[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
CREDIT CARD FAIR FEE ACT OF 2009
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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
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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
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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:]
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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:]
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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:]
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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
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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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__________
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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
__________
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.]