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




 
                   SUBCOMMITTEE ON INVESTIGATIONS AND
                   OVERSIGHT HEARING ON THE IMPACT OF
                  INTERCHANGE FEES ON SMALL BUSINESSES

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

                                HEARING

                               before the


                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                             JULY 29, 2010

                               __________

                               [GRAPHIC] [TIFF OMITTED] TONGRESS.#13
                               

            Small Business Committee Document Number 111-077
Available via the GPO Website: http://www.access.gpo.gov/congress/house



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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman

                          DENNIS MOORE, Kansas

                      HEATH SHULER, North Carolina

                     KATHY DAHLKEMPER, Pennsylvania

                         KURT SCHRADER, Oregon

                        ANN KIRKPATRICK, Arizona

                          GLENN NYE, Virginia

                        MARK CRITZ, Pennsylvania

                         MICHAEL MICHAUD, Maine

                         MELISSA BEAN, Illinois

                         DAN LIPINSKI, Illinois

                      JASON ALTMIRE, Pennsylvania

                        YVETTE CLARKE, New York

                        BRAD ELLSWORTH, Indiana

                        JOE SESTAK, Pennsylvania

                         BOBBY BRIGHT, Alabama

                      DEBORAH HALVORSON, Illinois

                  SAM GRAVES, Missouri, Ranking Member

                      ROSCOE G. BARTLETT, Maryland

                         W. TODD AKIN, Missouri

                            STEVE KING, Iowa

                     LYNN A. WESTMORELAND, Georgia

                          LOUIE GOHMERT, Texas

                         MARY FALLIN, Oklahoma

                         VERN BUCHANAN, Florida

                      BLAINE LUETKEMEYER, Missouri

                         AARON SCHOCK, Illinois

                      GLENN THOMPSON, Pennsylvania

                         MIKE COFFMAN, Colorado

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

                  Karen Haas, Minority Staff Director

        .........................................................

                                  (ii)

  
?

              SUBCOMMITTEE ON INVESTIGATIONS AND OVERSIGHT

                                 ______



                 JASON ALTMIRE, Pennsylvania, Chairman


HEATH SHULER, North Carolina         MARY FALLIN, Oklahoma, Ranking
BRAD ELLSWORTH, Indiana              LOUIE GOHMERT, Texas

                                 (iii)

  
?



                            C O N T E N T S

                               __________

                           OPENING STATEMENTS

                                                                   Page

Altmire, Hon. Jason..............................................     1

                               WITNESSES

Newton, Mr. Chris, President, Texas Marketers and Convenience 
  Store Association, Austin, TX..................................     3
Celaschi, Mr. Ronald, Vice President of Lending, Clearview Credit 
  Union, Moon Township, PA.......................................     4
Oeler, Mr. Robert, President and Chief Executive Officer, Dollar 
  Bank, Pittsburgh, PA. On behalf of American Bankers Association     6
Buss, Mr. Jerry, President, Aurora Huts LLC, Seven Fields, PA....     8

                                APPENDIX


Prepared Statements:
Newton, Mr. Chris, President, Texas Marketers and Convenience 
  Store Association, Austin, TX..................................    19
Celaschi, Mr. Ronald, Vice President of Lending, Clearview Credit 
  Union, Moon Township, PA.......................................    69
Oeler, Mr. Robert, President and Chief Executive Officer, Dollar 
  Bank, Pittsburgh, PA. On behalf of American Bankers Association    77
Buss, Mr. Jerry, President, Aurora Huts LLC, Seven Fields, PA....    90

Statements for the Record:
Independent Community Bankers of America.........................    95

                                  (v)

  


                   SUBCOMMITTEE ON INVESTIGATIONS AND
                    OVERSIGHT HEARING ON THE IMPACT
                          OF INTERCHANGE FEES
                          ON SMALL BUSINESSES

                              ----------                              


                        Thursday, July 29, 2010

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 2360, Rayburn House Office Building, Hon. Jason Altmire 
[chairman of the Subcommittee] presiding.
    Present: Representative Altmire.
    Chairman Altmire. I will now call the hearing to order.
    In this time of fiscal belt tightening, too many of 
America's small businesses are faced with unfortunate choices: 
either cut costs or close their doors. Taking measures such as 
delaying plans to expand and even cutting their own salaries, 
small-business owners have done their best to weather in these 
trying times.
    For a majority of small businesses, however, one of the 
costs they have been unable to trim has been the fees they pay 
in order to accept card payments from their customers. These 
fees, commonly known as interchange fees, are paid to banks and 
card-processing networks every time a consumer swipes their 
card and makes a purchase. While, on average, these fees are 2 
percent to 3 percent of a transaction's total, the costs can 
add up quickly for a small-business owner.
    The recently passed financial reform law includes a 
provision that gives the Federal Reserve the authority over 
these fees for the first time. The use of debit card purchases 
has grown steadily in recent years, as consumers have made 
increased use of debit cards in lieu of cash or checks. Under 
the new law, the Fed is responsible for setting reasonable and 
proportional rates for debit transactions.
    While small businesses expect to experience relief from the 
fees they currently pay for these transactions, small financial 
institutions, such as community banks and credit unions, have 
expressed concern that providing the Fed with this new 
authority could have long-term unintended consequences.
    Among those concerns is that these small financial 
institutions will ultimately be put at a competitive 
disadvantage against large card issuers and will be unable to 
match the fees set by the Fed for larger issuers, which could 
ultimately result in fewer services for consumers at these 
financial institutions that are integral to communities in 
western Pennsylvania and across the country.
    Today we will delve into these issues and take a first look 
at how new reforms enacted under the Wall Street Reform Act 
will affect American businesses, financial institutions, and 
consumers.
    Just 2 years ago, debit, credit, and prepaid cards 
surpassed the use of cash and checks as consumers' preferred 
form of payment. And today these cards are used in more than 56 
percent of all transactions. Electronic cards have always been 
a convenient means for payment for customers. They expedite 
transactions while providing the considerable ease of use and 
security.
    Today, nearly two-thirds of all customers carry cards that 
provide some type of reward when they are used. It should come 
as no surprise, then, that that card usage is on the upswing.
    As card usage has grown, so, too, have the amount of 
interchange fees paid by retailers. According to the Federal 
Reserve estimates, these fees more than doubled in the 5-year 
period between 2002 and 2007. Today, it is estimated that these 
fees comprise a $45 billion annual expense for our Nation's 
businesses.
    For businesses that operate on razor-thin profit margins, 
fees on card transactions can mean the difference between a 
profit and a loss each time they sell their goods. Even more 
troubling is the fact that this cost may fall 
disproportionately on small businesses since they often lack 
the market power to negotiate lower fees, as many large retail 
businesses do.
    However, payment cards also offer merchants a number of 
benefits. By accepting card payments, businesses can increase 
their sales and reach a wider customer base, including 
expanding into online/mail-order sales. These cards have the 
added benefit of providing merchants with guaranteed payment 
that is less prone to fraud, loss, or theft. Merchants also 
avoid the costs associated with handling cash, processing 
checks, and transporting funds to a bank when they accept card 
payments.
    Most importantly, however, the existence of national card 
payment networks means that every business in the country, 
regardless of its size, can sell its goods and services on 
credit cheaply and efficiently. Two decades ago, that was 
practically unheard of; today, it is commonplace. And the 
interchange system has made all that possible.
    Rarely does such a seemingly small issue have such a 
significant impact on the daily affairs of small businesses, 
small financial institutions, and customers alike. For this 
reason, it will be imperative that Congress and this Committee 
tread carefully in this area, as even a slight change to the 
system can have far-reaching consequences. That is what this 
hearing is about today.
    Last month, Congress took its first steps toward reforming 
the card payment system with provisions enacted under the Wall 
Street Reform Act. Today's hearing will likely be the first of 
many discussions to examine how these new rules will impact 
American businesses and customers and give us crucial insights 
into how these laws can best be implemented.
    Small financial institutions, like credit unions and 
community banks, were not the cause of the financial free-fall 
we experienced in 2008 or the impetus for the Wall Street 
Reform Act. While Congress was forced to bail out the bad 
actors on Wall Street, credit unions and small businesses 
remained stable. As we move forward with implementation of the 
new law, it is critically important that we do not 
unintentionally do harm to the small financial institutions 
that have played by the rules.
    I would like to thank our witnesses for their participation 
in today's hearing. I look forward to your testimony.
    And, as we wait for a ranking member, in the interest of 
time we will just move forward with the hearing. And I will 
introduce, starting with Mr. Newton, our witnesses.
    I will read about all of you first, and then we will go to 
the testimony. So, the bios for the four of you--and thank you 
all for being here.
    Mr. Chris Newton is the president of the Texas Petroleum 
Marketers and Convenience Store Association, located in Austin, 
Texas. TPCA was formed in 1949 as the Texas Oil Jobbers 
Association to serve the regulatory, legislative, and 
educational needs of fuel and the lube oil business.
    I changed my mind. Why don't we just go ahead with Mr. 
Newton first, and then we will introduce all of you.
    Welcome, Mr. Newton.

                   STATEMENT OF CHRIS NEWTON

    Mr. Newton. Thank you, Mr. Chairman. Again, my name is 
Chris Newton, and I appreciate this opportunity to talk about 
the impact of interchange fees on small businesses.
    As you alluded to, I am the president of the Texas 
Petroleum Marketers and Convenience Store Association, or TPCA. 
TPCA is a trade association representing fuel distributors and 
fuel retailers in Texas. Our members own, operate, and supply 
around 10,000 retail motor fuel outlets. Our members are also 
responsible, are collectively responsible, for the sale of 
about two-thirds of all the fuel sold in Texas.
    Interchange fee is a very important issue to our member 
companies. And it is important because it has a significant 
impact on small business because these fees, in our opinion, 
are anticompetitive. They are anticompetitive because the fees 
are centrally set by Visa and MasterCard and their member 
banks. There is an incentive to continue raising the fees to 
attract more member banks.
    The fees are hidden, and consumers are unaware of the fees' 
escalation. We also see there is no price advantage for lower-
priced cards. There is no ability to discount for cash. In 
fact, a recent study concluded that, without higher prices 
caused by fees above and beyond cost plus a reasonable rate of 
return, consumers would have an extra $26.9 billion and 
potentially add 242,000 jobs to the economy.
    For our industry, for the convenience store industry, the 
fees are our members' second-highest cost, behind labor. But, 
unlike our other costs, we can't do anything about these fees. 
They have increased dramatically over the last 13 years. 
Because we have no ability to negotiate these fees or offer our 
customers a lower-priced alternative, there is nothing we can 
do.
    The fees' impact on small business also becomes more 
egregious when you consider that our retail profit margins 
average under 2 percent, while the Federal Reserve of Kansas 
City has concluded that the profit margins for interchange fees 
are around 60 percent.
    And to further give you some additional context for this, 
in 2009 our entire industry made pre-tax profits of $4.8 
billion, but we paid fees to process card transactions of $7.4 
billion. This inverse relationship between fees and profit 
stymies economic growth.
    The Durbin amendment to the financial reform bill recently 
passed by Congress will help small businesses and consumers 
cope with the impact of interchange fees and lead to additional 
economic growth. Consumers will benefit because the amendment 
will allow my members to reward lower-cost means of payment 
with lower prices.
    Small businesses, my members, will benefit because we will 
receive an assurance that interchange fees for debit 
transactions will be reasonable and proportionate to their 
cost. We will have the ability to offer our customers discounts 
for more efficient means of payment or lower-cost means of 
payment. And lower prices for consumers mean more sales for our 
members.
    So that concludes my opening remarks. I appreciate the 
opportunity to be with you today, and look forward to the 
discussion.
    [The statement of Mr. Newton is included in the appendix.]
    Chairman Altmire. Thank you.
    Mr. Ron Celaschi is vice president of lending with the 
Clearview Federal Credit Union based in Moon Township, 
Pennsylvania. Clearview Federal Credit Union has 76,877 members 
and assets of $594 million. Clearview primarily serves the 
Pittsburgh metro area, though it also has branches in 
Philadelphia and Charlotte.
    Welcome. I look forward to hearing your testimony.

                  STATEMENT OF RONALD CELASCHI

    Mr. Celaschi. Good morning, Mr. Chairman, and thank you for 
the opportunity to testify at today's hearing. As you 
mentioned, I am Ron Celaschi, vice president of lending at 
Clearview Federal Credit Union.
    Just a little background on the credit union: We initially 
served the employees of US Airways and modified our charter 
back in 2004 to serve communities in the 10-county area 
surrounding Pittsburgh, Pennsylvania. So our charter is a 
little bit expanded.
    I do appreciate the opportunity to present our views or 
interchange, what it means to small businesses, and also what 
it means to my credit union.
    To begin with, we are very concerned with the provisions of 
the recently enacted financial reform law which relate to 
interchange fees. At many credit unions, it is true that 
interchange revenue covers the cost of providing debit card 
access to their members; however, for our credit union, that is 
simply not the case.
    Last year, our total expense for offering a debit card 
access or program to our members was $2.9 million. The 
offsetting debit-based interchange income was roughly $1 
million, causing us a shortfall of $1.9 million on a valuable 
service.
    How is this possible when merchants have been telling 
Congress that interchange fees are unreasonable? Clearview 
Federal Credit Union has an aging membership, and it is true 
that older members tend to use their debit cards less 
frequently than the younger members that we serve. In a recent 
survey conducted by the Credit Union National Association, 
credit unions reported an average number of transactions per 
card per member at 160 per year. At Clearview, that number is 
only 69.
    So even though our members use their debit cards with less 
frequency than members of other credit unions, we still incur 
the total cost of running and administering a program. We run 
our program debit program at a loss because it provides a 
valuable service to our members. However, any reduction in 
interchange income that we receive will require us to impose 
fees on members to make up for that lost revenue. And that is a 
direct result of the recently enacted financial reform bill.
    The new debit interchange law includes an exemption or a 
carveout for card issuers with less than $10 billion in assets, 
like our credit union. However, this exemption provides me with 
little comfort. And why? Quite simply, about 80 percent of 
debit volume is accounted for by a handful of large issuers. 
The scale of their transactions enables the operation of a 
global network with enough capacity so that small issuers like 
us can participate. It is hard to imagine a carveout that would 
protect our credit union from the impact of new interchange 
regulation and the loss of revenue.
    We don't know precisely how the system will change and in 
what ways, but we do know this: that an artificial marketplace 
will be created; the ability of small issuers to compete in the 
face of merchant pressure will be significant; the ability of 
small issuers to attract and retain customers will change; and 
merchants will become even more bold in their efforts to steer 
and influence consumers regarding payment method.
    Another aspect of the new law addresses the routing and 
processing for card transactions. No exemption or carveout 
currently exists for small financial institutions applying to 
the routing section of the law. In practice, this takes the 
routing decision away from the financial institution and places 
it in the hands of merchants. And the significance of that is 
the merchant's objective is to cut the cost to the bottom line, 
while the financial institution's objective is the security of 
the consumer's personal information and that transaction. With 
this new law, the merchant's objective clearly trumps the best 
interest of the consumer, in our opinion.
    That brings me to my second point: What will this 
interchange law mean to the small businesses in my community? 
As a credit union lending officer, I am very familiar with the 
challenges facing small businesses today. The interchange 
expenses incurred by small businesses are relatively 
insignificant compared to expenses associated with health-care 
costs, vendor and supplier expenses, franchise-related 
requirements or expenses, and certainly a difficult economy. In 
my experience within the credit union movement since 1991, I 
have yet to witness a business close based on elevated 
interchange expenses.
    But will the new debit interchange structure benefit big-
box retailers? You bet it will. The Wall Street Journal 
recently reported, "The new debit interchange law will, on an 
annual basis, mean a quarter of a billion dollars for Wal-
Mart." Someone needs to support this system. And if the buck is 
passed from the big-box retailer to the consumer, Wal-Mart wins 
big. And the same can't be said about the consumer and Main 
Street small business.
    And my final point: What actions can Congress take today 
that will truly help small businesses in our struggling 
economy?
    I think all of us come from different backgrounds, but we 
can agree upon the fact that there is a need to increase the 
amount of credit available to small businesses. There is 
legislation in place to increase the cap on credit-union-member 
business lending, and it has strong support in the House and 
Senate and key administration support as well.
    Pending legislation would increase the credit-union-member 
business lending cap from 12.25 percent of total assets to 27.5 
percent. If this language were enacted this year, credit unions 
could lend to small businesses an additional $10 billion and 
create 100,000 new jobs in the first year after enactment at no 
cost to taxpayers.
    While bank business lending has contracted in recent years, 
credit union business lending has expanded. Clearview Federal 
Credit Union is committed to helping the small-business members 
in our community. In fact, our average business loan is 
approximately $70,000 and includes, among others, hair salons, 
landscaping companies, and several other sole proprietorships. 
It is my hope that Congress will act as soon as possible on 
this important issue.
    Mr. Chairman, I thank you very much for the opportunity to 
testify at today's hearing. Clearview Federal Credit Union is 
proud to serve the citizens and small businesses of western 
Pennsylvania. And, at this time or after the other folks are 
finished, I would be pleased to answer any questions. Thank 
you.
    [The statement of Mr. Celaschi is included in the 
appendix.]
    Chairman Altmire. Thank you.
    Our next witness is Mr. Robert Oeler. He is the president 
and chief executive officer of Dollar Bank, headquartered in 
Pittsburgh, Pennsylvania. Dollar Bank is a full-service 
regional bank, operating more than 50 branch offices and loan 
centers.
    Mr. Oeler is testifying on behalf of the American Bankers 
Association, which was founded in 1875 and is the voice for the 
Nation's $13 trillion banking industry and its 2 million 
employees.
    Welcome, Mr. Oeler.

                   STATEMENT OF ROBERT OELER

    Mr. Oeler. Thank you, Mr. Chairman. Thank you for this 
opportunity. As you said, I am president and CEO of Dollar 
Bank, a traditional mutual bank that has served western 
Pennsylvania and northeastern Ohio for over 150 years.
    Any changes to the interchange system will impact all small 
businesses, small banks included. The vast majority of banks in 
our country are community banks--small businesses in their own 
right. In fact, over 3,200 banks and 6,100 credit unions have 
fewer than 30 employees.
    When merchants choose to accept payment cards, they pay a 
small fee for the many benefits that come with accepting 
electronic payments. For example, a $10 debit transaction would 
cost the merchant less than 10 cents in interchange. In return, 
retailers typically see more customers, shorter wait times at 
the register, immediate payments to their account, and less 
hassle and risk of managing cash. They also generally transfer 
the risk of fraud to the bank.
    These interchange fees pay to support a system that works 
24/7, 365 days a year, almost anywhere in the world. These fees 
are under attack by retailers, yet they are no different than 
any other cost of running a business.
    Restrictions on interchange fees were included in the 
recently enacted Dodd-Frank Act. The provision, called the 
Durbin amendment, requires the Federal Reserve to dictate the 
pricing of interchange on debit cards. The Durbin amendment, 
which was added to the bill without any hearings, limits 
consideration of many important costs of providing debit cards 
and does not even allow for a reasonable return on investment. 
Such uneconomic pricing will hurt my ability to offer 
reasonably priced banking products to consumers and small 
businesses in my community.
    Let me illustrate this. Last year, we processed 16 million 
debit card transactions and made less than $3 per month for 
each debit card. This revenue is important but does not cover 
our cost of maintaining a transaction account, which runs 
between $12 and $15 a month. Without this income, it becomes 
very difficult for many banks to continue to offer low- and no-
cost checking for our customers.
    Loss of revenue has other impacts, as well, including 
making it harder to make loans. This is even more pronounced 
for Dollar Bank. Since we are a mutual, the only way we can 
raise capital is through retained earnings. If we lose 
interchange income, it means we will be unable to make as many 
loans in our community. In fact, if we would see a 50 percent 
reduction in after-tax income on interchange, it means 200 
fewer small-business loans that can't be made each year, year 
after year. For the industry as a whole, a 50 percent loss of 
interchange income would mean that lending could fall by as 
much as $74 billion.
    Congress recognized that setting price controls on 
interchange fees will have a significant negative impact on 
roughly 16,000 small banks and credit unions. Congress 
attempted to remedy this problem by providing an exemption to 
the price controls for small banks. While this idea sounds 
good, there is no community banker that believes such an 
exemption will work in practice. As with any price controls, 
there are inevitable unintended consequences, market 
distortions, and higher costs for others, including consumers.
    While I realize the ink is barely dry on the Dodd-Frank 
Act, the negative consequences for banks and bank customers are 
so great that Congress should revisit and repeal this 
provision. Moreover, Congress should avoid further price 
controls, such as a restriction on credit card interchange 
fees.
    Government price setting of business-to-business 
transactions hurts the ability of local banks to serve 
consumers and local businesses. It affects banks in low-income 
communities looking to provide low-cost banking services to the 
underprivileged. And it stifles innovation in a system that has 
supported the development of electronic bill payment, the 
online retail market, and the promotion of enormous operational 
efficiencies for small businesses.
    Thank you for the opportunity to present the ABA's views. I 
would be happy to answer any questions you may have.
    [The statement of Mr. Oeler is included in the appendix.]
    Chairman Altmire. Thank you, Mr. Oeler.
    Our last witness is Mr. Jerry Buss. He is president of 
Aurora Huts, LLC, based in Seven Fields, Pennsylvania. Mr. Buss 
is the former COO of Pizza Hut. He bought 53 Pittsburgh-area 
Pizza Hut locations, making the company one of the largest 
Pizza Hut restaurant operators in the region. Aurora Huts owns 
roughly two-thirds of the Pittsburgh market's locations.
    Welcome, Mr. Buss.

                    STATEMENT OF JERRY BUSS

    Mr. Buss. Thank you, Chairman Altmire and members of the 
Committee. Good morning. I am honored to be here today to offer 
my perspective on credit card and debit card fees and how they 
affect my small business. I want to thank Chairman Altmire for 
his leadership on this Subcommittee and for giving us all the 
chance to air our views.
    I ask that my entire testimony be made part of the hearing 
record.
    As Chairman Altmire said, I operate now 55 Pizza Huts in 
western Pennsylvania. We employ around 1,300 employees, and we 
have a payroll of a little over $10 million. The business is a 
family business, as my children are also owners and operators 
of this business. And it is my desire to see this business grow 
and flourish and furnish an opportunity for them to have the 
lifelong satisfaction of being private business persons.
    Franchisees like myself and the actual restaurant owners 
operate most of the restaurants across the country. There are 
6,500 Pizza Huts, for instance, and almost all of them are 
operated by franchisees. And I believe that my views match the 
business model and customer payment realities for our 
franchisees nationwide.
    My restaurants are mostly located in small towns with 
populations of 2,000 to 10,000. In fact, we recently opened a 
new location in Mars, Pennsylvania, in early 2008, and we 
pumped $1.8 million in development of that location and 
employed another 30 employees.
    In that respect, we do not have to watch the evening news 
to understand the state of our economy. My customers, my 
employees, and I are all at the front end of the economy. Every 
store closing, every layoff, every tax regulation, and, yes, 
every missed mortgage payment directly affects all of us. At 
the same time, every new hire, every new business opening, and 
every new customer gives us a bit of optimism that we will pull 
through this.
    Congress has given merchants a lift. You have laid the 
groundwork to help us create a competitive market where no 
market forces prevailed. Let me be clear: I am pro-card and 
pro-bank. Both credit cards and debit cards are key forms of 
payment and are vital to the modern commerce.
    Here is the scope of my problem with interchange fees. In 
2008--and roughly about 50 percent of my income comes through 
cards. In 2008, about $15 million represented fees of $345,000, 
or 2.252 percent of my sales. As we look at 2010, and as of 
July 17th, I had about $10 million in money generated through 
cards and fees, and I paid $249,000, or 2.443. That is an 
increase over 2-1/2 years of 8.5 percent in my fee charges.
    Under the new rules, I am assuming that those fees will be 
more competitive and be reduced. And much has been said about 
where that money will go. Will it go to the consumer, or will 
it go in the merchant's pocket?
    I want to reinvest in my business, as I believe all private 
entrepreneurs do. To kind of give a demonstration of how we did 
this, this year, for the last 8 months, we have reduced our 
prices to the consumer in a "$10 any large pizza." That is $10, 
any pizza, any toppings. That is a discount of over $8. We ran 
that for over 8 months, and we do believe that the community 
and our neighborhoods enjoyed that, thought well of it, and we 
picked up traffic to offset some of that. I believe that, as we 
do multiple efforts and we look for volume relationships, that 
we can have reduced costs.
    If I could just save the project--the money off of what we 
think the cost raising in 2010 would be, that would be $20,000. 
That would supply part of equity for a new building. It could 
be the addition of new menu items. It could be the revamping of 
our merit system for our employees. There are plenty of places 
within the economy, other than the entrepreneur's pockets, that 
that would go. In fact, the word "greedy" has been used. And I 
would say, if you are truly greedy, you are going to be doing 
those things and growing your business.
    Thank you very much for the opportunity to speak to you.
    [The statement of Mr. Buss is included in the appendix.]
    Chairman Altmire. Thank you, Mr. Buss. And as a resident of 
your area, I can tell you that that $10 pizza deal does, in 
fact, make a difference. I have two kids, and we have kept you 
in business--helped keep you in business.
    Mr. Buss. Well, thank you.
    Chairman Altmire. Sure.
    Thank you all. This has been very instructive. And as you 
can see from the turnout we have among the public here to watch 
the hearing, this is an issue that has drawn great interest.
    And the Wall Street reform bill, of course, had any number 
of items in there that drew great public interest, but I will 
tell you, in the 2 years leading up to passage of that bill, 
there is no issue that I heard more about from more different 
people and coming from more different angles than the 
interchange fee. And that is the purpose of this hearing, is to 
bring you here.
    And the entire Committee will benefit from your testimony. 
As you can see from the diversity of testimony, this was not an 
attempt to skew what we were going to hear. We wanted to hear 
all sides of the debate. And you have done great in 
representing all sides.
    And I wanted to begin by asking each of you the same 
question, just to put in perspective what we are talking about 
and maybe a different opinion on the same question. And it is 
very simple. Most people in the country, when they go shopping, 
whether it be in Texas or Pennsylvania or wherever, generally 
most would go to a chain grocery store of some sort. We have 
Giant, Eagle, and Shop and Save, and others in western 
Pennsylvania. I don't know if you have Publix or Safeway or 
what Texas has.
    But if you go out for an outing with the family--and, of 
course, this bill only pertains to debit cards. And some of you 
alluded to the way that is going to affect credit cards, as 
well. But I am going to ask the question on credit cards for 
that reason.
    If you go out, you have dinner at a restaurant, a chain 
restaurant, you go shopping at the grocery store, maybe buy 
some gas at the corner gas station, use your credit card each 
time, what is the impact to the consumer from this regulation, 
say, a year from now, once this is fully in play and everyone 
has adjusted how they are going to adjust? What am I and my 
family going to see changed, as a consumer, for our credit card 
purchases for that evening of having bought those three 
different items?
    Mr. Buss?
    Mr. Buss. I think you would see, on our behalf, an altering 
of the offerings and the prices that we have to charge for 
those offerings. We are very sensitive to the average check 
cost of our customers, and we try to lower that every possible 
way we can.
    Chairman Altmire. So we will pay more?
    Mr. Buss. No, less.
    Chairman Altmire. Less. Okay.
    Mr. Oeler?
    Mr. Oeler. I think what you will see--many cards today come 
with some sort of rewards attached to them. They also tend not 
to have fees. I think if anything is altered along those lines, 
the rewards will begin to disappear, as well as we will be 
looking at, as we once did when credit cards were in their 
infancy, annual fees to carry the card with you.
    Chairman Altmire. So we may not see more each time we use 
the card, but we will pay more to have the ability to access 
that card.
    Mr. Oeler. That is correct, yes.
    Chairman Altmire. Okay.
    Mr. Celaschi?
    Mr. Celaschi. I would agree with Mr. Oeler. And I would 
also add that you are going to see, on the consumer side, 
probably higher interest rates to make up for the lost revenue 
that the institutions will be getting as a result of the 
financial reform act.
    You know, in our case, at least on the debit side, we are 
looking at slicing that revenue in half and creating even a 
larger deficit, which we would have to pass on the cost to our 
members, which is something we are certainly averse to doing.
    Chairman Altmire. You mean pass on the costs in their 
accounts, not just in the use of the card?
    Mr. Celaschi. Not in their--additional fees, higher 
interest rates, potentially, on the credit card side and even 
on our lending side, which puts us at a competitive 
disadvantage.
    Chairman Altmire. Okay.
    Mr. Newton?
    Mr. Newton. I think what your family will see when they 
pull up to the gas station is that, if they are using a debit 
card, there may be a choice to use debit or credit, and there 
may be cost savings associated with the use of debit. Those 
cost savings stem not only from ensuring that debit interchange 
fees are reasonable and proportionate, but also stem from the 
fact that the financial reform bill has a provision in it 
allowing merchants--I think they can select one of two networks 
in which to process the card from.
    One of the big issues right now in our industry is that 
there are instances where Visa and MasterCard will say, this 
particular debit card can only go through this particular 
network, and that may be at a higher fee. And so the Durbin 
amendment in the financial reform bill limits that to a certain 
extent and says, no, you can't discriminate amongst these 
networks.
    So there may be a cheaper alternative. And I think, 
especially as it pertains to gasoline, you will see our 
industry, you know, doing all they can to bring those 
efficiencies to the marketplace to attract more consumers and 
hopefully lead to more sales.
    Chairman Altmire. Thank you.
    And I ask that question--let me just say, first of all, Mr. 
Buss, you asked that your testimony in total be included in the 
record. And I wanted to say, for the record, all of your 
written testimony will be included in total in the record for 
the Committee.
    I asked my first question so that Mr. Oeler and Mr. 
Celaschi could answer this question. The amount of interchange 
a business pays can vary wildly from one business to another, 
as you both mentioned. But small businesses, in general, pay 
more in interchange fees than retail giants like Wal-Mart and 
Target, which you referenced.
    How would you propose we address this discrepancy in the 
Congress to provide small businesses with greater fairness in 
how these fees are set? What recommendation would you have?
    Mr. Oeler. We tend to mainly deal with small businesses, 
and our fees are established, you know, through the network. So 
our fees tend to be the same across the board. So we really 
haven't negotiated any separate deals with the big-box 
retailers.
    Chairman Altmire. What about on behalf of the American 
Bankers Association, when you would have banks that have maybe 
a larger scope than that? Is there a different spin to that?
    Mr. Oeler. Well, I think what would happen, if there is the 
ability to have different fees for different institutions based 
on their usage, I think the customer would be at a 
disadvantage, you know, depending on the card they hold. For 
instance, if the big banks are able to have the discount and 
the small banks would not, our card would be disadvantaged to 
that retailer.
    So, thus, there might be some reason for the retailer to 
try to move the customer to another type of card or suggest 
another type of card so they can maximize their revenue.
    Chairman Altmire. Mr. Celaschi, do you want to comment on 
that?
    Mr. Celaschi. Yes. We don't believe that the proposed two-
tier system, if you will, in practice is something that is 
viable. We believe that the 80 percent volume that I mentioned 
by a handful of issuers does not motivate that group to a two-
tier issue. They would want to keep it at a one-tier, one-rate 
tier, if you will. And that puts us, again, at a disadvantage, 
our small businesses as well as our individual members as well.
    Chairman Altmire. I wanted to follow up with Mr. Oeler.
    Over the past decade, as I referenced, with the steady 
growth in the number of credit card payments and the decline in 
the cost due to technology advances, one could reasonably 
expect the cost of processing card payments would fall, given 
those two factors. Why, then, have interchange fees increased 
so significantly during that same period?
    Mr. Oeler. The costs of business always go up. I don't 
think it is been usurious, the increases. It is just a matter 
of maintaining a system, as I said, that operates 24/7, 365 
days a year. The system itself always requires upgrades, new 
software, new controls. The fraud situation has increased over 
the years. We have had some breaches in cards, that the cards 
have to be reissued, and so on and so forth. So I think the 
increased cost helps compensate for that end of the business.
    Chairman Altmire. Okay.
    Mr. Buss, some have argued that capping interchange fees 
could result in a contraction of credit availability and a 
reduction in the number of rewards programs that over 80 
percent of consumers currently enjoy. You heard both of our 
witnesses answer recently to that.
    Is there a risk that these consequences could then lead to 
a decline in sales for small firms and outweigh any savings 
that a rate cap would generate in the outset?
    Mr. Buss. Yes, I believe that any time we see any increases 
on the ability to use the cards, that you are going to see some 
contracting on it.
    Chairman Altmire. Mr. Newton, did you want to comment on 
that?
    Mr. Newton. If I may ask, could you rephrase the question?
    Chairman Altmire. Certainly.
    Mr. Newton. I want to make sure I answer you to the best of 
my ability.
    Chairman Altmire. Well, it deals with the rewards programs 
that we were talking about. Is there a risk that there would be 
a reduction in rewards and that those consequences could lead 
to a decline in sales for small firms and outweigh any savings 
that that rate cap would generate?
    Mr. Newton. I really don't think so. This morning's Wall 
Street Journal reports that Visa saw a 14 percent increase in 
the third quarter in credit card transactions. The majority of 
Visa--I am sorry, the majority of Visa transactions are debit 
cards. So, you know, I think that there is a lot of choice out 
there, and I think, as consumers are given those choices, they 
are going to make intelligent decisions about which way to go.
    I think right now we have a system where--and this is an 
example from my office. One of my employees opened a checking 
account with a bank and got a debit card from the bank, saying, 
"Here is your debit card." And on the debit card, on the piece 
of paper that it came with, it said, "Please, when you go to a 
retail marketplace, tell the retailer to ring the sale up as 
credit signature." Credit signature is obviously a much higher 
rate as the debit card than PIN debit. "And, if you do that, we 
will then give you 450 reward points."
    So there is an incentive to steer the consumer to a higher-
priced fee transaction, even though signature credit is much 
more prone to fraud and less secure than using a PIN debit. And 
so that is one of the issues that I think the Durbin 
amendment--I know the Durbin amendment addresses. And I think 
that is to everybody's good.
    Chairman Altmire. And do you have the ability right now to 
incentivize cash and check transactions from your consumers?
    Mr. Newton. It is hard to answer. I know that the Durbin 
amendment explicitly authorizes discount for cash.
    Another anecdote from Texas, if you will bear with me: One 
of my members attempted to offer a discount for cash for people 
who use gasoline. And a representative of Visa or MasterCard 
happened to be driving down the road and pulled into the store 
and said, "What are you doing?" And he said, "Well, I want to 
give people a discount for cash." He had contacted me.. I 
discussed it with staff from our State AG's office, and they 
said, under Texas law, discounting is permitted.
    The representative of the card company said, "Absolutely 
not. It is against our rules." He called me and asked about it. 
I said, "Well, ask him to show you the rule, and then we can 
distribute it to members of our association, just saying, 'You 
need to be aware of this compliance issue.'" The Visa/
MasterCard person then claimed that, "I can't show it to you. 
But, trust me, it is against the rules."
    So this merchant was left with the choice of, okay, do I 
discount for cash and run the threat of Visa/MasterCard 
knocking me out of the system and suspending my access to the 
network, or do I continue to offer this discount for cash? And 
he chose to not continue that practice because he was afraid, 
and I think all retail merchants are afraid, of that threat 
because Visa and MasterCard control, I believe it is, 80 
percent of the market.
    Chairman Altmire. Thank you.
    I wanted to get back to our witnesses from the credit union 
and bank side, and start with Mr. Oeler.
    Under new provisions of the Dodd-Frank Wall Street Reform 
Act, merchants will have the right to offer discounts not only 
for cash but also for checks and debit cards. Will these 
changes in the law have an effect on credit card use, as you 
see it?
    Mr. Oeler. When we talk about offering discounts--I will 
just present our information. As I said in my testimony, we had 
16 million transactions we processed last year. The average 
ticket of that transaction or the average transaction amount 
was right around $35.
    When you are looking at debit cards, you are looking at 
less than 1 percent. So I guess, is it realistic that the 
retailers would offer a discount of 35 cents, you know, on a 
transactional basis.
    Chairman Altmire. Mr. Celaschi?
    Mr. Celaschi. As far as the discount for cash, checks, and 
debit, I don't know that it would have that great of an impact, 
solely because of the convenience and the popularity of the 
debit card transaction. People are more likely to carry the 
debit card than even cash and checks these days, as far as a 
payment processing. So what I do believe we would see is a 
decrease in the transactions on the credit side as a result of 
the discount, significantly.
    Chairman Altmire. Talk about--for the two of you, and then 
I will go to Mr. Newton and Mr. Buss, as well. Are there risks 
that the consumer will be confused and frustrated by having two 
different prices for goods depending on their chosen method of 
payment, if this were to lead to that?
    Mr. Celaschi. I believe so, because I believe the consumer 
considers that plastic a credit card, whether it is debit or 
credit, as their form of payment, regardless of it coming out 
of their checking account or being a revolving line of credit. 
So there is a risk of confusion.
    I think one important point to add to all of this, too, 
when we are talking about discounts and reducing the 
interchange rates is, the liability for any fraud or problem on 
the plastic transaction lies with the institution, not the 
consumer and not the merchant. So those costs have to be 
considered when we talk about the interchange income that we 
are receiving, as well.
    Chairman Altmire. Mr. Oeler?
    Mr. Oeler. I would agree with that comment.
    I think we had a huge breach up in the New England area 
that had ramifications across the country when we had a breach 
in their card system. I know we had to reissue several thousand 
cards ourselves. There are other members of the ABA that I 
talked to just last week. One in particular was a $1 billion 
institution located out in the Philadelphia area, and he had to 
reissue 10,000 cards. That stuff comes at a high cost to the 
institution itself, and we bear that cost, you know, through 
the current interchange setup.
    Chairman Altmire. Mr. Newton, do you have any concerns 
about different pricing levels giving the consumers some 
confusion?
    Mr. Newton. Shortly, no. I trust our members and the 
hundreds of thousands, if not millions, of retailers out there 
across this country, across all businesses, to communicate the 
message and to let consumers know of lower prices available for 
more efficient means of payment.
    So I think the industry has shown time and time again, 
especially for the industry that I am in, gasoline, we compete 
on price. And I just don't see it being an issue, because I 
think the consumer expects it and they expect a lower price. 
And once they become aware of a lower price associated with the 
use of a debit card when compared to their traditional credit 
card, I fully expect the entrepreneurs in our association 
across this country are going to find a way to make sure that 
they are aware of it and that they take advantage of that 
opportunity.
    Chairman Altmire. Mr. Buss?
    Mr. Buss. Well, I do think it may afford us an opportunity 
in business to attract more consumers. I am gravely concerned 
about trying to get that message across, that you have several 
ways to pay and you have different prices with those ways to 
pay.
    For instance, a little over 50 percent of our revenue comes 
in at home. We deliver to the homes. We would have a difficulty 
there with debit cards because of PINs. We generally take them 
as credit cards in that situation.
    I will add also to a little earlier comment that you were 
asking about. And that is, I have noticed over the economy 
slowdown that we have moved off of credit cards and debit cards 
and moved back into more checks from the consumers, at least in 
the area where I do business and where my fellow franchisees do 
business. So I do think the consumer has some interest in what 
is going on with some of this, and I do think they are moving 
around a little bit more.
    Chairman Altmire. Okay.
    Mr. Newton, have you had that same experience in the 
slowdown, with people using checks and cash more often than 
they were in the past?
    Mr. Newton. No. With fuel, our members have experienced 
increased usage of both credit and debit. With debit, I would 
say that our members in the urban areas--so, Dallas, Houston, 
Austin--say 90 percent of their transactions are either on 
credit or debit cards. And of that 90 percent, 50 percent to 60 
percent are associated with debit cards.
    So I think, speaking for the fuel end of it, as we have 
seen the volatility in prices and everything else, consumers 
continue to choose either credit or debit cards.
    Mr. Oeler. Mr. Chairman, may I add something?
    Chairman Altmire. Certainly, of course.
    Mr. Oeler. Kind of on a practical basis. I have two sons, 
one 28 and one 33. And, frankly, they never have cash with 
them. To them, the cards are the cash. So if you ask them for a 
few dollars, you know, they hold a card up, but there is not 
much you can do about it.
    Chairman Altmire. Right.
    I wanted to move to Mr. Buss again. As you know, proponents 
of maintaining the status quo on interchange fees have 
characterized the interchange fee as simply one more cost of 
doing business, not unlike utility or labor costs. And it is 
said that merchants can stop accepting card payments if costs 
outweigh the benefits.
    From your perspective, can a business realistically expect 
to operate without accepting card payments today? Which is a 
good follow-up from what we just heard from Mr. Oeler.
    Mr. Buss. No, I do not believe that we could.
    Like with checks, that would probably be beneficial to move 
away from checks and into cards if you could, but we cannot get 
that done. We have tried that over the years and not been able 
to do that.
    So, no, I think in our situation we would take any way of 
payment to continue to grow our business.
    Chairman Altmire. And a question for Mr. Celaschi--did you 
want to answer something on that?
    Mr. Celaschi. No.
    Chairman Altmire. Okay. At a recent conference hosted by 
European Central Bank, policymakers and banking experts 
suggested adopting a card fee system that took into account the 
cost that businesses would pay to operate their own credit card 
systems.
    Do you think that that type of system would have merit in 
this country?
    Mr. Celaschi. I believe that there should certainly be 
discussion and research into that. Any alternative that is 
consumer-friendly and small-business-friendly I am in favor of.
    I would further say, with regard to the interchange, that 
we as Clearview Federal Credit Union receive on, for example, a 
$100 purchase, our revenue would be something between $1.30 and 
$1.50, which, in my opinion, does not seem excessive or 
unreasonable.
    Chairman Altmire. Mr. Oeler, do you think that is something 
we should explore in this country?
    Mr. Oeler. If I read correctly, about a month ago, I 
believe, Target is actually looking to do that. They are 
looking to have their own card.
    If you recall, when cards were in their infancy, it used to 
be that the vendors all had their own cards and they weren't 
part of the overall network. So it is possible you could see 
some movement back to that.
    Chairman Altmire. Sticking with looking at what other 
countries have done, I wanted to ask Mr. Newton about 
Australia. I don't know if you are aware that since Australia 
placed a cap on interchange fees in 2003, their central bank 
found a sharp decrease in the availability of rewards cards and 
no conclusive proof of lower prices for consumers.
    Why do you believe that tighter caps on interchange rates 
in this country would be met with better results than they saw 
in Australia?
    Mr. Newton. Well, it is my understanding that there was a 
study done by the Australian bank that found that there was $1 
billion worth of--so there may be two different studies.
    My contention in regards--and, again, speaking from the 
fuel perspective--is that our industry is extremely price-
competitive. And our members are constantly looking for new 
ways to attract consumers or customers to their stores. And so, 
any means out there available that this new law will put at 
their disposal they will take advantage of.
    And I think, I am confident--and I would also bring up, the 
Department of Energy has studied fuel prices and found that 100 
percent of the cost decreases are reflected in retail gasoline 
prices. So I think we have a solid background of passing on 
those things. The Hispanic Institute issued a report that said 
the same thing, because consumers are already paying these 
fees.
    So I am confident that here in the United States there will 
be some movement as entrepreneurs, again, take advantage of the 
freedom of choice that this legislation provides.
    Chairman Altmire. Thank you. And I would ask if your 
association could forward to the Committee the study that you 
referenced, because we would love to see any further 
information.
    Mr. Newton. Yes, sir. I would be happy to.
    Chairman Altmire. Thank you.
    Chairman Altmire. Sticking with Mr. Newton, the business 
community has consistently maintained the high cost of 
interchange is passed along to consumers and that the Federal 
caps interchange could result in lower costs for goods and 
services.
    If interchange fees were capped, what guarantees would we 
have that those savings would be passed along to consumers? How 
do we know for sure that is what is going to happen?
    Mr. Newton. I think you know for sure because it is 
economics. Lower prices mean more sales. So it is to our 
members' advantage to ensure that they are offering the lowest-
priced products out there they can to attract consumers to 
their retail facility. Our market does not allow a retailer to 
sit on margin very long. You can drive through any community 
and know exactly what we are selling our products for. And so, 
just the competitive market forces are not going to allow that.
    And I think that is really what this bill addresses, is if 
the competitive market forces are not present, and now these 
interchange fees are set. And this bill seeks to remedy that 
and to ensure that the fees are reasonable and proportionate, 
to offer choice or some semblance of choice when it comes to 
network processing.
    Chairman Altmire. Mr. Buss, did you want to comment on 
that?
    Mr. Buss. Yeah, I would wholeheartedly support that. I do 
believe that the lower you can drive the prices, the higher you 
can drive the business. I do think we look for tenths of a 
percent.
    Mr. Oeler. May I add something, Mr. Chairman?
    Chairman Altmire. Mr. Oeler, certainly.
    Mr. Oeler. The Durbin amendment itself does not allow for a 
reasonable rate of return. So that is going to be an 
interesting discussion. You know, obviously, based on Mr. 
Celaschi and myself, you know, we need to make a rate of 
return, too, a combination to stay in business and continuing 
to lend to the community. So, you know, the fee has to be 
established to provide a reasonable rate of return.
    Chairman Altmire. Mr. Celaschi, do you want to have the 
final word on that?
    Mr. Celaschi. I would only add that, you know, with respect 
to Mr. Newton's comments on--and I have full confidence that 
his group would do that, would reduce the cost as their costs 
are reduced. Our concern is the big-box retailers, for lack of 
a better term. Who is the police of seeing consumer prices 
being lowered there? Does the Fed wash their hands once these 
tiers are set? And who talks about consumer prices? And, at the 
end of the day, the consumer and the small-business owners run 
our business.
    Chairman Altmire. So, before we conclude, again, the 
purpose of the hearing was to hear all points of view. And you 
all did a wonderful job in doing that. And I tried in my 
questioning, as you saw, to try to give you different 
perspectives and allow you to answer what some of the 
criticisms have been from your points of view.
    So I wanted to end the hearing by allowing each of you, if 
you choose--you don't have to--based on what we have discussed 
today, do you have anything else you would like the Committee 
to consider as we move forward? Was there any point that wasn't 
brought up or rebuttal that you want to make that you wanted to 
have the opportunity to do?
    Start with Mr. Newton.
    Mr. Newton. Let me first say thank you. We appreciate this 
opportunity to appear before the Committee today, and I thought 
this was an excellent discussion of all of the issues.
    I think there is not a specific point that I would bring 
up, but I would, in a more general sense, applaud the passage 
of the Durbin amendment because it does seek to reverse the 
incentives that are present in the market today and to bring 
some competitive market forces to this, which is something that 
my members deal with every day. And I think that is to the good 
of the American economy and to the good of the American people.
    So we appreciate it. Thank you.
    Chairman Altmire. Thank you.
    Mr. Celaschi?
    Mr. Celaschi. In closing, I would only say that the benefit 
to the merchant level would be clearly outweighed by the harm 
done to the average consumer and the small business. We, as a 
$630 million credit union, I consider us a small business. And 
the impact of the loss of revenue is certainly significant and 
would have a significant impact on both the credit union, our 
individual members, and our small-business members.
    And thank you, Mr. Chairman, for inviting me to the 
hearing.
    Chairman Altmire. Thank you.
    Mr. Oeler?
    Mr. Oeler. Mr. Chairman, I would also like to thank you. I 
thought you did a good job in being fair across the board.
    I would just like to add that, whichever way it goes, the 
consumer, whether they pay indirectly through interchange or 
directly if they lose out on free checking, you know, somehow 
the consumer is going to end up paying for this, and I think 
that is going to be the bottom line.
    I think you have already seen Wells Fargo, as of July 1st, 
announce that there is no more free checking across their 
system. I think Bank of America is exploring different fee 
structures, so they are heading in that direction. And I think 
any alteration in the interchange will lead more to go in that 
direction.
    Chairman Altmire. Thank you.
    Mr. Buss?
    Mr. Buss. Again, Chairman Altmire, thank you very much for 
being here.
    As I close, I would only ask, as we enter this phase of 
Federal rulemaking, that the Oversight Committee be diligent in 
ensuring that the final bill that comes out is as it was 
intended and is written so.
    Thank you.
    Chairman Altmire. Thank you.
    Thank you all. This was a great discussion. It is the first 
of many hearings we are going to have on this topic, but I 
think we moved the ball down the field a little bit.
    And I now ask unanimous consent that Members will have 5 
days to submit statements and supporting materials for the 
record. Without objection, so ordered.
    Chairman Altmire. And this hearing is now adjourned.
    [Whereupon, at 11:00 a.m., the Subcommittee was adjourned.]

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