards and the money still comes
    from their checking accounts, the company insisted that
    cardholders choose the credit option during transactions so
    they won't have to enter their PIN in public.
        In its mailings JPMorgan implied that it is safer to use a
    signature when paying with a debit card, but experts say this
    is not true. Entering a PIN is actually more secure. But in
    this instance, JPMorgan discouraged the practice because it
    does not generate as much revenue for the bank.
        Now that many consumers are shying away from credit cards
    the banks are doing everything they can to reap fees from debit
    card purchases. While none of this may initially seem to
    implicate the American public, as credit card companies charge
    merchants more the accept their cards and process transactions,
    the merchants, in turn, pass those costs off to customers by
    increasing the cost of their products.
        The Food Marketing Institute is also calling for
    interchange fee reform because of the impact the fees have had
    on the supermarket industry. On April 16th--number of debit
    network, run by Visa, increased its swipe fees by 30 percent
    for PIN debit purchases. These fees impact small, independent
    businesses and grocers because they pay some of the highest
    rates and have no choice about whether or not to accept debit
    cards to maintain being competitive.
        Some merchants even argue that there should be no
    interchange fees on debit purchases because the money comes
    directly out of the checking account and does not include the
    risk and loss associated with credit cards. In any event,
    merchants say they inevitably pass on that cost to customers--
    to the consumers. The National Retail Federation says the
    interchange fees cost households an average of $427 in 2008.
        Let me just close by acknowledging Doug Kantor, a partner
    at the law firm of Steptoe & Johnson, in Washington, D.C. He
    grew up in my district in Los Angeles. Early in his career Doug
    served in the U.S. Department of Housing and Urban Development
    working to improve affordable housing and bring opportunities
    to places in need.
        His father was my close friend--still is--Mickey Kantor. We
    have been friends and worked closely for many years, and you
    would recognize the name because he served in the Clinton
    administration.
        Thank you for your patience, Mr. Chairman. I do appreciate
    it. I yield back.
        Mr. Conyers. Thank you for your contribution.
        We will have 5 additional days to submit any questions or
    to receive any other materials, and to introduce into the
    record a Food Marketing Institute article on the Credit Card
    Act, dated April 28, 2010.
        [The information referred to follows:]

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                                   __________
        Mr. Conyers. We thank the witnesses. The hearing has been
    important since we have gone maybe a couple of years since our
    last one, and I appreciate the very important exchange and the
    number of people that joined us to hear and observe the
    hearing.
        Thank you all, and the Committee is adjourned.
        [Whereupon, at 12:53 p.m., the Committee was adjourned.]