[Senate Hearing 111-845]
[From the U.S. Government Publishing Office]
S. Hrg. 111-845
OVERSIGHT OF FEDERAL PAYMENT OF INTERCHANGE FEES: HOW TO SAVE TAXPAYER
DOLLARS
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HEARING
before a
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
SPECIAL HEARING
JUNE 16, 2010--WASHINGTON, DC
__________
Printed for the use of the Committee on Appropriations
Available via the World Wide Web: http://www.gpo.gov/fdsys
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COMMITTEE ON APPROPRIATIONS
DANIEL K. INOUYE, Hawaii, Chairman
ROBERT C. BYRD, West Virginia THAD COCHRAN, Mississippi
PATRICK J. LEAHY, Vermont CHRISTOPHER S. BOND, Missouri
TOM HARKIN, Iowa MITCH McCONNELL, Kentucky
BARBARA A. MIKULSKI, Maryland RICHARD C. SHELBY, Alabama
HERB KOHL, Wisconsin JUDD GREGG, New Hampshire
PATTY MURRAY, Washington ROBERT F. BENNETT, Utah
BYRON L. DORGAN, North Dakota KAY BAILEY HUTCHISON, Texas
DIANNE FEINSTEIN, California SAM BROWNBACK, Kansas
RICHARD J. DURBIN, Illinois LAMAR ALEXANDER, Tennessee
TIM JOHNSON, South Dakota SUSAN COLLINS, Maine
MARY L. LANDRIEU, Louisiana GEORGE V. VOINOVICH, Ohio
JACK REED, Rhode Island LISA MURKOWSKI, Alaska
FRANK R. LAUTENBERG, New Jersey
BEN NELSON, Nebraska
MARK PRYOR, Arkansas
JON TESTER, Montana
ARLEN SPECTER, Pennsylvania
Charles J. Houy, Staff Director
Bruce Evans, Minority Staff Director
------
Subcommittee on Financial Services and General Government
RICHARD J. DURBIN, Illinois, Chairman
MARY L. LANDRIEU, Louisiana SUSAN COLLINS, Maine
FRANK R. LAUTENBERG, New Jersey CHRISTOPHER S. BOND, Missouri
BEN NELSON, Nebraska LAMAR ALEXANDER, Tennessee
JON TESTER, Montana THAD COCHRAN, Mississippi (ex
DANIEL K. INOUYE, Hawaii (ex officio)
officio)
Professional Staff
Marianne Clifford Upton
Diana Gourlay Hamilton
Melissa Zimmerman Petersen
Dale Cabaniss (Minority)
Brooke Hayes Stringer (Minority)
LaShawnda Smith (Minority)
Administrative Support
Molly Barackman-Eder
C O N T E N T S
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Page
Opening Statement of Senator Richard J. Durbin................... 1
Statement of Senator Susan Collins............................... 3
Statement of Gary Grippo, Deputy Assistant Secretary for Fiscal
Operations and Policy, Department of the Treasury.............. 5
Prepared Statement of........................................ 8
Overview of Federal Collections.................................. 8
Use of Credit and Debit Cards in Federal Collections............. 8
Cost of Processing Federal Collections........................... 9
The Issue of Card Costs.......................................... 10
Negotiating New Rates and Terms.................................. 10
Potential Cost Savings........................................... 10
Statement of Dr. Alicia Puente Cackley, Director, Financial
Markets and Community Investment, Government Accountability
Office......................................................... 12
Prepared Statement of........................................ 14
Credit and Debit Cards: Federal Agencies Benefit From Card
Acceptance, but Have Limited Ability to Control Interchange Fee
Costs.......................................................... 14
Scope and Methodology............................................ 16
Federal Entities Receive Numerous Benefits Associated With Card
Acceptance, but Also Pay Interchange Fees and Other Costs...... 16
Federal Entity Officials Cited Various Benefits From Accepting
Cards.......................................................... 18
Card Usage by Federal Entities Provides Numerous Benefits, but
Creates Control Challenges..................................... 19
Federal Entities Have Worked to Reduce Card Acceptance Costs, but
Efforts to Negotiate Lower Interchange Fees Have Had Limited
Success........................................................ 20
Federal Entities Have Had Limited Success in Negotiating Lower
Interchange Fee Costs.......................................... 21
Merchants Similarly Have Had Limited Success in Reducing Their
Interchange Fee Costs.......................................... 22
Card Network Rules Are a Major Factor Limiting Card Accepters'
Ability to Negotiate Lower Interchange Fees.................... 23
Removal of Anti-steering Rules Seen as Improving Merchants'
Ability to Negotiate With Card Networks, but Impact of Lower
Interchange Rates on Consumers is Unclear...................... 23
Statement of Janet Langenderfer, Senior Director of Credit Cards,
Finance Department, National Railroad Passenger Corporation
(Amtrak)....................................................... 25
Prepared Statement of........................................ 27
The Direct and Indirect Costs of Acceptance...................... 28
Fast and Accurate Transactions................................... 28
Security Costs and Considerations................................ 29
Statement of Bruce Sullivan, Vice President and Head of
Government Services, Visa Inc.................................. 36
Prepared Statement of........................................ 38
What is Interchange?............................................. 39
Government Benefits From Accepting Electronic Payments........... 39
Government Benefits From Card Issuance........................... 42
Statement of Edmund Mierzwinski, Consumer Program Director, U.S.
Public Interest Research Group................................. 44
Prepared Statement of........................................ 46
The New GAO and Treasury Studies and the Durbin Amendment........ 47
Further Discussion............................................... 48
Interchange and its Effects...................................... 49
Interchange Fees Force Consumers to Pay Higher Prices............ 49
Increases in Interchange Fees Signal a Broken Market............. 50
Durbin Amendment Slows Deceptive Practices That Increase Prices
for Consumers.................................................. 52
Increased Consolidation of Card-issuers Harms Consumers More
Broadly........................................................ 53
The Credit Card Oligopoly Also Allows Issuers to Use Anti-
consumer Practices Against Cardholders......................... 54
Statement of Wendy Chronister, President and Chief Executive
Officer, Chronister Oil Company (d/b/a/ Qik-N-Ez Convenience
Stores), Springfield, Illinois................................. 55
Prepared Statement of........................................ 57
The Impact of Runaway Credit Card Fees on my Convenience Store
Busi-
ness........................................................... 58
Background on the Durbin Amendment............................... 59
Consumers Will Benefit From Reform............................... 59
The Durbin Amendment Would Bring Reasonable Reform............... 61
Additional Committee Questions................................... 69
Questions Submitted to Gary Grippo............................... 69
Questions Submitted by Senator Jon Tester........................ 69
Questions Submitted to Alicia Puente Cackley..................... 70
Question Submitted by Senator Ben Nelson......................... 70
Questions Submitted by Senator Jon Tester........................ 71
Question Submitted to Janet Langenderfer......................... 72
Question Submitted by Senator Jon Tester......................... 72
OVERSIGHT OF FEDERAL PAYMENT OF INTERCHANGE FEES: HOW TO SAVE TAXPAYER
DOLLARS
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WEDNESDAY, JUNE 16, 2010
U.S. Senate,
Subcommittee on Financial Services
and General Government,
Committee on Appropriations,
Washington, DC.
The subcommittee met at 2:35 p.m., in room SD-192, Dirksen
Senate Office Building, Hon. Richard J. Durbin (chairman)
presiding.
Present: Senators Durbin, Nelson, Tester, and Collins.
OPENING STATEMENT OF SENATOR RICHARD J. DURBIN
Senator Durbin. Well, good afternoon, everyone. Thanks for
being here. I am pleased to convene this hearing before the
Senate Appropriations Subcommittee on Financial Services and
General Government. Our hearing is titled ``Oversight of
Federal Payment of Interchange Fees: How to Save Taxpayer
Dollars.''
I welcome my distinguished ranking member, Senator Susan
Collins of the great State of Maine, and other colleagues are
to join us a little later during the course of this hearing.
We are also pleased to have a distinguished group of
witnesses, and I will be introducing them in just a moment.
Credit and debit cards are rapidly replacing cash and
checks in today's economy, accounting for more than one-half of
all retail sales in America, and that percentage is growing.
Credit and debit cards are also used to buy nearly $30
billion a year in goods and services from our Federal
Government.
People use cards to pay for things like admission passes to
the national parks, groceries at military commissaries, tickets
on Amtrak, and co-pays for Veterans Administration (VA) medical
services.
There are benefits to being able to use plastic for
transactions, but there are also some consequences. The more
Americans use credit and debit cards, the more the American
economy falls under the control of the two credit card giants,
Visa and MasterCard.
Visa and MasterCard control 80 percent of the credit and
debit card markets, and they have established a system of fees
and rules that apply to every transaction conducted across
their networks. Every time a credit or debit card sale is made,
Visa and MasterCard take a cut of the transaction amount. Some
of this cut they keep, but most of it is routed along to the
bank that issued the card used in the transaction. This fee
that they give to the card-issuing bank is called the
interchange fee.
Interchange fees, also known as swipe fees, average around
1 to 3 percent of the transaction. Because the fees are
deducted from the transaction, the seller who accepts the card
ends up with less than 100 percent of the actual amount.
An estimated $48 billion in credit and debit card
interchange fees were collected in 2008 from those who accept
credit cards and debit cards, including small businesses,
charities, Government agencies, universities, you name it.
While the interchange fee is not the only fee charged on
debit and credit transactions, it is the largest. It is also
unique in the way that it was established. Interchange fees are
received by the card-issuing bank, but banks do not set the
rates for the fees that they receive. Instead, interchange fees
are set by Visa and MasterCard who apply the same schedule of
rates to all card-issuing banks within their networks. All
banks in the network are guaranteed the same interchange rates
regardless of how efficient or inefficient a bank manages its
card-issuance costs.
There is no agency with regulatory authority over the
nearly $50 billion collected every year in interchange fees.
Nor is there any competition or negotiation in the market to
keep these fees in check. Visa and MasterCard set the fee rates
as they see fit, tell the merchants take it or leave it.
Given the card companies' enormous market power and the
rigid operating rules that they unilaterally mandate, it is
extremely difficult for those who accept their cards, including
the Federal Government, to influence how much Visa and
MasterCard will make them pay.
We need to step back and recognize the reality of the
situation: Visa and MasterCard and their big bank allies want
credit and debit cards to completely replace cash and checks.
That is their market goal, and we are already halfway there.
Already when a sale is made by a credit or debit card, the
person who makes the sale only receives 98 cents or 97 cent on
the dollar. The card companies automatically take a cut. The
cut keeps growing.
If we do not take steps to reasonably regulate this system,
a dollar will not be worth a dollar anymore. It will be worth
whatever Visa and MasterCard want it to be. We will literally
cede control of America's currency to the Visa and MasterCard
duopoly. The economic consequences to American businesses,
particularly small businesses operating on a thin margin, to
consumers and to taxpayers could be staggering.
I sponsored an amendment in the Senate that would require
debit interchange fees to be set at a reasonable level and
prevent Visa and MasterCard from prohibiting those who accept
cards from offering discounts to consumers. This amendment is
critical to addressing the abuses of the card companies' fees
and rules.
As chair of this subcommittee, I have also devoted
particular attention to the amount of interchange fees that the
Federal Government pays through Amtrak, the Department of
Defense, the National Park Service, the Veterans
Administration. Of course, interchange fees paid by the Federal
Government are actually paid with taxpayer dollars, and we have
an obligation to make sure the taxpayer is getting the best
value possible.
At my request last year, the Appropriations Committee
directed the Financial Management Service (FMS) within the
Treasury Department to provide a report on potential cost
savings that the Federal Government could receive if FMS were
able to effectively negotiate changes to the interchange fees
and operating rules established by the card networks. The
report concludes that Treasury could save an estimated $36
million to $39 million per year in taxpayer dollars if Treasury
were able to negotiate terms with the card networks.
We have invited the Treasury Department here to discuss
this report and explain what terms they seek to negotiate with
the card networks.
We are also pleased to be joined today by representatives
of Amtrak, which also incurs significant interchange fees, as
well as the Government Accountability Office (GAO), which
issued a report on Federal payment of interchange fees in 2008.
On our second panel, we will have representatives from
Visa, the U.S. Public Interest Research Group, and we will also
hear from one of my constituents, Wendy Chronister, who grew up
in my neighborhood and who operates several convenience stores
in central Illinois and faces these fees every day.
Today's hearing is not to debate whether credit and debit
cards can bring benefit to the Federal Government and other
accepters of cards. We all agree that cards do provide benefits
like convenience, electronic recordkeeping, and a lighter
wallet. Instead, this hearing is about whether the current
system of fees and rules that Visa and MasterCard have
established are necessary to achieve those benefits. We will
discuss how increased competition and an end to unrestrained
fee increases will help improve the system and actually save
taxpayer dollars.
I would like to now turn to my ranking member, Senator
Collins, for any remarks she would like to make.
STATEMENT OF SENATOR SUSAN COLLINS
Senator Collins. Thank you, Mr. Chairman, and thank you for
calling this oversight hearing on the issue of the Federal
Government's payment of interchange fees on credit and debit
cards.
I must say when you first brought this issue up when we
were discussing our legislation, I had no idea how pervasive
the use of credit and debit cards were within the Federal
Government. The fact is hundreds of executive branch agencies,
as well as legislative agencies and the judiciary, accept
credit and debit cards as payments for goods and services
provided by the Federal Government. From the Defense Department
commissaries, to the U.S. Mint, to the national parks, all
types of Federal agencies accept credit and debit cards.
And as you pointed out, Mr. Chairman, the use of those
cards is growing. In fact, this is an area where I see a real
age difference. I am sure you have found, as I have, that our
younger staff members carry no cash and use debit cards for
everything.
Because of concerns that the Federal Government may be
paying excessive interchange fees associated with the use of
those cards, this subcommittee required the Financial
Management Service at the Department of the Treasury to provide
a comprehensive report on issues associated with the rates,
fees, and types of card payments, and the methods by which
transactions are processed.
The Treasury Department witness today will discuss the new
report issued by the FMS.
As the use of credit and debit cards by consumers continues
to grow, Federal entities' acceptance of these cards can be
expected to grow as well. We look forward to receiving more
detailed information on those transactions so that we will be
in a better position to evaluate just whether the best
interests of taxpayers are being served in these transactions.
For that reason, to assist us, I am particularly looking
forward to the testimony of the GAO. I understand that the GAO
has done some analysis of the payment of fees by a number of
Federal entities and quasi-Federal entities such as Amtrak and
the Postal Service. I hate describing them as Federal entities,
particularly the Postal Service, because that reinforces the
view that they are getting these huge Federal subsidies, which
they are not in the case of the Postal Service.
According to a 2008 GAO report, the cost of these fees to
the Federal Government at that time was more than $400 million,
and I understand we will get some updated data today.
As evidenced by the appearance of our second panel, as well
as the chairman's remarks, the issue of interchange fees is not
limited to the Federal Government. In fact, the chairman
successfully offered one of the very few bipartisan supported
amendments to the financial reform bill, calling on the Federal
Reserve to establish reasonable fees for debit card
transactions for institutions with more than $10 million in
assets. That threshold was intended to exempt smaller banks and
credit unions across the country. Some of these smaller
institutions, however, from my State have expressed concerns to
me about whether the amendment gives the Federal Reserve the
flexibility it needs to ensure that all the costs that smaller
institutions incur in providing card services are fully taken
into account in setting interchange fees.
I am looking forward to hearing the testimony from Visa
because I am interested to learn whether credit card companies
will develop separate fees and rules for smaller versus larger
institutions.
And finally, like the chairman, I am interested in hearing
the views of consumer advocates and retailers. I must say
convenience stores throughout my State have repeatedly talked
to me about the burden of these fees, particularly when an
individual is coming in and only buying a cup of coffee. And a
lot of times, the profit from that sale goes to the interchange
fees.
This is a difficult issue to deal with, but I also know
that financial institutions, particularly smaller institutions,
really rely on the fee income generated by these cards.
So it is my hope today that we will able to fill in some of
the blanks and come to a better understanding, and I appreciate
your leadership, Mr. Chairman.
Senator Durbin. Thanks, Senator Collins.
Our first panel includes our first witness, Gary Grippo.
Gary is the Deputy Assistant Secretary for Fiscal Operations
and Policy at the Department of the Treasury, provides advice
and recommendations on a broad range of Government fiscal
affairs, including cash management, financial and housing
stability programs.
Prior to this appointment, Mr. Grippo served as Assistant
Commissioner for Federal Finance for the Financial Management
Service, a bureau of the Department of the Treasury, where he
managed the Government's revenue collection systems and
depository banking relationships.
He studied at Harvard University and the London School of
Economics.
Our second witness is Alicia Cackley, Director of Financial
Markets and Community Investment at the U.S. Government
Accountability Office. She manages several teams of analysts
doing program evaluation and policy research on a broad range
of issues, including consumer protection, financial literacy,
and homelessness. Ms. Cackley received her Ph.D. in economics
from the University of Michigan and has been with the
Government Accountability Office for 20 years.
The third witness on the panel is Janet Langenderfer, the
Senior Director of Credit Cards with the National Railroad
Passenger Corporation, also known as Amtrak. She has been with
Amtrak for 6 years and had extensive experience in the credit
card industry. She has an M.B.A. from George Washington
University and a B.A. in business and economics from the
University of Maryland.
My thanks to all the members of the panel.
Mr. Grippo, we are going to let you start off. Your written
statement will be a part of our record, and if you could take 5
minutes and summarize it, we will ask some questions after we
are finished hearing from the entire panel.
STATEMENT OF GARY GRIPPO, DEPUTY ASSISTANT SECRETARY
FOR FISCAL OPERATIONS AND POLICY,
DEPARTMENT OF THE TREASURY
Mr. Grippo. Well, thank you, Chairman Durbin, Ranking
Member Collins, and other members of the subcommittee. I am
pleased to be here to testify about the Federal Government's
costs of accepting credit and debit cards for collecting
Federal revenue.
The Federal Government is among the largest entities that
accept payment by credit and debit card. My statements today
reflect the interests of the Federal Government acting as a
participant in the card payment system and are not offered from
the perspective of a regulator or policymaker commenting on
financial regulatory reform.
The Treasury Department centrally collects and deposits all
Federal revenue on behalf of 228 Federal agencies. In fiscal
year 2009, the Treasury processed 391 million collection
transactions, totaling $2.86 trillion in gross Federal revenue.
These transactions include collections for taxes, duties, fees,
fines, sales of goods and services, leases, loan repayments,
among many other transactions.
Credit and debit cards are an important mechanism for
processing many of these collections, and Federal agencies
increasingly rely upon them to deliver Government services,
operating over 4,300 point-of-sale locations that accept cards.
Cards afford citizens and businesses with a convenient
means of interacting with their Government, and examples
include, some of which have already been cited, the Department
of Education accepting payment for various student loan fees,
the National Park Service for park entrance and camping fees,
the Federal Communications Commission (FCC) for radio operator
licenses, the Centers for Medicare and Medicaid Services for
individual Medicare premiums, the Federal Bureau of
Investigation (FBI) for Freedom of Information Act document
fees, the VA medical centers for insurance copayments from
veterans, Defense commissaries for the purchase of groceries by
service members, and Customs and Border Protection for customs
duties paid by citizens arriving at airports.
Last year, Federal agencies collected $8.6 billion through
80 million credit and debit card transactions. These
transactions have been steadily increasing, with an average
annual growth rate of over 15 percent over the last 5 years.
However, cards are by far the most expensive mechanism to
process Federal collections. In fiscal year 2009, the Treasury
spent $116 million on interchange and card network fees. By
contrast, it cost the Treasury only $66 million to operate the
electronic Federal tax payment system which processed $1.9
trillion in tax collections through wire transfers and
electronic funds transfers.
Moreover, the average per transaction cost of cards is more
than twice that of other collection mechanisms. Last year, for
example, the average card transaction cost $1.45, while the
average cost of processing a paper check that was mailed to a
Federal agency cost 60 cents.
The cost structure of cards for the Federal Government can
be summed up with this statistic. Cards collections represent
three-tenths of 1 percent of total Federal revenue but
constitute 20 percent of total collection costs. Credit card
interchange fees are the largest component of these costs, with
an average effective rate of 1.9 percent for all Federal credit
card collections.
As mentioned, the Treasury and not each Federal agency pays
for these card costs, and because these card costs are borne
centrally by the Treasury, the mechanism for paying them
differs from the commercial model. Normally a commercial
merchant pays its card fees by means of a discount to its
transactions such that a merchant charged card fees of 2
percent on a sales transaction of $100 would result in a
deposit of $98 to the merchant with $2 withheld to cover the
fees. When a Federal agency accepts payment for a $100
transaction with a $2 fee, however, the agency will receive a
deposit at par for $100 and the Treasury will be separately
billed for a $2 fee. Those card fees for agencies across the
Government are borne by the general fund of the Treasury and
any reductions to card costs would go directly to reducing the
Federal deficit.
As a steward of taxpayer money, the Treasury has for some
time been concerned about the relatively high cost of the
Federal Government's card transactions and has taken several
actions in recent years to help manage these costs. For
example, the Treasury may not offer the option of card
collections to an agency starting up a new Federal program when
the average transaction amount may be too high and result in
exorbitant costs to the Treasury.
These kinds of actions, while prudent and helpful in
containing costs, do not address the level of interchange rates
or the manner in which they are set, and while the Treasury
does benefit relative to some commercial merchants from special
interchange rates afforded only to Government entities, these
rates are established unilaterally and are not applied to most
transactions.
Although the Treasury has held discussions with card
networks in attempts to reduce the Federal Government's card
costs, it has been unable to negotiate real reductions in rates
and must choose between paying the prescribed rates or not
accepting cards under a given Federal program. Simply denying
the public the option of making a payment by card, however, is
not viable in many cases since it would mean turning away
citizens that have tendered a card for a sensitive or essential
Government service and instructing them to return with a check
or cash.
As mentioned, the conference report to the fiscal year 2010
Consolidated Appropriations Act directed the Treasury to
identify potential cost savings to the Federal Government if
the Treasury were able to effectively negotiate changes in fees
and operating rules imposed by card networks.
In our response to the conference report, we indicated that
one potential solution to consider was providing the Treasury
with a mechanism to restrict or opt out of accepting cards for
particular transactions without incurring a penalty from a card
network if processing the transaction would be contrary to the
public interest.
For example, one mechanism may include granting Treasury
legal authority to establish new standards for processing
public financial transactions, similar to the authority the
Treasury currently holds to establish standards for
depositories that hold public money. Any such mechanism would
not permit the Treasury to compel a card network or a member
institution to reduce its fees or to provide services to the
Government. Such a mechanism, including any new legal
authority, would be targeted simply to allow the Treasury to
establish standards for removing transactions from the
restrictions of card network rules and to process them through
some other payment mechanism.
The widespread limitation of card transactions would be
neither the likely nor the desired result from this authority
since the Federal Government would still have every incentive
to let citizens pay by card. However, having the ability to opt
out of certain transactions based on cost could allow the
Treasury to negotiate pricing terms on behalf of the taxpayer
from a more equitable position since the Treasury would have
the credible option of avoiding outlying costly card
transactions.
As we consider potential solutions, we are certainly
mindful of the complex legal and business issues associated
with the Treasury's conduct in the payments marketplace, but if
the Treasury could effectively negotiate costs and certain
processing rules with card payment providers, we believe that
significant savings could be achieved. Although cards would
still be the Treasury's highest cost collection mechanism, the
Treasury could reduce the Federal Government's per-transaction
cost by an estimated 45 cents to 49 cents, equating to $36
million to $39 million in reduced annual interchange fees.
I thank you for the opportunity for having this discussion
and look forward to questions.
[The statement follows:]
Prepared Statement of Gary Grippo
Chairman Durbin, Ranking Member Collins, and members of the
Subcommittee, thank you for inviting me to testify about the Federal
government's costs of accepting credit and debit cards to collect
Federal revenue.
The Federal government is among the largest entities that accepts
payments by credit and debit card. My statements today reflect the
interests of the Federal government acting as a participant in the
national payment card system, and are not offered from the perspective
of a policy maker commenting on financial regulatory reform or on the
interests of commercial participants in the larger economy.
OVERVIEW OF FEDERAL COLLECTIONS
The Treasury Department, through its bureau the Financial
Management Service (FMS), centrally collects and deposits all Federal
revenue on behalf of all Federal agencies. In fiscal year 2009, through
a network of over 125 banks acting as financial agents to the Federal
government, the Treasury processed 391 million collection transactions
totaling nearly $2.86 trillion in gross revenue. These transactions
include collections for taxes, duties, fees, fines, sales of goods and
services, leases, and loan repayments, among many other types of
transactions. The largest customer of these centrally provided
collection services is the Internal Revenue Service for individual and
corporate income taxes, but 228 other agencies rely on the Treasury for
collection and deposit services.
To process these collections, the Treasury maintains an
infrastructure that allows individuals and organizations around the
world to make payments to any Federal agency. This infrastructure uses
all the settlement mechanisms available in the U.S. payments system,
including wire transfers, Automated Clearinghouse (ACH) entries, credit
and debit cards, checks and other paper drafts, and cash, as well as a
number of cross-border payment mechanisms. The Treasury's collections
infrastructure also includes some of the largest cash management
systems in the world, such as the Electronic Federal Tax Payment System
(EFTPS), which in fiscal year 2009 processed $1.9 trillion in tax
collections though wire transfers and ACH entries from 11.5 million
businesses and individuals enrolled in EFTPS. The Treasury maintains
extensive government-wide customer service capabilities to help Federal
agencies process the collections required under their programs, and to
assist with the accounting and reconciliation of transactions.
The Treasury has several objectives in managing this global
collections infrastructure. One objective is to minimize collection
float and to settle funds into the Treasury's main account at the
Federal Reserve as soon as possible after a transaction is authorized
or initiated. Another goal is to process transactions at the lowest
possible cost, while recognizing that in some cases transaction costs
are driven by the statutory requirements of a Federal agency's program
and may not be discretionary. A third requirement is, of course, to
timely and properly account for and report on the millions of
transactions processed through the infrastructure. In measuring these
goals, the Treasury monitors several important metrics, including the
percentage of transactions conducted electronically versus through cash
and checks, and the unit cost of collections, both by the cost per
transaction and the cost per dollar collected.
USE OF CREDIT AND DEBIT CARDS IN FEDERAL COLLECTIONS
Credit and debit cards are an important part of the Treasury's
collections service, and Federal agencies increasingly rely upon them
to support Federal programs and deliver services. Cards help meet the
Treasury's cash management objectives by improving the accuracy and
timeliness of Federal collections through the displacement of cash and
checks. Cards afford citizens and small businesses with a convenient
means of transacting with their government, particularly online at
Federal agency web sites. Through a commercial bank acting as a
financial agent to the Federal government, the Treasury allows Federal
agencies to accept American Express, Discover, MasterCard, and Visa
credit and debit cards, as well as PIN-based debit cards. Over 200
Federal agencies operating 4,350 point of sale locations currently
accept cards. Examples of Federal programs for which cards are accepted
include the Federal Communications Commission for radio operator
licenses, the Centers for Medicare and Medicaid Services for individual
Medicare premiums, the Federal Bureau of Investigation for Freedom of
Information Act document fees, and the U.S. Mint for coin sales. In
fiscal year 2009, Federal agencies collected $8.6 billion through 80.3
million credit and debit card transactions. Mirroring trends in the
larger economy, the number of card transactions with Federal agencies
has been steadily increasing, with an average annual growth rate of
over 15 percent over the last 5 years. Note that these statistics do
not include the U.S. Postal Service and non-appropriated Federal
instrumentalities that manage their banking relationships outside of
the Treasury.
COST OF PROCESSING FEDERAL COLLECTIONS
The Treasury pays for the Federal government's collections
infrastructure and bears the costs of processing transactions on behalf
of Federal agencies, in part because only the Treasury or its
designated agent banks, and not Federal agencies or their contractors,
may legally hold public money. This centralized model ensures that the
Federal government has the most efficient systems to take advantage of
economies of scale, helps the Treasury enforce government-wide
standards for financial transactions, and allows the Treasury to better
manage the revenue side of government's daily cash position. In fiscal
year 2009, the Treasury spent $561 million on the Federal government's
collection and deposit infrastructure, which includes expenditures to
pay for transaction and service fees to process collections received or
authorized by mail, by phone, over-the-counter, over the Internet, and
through banking networks.
Credit and debit cards represent the most expensive component of
the infrastructure, costing $116 million in interchange and card
network fees, with an average transaction cost of $1.45, in fiscal year
2009. By contrast, EFTPS cost the Treasury $65.7 million to process 101
million income tax transactions, for an average transaction cost of
$0.65, and the Treasury's general lockbox network, which processes
paper check collections for all Federal agencies, cost $22.4 million to
process 37 million items, for an average transaction cost of $0.60.
Card collections represent only 0.31 percent of total Federal revenue,
but 20 percent of total collections costs. Interchange fees charged by
card networks are the largest component of these card costs, with an
average rate of 1.9 percent across all Federal credit card collections
transactions in fiscal year 2009. In contrast to a continuing decline
in the unit cost of other collection mechanisms, moreover, this credit
card interchange rate has remained relatively constant for many years.
As stated earlier, the Treasury and not each Federal agency pays
for credit and debit card fees. Because these costs are borne centrally
by the Treasury, the mechanism for paying them differs from the
commercial model. Normally, a commercial merchant pays its card fees by
means of a discount to its transactions. For example, if a merchant is
charged card fees of 2 percent, a sales transaction of $100 would
result in a deposit of $98 to the merchant when the card transaction
settles, with $2 withheld to cover the fees. When a Federal agency
accepts a card payment for a $100 transaction with a 2 percent card
fee, however, the agency will receive a deposit at par of $100 and the
Treasury will be separately billed for a $2 fee. Card fees for agencies
across the Federal government are borne by the general fund of the
Treasury, and any reductions to card costs would go directly to
reducing the Federal deficit.
As a steward of taxpayer money, the Treasury has for some time been
concerned about the relatively high cost of the Federal government's
card transactions, and has taken several actions in recent years to
help manage these costs. In fiscal year 2006, when the Treasury
solicited re-bids for government-wide card acquiring services, overall
cost was the most important factor in selecting an acquiring bank. In
2005, the Treasury issued a bulletin to Federal agencies instructing
them to limit their card collections to cashflows that consisted only
of individual transactions less than $100,000, since several agencies
were accepting cards under programs with individual transactions that
could range in size from under $100 to over $1 million. The Treasury
has also entered into agreements with Federal agency Chief Financial
Officers to establish goals and metrics for reducing an agency's
collections costs by moving transactions to more efficient mechanisms,
such as ACH, when it can be done without impairing the agency's ability
to deliver services under a program. In some cases, moreover, the
Treasury will not offer the option of card collections to an agency
implementing a new Federal program when the average transaction amount
is too high and would result in exorbitant costs to the Treasury. Last,
for PIN-based debit card transactions, the Treasury minimizes costs
through technology that ensures transactions are routed through the
processing network with the lowest effective rate for a transaction.
THE ISSUE OF CARD COSTS
These actions, while prudent and helpful in containing costs, do
not address the core issues of the level of interchange rates and other
mandatory fees paid by the Federal government, and how the card
networks establish these charges. While the Treasury does benefit,
relative to some commercial merchants, from special interchange rates
offered only to governmental entities in some instances, these rates
are established unilaterally and are not applied consistently across
transactions and payment networks. And although the Treasury has held
direct and indirect discussions with the card networks over the years
in attempts to reduce the Federal government's card acquiring costs,
rates have never been open to negotiation. Thus the Treasury, acting
strictly as an acceptor of payment cards and not as a regulator or
public policy maker, has been unable to realize acceptable reductions
in its interchange rates and must choose between accepting cards at the
prescribed rates or not accepting cards as a payment mechanism for a
given Federal program.
Denying the public the option of making payment by card, however,
is not viable in most cases, since it would mean turning away citizens
and businesses that have tendered a card and instructing them to return
with cash or check to pay for sensitive or essential government
services, such as a small business paying a fee to the Patent and
Trademark Office, a veteran making an insurance co-payment to a VA
Medical Center, or a medical clinic paying the Department of Health and
Human Services to research a physician in the National Practitioner
Data Bank. Moreover, card transactions are crucial to the delivery of
many government services on-line, where other payment mechanisms may
not be feasible. As a matter of both public policy and customer
convenience, citizens are, of course, increasingly interacting with
their government over the Internet, with on-line card transactions
growing 22 percent in fiscal year 2009.
NEGOTIATING NEW RATES AND TERMS
The Conference Report to the fiscal year 2010 Consolidated
Appropriations Act directed the Treasury ``to report to the House and
Senate Appropriations Committees . . . on the potential cost savings
and other benefits to the Federal Government if [the Treasury] were
able to effectively negotiate (1) changes in the rates and fees
assessed by card networks and (2) modifications to the rules and
regulations of the card networks which restrict the Federal
Government's ability to determine the types of card payments it accepts
and the methods by which its transactions are processed.'' If we accept
the premise in the Conference Report--that the current structure of the
payment card system has not afforded the Treasury an opportunity to
negotiate appropriate prices--then one potential solution to consider
is providing the Treasury with a mechanism to restrict or opt out of
accepting cards for particular transactions, without incurring a
penalty from a card network for violating the rule to accept all cards,
if processing the transactions would be contrary to the public interest
due to unduly high cost. For example, one mechanism may include
granting the Treasury legal authority to establish new standards for
processing public financial transactions, similar to the authority the
Treasury currently holds to establish standards for depositories that
hold public money.
Any such mechanism should not permit the Treasury to compel a card
network or member institution to reduce fees, to make special changes
in rules or fee structures, to provide any services to the government,
or to enter into any agreements with the government. Such a mechanism,
including any new legal authority, would only apply prospectively and
could be targeted to simply allow the Treasury to establish standards
for removing transactions from the cross restrictions in card network
rules and to process them through another payment mechanism without
enjoining any parties. The widespread restriction of card transactions
would be neither the likely nor the desired result from such authority,
since the Federal government would still have every incentive from
other quarters to let citizens pay by card. However, having the ability
to opt out of certain transactions based on cost, which may include
options provided under new legal authority, would allow the Treasury to
negotiate pricing terms on behalf of the taxpayer from a more equitable
position, since the Treasury would have the credible option of avoiding
card transactions where the expense to the taxpayer clearly outweighs
any benefits. Any such negotiations for new pricing terms would be
conducted separately with each card network on a bilateral basis.
POTENTIAL COST SAVINGS
As we consider potential solutions, there are difficult legal and
business questions that must be carefully assessed. Nevertheless, I can
provide an outline of several goals the Treasury may seek to achieve if
the Treasury could reasonably negotiate costs and certain processing
rules with card payment providers. We believe that significant cost
savings could be achieved, but also underscore that we are mindful of
the complex issues associated with the Treasury's conduct in the
payments marketplace. The following terms represent the types of
approaches the Treasury could pursue.
First, the Treasury could negotiate to establish a simplified
framework for interchange rates. For example, the Treasury might
negotiate to create one interchange rate that the government would pay
to card networks for all credit transactions, and a separate single
interchange rate the government would pay to networks for all debit
transactions. The rates would apply regardless of how a transaction is
tendered (e.g., card present versus card not present), the type of card
used (e.g., rewards versus non-rewards), or the type of Federal
collection (e.g., sale of goods, loan repayment, fine, etc.). These
uniform rates would displace the current complex of rate categories
applied to Federal agency transactions.
Second, the Treasury could seek to have the option of establishing
a maximum transaction amount above which an individual credit card
transaction would not be allowed. Above certain dollar amounts, credit
cards are simply not an appropriate payment mechanism under most
Federal programs, especially when the Treasury can process the
transaction at considerably less expense with any other paper or
electronic payment mechanism.
Third, Treasury could attempt to negotiate reasonable limits or
mutually acceptable rules on the card networks' unilateral right to
raise or institute new fees. Such reasonable limits are important not
only for reasons of equity, but also to ensure that any reductions that
the Federal government may realize in total interchange costs are not
offset by increases in other mandatory card network fees.
Fourth, Treasury could pursue the right to establish and collect a
processing fee from an individual card holder to defray the Treasury's
cost of processing a particular transaction. Such a fee would not be
used in most cases or with Federal programs with broad public
participation, but might be charged in those cases where the cost of
unique transactions should be reasonably borne by the individual card
holder receiving some special benefit and not by the general taxpayer.
The amount of the fee would be limited to the cost to the Treasury
imposed by a card network for the transaction, and would be deposited
into the Treasury as a miscellaneous receipt.
These types of changes in the rate structure and processing rules
could be implemented within the current card processing infrastructure,
in a manner that is straightforward for issuers, acquirers, and card
networks. Although cards would still be the Treasury's highest cost
collection mechanism, we believe changes like these could allow the
Treasury to reduce the Federal government's per transaction card cost
by an estimated $0.45 to $0.49, which would equate to $36 million to
$39 million in reduced annual interchange fees based on fiscal year
2009 transaction volume.
CONCLUSION
Mr. Chairman, these remarks are offered from the perspective of the
Federal government acting in the role of a service provider that
accepts cards, and in response to the direction from the House and
Senate Appropriations Committees in the fiscal year 2010 Conference
Report. They are not offered from the perspective of a policy maker or
regulator with responsibility for the commercial payments system.
Moreover, I wish to highlight the difference between a Federal agency
accepting cards and a commercial merchant accepting cards. With few
exceptions, Federal agencies that accept cards are not engaged in sales
for profit, in competitive or market based activities, or even in
traditional non-profit activities, but are delivering inherently
governmental services to execute Federal law. The strategy I have
outlined to reduce the Federal government's card costs is based on this
unique role and applies to the interest of the general taxpayer, and
not necessarily to merchant interests or any other special interest.
While currently there is a larger public policy debate on interchange
fees in the broader economy, with many competing interests among banks,
merchants, and payment companies, the Treasury's financial managers
have a responsibility to conduct fiscal operations as efficiently as
possible and to pursue arrangements that afford the lowest costs to the
general taxpayer. Toward this end, we welcome dialogue with all users
and providers of payment card services.
I thank you for allowing this discussion on the Federal
government's cost of accepting credit and debit cards, and look forward
to taking your questions.
Senator Durbin. Thanks a lot, Mr. Grippo.
Well, the bad news is that while you were testifying and
elucidating us on this particular subject, the bells were going
off to announce two rollcalls, which Senator Collins and I have
to answer. So I think I am going to stick around and try to
make sure that all three of you get a chance to testify, if I
can, at least Ms. Cackley, and then we are going to take a
recess because we will have to both go to the floor and vote
and return. I cannot predict how long the recess will be, but
in the range of 20 to 30 minutes I guess is pretty reasonable.
So that is the circumstance and forgive us for this, but it was
not our doing. Some higher-ups.
Senator Collins. Wait a minute. Are you not in the
leadership?
Senator Durbin. Well, now wait a minute. Do not get carried
away.
Ms. Cackley.
STATEMENT OF DR. ALICIA PUENTE CACKLEY, DIRECTOR,
FINANCIAL MARKETS AND COMMUNITY INVESTMENT,
GOVERNMENT ACCOUNTABILITY OFFICE
Dr. Cackley. Mr. Chairman, Ranking Member Collins, I am
pleased to be with you today as you examine issues related to
the interchange fees that Federal entities pay for accepting
credit and debit cards. As credit and debit card use have
become more popular, the costs of accepting these cards have
been rising. In particular, the level and growth of interchange
fees has become a growing concern.
My comments this afternoon are based on findings from two
GAO reports. The first, issued in 2008, examined the impact on
Federal entities of accepting and using credit and debit cards,
and the second, issued in 2009, dealt with the issue of
interchange fees for all merchants.
My remarks will cover three key areas discussed in those
reports: first, the amounts of revenue that Federal entities
have collected using credit and debit cards and the costs of
such acceptance; second, efforts such entities have made to
reduce their interchange fee costs, including negotiations; and
third, the extent to which certain card network rules affect
card acceptors' ability to reduce interchange fee costs.
In summary, as the volume of Federal entities' card payment
revenues have increased, so have their associated costs. In
fiscal year 2007, Federal entities collected a total of more
than $27 billion in revenues through credit and debit card
transactions and reported paying at least $433 million in
merchant discount fees, the majority of which was the
interchange fee associated with Visa and MasterCard
transactions. More recently, total card acceptance costs grew
from $182 million in 2007 to $204 million in fiscal year 2009
for the U.S. Postal Service and Amtrak and from $101 million in
2007 to $116 million in 2009 for the Department of the
Treasury's Financial Management Service. Federal entity
officials told us that they were concerned about these rising
costs, but that there were also benefits to accepting credit
and debit cards, including more satisfied customers, fewer bad
checks and cash thefts, and improved operational efficiency.
At the same time that they are acting as cards acceptors,
Federal entities also use credit and debit cards to purchase
supplies and pay for employee travel and transportation
expenses. In fiscal year 2009, card purchases by Federal
entities totaled more than $30 billion. Federal entity
officials told us that benefits of card use include lower
administrative costs compared to previous purchasing methods,
as well as the potential for rebates of a small percentage of
the purchase price. Such rebates totaled approximately $255
million in fiscal year 2009.
As card acceptance has become more common, Federal entities
have worked to control their associated fees. The card networks
offer interchange fees for Government transactions that are
lower than those for many other merchants, and FMS requires the
banks processing these transactions to monitor them to ensure
they receive the lowest interchange fee for which they are
eligible. In addition, some Federal entities have attempted to
negotiate directly with the card networks to lower interchange
rates for their transactions with limited success. However,
officials at some of the entities with whom we spoke said that
they did not believe they could negotiate effectively with the
largest card networks, MasterCard and Visa, for lower
interchange fees, partly because they felt that they could not
refuse to accept cards from these networks. Similarly, our more
recent work has indicated that non-Federal merchants also have
had little success in negotiating lower fees with the card
networks.
Certain card network rules, generally known as anti-
steering rules, are a major factor in limiting these
negotiations. These rules include honoring all cards, no
surcharging, and no discrimination, which means Federal
entities and merchants cannot turn away or charge more for more
costly types of credit and debit cards. Without the leverage of
being able to differentiate between cards or take other actions
to steer customers toward lower-cost forms of payment, Federal
entities and merchants are unable to use their influence with
the networks to encourage them to lower interchange and other
fees or to offer more lower-fee cards. In contrast,
representatives of issuers and card networks told us the
network rules are designed to promote the wide acceptance of
their cards and ensure that their cardholders have a positive
experience with the card.
Based on our 2008 and 2009 work, the increasing level of
interchange fees appears to be a significant concern for both
Federal entities and merchants in general. Although various
options have been debated for lowering interchange fees,
removing the anti-steering rules could allow Federal entities
and merchants to send signals to cardholders about which cards
increase merchant acceptance costs, which could improve
leverage in negotiating their payment costs with the networks.
If interchange fees for merchants were lowered, consumers might
benefit from lower prices for goods and services, but proving
such an effect is difficult.
In addition, lower interchange fee revenues for card
issuers could prompt them to increase cardholder costs, offer
less generous rewards, or curtail cardholder credit
availability, although card use would continue to have various
benefits to Federal entities and consumers even if such changes
occurred.
Mr. Chairman, this concludes my prepared statement. I would
be happy to respond to questions.
[The statement follows:]
Prepared Statement of Alicia Puente Cackley
CREDIT AND DEBIT CARDS: FEDERAL AGENCIES BENEFIT FROM CARD ACCEPTANCE,
BUT HAVE LIMITED ABILITY TO CONTROL INTERCHANGE FEE COSTS
GAO HIGHLIGHTS
Why GAO Did This Study
Federal entities-agencies, corporations, and others-are growing
users of credit and debit cards, as both ``merchants'' (receiving
payments) and purchasers. Federal entities, like other merchants that
accept cards, incur fees--called merchant discount fees--to process
card transactions. For Visa and MasterCard transactions, a large
portion of these fees--referred to as interchange fees--goes to the
card-issuing banks. This statement addresses (1) the amounts of revenue
that Federal entities have collected using credit and debit cards and
the costs of such acceptance, (2) these entities' efforts to reduce
their interchange fee costs, including negotiations, and (3) the extent
to which card network rules affect these entities and other card
accepters' ability to reduce interchange fee costs. The information for
this statement was drawn from Credit and Debit Cards: Federal Entities
Are Taking Actions to Limit Their Interchange Fees, but Additional
Revenue Collection Cost Savings May Exist (GAO-08-558) and Credit
Cards: Rising Interchange Fees Have Increased Costs for Merchants, but
Options for Reducing Fees Pose Challenges (GAO-10-45). GAO analyzed
data on accepting and using cards from the Department of the Treasury
(Treasury), Amtrak, the Postal Service, and General Services
Administration (GSA); and interviewed non-Federal merchants, card
networks, banks, academics, and others. GAO also obtained updated 2009
revenues and costs from Treasury, Amtrak, and the Postal Service, and
purchases from GSA.
What GAO Found
As Federal entities' card revenues have increased, so have their
associated costs. In fiscal year 2007, Federal entities collected more
than $27 billion in revenues through credit and debit card transactions
and reported paying at least $433 million in merchant discount fees,
which include the interchange fees associated with Visa and MasterCard
transactions. Since GAO originally reported in 2008, total card
acceptance costs for the U.S. Postal Service and Amtrak grew from $182
million in 2007 to $204 million in fiscal year 2009. Card costs for
Treasury's Financial Management Service (FMS) grew from $101 million to
$116 million during this same period. Federal entity officials told us
that the benefits of accepting cards include more satisfied customers,
fewer bad checks and cash thefts, and improved operational efficiency.
In addition to accepting cards, Federal entities also use cards to make
purchases for supplies or employee travel expenses, and these purchases
totaled about $30 billion in fiscal year 2009. Federal entity officials
noted that using cards provides a variety of benefits, including lower
administrative costs and rebates of a small percentage of the card
purchases that they make, which totaled about $255 million in 2009.
Federal entities have worked to control the costs associated with
card acceptance fees. Card networks already offer interchange rates for
government transactions that are lower than those for many other
merchants' transactions, but Treasury also requires the banks that
process Federal entities' card transactions to ensure that these
receive the lowest interchange rates for which they are eligible. Some
Federal entities have attempted to negotiate with the card networks to
lower interchange rates applicable to their transactions, but with
limited success. Similarly, GAO's more recent work indicated that non-
Federal merchants have also experienced little success in negotiating
with card networks to lower these fees.
Various card network rules have been a major factor limiting
Federal entities' and merchants' ability to negotiate lower interchange
fees. Each of the major card networks--Visa, MasterCard, American
Express, and Discover--have various card acceptance rules that prohibit
card accepters from imposing surcharges on cards, refusing to accept
certain cards--such as rewards cards with higher associated interchange
fees, or establishing minimum or maximum charges. Although various
options have been debated for lowering interchange fees, merchants and
others GAO interviewed most supported removing certain card network
rules. If interchange fees were lowered, card users might benefit from
lower prices for goods and services, but lower interchange revenues for
card issuers could prompt them to increase cardholder costs, offer less
generous rewards, or curtail cardholder credit availability--although
consumers and Federal entities could still enjoy various other benefits
of using cards, such as convenience and efficiency.
Mr. Chairman and Members of the Committee: I am pleased to be here
today to discuss issues relating to the extent to which Federal
entities accept payments from credit and debit cards and the associated
costs, including interchange fees. Each time a consumer uses a credit
card to make a purchase, a portion of the sale--known as the merchant
discount fee--is deducted and distributed among the merchant or Federal
entity's financial institution, the financial institution that issued
the card, and the card network that processed the transaction. The
majority of this amount generally is called the interchange fee and
goes to the financial institution that issued the card, which reported
using the revenues from these fees to cover their costs of maintaining
card programs. More specifically, I will discuss recent work we have
conducted related to these fees, including (1) the amounts of revenue
that Federal entities have collected using credit and debit cards and
the costs of such acceptance, (2) efforts such entities have made to
reduce their interchange fee costs, including negotiations, and (3) the
extent to which card network rules affect card accepters' ability to
reduce interchange fee costs.\1\
---------------------------------------------------------------------------
\1\ See Credit and Debit Cards: Federal Entities Are Taking Actions
to Limit Their Interchange Fees, but Additional Revenue Collection Cost
Savings May Exist, GAO-08-558 (Washington, D.C.; May. 15, 2008), and
Credit Cards: Rising Interchange Fees Have Increased Costs for
Merchants, but Options for Reducing Fees Pose Challenges, GAO-10-45
(Washington, D.C.; Nov. 19, 2009).
---------------------------------------------------------------------------
In summary, we reported in 2008 that as the volume of Federal
entities' card payment revenues have increased, so have their
associated costs. In fiscal year 2007, Federal entities collected a
total of more than $27 billion in revenues through credit and debit
card transactions and reported paying at least $433 million in merchant
discount fees, which include the interchange fees associated with Visa
and MasterCard transactions.\2\ Federal entity officials told us that
the benefits of accepting cards include more satisfied customers, fewer
bad checks and cash thefts, and improved operational efficiency. In
addition to accepting cards, Federal entities use cards to purchase
supplies and pay for employee travel and transportation expenses. Card
purchases by Federal entities totaled more than $27 billion in fiscal
year 2007. Since we originally reported, total card acceptance costs
for the U.S. Postal Service and Amtrak grew from $182 million in 2007
to $204 million in fiscal year 2009. Card costs for the Department of
the Treasury's Financial Management Service (FMS) grew from $101
million to $116 million during this same period. Federal entity
officials told us that benefits of card use include lower
administrative costs when compared with the slower, more labor-
intensive purchasing methods previously used. Furthermore, Federal
entities obtain rebates of a small percentage of the card purchases
that they make, which totaled approximately $175 million in fiscal year
2007, and grew to $255 million in fiscal year 2009. Although receiving
various benefits, Federal entities using cards to make purchases have
had to implement controls and procedures to prevent misuse.
---------------------------------------------------------------------------
\2\ Dollar values on the costs and revenues associated with card
acceptance for fiscal years 2005 through fiscal year 2007 are current
values and have not been adjusted for inflation.
---------------------------------------------------------------------------
As card acceptance has become more common, Federal entities worked
to control the associated fees. The card networks already offer
interchange rates for government transactions that are lower than those
for many other merchants' transactions. Additionally, FMS, which
processes the card transactions for numerous Federal executive,
legislative, and judicial branch agencies and other Federal entities,
requires the banks that process its card transactions--known as
acquiring banks--to monitor how transactions are processed to ensure
that these transactions receive the lowest interchange rates for which
they are eligible. Some Federal entities have attempted to negotiate
with the card networks to lower interchange rates for their
transactions, with varying success. Similarly, our more recent work
indicated that non-Federal merchants also have experienced little
success in negotiating lower fees with card networks.
Card network rules restrict their abilities to differentiate among
the cards they accept or take other actions and are a major factor
limiting the leverage that Federal entities and merchants have to
negotiate lower interchange fees. Each of the major card networks--
Visa, MasterCard, American Express, and Discover--have card acceptance
rules--generally known as anti-steering rules--that limit the options
that Federal entities and merchants have for accepting or denying
cards, including prohibiting them from: imposing surcharges on cards;
refusing to accept certain cards--such as rewards cards with higher
associated interchange fees; or establishing minimum or maximum
charges.
According to merchants and some academic researchers, these rules
constrain the ability of Federal entities and merchants to limit the
costs of credit card acceptance. For example, by not being able to
charge more for credit cards generally, for a particular network's
cards, or for higher interchange fee cards, these entities are unable
to steer customers towards lower-cost forms of payment or recoup some
of their costs for higher-cost cards. In addition, without the ability
to influence customers' payment choices, these entities are unable to
use their influence with the networks to encourage them to lower
interchange and other fees in general, or offer more lower-fee cards.
In contrast, representatives of issuers and card networks told us that
the network rules are designed to promote the wide acceptance of their
cards and ensure that their cardholders have a positive experience with
the card.
Although various options have been debated for lowering interchange
fees, removing the anti-steering rules appeared to receive the most
support from the large and small merchants and merchant trade
associations with whom we spoke.\3\ Removing these rules could allow
merchants to send signals to cardholders about which cards increase
merchant acceptance costs, which also could improve merchants' leverage
in negotiating their payment costs. The ability to charge more for or
refuse certain cards also could cause cardholders using rewards cards
to be more aware of and to bear more of the cost of the rewards from
which they benefit. If interchange fees for merchants were lowered,
consumers could benefit from lower prices for goods and services, but
proving such an effect is difficult. Lower interchange fee revenues for
card issuers could prompt them to increase cardholder costs, offer less
generous rewards, or curtail cardholder credit availability.
---------------------------------------------------------------------------
\3\ See GAO-10-45. The merchants and associations also supported
restricting interchange fees with a cap or other limit.
---------------------------------------------------------------------------
SCOPE AND METHODOLOGY
To examine the benefits and costs associated with Federal entities'
acceptance of cards, we analyzed data for executive, legislative, and
judicial branch agencies; government corporations; and other Federal
instrumentalities that accept credit and debit cards for payment. FMS
processes the card transactions for the majority of executive,
judicial, and legislative branch agencies and Federal commissions,
boards, and other entities and pays the associated fees for these
entities. We also reviewed data from several Federal entities for which
FMS does not settle transactions: Amtrak, the U.S. Postal Service, and
others.\4\ To determine the impact on Federal entities of using cards
to make purchases, we reviewed policies and procedures developed for
the General Services Agency (GSA) card program that Federal entities
can use to make purchases (known as the SmartPay program), collected
and analyzed data on card use from GSA, and reviewed our prior reports
and interviewed officials from five entities that were among those with
the highest volume of card use in fiscal year 2006. To learn about the
impact of interchange fees on other merchants, we conducted interviews
with more than 80 organizations, including U.S. Federal banking and
other regulators, academic researchers, and industry participants. We
also interviewed and obtained information from regulatory officials in
Australia. For this statement, we also obtained updated 2009 revenues
and costs from FMS, Amtrak, and the Postal Service, and purchases from
GSA. We conducted the work on which this statement is based from June
2007 to May 2008, from May 2009 to November 2009, and in June 2010 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
---------------------------------------------------------------------------
\4\ These other entities included nonappropriated fund
instrumentalities (NAFI) of the Department of Defense and Department of
Homeland Security which operate retail stores or recreational
facilities for the military. The data we collected from Federal
entities were the best data available; however, because of limitations
in and differences among the record keeping of the entities, the data
may not be complete for all years, may treat some costs inconsistently,
and in one case contain estimated, rather than actual, values. We
reviewed the data for completeness and accuracy and determined that
none of these limitations materially affect the findings we report.
---------------------------------------------------------------------------
FEDERAL ENTITIES RECEIVE NUMEROUS BENEFITS ASSOCIATED WITH CARD
ACCEPTANCE, BUT ALSO PAY INTERCHANGE FEES AND OTHER COSTS
The volume of revenues accepted through credit and debit card
payments was growing for the group of Federal entities we reviewed.
Data on revenues that Treasury's FMS collects show that while credit
and debit card transactions accounted for 0.23 percent of the total
Federal government revenues FMS collected in fiscal year 2007, its card
collections had grown by almost 28 percent in 2 years--from
approximately $5.5 billion in fiscal year 2005 to almost $7.1 billion
in fiscal year 2007 (in current dollars). Revenues that the U.S. Postal
Service and Amtrak--which have their own arrangements for processing
their transactions--collected on credit and debit cards grew from $9.3
billion in 2005 to $11.5 billion by 2007. As shown in table 1, the card
revenues from these organizations and various other Federal entities
from which we collected data grew from $22.3 billion in 2005 to $27.1
billion by 2007.
TABLE 1.--CREDIT AND DEBIT CARD REVENUES COLLECTED AND MERCHANT DISCOUNT
FEES PAID BY FEDERAL ENTITIES, FISCAL YEARS 2005-2007
[In current dollars]
------------------------------------------------------------------------
Credit and
debit card Merchant Average
Fiscal revenues discount fees merchant
year Entity collected paid (dollars discount rate
(dollars in in millions) (percent)
billions) \1\
------------------------------------------------------------------------
2005 FMS $5.5 $70 1.26
NAFIs (all) 7.5 128 1.72
U.S. Postal 9.3 143 1.54
Service and
Amtrak
-------------------------------------------------
Total 22.3 341 1.53
=================================================
2006 FMS 6.3 89 1.41
NAFIs (all) 8.3 139 1.67
U.S. Postal 10.4 160 1.54
Service and
Amtrak
-------------------------------------------------
Total 25.0 387 1.55
=================================================
2007 FMS 7.1 101 1.43
NAFIs (all) 8.5 150 1.75
U.S. Postal 11.5 182 1.58
Service and
Amtrak
-------------------------------------------------
Total 27.1 433 1.60
------------------------------------------------------------------------
\1\ We use the term ``merchant discount fee'' throughout this
report to refer to the card acceptance fees paid by Federal
entities. For FMS, the merchant discount fees are not
``discounted'' from the amount of the card payment. Instead,
FMS settles card transactions ``at par,'' and all costs
associated with card acceptance are paid separately.
Source: GAO analysis of Federal entity data.
Note: Not all entities from which we collected data operate on
the Federal fiscal year of October 1-September 30; therefore,
the data presented for fiscal years represent some costs
associated with dates that fall outside of the Federal fiscal
year.
As the volume of revenues from card payments have increased, so
have the total amounts of merchant discount fees paid by the Federal
entities from which we collected data. These Federal entities reported
paying almost $433 million in merchant discount fees in fiscal year
2007 (see table 1). This figure represents an almost 12 percent
increase over the amount paid in fiscal year 2006 and an almost 27
percent increase over fiscal year 2005. The average merchant discount
rate increased about 4 percent from fiscal year 2005 to fiscal year
2007. Since we originally reported, total card revenues for the U.S.
Postal Service and Amtrak rose to $12.4 billion and those for FMS rose
to $8.6 billion in fiscal year 2009; the card acceptance costs for the
Postal Service and Amtrak grew to $203.7 million and for FMS to $116
million.
Among the entities included in our review, Amtrak, FMS, and the
Postal Service provided data specifically showing the amount of
interchange fees associated with their Visa and MasterCard transactions
(their acquiring banks provide them with these data).\5\ The three
entities paid approximately $205 million in interchange fees during
fiscal year 2007, out of a total of $218 million in merchant discount
fees specifically for MasterCard and Visa transactions.\6\ These
interchange fees accounted for the majority of total merchant discount
fees these entities paid for accepting all card types. As card revenues
and merchant discount fees increased for the three entities, so did the
interchange fees they paid. Interchange fees increased by almost 36
percent, from almost $151 million in fiscal year 2005 to $205 million
in fiscal year 2007 (in fiscal year 2006, they were $179 million).
---------------------------------------------------------------------------
\5\ Merchants (or Federal entities) enter into relationships with
acquiring banks to provide card processing services for Visa or
MasterCard (or both).
\6\ This estimate for interchange fees paid includes fees
associated with debit transactions using personal identification
numbers (PIN) as well as MasterCard and Visa credit and signature debit
transactions. We were not able to determine the portion of the PIN
debit interchange fees that were specifically paid for Visa and
MasterCard PIN debit transactions. It is possible that some of the PIN
debit transactions reported by these entities were routed through other
debit networks and, therefore, are not necessarily Visa and MasterCard
transactions. Also, some Federal entities included quarterly fees paid
to Visa and MasterCard in the interchange fees figures they reported;
therefore, our estimated interchange fee amount includes these fees.
---------------------------------------------------------------------------
In our most recent report on interchange fees issues, we reported
that non-Federal merchants also were experiencing increasing card
acceptance costs, which they largely attributed to increased volumes of
payments being made by consumers with cards, but also as a result of
customers' increased use of rewards cards. Staff from these merchants
expressed concerns that the increasing use of rewards cards was
increasing merchants' costs without providing the commensurate benefits
of increased sales.
For some payments made using cards, the government does not bear
merchant discount costs.\7\ For example, consumers can pay their income
and business taxes to the Internal Revenue Service (IRS) using cards.
IRS has agreements with two private third-party entities to process
payments for individuals or businesses that choose to use a credit or
debit card to make a tax payment. The private entities charge a
convenience fee of 2.49 percent of the total tax payment, a portion of
which covers the merchant discount fees the entities pay to their
acquiring banks. In fiscal year 2007, these merchant discount fees
totaled about $47.5 million for approximately $2.4 billion in tax
payments, an 85 percent increase in tax payments made with credit and
debit cards from fiscal year 2005.
---------------------------------------------------------------------------
\7\ We did not include such transactions in compiling the total
merchant discount fees paid by Federal entities for card acceptance.
Instead, we provide this information as an example of additional fees
that are paid by consumers for card acceptance associated with
government payments.
---------------------------------------------------------------------------
In addition to the interchange and processing fees that make up the
merchant discount fee, Federal entities face other costs associated
with the acceptance of credit and debit cards. While FMS pays the
merchant discount fees associated with card transactions for entities
for which it settles transactions, it does not pay for the costs
associated with equipment and software; these costs are the
responsibility of the entities. For example, entities must pay for
point-of-sale terminals, keypads for PIN debit card transactions,
computers, modems, and printers, and pay for their installation and
maintenance. Other costs of accepting cards include complying with
industry security standards, training employees to process and
reconcile card transactions, and experiencing losses associated with
fraudulent use of cards. However, some entities provided information
that indicated these additional costs were not significant compared to
merchant discount fees.
FEDERAL ENTITY OFFICIALS CITED VARIOUS BENEFITS FROM ACCEPTING CARDS
The ability to accept credit and debit cards provides a variety of
benefits to Federal entities, including greater customer satisfaction
and improved internal operations. Officials at several Federal entities
noted that card acceptance helped to ensure that the Federal entities
would remain competitive with private-sector organizations. Federal
officials with whom we spoke mentioned benefits such as improved
customer satisfaction with their organizations because consumers liked
to use their cards for convenience, credit card reward programs, and
security reasons. Accepting cards also has enabled entities to conduct
business through the Internet, which can reduce labor costs associated
with sales and also can provide greater convenience to customers. For
example, officials from the U.S. Mint stated that about 50 percent of
their sales occurred through their Web site. Some entities also stated
that the ability to accept cards has increased their sales volume.
Federal entity officials also noted that accepting cards reduced
the amount spent on processing other forms of payment. By accepting
cards, Federal entities incurred less expense in transporting cash,
lower losses from theft of cash, and had fewer bad check expenses. For
example, officials at the Department of the Interior noted that cash
transport costs could be high for some remote parks and wildlife
refuges. Several Federal officials also stated that accepting cards has
reduced the costs associated with processing checks, and that funds
were deposited in accounts faster when customers use credit or debit
cards than when they used checks. Additionally, Amtrak officials told
us that accepting cards on trains for ticket, food, and beverage sales
resulted in fewer instances of employee theft of cash.
Finally, many officials cited that card acceptance improved
internal operations. For example, officials at the Department of the
Interior stated that payments made by credit cards result in a more
streamlined bookkeeping approach because card sales involved less
paperwork (for reconciliation) than other payment forms. Defense
Commissary Agency (DeCA) officials also stated that they believed that
the labor associated with reconciling sales declined as a result of the
reduced cash volume. The officials mentioned additional operational
efficiencies, including reductions in costs and exposure to fraud and
errors from misplacing or miscounting cash and checks. Some officials
stated that the efficiencies gained as a result of card acceptance
allowed them to reallocate staff to different and more productive uses.
For example, officials at the Department of the Interior explained that
accepting cards at automated kiosks allowed them to reallocate some
staff that used to collect entrance fees. Amtrak officials also stated
that customers' ability to purchase tickets using cards, especially
through the Amtrak Web site, has reduced their labor costs.
The Federal entities we contacted were not able to provide
comprehensive data on any cost savings from accepting cards. We
identified various government, academic, and industry studies that
compared the cost of processing for different forms of payment;
however, many of these studies found that precise estimates were
difficult to calculate. Additionally, while most of the studies we
reviewed found cash to be the least expensive payment form to process,
the methodologies used in the studies were not consistent and the data
contained in many of them were outdated.\8\
---------------------------------------------------------------------------
\8\ David B. Humphrey and Allen N. Berger. ``Market Failure and
Resource Use: Economic Incentives to Use Different Payment
Instruments,'' in The U.S. Payment System: Efficiency, Risk and the
Role of the Federal Reserve: Proceedings of a Symposium on the U.S.
Payment System Sponsored by the Federal Reserve Bank of Richmond, ed.
David B. Humphrey, (Boston: Kluwer Academic Publishers, 1990). D.D.
Garcia-Swartz, R.W. Hahn, and A. Layne-Farrar, ``The Move toward a
Cashless Society: Calculating the Costs and Benefits,'' Review of
Network Economics, 5, no. 2 (2006). D. Humphrey, M. Willesson, T.
Lindblom, and G. Bergendahl, ``What Does It Cost to Make a Payment,''
Review of Network Economics, 2, no. 2, (2003).
---------------------------------------------------------------------------
CARD USAGE BY FEDERAL ENTITIES PROVIDES NUMEROUS BENEFITS, BUT CREATES
CONTROL CHALLENGES
In addition to accepting cards as payment, Federal entities are
also users of credit cards. More than 350 Federal entities participate
in GSA's SmartPay program--which provides purchase, travel, and fleet
cards for these entities to use. Federal entities pay no direct costs
for the general use of cards. According to card network officials, the
banks that issue cards to Federal entities are compensated in part by
the interchange fees they receive when a government entity or employee
uses a card to make a purchase. In fiscal year 2007, Federal entities
used cards to purchase more than $27 billion in goods and services, and
since we originally reported this amount has grown to $30 billion as of
fiscal year 2009. Most of this spending occurred using purchase cards,
which account for nearly 70 percent of total Federal entity card
spending, while travel card use accounts for about one-quarter of card
spending, and fleet card use about 5 percent.
Card use by Federal entities is expected to continue growing as the
entities identify additional ways of using cards and use new payment
technologies. For example, officials from the Department of Veterans
Affairs (VA) told us that they have been working with the bank that
issues the department's purchase cards to find new ways to increase
card usage. For example, in 2003 they developed a process for making
payments through the card system to non-VA medical providers for
services to veterans who were unable to visit a VA center for medical
care, reducing the number of checks they issued and increasing the
number of electronic payments they made and the rebates they received
for using their cards. Additionally, officials stated that VA has been
reviewing its purchase records to attempt to shift more purchasing to
vendors that accept cards. Similarly, the U.S. Army has developed an
automated payment system that uses purchase cards for most of the $400
million per year it pays schools and other institutions for soldiers'
tuition assistance. GSA officials also expect the new products and
services that will be available under the SmartPay 2 program--the
follow-on to SmartPay--will lead to increases in overall card spending.
These products include prepaid cards, contactless cards, and cards in
foreign currencies.\9\
---------------------------------------------------------------------------
\9\ A prepaid card is one that is programmed to have a monetary
value, and charges to that card cannot exceed the balance. Contactless
cards store data on a microchip embedded in the card, which can be read
by passing the card in front of a special card reader.
---------------------------------------------------------------------------
According to Federal entity officials with whom we spoke,
administrative cost savings are one of the primary benefits associated
with card usage--compared with procurement methods that cards partially
replaced, such as purchase orders, imprest funds, and blanket purchase
agreements. For example, obtaining goods or services under a purchase
order system requires that a purchase request be filled out and
approved, then sent to a procurement office, which issues it to a
vendor. However, when government entities use a card, cardholders can
purchase goods or services directly, review their statements at the end
of the billing cycle, and forward the statements to approving
officials. Officials from the Department of Agriculture said that if
cards were not used, staff would need to complete purchase orders for
the 1.5 million transactions per year that currently are made using
purchase cards. Officials from the Department of Homeland Security
estimated that the department would require from four to five times the
current number of staff to operate its travel card program if the
agency paid for travel expenses without cards. In addition, officials
at the Department of Agriculture stated that new tools, such as an
automated process to reset charge card passwords, might further reduce
the costs of administering their program.
Federal entities receive another benefit of card use through
rebates from the banks that issue their cards. Rebate amounts, after
adjusting for inflation, had almost doubled since fiscal year 2002 to
$175 million in fiscal year 2007, and were $255 million in fiscal year
2009. Rebate amounts to Federal entities are based on a number of
factors, mainly the volume of net spending on cards and how quickly
balances on the cards are paid. GSA establishes a minimum rebate rate
that Federal entities should receive, but entities can negotiate with
their issuing banks for additional amounts. From 1998 through 2007, the
minimum rate was 6 basis points of the net volume of spending on the
cards, while under SmartPay 2, the minimum rebate rate increased to 8
basis points. A GSA official stated that typically in Federal entities'
negotiations with issuing banks, the rebate rate is increased as an
incentive for an entity to choose a particular bank to issue its cards.
According to the GSA official, some entities have negotiated for
specialized services rather than increased rebate amounts, and GSA
encourages entities to examine their programs holistically when
negotiating terms. Federal entities differ in how they use their
rebates. Two of the Federal entities we spoke with return the rebates
directly to the location that originated the relevant transaction, one
adds the rebates into general income for the entity, and one other
allocates rebates to a working capital fund for initiatives of general
benefit to the entity.
Officials at the Federal entities with whom we met cited only a few
drawbacks associated with the use of cards, although officials from
some entities mentioned the risk of fraud and misuse. These officials
told us that the risk of fraud or abuse was less than or equal to that
under previously used procurement systems. Although instances of fraud
and misuse on cards may be infrequent, we and several inspectors
general have reported internal control weaknesses in charge card
programs at Federal entities and instances of fraud and abuse. For the
most part, fraud and misuse can be limited through strong internal
controls in card programs of Federal entities. GSA and the Office of
Management and Budget (OMB) have issued guidance on internal controls
intended to reduce the risk of misuse of cards. For example, GSA
develops guidance through training courses for Federal entities and
publishes guidelines for oversight and information on detecting misuse
and fraud. Additionally, OMB has issued several memorandums related to
oversight of card programs. Finally, officials from some of the Federal
entities told us that the tools and data that their card-issuing banks
provided helped them reduce the risk of misuse of cards by enabling
them to track and limit the types of purchases made on the cards.
FEDERAL ENTITIES HAVE WORKED TO REDUCE CARD ACCEPTANCE COSTS, BUT
EFFORTS TO NEGOTIATE LOWER INTERCHANGE FEES HAVE HAD LIMITED SUCCESS
As card acceptance has grown, Federal entities have used several
methods to manage their costs and reduce the fees associated with card
transactions. First, both Visa and MasterCard have a designated
merchant category for Federal entities, in which the interchange rates
are lower than those for many other merchant categories. As long as
Federal entities' transactions meet all applicable processing
requirements--for example, they must be submitted for final settlement
in a timely manner--the entities are charged the interchange rate
applicable to those merchant categories. For example, as of April 2008,
if transactions met all applicable processing requirements, government
entities accepting a MasterCard consumer credit card as payment would
pay an interchange fee of 1.55 percent of the transaction amount plus
$0.10, and for a Visa consumer credit card, 1.43 percent plus $0.05.
(In comparison, the interchange rate for a MasterCard general purpose
consumer credit card transaction at some fast food stores is 1.90
percent.) In some cases, card transactions at Federal entities can be
assessed a lower rate. For example, FMS officials told us that DeCA
transactions qualify to be processed using the interchange rate for the
supermarket merchant category, which can range from 1.27 percent to
1.48 percent plus $0.05 for MasterCard general purpose consumer credit
card transactions, depending on the volume of card transactions
processed.
Because the method in which the card is accepted, transaction
volume, and other factors can affect interchange rates, many Federal
entities have taken steps to ensure that the acceptance and processing
procedures they follow result in the most advantageous interchange
rates applying to their transactions. For example, Amtrak officials
explained that by replacing card machines (which embossed paper
receipts) with wireless card terminals on trains, they were able to
significantly reduce the interchange rates that applied to transactions
made on trains, because the electronic transaction qualified for a
lower interchange rate than the paper transactions. Moreover, FMS
officials explained that their acquiring bank was responsible for
monitoring how card transactions were processed and the interchange
rates assessed. The bank provides FMS with daily and monthly reports
that provide various levels of detail on the interchange fees paid.
Both the bank and FMS officials review these reports to identify
instances in which transactions may have been charged a higher
interchange rate--known as a downgrade--because they were not processed
under the requirements necessary to qualify for a lower rate.
Several Federal entities have attempted to control fees associated
with card acceptance by expanding their ability to accept PIN debit
card payments. PIN debit transactions generally are assessed lower
interchange rates than ``signature'' debits, and therefore some Federal
entities are beginning to put in place the technology necessary to
accept these transactions. While Federal entities would have to
purchase the equipment needed to process PIN debit transactions (for
example, PIN pads), one entity told us that the much lower interchange
rates associated with PIN debit transactions justified the investment.
An FMS official stated that the only entity for which it processes card
transactions that currently can accept PIN debit cards is DeCA;
however, as entities undergo equipment upgrades, FMS works with them to
identify equipment that may lower overall collection costs. For
example, one Federal entity has been developing a new terminal system
for card collections, and as part of this process, FMS has encouraged
the entity to implement a system that can process PIN debit
transactions. Additionally, some of the military NAFIs with which we
spoke adopted technologies for accepting PIN debit cards, stating that
they too recognized the cost savings associated with these
transactions.
FEDERAL ENTITIES HAVE HAD LIMITED SUCCESS IN NEGOTIATING LOWER
INTERCHANGE FEE COSTS
Federal entities have acted to reduce card acceptance costs by
negotiating with their acquiring banks for lower merchant discount
rates or with card networks for lower interchange rates. Some of the
Federal entities we reviewed have realized card acceptance savings by
negotiating new acquiring bank services contracts. These entities were
able to negotiate lower rates for the processing component of the
merchant discount rate applied to their transactions. For example, by
signing a new acquiring bank agreement, one Federal entity received a
substantial reduction in the processing fee component of its merchant
discount rate. Also, to obtain a more favorable merchant discount rate
for their transactions, officials from some of the military service
NAFIs have been working together to try to negotiate a lower merchant
discount rate with American Express on the basis of the volume of
transactions they provide to that company.
Officials at some of the entities with whom we spoke stated that
they did not believe they could negotiate effectively with the largest
card networks--MasterCard and Visa--for lower interchange rates. One of
the primary ways of negotiating lower rates would be to refuse to take
a particular network's card. However, many of the Federal entity
officials told us that consumers expect to be able to use cards to make
payments, and some stated that they did not think they could stop
accepting cards. For example, Amtrak officials stated that customers
paying with cards accounted for about 85 percent of their sales and
that if they did not accept cards, ridership would decline
significantly. Some Federal entities stated that they have attempted to
negotiate, but have had varying levels of success:
--FMS officials told us that they tried to negotiate lower
interchange rates with both Visa and MasterCard by stating that
some factors that were included in rate determinations did not
necessarily apply to Federal government transactions. For
example, FMS officials argued that the Federal entities that
participate in the Card Acquiring Service pose less risk than
other merchant types and that there is no risk of delinquency
on the part of the Treasury. FMS officials stated that their
negotiations were not successful and that they were not able to
negotiate lower interchange rates.
--Officials from the Postal Service also explained their attempts to
negotiate with the card networks. They stated that they
believed lower interchange rates should be applied to their
transactions for the following reasons. First, the Postal
Service estimated that it has been one of the top U.S.
merchants in terms of card transaction volume. Second, it poses
less risk of fraud than some other merchants because most of
its transactions are face-to-face. Third, the Postal Service
operates a large retail network with 35,000 offices, self-
service terminals, mail and phone orders, and a Web site that
receives approximately 30 million hits per month and provides a
great amount of visibility for the networks. Fourth, the Postal
Service has its own law enforcement agency that investigates
instances of fraud, including fraudulent use of cards where
merchandise travels through the mail. These investigations
result in the recovery of merchandise as well as stolen card
data and in some cases the arrest of international criminals to
the benefit of the credit card industry. They noted that the
benefit of such services to the card networks were not
reflected in the interchange rates for Postal Service
transactions. The officials did state that they have had some
limited success in negotiations, resulting in some small cost
savings.
--Officials from another Federal entity told us that they have had
some success in receiving funds from one of the networks as a
result of a joint marketing program. The funds could be used to
reduce interchange costs or for additional marketing efforts;
however, confidentiality agreements bind the details of the
negotiations, which are considered proprietary information. The
officials explained that negotiations of this type are not
typical of Federal entities because of the limited marketing
opportunities available to most government entities.
Although some Federal entities have had some success in negotiating
lower interchange rates for their transactions, whether additional
opportunities exist for further reductions in interchange rates is
unclear. According to officials of MasterCard and Visa, factors they
consider when setting interchange rates include whether the industry or
sector represents a new market for credit and debit cards. According to
these officials, government payments are a market in which they hope to
increase card acceptance and transaction volumes; thus, the interchange
rates that they set for government transactions are lower than those of
many other merchant categories. Additionally, officials at MasterCard
and Visa told us that opportunities exist for merchants, including
Federal entities, to negotiate for lower interchange rates. For
example, the MasterCard officials cited an instance in which, in
response to rapidly rising gasoline prices, they worked with gasoline
merchants to develop a cap on the interchange fees for petroleum
purchases. Officials from both networks explained that they have staff
dedicated to developing customized arrangements with merchants and that
these negotiations involve identifying mutually beneficial
arrangements. We found it difficult to assess whether Federal entities
could negotiate rate reductions based on their relative transaction
volume or aggregate card revenues, because we could not identify any
publicly available data we could use to determine how the Federal
government's total transaction volume or aggregate card revenues
compared with other large merchants.
MERCHANTS SIMILARLY HAVE HAD LIMITED SUCCESS IN REDUCING THEIR
INTERCHANGE FEE COSTS
In our most recent report on interchange fee issues, we reported
that merchants had had similar difficulties in negotiating lower
interchange fee rates. We found that merchants did have greater ability
to lower the processing fee portions of their merchant discount fee as
the result of greater competition among banks offering such services.
Increased competition for acquiring services provides merchants with
considerable choice and opportunities to negotiate and lower some card
acceptance costs. Hundreds of financial institutions and other firms
compete as acquirers to provide card processing services. Merchants of
varying sizes that we interviewed reported that they have multiple
acquiring banks and processors competing for their business and have
been able to lower the acquiring fee portion of their merchant discount
fees in recent years.
Although merchants have reported success in negotiating their
acquiring costs, several of the merchants we interviewed told us that
their ability to lower their interchange fee costs--which represents
the bulk of their card acceptance costs--was limited. These merchants
generally paid the rates listed in the Visa and MasterCard networks'
default interchange fee schedules. Although the ability to refuse to
accept Visa and MasterCard should provide merchants with the leverage
to negotiate lower interchange fees, merchants reported that they could
not refuse to take such cards because of customer demand. For example,
some merchants told us that if they did not accept credit cards from
Visa or MasterCard, their sales would decrease and they would lose
business to competitors that did accept those cards. Without this
ability, merchants told us that they generally have not been very
successful in obtaining meaningful reductions in Visa and MasterCard
interchange fees. According to staff from Visa and MasterCard, their
networks are willing to negotiate with merchants. For example,
officials from one network told us that their network has negotiated
with merchants with sales that represented 26 percent of their overall
processing volume. Only one of the large merchants we interviewed told
us that their company had received a limited and temporary reduction in
their interchange fee costs as a result of negotiations with Visa or
MasterCard following the settlement of a lawsuit.
card network rules are a major factor limiting card accepters' ability
TO NEGOTIATE LOWER INTERCHANGE FEES
Card network rules also limit the leverage that Federal entities
and merchants have to negotiate lower interchange fees. Each of the
major card networks--Visa, MasterCard, American Express, and Discover--
has various card acceptance rules--generally known as anti-steering
rules--that limit the options that card accepters have for accepting or
denying cards.\10\ These rules include:
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\10\ Not all of the networks have each of these rules, but if a
merchant accepts cards from each of these networks, they are subject to
all of them. Visa, MasterCard, and American Express have posted some of
their rules on their Web sites; Discover's rules are not available
online.
---------------------------------------------------------------------------
--no surcharges--card accepters may not impose a surcharge on
consumers for the use of credit cards or cards with higher
interchange fees;
--honor all cards--card accepters are required to accept all credit
cards within a network's brand;
--no discrimination/differentiation--card accepters may not
differentiate between credit cards within a network nor
discourage the use of cards within a network;
--no minimum or maximum charges--card accepters may not impose a
price floor or price ceiling on credit card transactions; and
--preferred treatment--card accepters may not direct consumers away
from or to a certain network's cards.
Some academic researchers and merchant representatives argue that
these rules constrain card accepters' ability to limit the costs of
credit card acceptance. For example, without the ability to surcharge
for credit cards generally, for a particular network's cards, or for
higher interchange fee cards, card accepters, including Federal
entities, are unable to steer customers towards lower-cost forms of
payment or recoup some of their costs for higher-cost cards. In
addition, without the ability to influence customers' payment choices,
card accepters are unable to use their influence with the networks to
encourage them to lower interchange and other fees in general, or offer
more lower-fee cards. In contrast, representatives of issuers and card
networks told us that the network rules are designed to promote the
wide acceptance of their cards and ensure that their cardholders have a
positive experience with the card.
removal of anti-steering rules seen as improving merchants' ability to
negotiate with card networks, but impact of lower interchange rates on
CONSUMERS IS UNCLEAR
Although various options have been debated for seeking to lower
interchange fees, removing the networks' anti-steering rules was one of
the options that appeared to receive the most support from the large
and small merchants and merchant trade associations with whom we
spoke.\11\ Removing the anti-steering rules appears to have various
advantages, including providing merchants with the ability to send
signals to cardholders about which cards increase merchant acceptance
costs, a change that could improve merchants' leverage in negotiating
their payment costs. Merchants' ability to surcharge or refuse certain
cards also could cause cardholders using rewards cards to be more aware
of and to bear more of the cost of the rewards from which they
currently benefit. This option also may require the least intervention,
as merchants could decide whether to add surcharges or refuse certain
cards based on their customer mix.
---------------------------------------------------------------------------
\11\ See GAO-10-45. The other option that was most supported was
restricting interchange fees with a cap or other limit.
---------------------------------------------------------------------------
Merchants told us that they have faced increased costs from
accepting credit cards in recent years, partly because of the
increasing number of customers using credit cards and partly because of
the increase in average interchange fees, particularly for higher-fee
rewards cards. With lower card acceptance costs, merchants may pass on
their interchange fee savings through lower prices to consumers;
however, the extent to which they would do so is unclear.\12\
Representatives of merchants we interviewed told us that they generally
passed any increased costs--including the costs of accepting credit
cards--to their consumers through higher retail prices. Thus, all their
customers may be paying higher prices for goods and services, whether
using a credit card or not.
---------------------------------------------------------------------------
\12\ For example, Federal Reserve economists told us that the
extent to which merchants would pass on their interchange fee savings
likely would depend on the competitiveness of the markets in which the
merchants operate.
---------------------------------------------------------------------------
If interchange fees were lowered for merchants, consumers could
benefit from lower prices for goods and services, but proving such an
effect is difficult. For example, Australian regulators estimated that
capping interchange fees in their country resulted in lower interchange
fees for their merchants by about 1.1 billion Australian dollars for
the period of March 2007 through February 2008. They acknowledged that
providing conclusive evidence of the extent to which these savings have
resulted in lower retail prices was difficult because so many factors
affect prices at any one time. Moreover, the degree of savings depended
on whether or not merchants were increasing their prices because of
higher interchange fee costs. Some merchant representatives we
interviewed told us that merchants would take different steps to
improve customer service if interchange fees were lowered, such as
hiring more employees. Customers also might not experience lower prices
if merchants' overall costs did not decrease. Several industry
participants speculated that if merchants were allowed to refuse
higher-cost cards, merchants would lose sales from customers using
premium credit cards. Network and issuer officials told us such
customers spend more than customers using basic credit cards. A study
of the Australian reforms by several economists reported that because
the actual decrease in merchant costs was very small, merchants may
have hesitated to lower prices, especially when their other costs might
have been changing.\13\
---------------------------------------------------------------------------
\13\ See Howard Chang, David S. Evans, and Daniel D. Garcia-Swartz,
``The Effect of Regulatory Intervention in Two-Sided Markets: An
Assessment of Interchange-Fee Capping in Australia,'' Review of Network
Economics, 4, no. 4 (December 2005).
---------------------------------------------------------------------------
Lowering interchange fee revenues for issuers could prompt issuers
to increase cardholder costs or curtail cardholder credit availability.
In Australia, issuers reduced rewards and raised annual fees following
that country's interchange fee cap. In addition, with less interchange
fee income, representatives of smaller issuers such as community banks
and credit unions told us that they likely would not offer rewards
cards and therefore would be unable to compete with larger issuers. One
credit union official told us that the credit union could not offer
credit cards because of the expense involved with running such a
program. In addition, representatives of credit unions and community
banks we interviewed said that they benefited from a network system
that developed interchange rates to attract both merchants and issuers.
Allowing merchants to refuse certain cards or negotiate rates directly
with the issuers would eliminate smaller institutions from the process.
Representatives of larger issuers told us that with less revenue from
interchange fees, they would consider reducing the amount of credit
they make available to cardholders. Australian officials reported that
since their reforms were instituted, the number of credit card accounts
in Australia has continued to increase and smaller credit unions have
remained in the credit card business, albeit with some of their
operations outsourced.
Banks' lower interchange fee revenue and the removal of certain
anti-steering rules could also negatively affect Federal entities. For
instance, a GSA official told us that banks facing reduced interchange
fee revenue might reduce the amount of rebates Federal entities receive
for using purchase cards. In addition, he said that the ``honor all
cards'' rule ensures universal acceptance of GSA purchase cards--an
important consideration for timely purchase of goods for first
responders.
Although interchange fees are not regulated at the Federal level in
the United States, these fees and card network rules, including the
anti-steering rules, have been the subject of various actions by
foreign regulators, the Department of Justice (DOJ), and private
litigation. The Federal Reserve, under the Truth in Lending Act, is
responsible for creating and enforcing requirements relating to the
disclosure of terms and conditions of consumer credit, including credit
cards, but because interchange fees are paid by merchants' banks and
not directly assessed to consumers, such fees are not required to be
disclosed to consumers. Although not specifically regulating credit
card interchange fees, DOJ and the Federal Trade Commission have
jurisdiction over credit card networks and issuers as part of enforcing
U.S. antitrust laws or the Federal Trade Commission Act. In 1998, DOJ
sued Visa and MasterCard for alleged antitrust violations regarding,
among other things, how these networks' rules in effect prevented
issuers from issuing cards on competitors' networks.\14\ DOJ officials
reported that they currently have another investigation under way
involving potentially anti-competitive network rules such as those that
prevent merchants from steering customers to other forms of payment,
levying surcharges for card transactions, or discriminating against
cards by type. DOJ staff told us they have requested information from
American Express, Discover, MasterCard, and Visa as part of this
investigation. They were not able to provide an estimate for when any
formal action resulting from the investigation, if any, might occur.
Interchange fees and other card network practices also have been the
subject of private lawsuits. Since the mid-1980s, various lawsuits
alleging problems with interchange fees and other card network
practices have been litigated or remain pending.
---------------------------------------------------------------------------
\14\ See United States v. Visa U.S.A., Inc., 344 F.3d 229 (2d Cir.
2003), aff'g, 163 F. Supp. 2d. 322 (S.D.N.Y. 2001), Cert. Denied, 543
U.S. 811 (2004).
---------------------------------------------------------------------------
In addition, as of September 2009, more than 30 countries have
acted or are considering acting to address competition or card cost
concerns involving payment cards.\15\ Some actions taken by these
countries include:
---------------------------------------------------------------------------
\15\ Federal Reserve economists and others report that these
countries include Argentina, Australia, Austria, Brazil, Canada, Chile,
Colombia, Denmark, Finland, France, Germany, Hungary, Israel, Italy,
Mexico, New Zealand, Norway, Panama, People's Republic of China,
Poland, Portugal, Romania, Singapore, South Africa, South Korea, Spain,
Sweden, Switzerland, Turkey, and the United Kingdom, as well as the
European Commission. See Terri Bradford and Fumiko Hayashi,
``Developments in Interchange Fees in the U.S. and Abroad,'' Payment
System Research Briefing (Federal Reserve Bank of Kansas City: April
2008); and GAO-08-558.
---------------------------------------------------------------------------
--regulating relationships between merchants, issuers, and card
networks, such as prohibiting card networks from imposing
certain rules on merchants;
--establishing maximum interchange fees or capping average
interchange fees;
--allowing more institutions to enter the credit card market by
changing the requirements to allow more institutions to qualify
to act as an issuer or acquirer; and
--conducting investigations into the functioning of the payment card
market, including legal antitrust proceedings.
Federal agencies accept cards and pay the associated costs. They
also use cards and obtain various benefits as a result. Efforts to
reduce interchange fees by addressing anti-steering rules could lower
Federal entities' interchange fee costs. If interchange fees were
lowered, consumers and Federal entities might benefit from lower prices
for goods and services, but lower interchange revenues for card issuers
could prompt them to increase cardholder costs, offer less generous
rewards, or curtail cardholder credit availability, although consumers
and Federal entities could still enjoy various other benefits of using
cards, such as convenience and efficiency.
Mr. Chairman and Members of the Committee, I appreciate the
opportunity to discuss these critically important issues and would be
happy to answer any questions that you may have. Thank you.
Senator Durbin. Well, thanks. We are going to have some
questions, but it is going to be a little while.
Ms. Langenderfer, if I can beg your indulgence here, I am
going to run off to vote and then return and hold this
subcommittee in recess for approximately 20 minutes. So I thank
you all for your understanding.
Well, the subcommittee will resume now that Senator Collins
and I have returned from casting our votes, another pair of
identical votes I am sure. Right.
Senator Collins. It was. This is scary.
Senator Durbin. It is scary.
So, Ms. Langenderfer, thanks for waiting. The floor is
yours.
STATEMENT OF JANET LANGENDERFER, SENIOR DIRECTOR OF
CREDIT CARDS, FINANCE DEPARTMENT, NATIONAL
RAILROAD PASSENGER CORPORATION (AMTRAK)
Ms. Langenderfer. Thank you. Good afternoon. Thank you for
the opportunity to present this testimony.
My name is Janet Langenderfer. I am the Senior Director of
Credit Cards in the Finance Department at Amtrak. I work for
the treasurer and have responsibility for everything having to
do with customer payments made by credit and debit cards. I am
here today to discuss how the proposed financial reform
legislation may benefit Amtrak and its customers.
Amtrak sold more than $1.8 billion worth of tickets, food,
and beverages to customers traveling between 500 stations
located in 46 States in fiscal year 2009. Our customers used
credit or debit cards for more than 90 percent of those
purchases. As a result, our systems processed approximately 30
million transactions.
Clearly, Amtrak customers want to pay with cards, and
therefore it is critical that Amtrak continue to offer as many
payment choices as possible.
A customer swipes his card, and like magic it is supposed
to work, but it is not magic. It is a financial transaction
created by Amtrak to be entered into the banking system,
bringing with it all of the rules and regulations of any other
banking transaction.
My job at Amtrak is to make sure that every customer's
credit or debit card transaction is processed quickly,
accurately, securely, and cost effectively.
The legislation proposed by Senator Durbin addresses
certain direct costs for payment card acceptance that will
benefit Amtrak and its customers. However, the total cost of
accepting payment cards results from a complex structure of
both direct and indirect costs.
In fiscal year 2009, Amtrak paid more than $33 million to
outside companies to process $1.6 billion worth of card
transactions. This calculates to 2.27 percent and is 0.11
percent more than what we paid in 2008.
As you may know, every credit and debit card transaction is
priced independently based upon the type of card used, the
sales channel used, and the technical properties associated
with the transaction. Our April 2010 statements for the four
major credit card brands contained more than 200 different
rates. We work aggressively to analyze our monthly statements,
looking for opportunities to cut our costs, and you can see
that our fees are based on a really complicated rates matrix.
We have also worked with each of the payment card brands,
to the extent possible, to qualify for the best category of
rates. We have been more successful with some brands than with
others. Under the proposed legislation, we will have the
opportunity to encourage a customer to use our lowest-cost
card, thereby lowering our overall costs. This would likely
create an environment that would encourage competition among
the various brands to negotiate rates that are more favorable.
I would see this as a benefit to Amtrak, to its customers, and
to the taxpayer at the end of the day.
As customers ourselves, we can all appreciate what it means
to have a purchase processed quickly and accurately. In order
to have a consistent process, the payment card companies
establish card processing rules, including requirements for
technology, how to issue receipts, how to handle returns and
refunds, how to prevent fraud, and many more.
It is the responsibility of Amtrak's management team to
make sure that our front-line employees and our electronic
systems incorporate all of these rules into our own policies
and procedures so that each purchase is seamless to the
customer. But following the rules is not easy and the
transactions do not always get processed quickly and
accurately.
Security has always been a high priority at Amtrak.
Everyone understands that payment transactions must be handled
carefully and theft of payment card information is scary. From
our perspective, payment card security is viewed in two general
categories: fraud prevention and compliance with the payment
card industry (PCI) data security standards, often called PCI.
Amtrak has spent close to $4 million on IT projects
specifically to meet PCI compliance so far. However, there is
no separate financial accounting for the significant amount of
staff time spent on PCI-related issues such as contracts,
policies, and procedures.
Amtrak works to prevent fraud through a series of industry
best practices. As a result of recent efforts, we have reduced
losses from 0.5 percent in 2001 to 0.04 percent in 2007. It has
remained at 0.04 percent through 2009 even though sales on
payment cards have increased by 50 percent during the same
period. These are laudable numbers, but they come with hidden
costs, increased interchange fees, more customer service costs,
and potentially lost revenue from customers who do not want to
be inconvenienced.
In conclusion, Amtrak accepts debit and credit cards from
customers for almost all of our sales. The cost of accepting
these cards are difficult to manage due to the complexity of
the rate structure and the rules established by the payment
card companies.
The legislation proposed by Senator Durbin puts us in the
position to offer our customers the choice to use a payment
type that provides them and Amtrak with the best combination of
service and cost. With that opportunity, Amtrak will be able to
negotiate with each payment card company on an equal footing
for pricing that is appropriate for selling train tickets,
food, and beverages and for rules that are geared to our
organization and our customers.
Thank you for the opportunity to testify today. I will be
happy to entertain any questions.
[The statement follows:]
Prepared Statement of Janet Langenderfer
Good afternoon and thank you for the opportunity to provide this
testimony. My name is Janet Langenderfer. I am the Senior Director of
Credit Cards in the Finance Department at Amtrak. I work for the
Treasurer and have responsibility for everything having to do with
customer payments made by credit and debit cards.
INTRODUCTION
I am here today to discuss how we believe the proposed financial
reform legislation may benefit Amtrak and its customers. Amtrak sold
more than $1.8 billion worth of tickets, food, and beverages to
customers traveling between 500 stations located in 46 States in fiscal
year 2009. Our customers use a credit or debit card for more than 90
percent of those purchases; and as a result, our systems process
approximately 30 million authorization requests, sales and refund
transactions each year. Clearly, Amtrak's customers want to pay with a
credit or debit card, and therefore it is critical that Amtrak continue
to offer them as many payment choices as possible.
Customers expect their card to simply work when using it at Amtrak;
they do not realize that Amtrak is actually creating a financial
transaction that will be entered into the banking system--bringing with
it all of the rules and regulations of any other banking transaction.
Controls and consistency are necessary to protect the security and
integrity of the system. However, it is challenging to understand the
rules established for the financial transactions we are trying to
support.
The total cost of accepting payment cards results from a complex
structure of direct and indirect costs. The Amendment proposed by
Senator Durbin incorporates language that addresses certain direct
costs for payment card acceptance that will reduce the cost of these
transactions and therefore benefit Amtrak and its customers. The
remainder of my testimony will demonstrate some ways that payment card
transaction rules impact Amtrak and its customers today.
THE DIRECT AND INDIRECT COSTS OF ACCEPTANCE
In fiscal year 2009, Amtrak paid more than $33 million to outside
companies to process $1.6 billion worth of payment card transactions.
To provide a frame of reference, this is a ``blended rate'' of 2.27
percent and is 0.11 percent more than what we paid in fiscal year 2008.
As you may know, every single transaction is priced independently
based upon the type of card used, the sales channel used, and the
technical properties associated with the transaction. Our April 2010
statements for the four major card brands contained more than 200 line
items. We work aggressively to analyze our monthly statements, looking
for opportunities to cut our costs. But the savings do not show big
returns; one effort in fiscal year 2009 saved us about $2,500; another
one $200. On the other hand, as customers have moved (with society as a
whole) from traditional travel agencies to the Internet, sales on
Amtrak.com have saved us more than $50,000 each year just in payment
card fees.
You can see that a company like Amtrak pays its payment card fees
based on a complicated rates matrix applied to each transaction. We
have worked with the payment card brands to the extent possible to
qualify for the best category of rates. We have been more successful
with some brands on this than with others. Under the proposed
legislation, we have the option to encourage a customer to use our
lowest-cost card, thereby lowering our overall costs significantly.
This would likely create an environment that would encourage
competition among the various brands to negotiate more favorable rates.
I would see this as a benefit to Amtrak, to its customers, and to the
taxpayer at the end of the day.
Example of Debit Card Customer Challenge
Here is an example of indirect costs we incur related to the
application of the payment card contractual rules rather than the
direct costs we pay. A customer makes a reservation and offers a debit
card to pay for it. For one reason or another, the transaction is not
completed. It could be because there were not enough funds available in
the account, or because the transaction did not pass the Amtrak fraud
prevention screens, or because the customer changed his or her mind
about which train to take. In any event, Amtrak will work with the
customer to either use another form of payment or hold the reservation
until the customer is able to complete the payment. When this occurs,
Amtrak sends an automated payment reversal transaction to the payment
card company so that the customer's money is not held by the bank and
unavailable for his or her use.
However, banks do not always apply the reversal transaction to the
account immediately and the customer does not have access to his or her
funds. The customer will request our help, but only the bank can
release the money. As you can imagine, this is a significant
inconvenience for our customer and it is very costly for Amtrak.
FAST AND ACCURATE TRANSACTIONS
My job at Amtrak is to make sure that every customer's credit or
debit card transaction is processed quickly, accurately, securely, and
cost-effectively. I think as consumers ourselves we can all appreciate
what it means to have our purchase processed quickly and accurately.
The payment card company rules also include technology requirements
(hardware, software, and telecommunications), and regulations regarding
how to issue receipts, how to handle returns and refunds, how to
prevent fraud, and many more. And by the way, each company generally
sends out its own update every 6 months. It is the responsibility of
Amtrak's management team to make sure that our front-line employees and
our electronic systems incorporate all of these rules into our own
policies and procedures so that each purchase feels seamless to the
customer. But following the rules isn't easy and transactions don't
always get processed quickly and accurately.
I'd like to provide a specific example on this topic that may not
be familiar to everyone. Amtrak has some large corporate customers who
use one credit card for many employees traveling on the trains. During
the course of a month, there are many sales, refunds, and exchanges for
travel between the same two cities--the train number and the price are
the same. In an effort to improve data sharing between travel companies
and their customers, the payment card companies began requiring that
additional data regarding each transaction be submitted within the
payment transaction record--every time. The concept is great; however,
the implementation is very difficult, and the transaction fees are some
of the highest. In the past, inconsistent application of the rules has
led to challenges where customers are not receiving the information
that Amtrak has sent; creating some of the problems the program was
designed to fix. This demonstrates the need for full life-cycle data
accuracy and prompt delivery to all transaction participants.
SECURITY COSTS AND CONSIDERATIONS
When it comes to security, everyone understands that payment
transactions must be handled carefully and theft of payment card
information is scary to everyone. While we focus a great deal on
prevention, the Amtrak Police Department, a nationally recognized
agency, has a dedicated fraud investigation unit focused solely on
credit card fraud. Together our company does everything we can to keep
all of Amtrak's and our customer's data secure. This involves a major
ongoing investment in information technology which is neither simple
nor inexpensive--but security has always been a high priority at
Amtrak.
We look at security in two general categories: fraud prevention and
compliance with the Payment Card Industry Data Security Standards,
often called ``PCI''.
Fraud Prevention
At the macro level, fraud prevention is managed through a payment
card company process where a bank may reverse a customer's purchase
after Amtrak has already been paid for it. For example, if you report
your card stolen and it is later fraudulently used to purchase a ticket
on Amtrak.com with a valid approval by the credit card issuer, you
would not be charged for the ticket but Amtrak would! According to
payment card company rules for a ``Card Not Present'' environment,
Amtrak is held responsible because as ``the merchant'', we cannot prove
who was using the card at the time of the transaction.
More than 70 percent of Amtrak passengers now elect to purchase
their tickets through Amtrak's card-not-present sales channels (rather
than going to the ticket counter). Today Amtrak has few options for
avoiding a fraudulent transaction at one of its card-not-present sales
channels and therefore, if the bank will not guarantee a card's
validity, we do not accept it. We require that the customer come to the
station and complete the transaction there. This is much more costly
for Amtrak, and very inconvenient for the customer.
Amtrak works to prevent fraud through a series of industry best
practices. As a result of recent efforts, we have reduced chargeback
losses from 0.5 percent in fiscal year 2001 to 0.04 percent in fiscal
year 2007. It remained at 0.04 percent through fiscal year 2009 even
though sales on payment cards have increased by 50 percent during that
same period and despite the fact that more customers are using card-
not-present channels. These are laudable numbers--but they come with
hidden costs, increased interchange fees, more customer service costs,
and potentially lost revenue from customers who do not want to be
inconvenienced in this manner.
Payment Card Industry Data Security Standards--``PCI''
The PCI standards, for anyone familiar with them, are like many
other standards--continually evolving. Formal changes are announced
every 2 or 3 years and interpretations are published more often. To
date, Amtrak has spent close to $4 million on IT projects specifically
to meet PCI compliance; however, there is no separate financial
accounting for the significant amount of staff time spent on PCI-
related issues such as revising contracts, policies, and procedures.
I offer one final example to demonstrate the issue. As you can
imagine, Amtrak has contracts with tens of thousands of vendors. This
includes vendors who build train engines, those who process card
payments, and those who write software. According to the PCI standards,
Amtrak is required to re-negotiate its contracts to include new
language regarding PCI security, where the vendor is responsible for
any violation of the PCI standard whether they are aware of it in their
own system or not. Needless to say, the investment in the process to
modify these contracts has not been easy--and yet it is part of our
jobs and we haven't tracked the costs separately.
CONCLUSION
In conclusion, Amtrak accepts debit and credit cards from customers
for almost all of our sales. The costs of accepting these cards are
difficult to manage due to the complexity of the rate structure and the
rules established by the payment card companies. The amendment proposed
by Senator Durbin addresses certain direct costs for payment card
acceptance. It puts us in the position to offer our customers the
choice to use a payment type that provides them and Amtrak with the
best service and cost combination. With that opportunity, Amtrak will
be able to negotiate on an even basis with each payment card company
for pricing that is appropriate for selling train tickets, food and
beverages. It will also allow us to negotiate on the topic of rules
that will help our customers.
We believe that the provisions of Senator Durbin's Amendment are
reasonable, and we support it.
Thank you.
Senator Durbin. Well, thanks for your testimony.
Let me digress before I get into the substance of this and
say that as I listened to Mr. Grippo and Ms. Langenderfer and
Ms. Cackley as well talk about the refusal of Visa and
MasterCard to negotiate with our Federal Government, for some
reason I remembered a scene from my favorite movie, ``Dr.
Strangelove'', when Lionel Mandrake needed some change to make
a long distance call because they thought there was going to be
a nuclear war and he didn't have change. And it was suggested
that he shoot up the Coca Cola machine and take the change and
use it to avoid a nuclear war. And Keenan Wynn, who was playing
Colonel Bat Guano, said to him, you're going to have to answer
to Coca Cola if you do that.
It seems like things are similarly upside down here where
we have the Federal Government with literally millions, if not
billions, of dollars in transactions unable to negotiate when
it comes to the fees that they are going to pay on credit
cards? Stick with me for a minute, Mr. Grippo. It seems like we
have some bargaining power under most circumstances here to
make sure that taxpayers get a break. What is missing?
Mr. Grippo. I think under many circumstances, the Federal
Government has lots of purchasing power as a consumer in the
marketplace. But if you look at the overall numbers, which
total to, let us say, $3.5 trillion of credit and debit card
collections in this economy, our $8.6 billion may not be enough
to exercise any purchasing power here. And in fact, the Federal
Government card volume really is not enough when it is
considered in the larger context of the economy.
Senator Durbin. So what chance do the Qik-n-EZ convenience
stores in central Illinois have if $8 billion does not get you
to the table with Visa and MasterCard?
Mr. Grippo. Well, I think they are in the same boat as all
other merchants, which is, by and large, they are presented
terms through their acquiring banks from the card associations
and they do their best in accepting those terms.
Senator Durbin. Our research says that Visa has 122
different interchange fee arrangements. So it is not as if they
do not look around and shop around.
Is there any indication--do any of you have any indication
that the amount that is being charged to the Federal Government
reflects the reasonable cost of collection, fraud, default? Is
there anything that you can point to, for example, at Amtrak
where you can say, well, there is a reason why we pay? What is
the number that you gave us here? 2.27 percent on every
transaction with a credit card and debit card. Is there
anything that you can point to that says, well, that is because
of default or fraud or something?
Ms. Langenderfer. Senator, I cannot give you an exact
answer. There is a big range of rates. I will give you one
example. I have looked at our most recent statement, and I have
debit card transactions that range from 0.97 percent to almost
5 percent for debit cards.
Senator Durbin. On the interchange fees.
Ms. Langenderfer. Interchange fees.
Senator Durbin. So they range from less than 1 percent to 5
percent.
Ms. Langenderfer. Yes.
Senator Durbin. And the reason?
Ms. Langenderfer. I do not know.
Senator Durbin. It is just an arbitrary decision by the
credit card company?
Ms. Langenderfer. I would imagine there are transaction
details that are different, and I would imagine that the type
of debit card that was used would be different, but I cannot
tell on the face of it.
Senator Durbin. So it appears that some card networks in
other countries have been more successful than the United
States of America. On April 27, the Wall Street Journal
reported that Visa Europe agreed to lower the debit card fees
it would charge in nine European countries, as well as for
cross-border European Union transactions. MasterCard had
reached a similar agreement last year.
Also, according to the April 2008 report issued by the
Federal Reserve Bank of Kansas City, banks have reached
agreement with foreign governments to reduce interchange fees
in Israel, Mexico, and Switzerland.
Mr. Grippo, why is it that other governments can negotiate
with Visa and MasterCard but the Government of the United
States of America, where they are nominally part of, cannot
negotiate?
Mr. Grippo. Well, I think in most, perhaps all, of the
examples you mentioned, those countries were acting as
regulators through their competition authorities' negotiating
agreements to reduce rates across the general economy. I do not
believe they were governments acting as purchasers of banking
services to negotiate lower rates for the government itself.
Senator Durbin. So the plot thickens. It appears that our
failure to assume a power or responsibility when it comes to
these fees ties our hands with these two giants, Visa and
MasterCard. And in other countries where they have assumed a
regulatory relationship--incidentally, for the record, who
regulates interchange fees in the United States?
Mr. Grippo. To my knowledge, there is no Federal regulatory
power over interchange rates. It is a matter of contract among
the parties.
Senator Durbin. I think you are right.
Senator Collins.
Senator Collins. Thank you, Mr. Chairman.
Mr. Grippo, I want to follow up by getting a better
understanding of whether Federal agencies try to negotiate the
interchange rates that they are paying. Does Treasury try to
negotiate the rates?
Mr. Grippo. The Treasury negotiates the rates on behalf of
all the agencies for a variety of reasons, including the fact
that the Treasury is the one legally that is processing the
collection and taking the deposit. And we do try to negotiate,
as best we can, with the card associations primarily through
our acquiring bank, although directly with the card networks in
some cases. And there are cases where we may be successful in
negotiating a lower charge for a particular type of transaction
or categorization, or in the definition of an interchange
category, but in directly negotiating the rates, the level of
rates, and the manner in which they are set, we really have not
had much success in realizing any reductions.
Senator Collins. That surprises me, given the amount of
transactions that the Federal Government is doing. If it were
individual agencies trying to negotiate the rate, I could
understand that they might not have sufficient clout to do so,
but if Treasury is negotiating the rates across the board, why
are you not having more success, for lack of a better word? You
could go through different banks. Correct?
Mr. Grippo. We could go through different banks, but any
bank we went through would be subject to the same card
association rules.
Senator Collins. So does this get back to the point that
the chairman made that you have two big issuers who control 80
percent of the market?
Mr. Grippo. It does get back to the fact that there is one
set of rules, and while we very aggressively compete to select
an acquiring bank, and the fees that we pay that particular
bank for their particular services are very competitive, as
good as anyone can get, the interchange fees and other card
network fees that are established by the associations and
merely passed through the bank we happen to be dealing with are
not something that the acquiring bank controls and not
something we negotiate directly with the acquiring bank.
Senator Collins. Your report, which came out earlier this
week, notes that the Treasury could seek to negotiate a maximum
rate that would be a flat, fixed percentage of all transaction
dollars. First of all, is that being done now, or is that a
recommendation?
Mr. Grippo. This is a recommendation. One of the themes of
the report is that if the Treasury were able to change the
status quo--and what we recommend is some mechanism, perhaps
new legal authority, that allows us to opt out of certain
transactions that may be cost prohibitive. If we have such a
mechanism, that would put us on a more equal negotiating
footing to directly negotiate what those rates were. Then we
would pursue this concept of a uniform rate or a flat rate that
would apply to all credit or all debit transactions. This would
help simply by eliminating the complexity of dozens of
categories which, frankly, we have to aggressively monitor to
make sure that they are applied correctly to our transactions.
Senator Collins. Ms. Cackley, I can see why Treasury would
like the simplicity of one fixed rate for all transactions,
regardless of whether it's a personal identification number
(PIN) or a signature debit, for example. But do different
transactions not have different costs?
Dr. Cackley. Different transactions could have different
costs definitely, depending on whether they are transactions
with a card that is presented or a transaction over the
Internet. There could be different processing costs. But the
interchange fees, as they are currently set, are not directly
connected to the cost of the transaction itself, although they
can vary by the perceived risk of the merchant.
Senator Collins. Which has been the chairman's point and
why he wants the Federal Reserve to look at setting reasonable
and proportional rates.
But I am wondering--and my time has expired. So just
quickly, what do you think of the Treasury's recommendation
that there should be a flat, fixed rate? The reason I am
somewhat concerned about that is it seems to me with a debit
card, you have less of a chance of a default because the money
is presumably taken immediately from the individual's account.
Therefore, I would think debit charges should be lower than if
someone is using a credit card.
Dr. Cackley. The idea of having a different rate for a
debit card versus a credit card is something that has already
been suggested and actually is already true.
But when we did our work on interchange fees, looking at
the different kinds of ways to try to lower interchange fees
for all merchants, capping the fees was certainly one of the
options that we considered and that has some merit.
Senator Collins. Thank you, Mr. Chairman.
Mr. Grippo. If I could just comment, Senator Collins. In
our report, we do in fact make that distinction, and when we
talk about a flat rate or a uniform rate, there would be one
for credit and a separate for debit to reflect those different
risks and costs.
Senator Collins. Right, though you treat different kinds of
debit cards alike, whether they are a PIN card or a signature
card.
Mr. Grippo. That is right.
Senator Durbin. I have asked Senator Nelson if I could ask
a couple questions before I give the floor to him.
Ms. Cackley, in your testimony you say that MasterCard has
set a Government interchange rate of 1.55 percent plus 10 cents
per transaction. You also note that MasterCard gives
supermarkets a 1.27 percent interchange rate. Your testimony
says that most Government transactions do not qualify for the
lower rate given to supermarkets, even though Federal
Government transactions have far less risk than a merchant
transaction. Can you explain why supermarkets are getting a
better deal than Federal agencies and Federal taxpayers on
interchange rates?
Dr. Cackley. Senator, I believe that the interchange rate
for supermarkets was set somewhat lower in order to attract
supermarkets and persuade them to start accepting credit and
debit cards because that was not something that supermarkets
did originally, and so having a lower rate was a way to bring
them into the market.
Senator Durbin. But $8 billion worth of buying power in the
Federal Government is not enough to entice them to give the
taxpayers a similar break?
Dr. Cackley. Apparently not.
Senator Durbin. So let me ask one last question. There is
something called a SmartPay program, the General Service
Administration's (GSA) SmartPay program. I have got one, and
this is a credit card given--an official credit card for
official expenses given to Members of Congress and other
Federal employees. And this is interesting because in this
case, the Federal Government is not accepting credit cards. The
Federal Government is issuing credit cards to be used by their
employees, and a different world has emerged.
As your testimony notes, Ms. Cackley, there are Federal
agencies participating in the GSA SmartPay program that receive
rebates from the card-issuing banks. The rebates can be
substantial. GSA is able to get back these rebates because
card-issuing banks are competing with one another to get GSA's
card business and because GSA negotiates with banks and
comparison shops to get the best deal possible. In other words,
competition in a card-issuing market works to the Government's
benefit in the GSA case.
So, Ms. Cackley, is there any opportunity for Government
agencies to negotiate with or comparison shop between card-
issuing banks with regard to the interchange rates the
Government pays those banks when it accepts their credit cards?
Dr. Cackley. The Government does negotiate the rebates that
they get for----
Senator Durbin. This is when they issue cards. I say when
they accept cards.
Dr. Cackley. But when they accept cards, they do not have
the ability to negotiate in the same way.
Senator Durbin. It seems that there is something missing in
the equation when there is no competition.
Senator Nelson.
Senator Nelson. Thank you, Mr. Chairman.
I know that you called the hearing to discuss the Federal
Government's payment of interchange fees, but I would like to
turn briefly to a question about the impact of interchange fee
regulation on State prepaid debit card programs.
We have heard from some States. And I would like to know
how the regulation of the debit card interchange fees will
impact prepaid debit card programs that are used by the States
such as the State of Nebraska, my home State, to disburse
Government benefits and assistance, which has apparently been
happening for some period of time. I remember as Governor, when
we set the program in place, we called them Smart Cards. So
perhaps you can--first of all, Mr. Grippo and then Ms. Cackley.
Mr. Grippo. Well, it is, I know, a very important question.
Any change to the balance of interests in the payment card
system across merchants, banks, the associations, and users is
a delicate matter. And certainly the regulation of debit card
interchange rates will impact all of those participants.
At the Treasury, we have not taken a position on Senator
Durbin's amendment to the regulatory reform bill that would go
to directly regulating debit card fees. So I do not want to
offer thoughts that would support or oppose that.
Senator Nelson. No, I understand. If you could just explain
what you believe the impact would be without taking a position
on it--on the States and what would happen in terms of their
costs, their charges.
Mr. Grippo. In general terms, I would say that it would
cause State governments with benefit cards to have to
renegotiate the terms of their card agreements with their
issuing banks. I could not comment on the extent to which they
would have to do that, but clearly, if the underlying cost
structure changed due to new regulation of the fees, then the
end users, including State governments, would have to
renegotiate some of their terms with the banks.
Senator Nelson. Do you think they gain leverage or do they
lose leverage?
Mr. Grippo. I do not know, Senator. Frankly, I am not sure
how the direct regulation of debit card fees would play out and
how all of the different actors would respond. I do not know.
Senator Nelson. Thank you.
Ms. Cackley.
Dr. Cackley. Senator, we did not do work on the electronic
benefit transfer (EBT) cards directly, but we do know a little
bit about which cards are not currently impacted by interchange
fees. The Supplementary Nutrition Assistance Program cards are
not now affected by interchange fees. I think that we would
have to do more work in order to answer the rest of your
question.
Senator Nelson. Well, I think it is an important point for
us to consider because raising the cost to the States is not an
intended consequence. So I think it would be very helpful if we
could get more information in connection with that because the
last thing we need to be doing is raising their costs at a time
that they are coming to us asking for more help on Medicaid.
Do you have any initial thoughts, even prior to the
research, as to what the impact would be?
Dr. Cackley. I think, as Mr. Grippo said, there are so many
actors that it would be difficult for me to speculate until I
had done the research.
Senator Nelson. But do you think it would be a good idea to
be able to do some research on that to give us some
enlightenment?
Dr. Cackley. I think we could certainly look into it for
you, sir.
Senator Nelson. Okay.
Senator Durbin. Senator Nelson, thank you for raising that
issue and thank you for calling me personally on this because
after we passed the amendment, you brought to my attention that
this was a concern based from your experience as Governor of
your State and what you had heard since. And I wanted you to
know that we are working on an amendment that will specifically
carve out these government types of cards so that they would
not be affected by anything related to the private sector. I
think it is a special case situation, and I am on your side on
this one. I am glad you brought it to my attention. Thank you
for doing that.
Senator Nelson. Thank you, Mr. Chairman. Thank you.
Senator Durbin. Senator Collins? Nothing further?
Thank you to this panel. Appreciate your testimony and your
patience while we were in recess voting and all those things.
I would like to ask the second panel to please, if they
would, come to the table.
The first witness in the second panel, who is taking a seat
now, is Bruce Sullivan. He is Vice President and head of
Government services for Visa, Incorporated. And prior to his
tenure at Visa, Mr. Sullivan worked for the Department of
Defense for 33 years and received numerous awards for his
expertise and accomplishments in the Federal acquisition arena.
Mr. Sullivan, thank you for being here.
Our next witness is Ed Mierzwinski. He is the Consumer
Program Director of the U.S. Public Interest Research Group
(PIRG), the nonpartisan and nonprofit federation of State
public interest research groups. State PIRGs are nonprofit,
nonpartisan, consumer, environmental, and government watchdog
groups with over 500,000 members. Mr. Mierzwinski has been a
consumer advocate with PIRG for over 20 years authoring major
reports on a wide variety of issues relating to financial
reform, identity theft, product safety issues.
And Wendy Chronister, who is the President and Chief
Executive Officer of Chronister Oil Company. Her company
currently owns and operates 11 Qik-n-EZ convenience stores
located in central Illinois and employs approximately 150
people. She grew up in my hometown of Springfield where her
father founded Chronister Oil Company. She has extensive
experience in venture capital and private equity, graduated cum
laude from Dartmouth and magna cum laude from the University of
Illinois College of Law in Champaign. Thank you for joining us
too.
Mr. Sullivan, we will make your written testimony part of
the official record and we would like to give you 5 minutes to
summarize it or to raise some highlights. The floor is yours.
STATEMENT OF BRUCE SULLIVAN, VICE PRESIDENT AND HEAD OF
GOVERNMENT SERVICES, VISA INC.
Mr. Sullivan. Thank you very much. Chairman Durbin and
Ranking Member Collins, thank you for inviting me here today to
discuss Federal payment of interchange fees and how electronic
payments are saving taxpayer dollars.
My name is Bruce Sullivan. I am Vice President and head of
Government services for Visa. In this capacity, I work with
issuing banks and Federal agencies participating in GSA's
SmartPay program. I also work with the FMS in introducing new
payment technologies for them to use with Federal agencies on
their programs.
As a former public servant, I am acutely aware of the need
to both reduce costs and increase efficiencies within the
Government.
As a global payments network, Visa provides a platform for
business and Government efficiency. Our products provide
extraordinary value to all participants in the payment chain by
facilitating commerce, reducing operational costs, and
expanding the availability of electronic payments to the
Nation's unbanked. In return, this reduces overall costs to
taxpayers.
That is why Government agencies increasingly are embracing
electronic payment products. To highlight this, the GAO
reported that the U.S. Government saved close to $2 billion in
2006 just from the efficiencies gained from the use of the GSA
purchase cards.
Just this week, the Treasury announced plans to modernize
Government and eliminated outdated wasteful processes to create
savings for taxpayers, distributing most benefits from the
Government to consumers via direct deposit or prepaid cards.
This eliminates the need for paper checks. This change is
estimated to save the Government more than $300 million in its
first 5 years.
Electronic payments are also an effective tool for ensuring
governments and underserved consumers have ready access to
funds in moments of crisis each and every day. Following
Hurricane Katrina, Louisiana used purchasing cards to purchase
and pay for vital supplies, everything from generators to sun
screen.
Forty-seven States use or are in the process of
implementing debit and credit cards for disbursing essential
benefits such as supplemental child support and unemployment,
saving State governments and their taxpayers hundreds of
millions of dollars in the process.
Interchange is what helps make these programs work.
Interchange is not revenue to Visa. Rather, it is a transfer of
value from the merchant's bank to the cardholder's bank.
Interchange is but one component of the total cost of
acceptance a Government merchant or enterprise faces when
arranging with an acquiring bank to accept cards for payment.
As issuer revenue, interchange supports an issuer's
significant investment in providing cardholders with access to
the payment system. Issuer interchange helps many Federal and
State agencies enjoy a no-cost proposition when it comes to
using prepaid products to disburse benefits to beneficiaries,
thereby allowing the unbanked to keep more of their wages
instead of paying high check cashing fees.
Federal Government agencies have benefitted tremendously
from accepting payment cards as well. It is a more efficient
and less costly method of payment than cash or check. The 2008
GAO report on the cost and benefits of accepting payment cards
concluded that by accepting cards, Federal entities realize
benefits, including more satisfied customers, fewer bad checks
and cash thefts, and improved operational efficiencies.
For more than 14 years, the majority of Government-oriented
merchant category codes have qualified for one of Visa's lowest
interchange rates. Visa has also created new, unique
interchange rates for select types of Government transactions.
Importantly, the level of Visa interchange rate applied to the
Government sector transactions has remained essentially flat
over the last decade.
Both Federal and State governments have decided that
distributing government benefits on payment cards is an
important tool to both minimize costs and expand their ability
to offer a convenient and efficient method of distribution to
the Nation's unbanked and underserved. And by using GSA
purchasing travel cards to eliminate paper-based processes,
agencies have saved billions of dollars in reduced annual
expenses, and military and civilian personnel can respond
faster to military deployments, natural disasters, and national
emergencies.
In conclusion, electronic payments, whether used by
Federal, State, or local governments for disbursing benefits,
making purchases, or accepting purchases, promote efficiency,
reduce costs, and save taxpayer dollars.
Visa looks forward to our continuing discussion with the
Government on how Visa can be a valued partner in maximizing
the benefits of electronic payments for U.S. taxpayers. Thank
you very much.
Senator Durbin. Thanks, Mr. Sullivan.
[The statement follows:]
Prepared Statement of Bruce Sullivan
INTRODUCTION
Chairman Durbin, Ranking Member Collins and distinguished members
of the subcommittee, thank you for inviting me here today to discuss
Federal payment of interchange fees and how electronic payments are
saving taxpayer dollars.
My name is Bruce Sullivan, and I am Vice President and Head of
Government Services for Visa Inc. In this capacity, I work with issuing
banks and Federal agencies participating in the General Services
Administration's SmartPay program and I work with the Department of the
Treasury's Financial Management Service on new payment technologies
available for use by Federal agencies.
Prior to joining Visa 7 years ago, I proudly served our country in
both military and civilian capacities for more than 33 years. As a
retired public servant, I am acutely aware of the need to both reduce
costs and increase efficiencies within the government due to declining
budgets. Throughout my career, I tirelessly fought for the elimination
of waste, fraud and abuse at the Department of Defense and continue to
do so in my position at Visa.
Visa Inc. is pleased to testify before the Subcommittee on
Financial Services and General Government to discuss how interchange
enables programs that help Federal, state and local government
agencies, our nation's most vulnerable citizens and, ultimately, all
taxpayers.
As a global payments network, Visa provides a platform for business
and governmental efficiency, consistently delivering a highly reliable,
secure and innovative system over which a wide range of payment
products and services can be delivered to both those accepting Visa for
payment and those seeking to pay with Visa. Visa has been the Federal
government's primary provider of these services for over a decade. We
believe our products provide extraordinary value to all participants in
the payment chain by facilitating commerce across the United States and
global economies, reducing operational costs and expanding the
availability of electronic payments to the nation's unbanked. Visa is
proud to be a partner of both the Federal and state governments in
pursuing these goals.
For many years, government agencies have increasingly embraced
electronic payment products as a cheaper, more secure and more
convenient alternative to cash, checks and purchase orders. These
products include GSA Purchasing cards as well as Federal and state
benefits disbursement programs--all of which have been shown to provide
tremendous savings and efficiencies for both the government and, in
turn, U.S. taxpayers. Indeed, the U.S. Government Accountability Office
(GAO) reported that the U.S. government saved close to $2 billion in
2006 just from the efficiencies gained from use of GSA Purchasing
cards.
Just this week, the Department of the Treasury announced plans to
modernize government and eliminate outdated, wasteful processes to
create savings for taxpayers: distributing most benefits from the U.S.
Government to consumers via direct deposit or pre-paid cards, thus
eliminating the need for paper checks for all benefits payments.
By switching from inefficient paper forms of payment to digital
currency, the Director of the Office of Management estimates the
Federal Government will save more than $300 million over the first 5
years, and more than $120 million each year thereafter. As the Director
noted in a blog posting, ``this is a win-win for the American public
because it makes government more convenient and cost-effective. This is
precisely the type of smart, streamlined improvement that this
Administration is committed to making across government to boost
efficiency and modernize how we do business.''
But electronic payments provide far more than just cost savings--
they are also an incredibly effective tool for ensuring that our
nation's most under-served consumers have access to ready funds, both
in moments of crisis and, indeed, each and every day. For example,
following Hurricane Katrina, Louisiana's Department of Environmental
Quality (DEQ) used Visa Purchasing cards to pay for vital supplies--
everything from generators to sunscreen. As another important example,
47 states use or are in the process of implementing the use of debit or
prepaid cards for disbursing essential benefits such as supplemental
child support and unemployment, saving state governments and their
taxpayers hundreds of millions of dollars in the process.
As explained below, Federal and state governments--and ultimately
taxpayers--receive tremendous value from electronic payments. These
benefits are evident both when a government agency or enterprise
chooses to accept cards for payment, and when it provides them to its
employees or others as a way to pay, or to receive funds.
Visa is committed to ensuring that our nation's Federal, state and
local governments are able to maximize these benefits through programs
customized to their unique needs. We appreciate the opportunity to
detail these efforts and continue an important dialogue with the
government, both on these effort's successes as well as how they can be
expanded.
WHAT IS INTERCHANGE?
The term ``interchange'' is often misunderstood, but it is
important to recognize both what it is and, just as importantly, what
it is not. Interchange is not revenue to Visa; rather it is a transfer
of value from a merchant's bank to the cardholder's bank. Visa sets
interchange to maximize the participation in its network, seeking out
the largest level of Visa issuance to cardholders and Visa acceptance
by merchants. Visa has no interest in setting the level of interchange
too high (which might lead to lost acceptance) or too low (which could
lead issuers to put other payment products in the hands of
cardholders). Please let me repeat: Visa receives no revenue from
interchange.
Interchange is also but one component of the cost of acceptance a
merchant, or a government agency or enterprise, faces when arranging
with an acquiring bank to accept cards for payment. Typically, each
agency that accepts cards for payment pays a ``merchant discount
rate,'' which may include interchange and the acquirer's own expenses
and return on investment. The level and structure of the merchant
discount rate paid by an agency or enterprise is entirely a function of
its acceptance contract with its chosen acquiring bank. Visa has no
role in that negotiation.
As issuer revenue, interchange supports an issuer's significant
investment in providing cardholders with access to a national and
global payment system, and investing in developing and supporting
payment innovations that ultimately benefit both the government and
U.S. taxpayers. Issuer interchange helps many Federal and state
agencies enjoy a no-cost proposition when it comes to using Visa
prepaid products to disburse benefits to eligible beneficiaries--
because issuers get paid a small fraction of the value of the
transaction when recipient of government benefits use their cards, they
are able to provide those cards at no cost to the government. And, in
some cases, Federal or state agencies may earn financial rebates from
the use of Visa products by their employees--rebates provided by the
issuer, supported by the interchange revenues that issuer receives.
Interchange revenue is also a major component of driving financial
inclusion to the unbanked, allowing employers to deliver payroll cards
to their low income, unbanked workers at little or no cost. Prepaid
payroll programs allow the unbanked to keep more of their wages instead
of paying high check-cashing fees and having the risk of carrying
significant amount of cash.
GOVERNMENT BENEFITS FROM ACCEPTING ELECTRONIC PAYMENTS
Federal government agencies have benefitted tremendously from
accepting payment cards as a more efficient and less costly method of
payment than cash or check. Indeed, the GAO released a report in 2008
on the costs and benefits of accepting payment cards and concluded
that: ``By accepting cards, Federal entities realize benefits,
including more satisfied customers, fewer bad checks and cash thefts,
and improved operational efficiency.'' The day-to-day, routine costs
that are minimized through electronic payments do not often receive
much attention or discussion. But all that paper is expensive to
handle, expensive to collect and expensive to track. It is challenging
to determine all the direct and indirect costs of paper-based payments,
including losses on lost or bad checks, pilferage of cash, errors in
record keeping and slower receipt of funds. These are, however,
incredibly important savings at the end of the day--savings that
ultimately benefit U.S. taxpayers. Some examples of specific agency
benefits identified in the GAO report included:
--Reduction of cash-associated expenses.--By accepting cards, Federal
entities incurred less expense in transporting cash, lower
losses from theft of cash, and had fewer bad check expenses.
For example, officials at the Department of the Interior noted
that cash transport costs can be high for some remote parks and
wildlife refuges. Several Federal officials also stated that
accepting cards has reduced the costs associated with
processing checks, and that funds are deposited in accounts
faster when customers use credit or debit cards than when they
use checks.
--Improved internal operations and more streamlined bookkeeping
through reduced paperwork.--For example, officials at the
Department of the Interior stated that payments made by credit
cards result in a more streamlined bookkeeping approach because
card sales involve less paperwork (for reconciliation) than
other payment forms.
--Reduced labor costs.--Accepting cards also has enabled entities to
conduct business via the Internet, which can reduce labor costs
associated with sales and also can provide greater convenience
to customers. For example, officials from the U.S. Mint stated
that about 50 percent of their sales occurred through the
Mint's Web site.
--Re-allocation of staff to more productive uses.--Officials at the
Department of the Interior explained that card acceptance at
automated kiosks allowed them to reallocate some staff that
used to collect entrance fees to more productive tasks. Amtrak
officials also stated that customers' ability to purchase
tickets using cards, especially through the Amtrak Web site,
has reduced their labor costs.
--Reduced fraud and errors from miscounting or losing cash and
checks.--Additional operational efficiencies mentioned by
officials included a reduction in costs and exposure to fraud
and errors from misplacing or miscounting cash or checks.
--Fewer instances of employee theft.--Amtrak officials told us that
accepting cards onboard trains for ticket and food and beverage
sales resulted in fewer instances of employee theft of cash.
--Improved customer satisfaction.--Agencies reported that card
acceptance improves customer satisfaction with their
organizations because consumers like to use their cards for
convenience, credit card reward programs, and security reasons.
In a time of a declining workforce and budget dollars, agencies are
able to leverage these benefits and make people that might otherwise be
behind the counter more productive, resulting in a friendlier, more
responsive and less costly government.\1\ Ultimately, as noted by
Amtrak, payments are ``a win-win'' for customers and employees'' \2\
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\1\ A second GAO report--released just about 6 months ago--reported
that private-sector retail merchants realized the same benefits from
card acceptance: incremental sales, faster and more certain payments,
fewer bounced checks, and reduced cash handling. Also, merchants use
electronic payments to speed and automate checkout, and expedite
credits or merchandise returns.
\2\ March 28, 2007 Amtrak Press Release.
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Visa recognizes that government payments represent a major area of
mutual opportunity and, for that reason, has consistently sought out
ways to ensure that the interchange applied to government transactions
on its major product sets is attractive for broad acceptance. For more
than 14 years, Visa has allowed transactions from the majority of
government-oriented merchant category codes to qualify for one of its
most attractive interchange rates on consumer credit and debit
transactions, its ``emerging segments'' rate (this rate appears as
``CPS-Retail 2'' on Visa's published rate sheet, which is posted online
with all Visa interchange rates at Visa.com).
Visa has also created new, unique interchange rates for the
government sector, or for select types of governmental transactions, as
part of its ongoing efforts to expand acceptance and grow the volume of
governmental transactions going over the Visa network. For example,
only GSA cards receive a special large ticket interchange rate,
available with fewer restrictions compared to the equivalent non-GSA
Purchasing card large ticket interchange rate, and only tax payment
transactions may qualify for a unique flat debit interchange rate.\3\
---------------------------------------------------------------------------
\3\ Again, these rates may be found as part of Visa's published
rate sheet posted online at Visa.com.
---------------------------------------------------------------------------
Importantly, the level of the Visa interchange rate applied to
government sector transactions has remained essentially flat over the
past 10 years. Looking at all Visa payment methods from 1999 through
2009, volume (i.e., cardholder usage) in governmental categories has
increased by almost 600 percent over the past 10 years, to roughly $25
billion in 2009. Visa interchange applied to these transactions grew
over this period, in line with volume growth, to roughly $392 million.
The resulting percentage, or volume-weighted interchange rate, of 1.57
percent is just over 3 percent higher than it was in 1999--an
exceptionally low level of change when one considers all of the ways in
which the value of access to the Visa system increased over that 10
year period, including access to more cardholders, improved system
reliability, and increased speed of authorization and settlement, among
other enhancements.
When looking just at Visa debit products over this same timeframe,
Visa volume has increased almost 2,000 percent since 1999--a remarkable
growth rate reflecting the increasing adoption of electronic payments
by governments as a method of acceptance and by cardholders as their
preferred method of payment. At the same time, the effective
interchange rate on these transactions has actually declined by 5
percent. Visa believes these figures are a compelling testimonial to
its efforts to ensure that the government maximizes the benefits of
card acceptance while minimizing its costs.
In their ``Report on Credit and Debit Interchange and Other Fees,''
the Financial Management Service (FMS) indicated that they accounted
for $8.6 billion in government payment volume across all networks in
their fiscal year 2009, and $116 million in interchange and other
fees--which would equate to a merchant discount fee of 1.35 percent.
Interchange is only one component of the merchant discount fee,
therefore interchange would be an amount less than the 1.35 percent
computed from FMS figures.
Visa welcomes the additional feedback from the FMS provided as part
of their own testimony to this hearing, just as we welcome engagement
and feedback from any and all merchants and other Federal and state
government agencies accepting Visa. We are eager to engage directly
with the FMS so that we can discuss each element of their report and
request in more detail, and determine what adjustments Visa might make
to its interchange rates and structure in order to maximize the joint
opportunity for more Visa volume processed in a more cost-effective
manner for the U.S. government and ultimately U.S. taxpayers.
While the FMS' comments were not directed at Visa alone, Visa
certainly recognizes many of the issues raised--including the need for
any new solutions to be both operational and financially viable for
participants across the entire payment system including acquirers,
issuers and processors. Ultimately, for any solution to work for all
stakeholders there must be a business case for each: for acquirers (who
must implement any new changes on behalf of their merchant), for
networks (who are interested in expanding and improving network
volumes) and issuers (who seek to increase payment transactions while
reducing costs and improving cardholder value). And all of this is in
the context of a highly competitive environment for each.
While we are still absorbing and thinking through the full range of
implications of each specific element of their proposal, a few points
are worth making here:
--First, the ``government segment'' or even the volume within FMS is
not a singular agency, but instead represents thousands of
agencies covering a very broad range of possible transaction
sizes and types (government-to-government payments, everyday
commissary purchases, admissions and other transactions at
national parks, U.S. Mint eCommerce sales, traffic and court
fines, etc.). When the USPS and Amtrak are included, the range
expands further to include postage stamps, larger-scale
packaging and mailing invoices, and railway tickets (in a
variety of modes, including onboard trains, at kiosks, and via
the Internet). Sometimes consumers prefer to pay for these
things with credit, and sometimes with debit, differences
reflected in each agency's own payment mix and customer base.
And many of these differences are reflected in the current Visa
interchange structure, to the merchant's benefit.
--Second, while Visa is happy to discuss the potential merits of a
singular interchange rate for credit or debit transactions,
such a structure creates the potential for an interchange rate
that will be lower on some portion of today's volume, but may
be higher on some portion as well. This becomes increasingly
likely when moving away from a variable structure (e.g.,
interchange is a percent of the total transaction amount) and
toward a fixed structure (e.g., the interchange is always the
same, regardless of transaction size). And as a result, a
singular interchange rate could have detrimental impacts on
acceptance of electronic payment transactions in specific
situations, e.g., rate is too high to effectively promote small
dollar transactions.
--Third, FMS has raised some issues in regard to certain of Visa's
rules, including the requirement that merchants accept Visa for
payments of all amounts and the prohibition on cardholder
surcharges. Visa has adopted these rules to protect all
cardholders, including government cardholders. While FMS, in
its capacity as a payment card acceptor, might appreciate the
ability to set transaction maximums or surcharge customers,
allowing such anti-consumer practices would hardly seem to be
in the interest of the government as a card user. Government
purchasing cards would be far less useful if merchants could
set maximum transaction sizes, and the government could face
hundreds of millions of dollars of surcharges on its own
purchases. Allowing minimum transaction sizes and surcharges
would also disadvantage users of government benefit cards.
Regardless of any open issues, Visa would like to engage FMS
directly and explore ways in which Visa might address their core issues
in such a way that also remains viable for all other participants in
the transaction. As the FMS said itself, ``The desired outcome would be
not to reject any transactions . . .'' While our business and system
connections are to issuers and acquirers, Visa has a good history of
engaging merchants directly and, when mutually viable terms can be
found, customizing interchange and other elements of our network
parameters to work better for a given merchant's business model. We
would very much like to have that opportunity with the FMS and the
broader Federal government.
GOVERNMENT BENEFITS FROM CARD ISSUANCE
Both Federal and state governments have decided that their issuance
of payment cards is an important tool to both minimize costs and expand
their ability to offer a convenient and efficient method of
distributing benefits to the nation's unbanked and under-served, both
for their everyday expenses but also for an essential method of
commerce during both national and international crises.
Additionally, over 350 Federal agencies use GSA purchasing and
travel cards to eliminate paper-based purchasing processes as well as
to eliminate the need for advance travel payments.\4\ These cards have
saved billions of dollars in reduced annual expenses and have enabled
military and civilian personnel to respond faster to military
deployments, natural disasters and national emergencies. These
essential government programs are detailed below.
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\4\ As noted by the U.S. General Services Administration,
``estimated administrative savings for the purchase card alone is $1.7
billion per year ($70 per transaction) when used in place of a written
purchase order.''
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Government Distribution of Benefits to the Unbanked and Under-Served
State Benefits Electronic Payment Programs
Almost every state in the nation has concluded that electronic
distribution of government benefits both saves taxpayers money and,
just as importantly, ensures that the unbanked have equal, quick and
convenient access to funds. As mentioned, 47 states are using or are in
the process of implementing electronic payments in the form of debit
(or prepaid) cards for supplemental child support and unemployment
benefits. Just like in the Federal sector, state budgets have endured
significant cuts and continuing this trend would cause a lasting impact
on critical services for their most vulnerable citizens. Visa believes
the thoughts from Dennis McKinney, Treasurer of the State of Kansas,
hits this point home: ``The move to digital technology, including their
prepaid debit card usage, with less reliance on the issuance of paper
checks has been one key step to reducing costs while preserving funds
for services for those most in need of assistance.'' Visa, too,
believes that these programs have offered significant benefits both to
state governments and the constituencies they serve.
As Treasurer McKinney noted in his letter to Senator Christopher
Dodd and Representative Barney Frank on June 4, 2010:
--``Electronic disbursement of benefits offers significant cost
controls for the state, ranging from the obvious savings in
paper and postage to the elimination of hidden costs for
carrying `undisbursed collections' in the form of un-cashed
checks that must be accounted for and reported to Federal
regulators. It also prevents problems that occur when a
criminal counterfeits a state check--cheating the merchant who
accepts the counterfeit and hampering honest citizens who
subsequently have difficulty cashing legitimate state checks.
Electronic disbursement also improves service to citizens by
giving them quick access to state benefits and eliminating mail
delays and disruptions due to address changes, inclement
weather or catastrophic events. Families, whether banked or
unbanked, benefit from having access to ATM withdrawals and
teller withdrawals while eliminating the expense of check
cashing fees. Electronic disbursement also protects benefit
recipients from theft of support checks from mailboxes,
wallets, and purses.''
--``Finally, recipients of these debit cards no longer have to worry
about being displaced in the event of natural disasters or
national emergencies as their benefits travel with them. As
seen in the aftermath of Katrina, many people receiving
government benefits by checks had no way of obtaining those
benefits (in fact the post office was closed) and the
beneficiaries had to rely on various Federal agency personnel
to provide them with some form of government relief hastily put
together . . . and we all remember the fraud and waste that
occurred from that effort.''
Federal Benefits Electronic Payment Programs
Like state governments, the Federal government has also embraced
the convenience and cost-savings associated with the distribution of
government benefits through electronic payments.
For example, the Department of the Treasury is currently using
prepaid debit cards to distribute social security and supplemental
security income payments to hundreds of thousands of citizens under its
Direct Express program. Although originally designed for the unbanked,
this program is open to anyone who receives these benefits, providing
citizens with a convenient and more efficient alternative to paper
checks and saving the Federal government the cost of check
distribution. This program also allows the unbanked to avoid costly
check-cashing fees, essentially providing them an additional 3 percent
of benefits by avoiding fees which average above 3.24 percent,
according to a 2008 study by The Brookings Institution.\5\
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\5\ The Brookings Institution, Banking on Wealth: America's New
Retail Banking Infrastructure and Its Wealth-Building Potential, p.13.
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Deputy Assistant Secretary for Fiscal Operations & Policy
recognized these efficiencies in his 2008 testimony before the House
Committee on Ways and Means, Subcommittee on Social Security:
--``Electronic payments provide real and meaningful savings not only
to the government and the taxpayer but also to the financial
industry. For Treasury, it costs approximately 98 cents to
issue a check versus 10 cents to issue an electronic payment.
When this 88 cents per item savings is multiplied over the
millions of Federal payments issued annually, and as recipients
convert from checks to electronic payments, the savings can
become substantial.''
Today, Financial Management Services is looking to migrate roughly
4 million unbanked social security recipients to the Direct Express
card by 2013. In fact, as mentioned above, just this week the Treasury
Department announced that it intends to move most government payments
to direct deposit or, in the case of the unbanked, to prepaid cards.
The government estimates that this will cut about $48 million in
postage costs and will save taxpayers approximately $303 million in the
first 5 years.
General Services Administration (GSA) SmartPay Program
The General Services Administration (GSA) SmartPay program provides
purchase, travel, fleet and integrated card programs to over 350
Federal agencies and departments. The SmartPay program enables agencies
to reengineer their purchasing, financial and logistics business
processes by implementing a commercial payment process used by millions
across the globe. The travel program has saved millions by eliminating
the need for advance travel payments and has allowed military and
civilian personnel to respond faster to military deployments, natural
disasters and national emergencies. The GSA purchasing card has
streamlined commercial low dollar purchases and saves the government an
average of $70 for every purchase. Repair times and equipment down
times are shorter, as the individuals needing parts/supplies can order
them and pay for them immediately. The programs are offered with state-
of-the-art technologies to both military departments and civilian
agencies. In fact, a web-based cardholder statement review and approval
system with electronic feeds to supporting finance and accounting
systems was fielded by the issuing banks to the Department of Defense
as early as 2000--years before online banking was available to
consumers.
The GSA travel card programs have also provided tremendous savings
by helping to eliminate administrative tasks and expense. For the
Department of Homeland Security, the use of travel cards has eliminated
the need for 75 percent of the staff that would be necessary for a
paper-based system. The Department of Agriculture has also saved staff
expenses through new automated electronic payment tools.\6\
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\6\ Credit and Debit Cards, GAO Report 08-558, p. 42-43.
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An additional benefit received by government agencies from the
issuance of electronic payments cards is the receipt of rebates from
the card issuing bank. These rebates are only possible because of
interchange fees. Federal agencies use these rebates in several ways;
some return the rebates directly to the Federal agency where the
purchase was made, others invest the rebates to fund specific agency
initiatives. In 2008, for example, rebates totaled $187 million.
Finally, Federal agencies receive a variety of additional benefits
associated with electronic payments. In particular, government
transactions typically have detailed data about the items purchase--or
line item invoice details. By analyzing electronic purchase data
patterns, the government is able to identify opportunities for
negotiating strategically-sourced contracts, thereby reducing the cost
of items being purchased by the government. Transparency also allows
the government to identify misuse of funds; indeed, the GAO stated that
without the use of the cards, instances of misuse may never have been
identified.
CONCLUSION
Electronic payments--whether being paid by government employees or
beneficiaries, or paid to governmental agencies or enterprises--promote
efficiency, reduce costs and save taxpayer dollars. Electronic payments
increase transparency and accountability within the government by
facilitating better record-keeping and reporting of how and where
government funds are spent. Electronic payments also provide a critical
point of access to the financial system for the nation's unbanked,
lower-income taxpayers and citizens at large. And we believe that
electronic payments will continue to innovate and expand in their
efficiency, offering taxpayers even more benefits as additional
programs are implemented and adopted--so long as the industry has a
business case for ongoing investment and innovation.
While the exact total amount of cost savings to the United States,
state and local governments of card acceptance and issuance has not
been determined, we know from the GAO's past work that Federal savings
alone are measured in the billions of dollars. Certainly, Visa believes
the overall value of Visa acceptance far exceeds the cost. Reductions
in paper-based processes, labor costs, reduced fraud, and errors from
miscounting or losing cash and checks allow government entities to
reallocate staff to more productive uses, reducing costs and increasing
the quality of service and efficiency to the taxpayers. Electronic
payments also allow for a more accessible government, in moving tax and
other payments from over the counter to the Internet, thereby reducing
the time it takes to transact with government.
Interchange, as transaction-based revenue that goes to the issuers
of a particular payment product, is integral to the health of the
payment system, and ongoing expansion of benefits and innovation in the
services provided by the issuers that participate. Cash and check are
cost items--and costly to banks that handle and process them, just as
they are to those that accept cash and check for payment. The growth,
stability and efficiency of the Visa payment system is thanks, in part,
to the bank's business case for ongoing investment in improving their
portion of the system. Visa, as the operator of the central ``network
switch,'' is equally invested in ensuring our own portion of the value
chain is as secure, and sound, and innovative as the others, and that
we continue to refine our system to keep it viable and competitive in
the eyes of our customers.
As noted, we welcome the feedback from the FMS as to how the
interchange portion of their costs of acceptance could be simplified
and streamlined, and are committed to demonstrating our willingness to
be flexible and set interchange in such a way that it balances the
needs of the FMS and the government agencies they support, alongside
the needs of our acquirer and issuer clients who collectively
participate in each transaction.
Visa looks forward to our continuing discussion with the government
on how Visa can be a valued partner in maximizing the benefits of
electronic payments for U.S. taxpayers.
Senator Durbin. Mr. Mierzwinski.
STATEMENT OF EDMUND MIERZWINSKI, CONSUMER PROGRAM
DIRECTOR, U.S. PUBLIC INTEREST RESEARCH
GROUP
Mr. Mierzwinski. Thank you, Chairman Durbin, Senator
Collins. I am Ed Mierzwinski of the U.S. Public Interest
Research Group.
All consumers pay more at the store and more at the pump
because of unfair, nonnegotiable, nontransparent merchant
interchange fees imposed by the card networks. If you take the
numbers from just a few years ago, because I can do the math in
my head, just a few years ago, 50 percent of all transactions
were plastic and 50 percent were cash. Now the merchant
witnesses at this hearing and at other hearings will say it is
much closer to 70 or 80 percent are plastic, but if you just
take 50 percent of transactions have a 2 percent interchange
tax, that means merchants are raising their prices an average
of 1 percent across the board for all customers, including cash
customers. Since interchange is highest for rewards cards,
rewards credit cards in particular, that means cash customers
and checking account customers with low-cost debit cards are
subsidizing the most affluent credit card customers.
So the subsidies are going in the wrong direction. The fees
are nonnegotiable, and the merchants are angry. And as we found
out today with the reports from the Government investigators,
the Government is unable to negotiate these fees as well. It is
not just consumers. It is not just merchants. It is also the
Federal Government that pays too much in nonnegotiable,
nontransparent interchange fees.
It is my view, U.S. PIRG's view, that consumers always win
with greater transparency, and the Durbin amendment
accomplishes two goals.
First, I want to point out that the Durbin amendment to the
Wall Street reform legislation that is currently in conference
is a rifle shot approach. I think that is useful. You address
part of the problem. Through a Federal Reserve reasonable
proportional test, you would attempt to lower the cost of
interchange on debit. Then that would be an incremental change.
I see no reason for the catastrophes that the industry is
claiming will occur because of your amendment. You are not
going after the entire marketplace. You are going after part of
it. I think that is a very smart way to go about it.
Second, you address the unfair practices that the card
associations impose on the retailers who are unable to offer
their customers discounts without being threatened with
thousands of dollars a day in fines and penalties. I think it
is very important that we have greater transparency and we
improve the way the system works. The two parts of the Durbin
amendment I think work very well in that regard.
I also commend you for including the provision in the
amendment that says that merchant minimums do not apply to
debit cards, which partly addresses the issue of an EBT
customer who just needs a gallon of milk and does not need to
spend $15 on other unnecessary purchases. Those minimums would
only apply to cards that are credit cards.
Now, I personally feel that merchants will be careful about
how they use the powers that you have given them in the
amendment because they have to respond to their customers as
well. So I think you are giving them the opportunity in the
marketplace to advise customers on lower forms of payment that
will benefit them, that will benefit cash customers, and that
will ultimately result in those benefits being passed on.
I cannot tell you how much of those benefits will be passed
on, but I can tell you this. Merchants are in a competitive
retail marketplace. Card networks are not. The courts have
found that card networks have market power. It is clear that
individual merchants do not have the kind of market power that
the card networks have. So I think your amendment is a very
thoughtfully crafted amendment and will do a great deal to move
this process forward.
The other thing is that I support your views, as in your
colloquy with Senator Nelson, that there should be a carve-out
for EBT programs. I do not think that the way that the banks
have negotiated with governments is necessarily fair. On the
one hand, governments are paying hundreds of millions, if not
billions, of dollars in interchange fees. On the other hand,
the banks come in as if they are white knights, which they are
not, and say, we can offer you a good deal on EBT programs.
Ultimately the taxpayer is paying some way or another, but the
best solution in the short run is, as you have proposed, to
have that carve-out.
I want to take one quick moment of personal privilege to
also say that I want to commend you, Senator Durbin, on your
leadership on the originally named, I believe, the Financial
Credit Product Commission, which is now the Consumer Financial
Protection Agency. You took Professor Warren's idea, along with
Representative Delahunt. It is now in both parts of the bill.
We are fighting over how strong it will be, but ultimately
consumers will benefit tremendously from your leadership. We
will finally have a regulator that does not advise consumers
that they cannot do anything because the banks told them they
could not do anything. We will have a regulator with one job,
protecting consumers.
Thank you.
Senator Durbin. Well, thank you. I appreciate your kind
words.
[The statement follows:]
Prepared Statement of Edmund Mierzwinski
Chairman Durbin and Ranking Member Collins, members of the
Subcommittee on Financial Services and General Government, thank you
for the privilege of testifying today on the important subject of
credit card interchange fees. I am Consumer Program Director of the
U.S. Public Interest Research Group, the nonpartisan and nonprofit
federation of state PIRGs.\1\ As an advocate for consumers we welcome
the opportunity to discuss issues regarding interchange fees imposed on
merchants by credit card networks.
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\1\ The United States Public Interest Research Group (U.S. PIRG)
serves as the federation of and the Federal lobbying office for the
state PIRGs. State PIRGs are nonprofit, nonpartisan consumer, public
health and good government watchdog groups with over 1 million members
around the United States. U.S. PIRG places a special emphasis on
predatory financial practices and financial education and maintains a
website at www.truthaboutcredit.org for consumers to obtain nonpartisan
information and fact sheets about credit card company practices. Recent
major PIRG reports on credit card practices include the following:
Characteristics of Fair Campus Credit Cards (April 2008); The Campus
Credit Card Trap: A Survey of College Students and Credit Card
Marketing (March 2008); Graduating Into Debt: A Survey of On-Campus
Credit Card Marketing In Maryland (2004); Deflate Your Rate: How To
Lower Your Credit Card APR (2002) and The Credit Card Trap: How To Spot
It, How To Avoid It (2001). www.uspirg.org or www.truthaboutcredit.org.
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A primary purpose of my organization is to advocate on behalf of
all consumers for a fair and competitive marketplace. We regularly
advocate before state and Federal regulators and legislators on both
consumer protection and competition policy issues in the credit card
marketplace.\2\ We have also launched a major campaign on over 40
college campuses around the country against unfair credit card
marketing practices.\3\
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\2\ For example, see my recent testimony before the House Judiciary
Committee on interchange fees, available at http://judiciary.house.gov/
hearings/pdf/Mierzwinski100428.pdf, (28 April 2010), the Financial
Services Committee, on interchange fees (8 October 2009), available at
http://www.house.gov/apps/list/hearing/financialsvcs_dem/
fchrCC_100809.shtml; on financial regulatory reform (16 July 2009)
available at http://www.house.gov/apps/list/hearing/financialsvcs_dem/
fchr_071809.shtml and on consumer financial protection (24 June 2009)
available at http://www.house.gov/apps/list/hearing/financialsvcs_dem/
hrfc_062409.shtml. Also, on whether unfair consumer credit card
practices lead to bankruptcy before the House Subcommittee on
Commercial and Administrative Law on bankruptcy and credit card debt (2
April 2009), available at http://judiciary.house.gov/hearings/
hear_090402_1.html.06243.
\3\ See http://www.truthaboutcredit.org.
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SUMMARY
The Durbin interchange amendment to the Restoring American
Financial Stability Act,\4\ takes important steps to end unfair and
anti-competitive practices in the credit and debit card marketplace. As
shown in the reports released today, excessive, non-transparent and
non-negotiable interchange fees even harm the Federal government and
that harms taxpayers.
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\4\ The bill was originally S. 3217 and was re-numbered H.R. 4173
on passage and for conference consideration.
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For the past 3 or more years I have testified before Congress and
presented a simple message: the deceptive and anticompetitive practices
of the two credit card associations--Visa and MasterCard--have injured
both consumers and merchants for many years. That message still rings
true.
Interchange fees are hidden charges paid by all Americans,
regardless of whether they use credit, debit, checks or cash. Put
another way, all consumers pay more at the store and more at the pump
because of the non-transparent, non-negotiable, non-competitive
interchange fee system. These fees impose the greatest hardship on the
most vulnerable consumers--the millions of American consumers without
credit cards or banking relationships. These consumers subsidize credit
card usage by paying inflated prices for many goods and services. These
prices are inflated by the billions of dollars of anticompetitive
interchange fees, which are used to subsidize rewards programs,
promotions, and riskier credit underwriting for credit card users. And
unfortunately, those credit card interchange fees continue to
accelerate, because there is nothing to restrain Visa and MasterCard
from charging consumers and merchants more.
THE NEW GAO AND TREASURY STUDIES AND THE DURBIN AMENDMENT
Information provided to your committee by the U.S. Treasury
Financial Management Service (FMS) and the Government Accountability
Office (GAO) re-affirms their previous findings. Even the Federal
government, in many ways one of the biggest merchants, pays hundreds of
millions of dollars or more in non-negotiable interchange fees.
In response to this and other problems with interchange, you
proposed the Durbin interchange amendment to the Restoring American
Financial Stability Act. It would provide the Federal Reserve Board
with authority to set fees for debit interchange that are reasonable
and proportional, rather than based on what the card networks call
``value'' but really means ``whatever they want and think that they can
get.''
Your amendment also responds to certain unfair practices in the
card network contracts that prohibit merchants from offering otherwise
legal discounts or setting minimums for transactions to offset the high
cost of interchange. In consideration of Wall Street reform, we have
talked about the need to reform the shadow markets of over-the-counter
derivatives and hedge funds--interchange is yet another shadowy market
in need of reform. As Louis Brandeis said, ``Sunlight is the best
disinfectant, electric light the best policeman.'' By allowing
merchants to educate consumers about this marketplace, the Durbin
amendment will improve transparency and force better practices by the
card networks. By allowing the Federal Reserve to act, the amendment
will alleviate the market's lack of competition that has resulted in
U.S. merchants paying the highest interchange fees in the world.
The Durbin amendment does not accomplish everything that the
merchants seek in order to obtain redress in this market. Instead, it
takes a rifle shot to some of the worst industry practices but will not
change the entire interchange fee system. It will have a positive
effect. But in addition, because it is incremental, there is simply no
way it could be as disruptive as its opponents claim. While the Durbin
amendment is being implemented and its effects reviewed, the Congress
will have the time to determine what additional changes are needed to
interchange practices.
The amendment's primary focus is on the area of most rapid
interchange growth--debit transactions. Just a few years ago, debit and
credit (plastic) transactions combined surpassed the volume of cash and
check transactions. Yet, in House testimony this year, a small merchant
testified that, already, 80 percent of his convenience store
transactions were plastic. The most rapid growth in the interchange
marketplace has been the substitution of debit for cash transactions.
So, merchants are facing a system where--on the one hand, despite
technological advance, the rate of interchange has not declined--while
on the other the volume of interchange has increased rapidly. The
merchants, and their customers, cannot win.
Reasonable and proportional.--The first part of the amendment
requires the Federal Reserve to issue a rule assessing whether debit
interchange is ``reasonable and proportional,'' and to determine
whether debit card transactions are similar to checking transactions,
which clear ``at par.'' The amendment exempts all small bank and credit
union institutions from its requirements.
Anti-Competitive Practices.--The second part of the amendment
addresses anti-competitive card network rules that merchants find
unfair. The merchants tell me that when they attempt to offer a legal
(under the Truth in Lending Act) discount for cash--the networks accuse
them instead of using prohibited and ``disguised'' surcharges. This is
not an empty accusation as it comes with the threat of multi-thousand
dollar per day fines and penalties.
--First, the Durbin amendment allows merchants to offer consumers
discounts for use of lower cost payment networks and lower cost
forms of payment.
--Second, the Durbin amendment, in credit card transactions only,
allows merchants to set nondiscriminatory minimums or maximums
for transactions to offset the high cost of interchange.
Why Credit Cards Only.--Unbanked and under-banked consumers are
increasingly receiving Federal, state and local benefits on prepaid
debit cards through programs known as Electronic Benefits Transfer or
EBT. This important provision will ensure that a parent using an EBT
debit card needing one item, such as a gallon of milk, will not need to
purchase, for example, $15 worth of additional, unnecessary goods.
Along with other consumer groups, U.S. PIRG has long been concerned
that despite all the taxpayer benefits provided to the insured banking
system--from taxpayer-guaranteed deposit insurance to the Federal
Reserve discount window and even to bailouts--banks have either chosen
to ignore or been unwilling to provide the un- and under-banked with
reasonable-cost accounts. Consequently, many have become victims of the
fringe banking system--payday lenders, rent-to-own stores, check
cashers, etc.\5\ According to a mammoth 2009 survey by the FDIC, ``up
to 10 percent of American families are unbanked and that a substantial
share of the population may be under-banked.'' \6\
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\5\ See Mierzwinski, Edmund. 2008. The Poor Still Pay More. Trial
Magazine, Journal of the American Association for Justice, 44
(September): 40-49.
\6\ News release, 5 February 2009, ``FDIC Releases First National
Survey of Banks' Efforts to Serve the Unbanked and Underbanked,''
available at http://www.fdic.gov/news/news/press/2009/pr09015.html,
(last visited 4 June 2009).
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EBT programs, and other emerging innovative, prepaid debit card
products--because of lower electronic transaction costs--have emerged
as important bridges to allow the unbanked to become banked, where they
can open deposit accounts and grow their assets and savings. Studies
have shown that with the cushion of just a small savings account of as
little as $500, under-banked families can avoid the wealth-depleting
practices of payday lenders in the event of a family emergency.
Building the assets of un- and under-banked families is an important
policy goal.
So, although I believe that the government cross-subsidy issues in
interchange are complex, and that the Durbin amendment will actually
save governments substantial sums of money that they are paying to bank
networks, it makes sense to consider a carve-out for government EBT
programs, some of which have been designed around bank claims that
interchange fee revenues are the key offset to costs that the
governments would otherwise pay. Such a carveout should not, however,
apply to poorly-designed government programs that allow the bank or
other vendor to impose a harsh fee structure on benefits recipients.
The opponents of the legislation may suggest that consumers will be
harmed from the enactment of the legislation because if fees are set to
be ``reasonable and proportional'' then banks will claim that they will
no longer be able to provide allegedly attractive rewards programs or
will otherwise change fee structures adversely. Even if that were
true--and it is not--that should not drive the Conference Committee's
evaluation of the Durbin Amendment. Rewards programs are not a ``free
gift'' given by banks. Rather, all consumers pay for rewards in the
form of higher prices for the goods they purchase everyday. Indeed,
card issuers actually account for reward programs in their public
financials as reductions in interchange income. Only a small portion of
cardholders actually receive rewards and the portion they receive is
very modest compared to what cardholders pay in interchange. But most
important, the most vulnerable consumers, those without credit cards,
receive nothing from interchange, and subsidize the supposedly ``free
gift'' of rewards programs for more affluent consumers.
Further, any system that allows sellers to control the terms of
trade in anti-competitive ways--prohibiting discounts or prohibiting
advising customers so that they can understand the differences between
the costs of a rewards credit, plain old classic credit, debit, check
or cash transaction--is a non-transparent system. Consumers always
benefit from transparency. Is there a situation where they have not?
FURTHER DISCUSSION
None of the alternatives to legislation is particularly likely to
resolve the fundamental competitive concerns in this market. The
rapidly accelerating interchange fees appear to be a clear exercise of
market power by Visa and MasterCard. In the past year alone the total
amount of interchange fees collected has reached $48 billion after
years of constant increases. This is a staggering number given the fact
that retail sales have suffered as a result of the recession. Did
consumers benefit from this rapid increase? Did cash customers benefit?
Obviously not. Did credit card customers benefit? Did rewards programs
improve substantially? Were there greater benefits to cardholders in
some fashion? We doubt it.
Based on our experience in these and other markets we believe there
are two essential elements to a competitive marketplace: information
and choice. Accurate and transparent information is necessary for
consumers to make accurate choices. When information is readily
available consumers can make choices, effectively compelling firms to
compete for their purchases. And choice is a necessary element too.
Absent choice, the discipline of the market will be lost.
The credit card market lacks both choice and adequate information.
From a consumer's perspective it lacks choice because it is an
oligopolistic market in which a small set of card-issuers dominate the
market and establish a set of deceptive practices that harm consumers.
From a merchant's perspective it lacks choice because merchants have no
alternative but to accept the card associations' cards even when the
associations significantly increase prices.
Markets don't work when there are hidden fees and rules--and no one
hides fees and rules better than the credit card companies. Credit card
markets lack the information necessary for both consumers and merchants
to make informed choices. The markets lack adequate information for
consumers to detect the fraudulent and exploitative practices of many
card-issuers. For merchants, the markets lack adequate information
because the associations prevent merchants from accurately informing
consumers of the costs of credit card acceptance or attempting to
direct them to more efficient and lower priced payment mechanisms.
Moreover, the banks and associations engage in other deceptive
practices to increase the interchange problem. Since the costs of
accepting cards are passed on in the overall costs of goods, all
consumers--affluent, working-class, and poor--ultimately pay these
hidden charges. Low-income Americans, most without bank affiliations,
are paying more for goods and services to fund credit card company
programs for which they are not even eligible.
INTERCHANGE AND ITS EFFECTS
We present six main points:
--All consumers, even those who pay with cash and checks, pay more at
the store and more at the pump because these interchange fees
are passed on in the overall cost of goods sold.
--The significant increases in interchange fees signal a broken
market. Visa and MasterCard have tremendous market power, which
allows them to dictate the terms of trade: merchants have no
choice but to accept Visa and MasterCard products on the
sellers' terms. It is not surprising that interchange fees have
increased significantly and are much higher in the United
States than other countries.
--The card associations' rules prevent merchants from informing
consumers on the costs of payment and limit the ability of
merchants to direct consumers to the safest, lowest cost, and
most efficient forms of payment.
--In addition, both the associations and banks engage in a variety of
deceptive practices to drive consumers to higher-cost forms of
payment.
--Neither the card-issuance or card network markets are competitive.
Because of lax merger policy the card-issuance market has
become an oligopoly. Ten banks account for approximately 90
percent of the issuance market. Interchange and consumer fees
have increased as concentration has increased to alarming
levels.
--Finally, this oligopolistic concentration has allowed issuers to
engage in a variety of unfair and anti-consumer practices.
interchange fees force consumers to pay higher prices
The interchange fee system is hidden from consumers and the public.
The card associations do not disclose publicly their fees or the basis
for these fees. Some public reports maintain that, on average,
interchange fees cost merchants 2 percent or more of each transaction
on a credit or signature debit card. In 2009, credit card interchange
fees alone cost merchants and consumers an estimated $48 billion.\7\
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\7\ Foer, Bert. ``Our $48 Billion Credit Card Bill.'' New York
Times. April 20, 2010.
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Like all other costs incurred by merchants, interchange fees are
included--at least in part--when pricing goods and services. Card
associations may suggest that interchange fees fund attractive rewards
programs. Setting aside the question of the dubious value of these
programs, many consumers with credit cards do not use them and those
without credit cards receive no benefits.\8\ Over 27 percent of
Americans do not have credit cards. For these consumers, interchange
fees are especially pernicious and regressive.\9\ These low-income
Americans subsidize interchange fees for ``services'' that they are not
eligible to use. No charge could be as regressive as one in which low-
income consumers receive no benefits.
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\8\ We seriously doubt consumers receive anything close to $42
billion in benefits through rewards programs. Some of the interchange
fees undoubtedly fund industry marketing efforts, such as the more than
5 billion annual mail solicitations consumers receive for credit cards.
Moreover, credit card issuance is a tremendously profitable line of
business. According to the Federal Reserve, it is consistently the most
profitable line of banking.
\9\ U.S. Census Bureau, Statistical Abstract 2006, Table 1176.
---------------------------------------------------------------------------
The Hispanic Institute, an organization that educates Hispanic
Americans on a number of issues, released a report last November titled
``Trickle-Up Wealth Transfer: Cross-subsidization in the payment card
market'' that details the findings of a study the Institute conducted
on American consumers. They found that those Americans who do not
benefit from credit card rewards pay in excess of $1 billion annually
to subsidize those awards, which typically accrue to higher-income
consumers, as a result of the higher prices consumers pay because of
interchange fees.\10\ This imbalance makes it clear that interchange
fees are no friend to the vast majority of consumers. In the report,
the Hispanic Institute recommends policies or regulatory actions to
remedy this tax on low-income consumers, including those that would
lower interchange fees and thus reduce the wealth transfer that occurs
as a result of the higher costs card issuers pass on to all
consumers.\11\
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\10\ In a recent study, the GAO also cites this issue: ``Consumers
who do not use credit cards may be worse off by paying higher prices
for goods and services.'' Government Accountability Office. ``Credit
Cards: Rising Interchange Fees Have Increased Costs for Merchants, but
Options for Reducing Fees Pose Challenges.'' November 2009.
\11\ The Hispanic Institute. ``Trickle-Up Wealth Transfer: Cross-
subsidization in the payment card market.'' November 2009. http://
www.thehispanicinstitute.net/files/u2/Trickle-
Up_Wealth_Transfer_Paper.pdf
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The regressive nature of this charge is exacerbated because
interchange fees are assessed as a proportion of overall sales. For
example, when gas prices averaged $1.87 per gallon in 2004, interchange
fees totaled about $12.5 million per day. In 2005, gas prices averaged
about $2.75 per gallon nationally: credit card companies then made
$18.4 million a day. These companies made an additional $2.2 billion
per year simply because of rising gas prices.\12\ This problem will
increase if gas prices continue to increase. It is difficult enough for
low- and moderate-income consumers to afford skyrocketing gasoline
prices without having to pay additional fees that are passed on to
them.
---------------------------------------------------------------------------
\12\ Margaret Webb Pressler, ``Card Companies Are Filling Up at the
Station,'' in Washington Post. 25 September 2005: pg. F01.
---------------------------------------------------------------------------
INCREASES IN INTERCHANGE FEES SIGNAL A BROKEN MARKET
Credit card interchange fees were intended to compensate card-
issuers for certain costs, such as the costs of issuance, fraud, risk
of loss, float and processing. Yet as all these costs have decreased in
the past decade credit card interchange fees have increased. According
to the Food Marketing Institute (FMI), these fees have increased over
20 percent in the past few years even though all the costs of card
processing and issuance have fallen. The United States appears to be
the only country in which credit card interchange fees are increasing
and it has far higher fees that almost any other industrialized
country. FMI projects that these fees will increase 22 percent
annually.\13\
---------------------------------------------------------------------------
\13\ Food Marketing Institute, ``Hidden Credit Card Fees: The True
Cost of a Plastic Marketplace'' (February, 2006).
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In a competitive market, prices would fall when costs decrease. In
the credit card market, the opposite happens. The card associations may
say that they need to increase interchange fees to compete for the
loyalty of card issuers. What about merchants and consumers? Merchants
certainly have no choice but to accept Visa or MasterCards.
In the recent Department of Justice antitrust litigation against
Visa and MasterCard, the Second Circuit Court of Appeals determined
that both associations had market power because merchants were
compelled to accept these cards even in the face of a significant price
increase. Almost all merchants are forced to accept Visa and
MasterCard's terms, no matter what the interchange rates or contractual
terms. Armed with this market power, credit card companies can, and do,
increase interchange fees without suffering any repercussions.\14\
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\14\ A recent GAO report reads, ``Our own analysis of Visa and
MasterCard interchange rate schedules shows that the interchange rates
for credit cards have been increasing and their structures have become
more complex, as hundreds of different interchange fee rate categories
for accepting credit cards now exist.'' Government Accountability
Office. ``Credit Cards: Rising Interchange Fees Have Increased Costs
for Merchants, but Options for Reducing Fees Pose Challenges.''
November 2009.
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Are these substantial interchange fees necessary? Examples outside
the United States suggest this is not the case. As a recent European
Commission decision detailed, numerous countries operate payment
systems without the use of interchange fees. In those countries the
ultimate costs of these systems is modest and the systems operate quite
efficiently. In an effort to head off the European Commission's
antitrust proceedings against them, Visa Europe recently announced that
they would be slashing transaction fees on debit cards by fully 60
percent, down to just 0.2 percent--a small fraction of the interchange
fees here, and a clear sign that the fees here are artificially
inflated. Visa Europe certainly isn't cutting rates below what it will
cost them to remain profitable.\15\
---------------------------------------------------------------------------
\15\ PaymentsSource. ``Bulletin: Visa Europe Agrees To Cap Intra-
regional Debit Interchange Rate.'' April 26, 2010.
---------------------------------------------------------------------------
Another example is the debit market in Canada. In that market,
there are no interchange fees. Even without interchange, there is
higher debit card usage and merchant acceptance than in the United
States. Some consumers pay direct fees for debit card use but because
those fees are transparent there is active competition to reduce those
fees. Ultimately everyone in Canada pays less for the cost of payment
services.\16\
---------------------------------------------------------------------------
\16\ Gordon Schnell and Jeffrey Shinder, ``The Great Canadian Debit
Debate,'' Credit Card Management, May 2004. http://
www.constantinecannon.com/pdf_etc/TheGreatCanadianDebit.pdf.
---------------------------------------------------------------------------
New Zealand has also taken action to reduce interchange fees and
enhance competition between credit card issuers. The country's Commerce
Commission ultimately settled with both Visa and Mastercard to set
maximum allowable interchange fees, imposing caps at 2 percent or lower
for all categories of purchases.\17\
---------------------------------------------------------------------------
\17\ See ``Visa New Zealand Domestic Maximum Interchange
Reimbursement Fees,'' http://www.visa-asia.com/ap/nz/mediacenter/
factsheets/interchange.shtml and ``Interchange Fees: MasterCasd
Domestic Purchase Transactions Interchange Fees for New Zealand,''
http://www.mastercard.com/nz/merchant/en/interchangefees/index.html.
---------------------------------------------------------------------------
There is a great deal of debate about the impact of reductions in
interchange fees in Australia, but a careful, neutral analysis of that
debate demonstrates that the reduction in interchange fees ultimately
benefited consumers in the reduction of card costs, greater innovation,
and greater competition leading to lower interest rates. Several years
ago the government mandated a reduction in interchange fees in
Australia from 0.95 percent to 0.55 percent (both rates far lower than
the current rates in the United States). It was recently reported that
fees to merchants were 1.1 billion Australian dollars lower from March
2007 to February 2008 as a result.\18\ Reducing interchange has also
spurred innovation, leading the card issuers to offer new types of
cards such as no-frill cards with lower fees and lower interest rates.
The Federal Reserve Bank of Australia (RBA) found an overall benefit to
society because consumers received better pricing signals, creating an
incentive for them to use the most efficient forms of payment.
---------------------------------------------------------------------------
\18\ Government Accountability Office. ``Credit Cards: Rising
Interchange Fees Have Increased Costs for Merchants, but Options for
Reducing Fees Pose Challenges.'' November 2009.
---------------------------------------------------------------------------
While a study funded by MasterCard found no benefit to consumers
from the reduction of interchange fees in Australia, the Federal
Reserve Bank of Australia vigorously disputes this finding.
As the members of the Committee recognize, interchange, like any
other credit card policy, affects different groups of consumers
differently. In fact one of the strongest reasons for attacking the
interchange fee problem is that the costs of interchange are borne by
all consumers: thus, cash paying customers, many of whom are not
eligible for credit cards, effectively subsidize the attractive rewards
programs for far more affluent consumers. In considering efforts to
solve the interchange fee problem, protecting these consumers must be
the first priority of this Committee.
The evidence from Australia seems relatively clear: cash paying
customers benefit from the reduction in interchange:
The Board acknowledges that the reforms have not affected all
parties equally. In particular, those who use EFTPOS and cash
are more likely to have been made better off as a result of the
reforms than those who use credit cards extensively and pay
their balances off by the due date. Previously, this latter
group was receiving significant benefits, partly at the expense
of the former.\19\
---------------------------------------------------------------------------
\19\ Reserve Bank of Australia, Reform of Australia's Payment
System: Preliminary Conclusions of the 2007/08 Review (April 2008).
---------------------------------------------------------------------------
For those individuals holding credit cards, there are general
benefits in lower interest rates and card fees. And for transactors
(those who pay off their balance on time) there was a slight decrease
in benefits, as rewards programs have been reduced, but these programs
only benefit some users. In the United States, where interchange fees
are considerably higher, the potential savings for each consumer could
be far greater.
The opponents of a competitive interchange fee market may suggest
that any reduction in interchange fees must result in an increase in
other fees such as annual fees or late fees. This argument overstates
any legitimate concern. A reduction in interchange fees will only
result in an increase in other fees to the extent that the credit card
market is not competitive. If the market is in fact competitive, it
will instead result in banks striving for greater efficiency by
reducing their costs or by simply having reduced profit margins. Cost
cutting could come in a reduction of the blizzard of promotional
mailings sent out by banks on a daily basis. It could also come from a
reduction in rewards programs. To the extent that rewards programs are
scaled back, however, it will mean that banks must compete in terms of
interest rates and other fees, thereby benefiting consumers. In the
United States, lower interest rates are the most important criteria for
most consumers to use when determining their choice of cards and reform
that improves those rates will be an important consumer benefit, even
if there is some reduction of rewards programs.
DURBIN AMENDMENT SLOWS DECEPTIVE PRACTICES THAT INCREASE PRICES FOR
CONSUMERS
As we suggested earlier, accurate and complete information serves a
critical role in making sure the forces of competition work. As the
government does not regulate or compel disclosure of credit card
interchange fees, most consumers have no idea that they exist and that
they are paying for services that they may not even use. In fact, Visa,
MasterCard and the card issuing banks engage in a variety of practices
to prevent well-informed consumers from exercising their choices.
First, as the Durbin amendment recognizes, Visa and MasterCard
rules prevent merchants from disclosing fees to their customers or
attempting to steer consumers to lower-priced payment options, such as
cash or online debit cards. They cannot charge a distinctive price or
surcharge based on payment options. They cannot attempt to direct
consumers to lower priced credit cards or to other cheaper payment
systems such as cash, checks and online debit.\20\
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\20\ We note that the standard canned industry response is that
``nothing in our rules prevents cash discounts from being offered.''
This argument is both irrelevant and only technically correct. For a
merchant that wishes to accept credit cards, but does not want to
accept high-cost premium cards, the ability to offer a cash discount is
irrelevant. And for merchants that wish to steer customers to other
payment options, the ability to cash discount (from Federal and state
law) is rendered largely useless by card association regulations that
require separate price markings for each product with the higher
interchange price and the lower cash price makes cash discounts very
hard to offer. Fuel is a relatively simple example, but even there with
a variety of different octane grades and products (gasoline, diesel,
etc.) card association rules can make discounting more difficult than
it ought to be. And if it is difficult for fuel, imagine the logistical
difficulties created for offering cash discounts at a convenience store
with a thousand different items, let alone a grocery store with
thousands of different items for sale. The card associations may not
technically prohibit cash discounts, but they do what they can to make
sure it does not happen very often.
---------------------------------------------------------------------------
Second, card associations and banks use misleading marketing to
encourage consumers to use their credit cards or signature debit cards
as frequently as possible. Reward incentives, such as frequent flier
miles, are designed to seem as though customers are paid to use these
cards. In reality, these consumers and other consumers are simply
paying for those rewards.
This lack of disclosure is especially problematic with the efforts
of the card associations to ``convert'' cardholders from regular credit
cards to so-called ``premium cards'' such as the Visa ``Signature'' or
the MasterCard ``World'' cards. These cards have a significantly higher
interchange fee than traditional cards, among the highest of all
interchange fees. For example, a premium card may cost merchants well
over 2 percent compared to 1.6 percent for a traditional card. These
premium cards focus only on the highest-income consumers. However, they
offer minimal additional benefits. Consumers do not realize that
everyone else pays higher prices on goods and services when they
themselves use a premium card and consumers are wholly unaware that
converting to a premium card will ultimately cost all consumers more.
Nor, as stated above, can merchants refuse to accept these cards or
attempt to direct consumers to lower priced cards through differential
pricing. These premium cards are simply a scheme to substantially
increase hidden interchange fees.
Third, although merchants can't surcharge or use differential
prices to direct consumers to the most efficient and lowest priced
payment options, banks do have that power. Not surprisingly, they use
it to direct consumers to less efficient, higher cost options. The
debit card market illustrates this problem. Signature based debit is
more expensive and less secure than online debit because online debit
transactions are instantaneous. Online debit has a far lower rate of
fraud. Online debit transaction interchange fees are capped at fixed
levels; they only cost merchants between $0.17 and $0.50 per
transaction.\21\ Conversely, credit and signature debit cards cost
merchants up to 2 percent of the entire transaction, no matter how
large. Instead of promoting online debit which is safer and less
costly, banks increasingly surcharge consumers seeking to make these
transactions with penalty fees of as much as 50 cents a
transaction.\22\ Consumers are paying more for a less safe and more
costly product.\23\ These penalties effectively steer consumers to the
less efficient, less secure, more costly signature debit product. While
the use of online debit cards is the best option for both consumers and
merchants, deceptive and manipulative tactics ensure the most expensive
payment possible is used.
---------------------------------------------------------------------------
\21\ November 2004, Federal Reserve Board, Report to the Congress
on Disclosure of Point-of-Sale Debit Card Fees, See Figure 4, page 14
available at http://www.Federalreserve.gov/boarddocs/rptcongress/
posdebit2004.pdf.
\22\ A 2003 NYPIRG report found that 89 percent of the banks
surveyed assess a fee for online debit PIN-based transactions. The
average fee assessed is 70. The fees ranged from 10 to $1.50. See
``Pricey Plastic: A NYPIRG Report and Survey of Plastic Card Fees,''
2003, available at http://www.nypirg.org/consumer/cards/debit.html
(last visited 18 July 2007). While a Federal Reserve study found
substantially lower numbers of banks imposing PIN debit fees, it found
fees in the same range: ``At sampled institutions that charge fees for
PIN debit, the fees range from roughly $0.10 to $2 per transaction
(figure 5). The median (and mean) fee is approximately $0.75.'' See
``Report to the Congress on the Disclosure of Point-of-Sale Debit
Fees,'' November 2004, Federal Reserve Board of Governors, available at
http://www.Federalreserve.gov/boarddocs/rptcongress/posdebit2004.pdf.
\23\ All plastic is not created equal. Congress should also upgrade
the weak consumer and anti-fraud protections applicable to debit, ATM
and stored value cards (regulated under the Electronic Fund Transfer
Act and Regulation D) to the higher standard credit cards are subject
to (that of the Truth In Lending Act and Regulation Z). But within the
debit card universe, PIN-based online transactions are more secure than
offline signature based transactions.
---------------------------------------------------------------------------
These examples show that card associations and banks use some of
the same deceptive practices against merchants as we have seen them use
against consumers for years. Not only do the merchants suffer as a
result, but consumers, unwittingly, do too. The Durbin amendment's
provisions on anticompetitive practices aim a rifle shot right at these
problems and will let sunlight into what has been a dark room.
Not surprisingly, outside the United States, where these
anticompetitive practices are not permissible, online (PIN) debit is
the most preferred form of debit. Online debit is a far safer and more
secure product, with a much lower incidence of identity theft than
signature debit or credit cards. Where market forces are not restrained
and consumers can make fully informed choices, the lower-priced, more
efficient product prevails.
INCREASED CONSOLIDATION OF CARD-ISSUERS HARMS CONSUMERS MORE BROADLY
The credit card issuing market has become significantly more
concentrated over the past few years as numerous card issuers have
merged. For example in the past few years we have seen mega-mergers
such as Bank of America's acquisitions of Fleet and MBNA. The top ten
card issuers now have over 90 percent of the market, and the level of
concentration has increased from an HHI of about 1,100 in 1998 to an
HHI of over 1,800 today, a level that the Department of Justice Merger
Guidelines define as highly concentrated. Unfortunately the Department
of Justice has not challenged any of these mergers and there is little
to suggest that concentration in this market will not continue to
increase dramatically.
Of course, we expect the card associations and their members to
suggest that the credit card issuance market is un-concentrated and
vigorously competitive.\24\ But the facts are to the contrary. There
have been numerous antitrust suits alleging that card issuers and the
associations have colluded over fees, exchange rates, and important
contractual terms.\25\ While concentration has increased dramatically
over the past 7 years, interchange fees, other fees charged to
consumers, deceptive practices, and interest rates have increased
significantly. Although the parties to these mergers suggested that
there would be significant efficiencies from these mergers, consumers
have seen few, if any, benefits. After years of consolidation the bad
news for consumers is clear: an oligopolistic market which is a fertile
environment for collusion, higher prices, more hidden fees, and more
deceptive practices.
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\24\ In testimony in 2005 Timothy Muris testified that ``[n]o
[card] issuer has market power, and issuers respond to increases in
interchange fees by enhancing card benefits to consumers.'' We doubt
that Visa and MasterCard or card-issuers act as benevolent monopolists,
but in any case there is no systematic study to suggest that increased
interchange is passed on to consumers in greater benefits. Even if this
allegation was substantiated, it would still be true that all
consumers, including those who do not use credit cards pay for those
``increased benefits.''
\25\ In 2006, Visa, MasterCard and several card-issuing banks
settled an antitrust suit for $336 million alleging they had fixed the
credit card foreign currency exchange rates. Other litigation involves
alleged collusion by card-issuers over credit card late fees and over
limit fees (In re Late Fee and Over Limit Fee Litigation, Civ. No. C-
07-0634 SBA (N.D. Cal.)) and alleged collusion by card-issuers and
networks requiring the use of mandatory arbitration provisions (Ross v.
Bank of America, N.A. et. al. Civ. No. 05-07116 (S.D.N.Y.)).
---------------------------------------------------------------------------
Congress has taken on financial reform as a response to the laundry
list of reckless practices in financial markets. The very existence of
interchange fees explains the perverse incentives that may have
encouraged card-issuing banks to engage in indiscriminate lending
rather than curb credit risk. Banks and the card companies profit from
these fees regardless of the consumer's ultimate ability to fulfill
their debt obligations, and thus have an immediate incentive to issue
cards and encourage a high volume of transactions.\26\ This undermines
the safety and soundness of the entire financial system.
---------------------------------------------------------------------------
\26\ Adam Levitin, Associate Professor of Law, Georgetown
University Law Center. Testimony before the U.S. House of
Representatives, Committee on the Judiciary, Subcommittee on Commercial
and Administrative Law. Hearing: Consumer Debt--Are Credit Cards
Bankrupting Americans? April 2, 2009.
---------------------------------------------------------------------------
THE CREDIT CARD OLIGOPOLY ALSO ALLOWS ISSUERS TO USE ANTI-CONSUMER
PRACTICES AGAINST CARDHOLDERS
Last May, President Obama signed into law the Credit Card
Accountability, Responsibility and Disclosure Act \27\, which addresses
a number of deceptive practices credit card companies regularly engage
in at a high cost to consumers. That legislation gave the Fed authority
to ensure that certain credit card penalty fee practices are
``reasonable and proportional,'' \28\ which is similar authority to
that of the Durbin amendment, which is simply a necessary complement to
the CARD Act's provisions, which ban credit card companies from a
number of practices.
---------------------------------------------------------------------------
\27\ The Credit CARD Act, H.R. 627, became Public Law 111-24.
\28\ See Section 102(b) of Public Law 111-24. The reasonable and
proportional rules became final yesterday. See Federal Reserve press
release of 15 June 2010, http://www.Federalreserve.gov/newsevents/
press/bcreg/20100615a.htm (last visited 15 June 2010).
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There is no question, of course, that the current bank regulators
will not adequately enforce the Durbin amendment, if it becomes law. We
also need to enact a strong independent Consumer Financial Protection
Bureau and restore the right of states to enact stronger consumer laws
and the right of their Attorneys General to enforce both Federal and
state laws against both state and nationally-chartered banks.
We also need to restore full private rights of action to enforce
laws. Encouragingly, both the Senate and the House-passed versions of
Wall Street reform give the CFPB/A broad authority to ban forced
mandatory arbitration clauses that limit consumer rights to enforce the
law, although the House language is preferred.
The fact that credit card companies freely engaged in such a wide
range of deceptive and unfair practices that resulted in higher costs
to consumers without being wholly rejected by market forces suggests
that Visa and MasterCard have simply enjoyed market power. The
oligopolistic market structure of the card-issuance market facilitates
these deceptive and onerous practices. The ability of these dominant
card-issuers to impose these terms is derived from the tight oligopoly
that the largest issuing firms maintain in the marketplace. There is a
clear lack of competition in the card network market. Visa and
MasterCard have the ability to prevent many of these practices through
their regulation of card-issuers. Yet these associations--which are
aggressive in regulating merchants (e.g., preventing them from offering
cash discounts that the Durbin amendment would instead encourage)--are
timid when it comes to restricting the deceptive practices of their
bank members. If there was active competition in the card network
market one would expect Visa and MasterCard would compete in trying to
self-regulate and stop these anticonsumer practices. Similarly, if
there were not substantial entry barriers one might expect a more
consumer friendly card network to arise. But the dominance of Visa and
MasterCard and the substantial entry barriers effectively protect these
deceptive and anti-consumer practices.
CONCLUSION
In the past some of the defenders of interchange fees have claimed
that ``[i]f consumers understood the threat that the merchants'
campaign [against interchange] poses to the plastic in their wallets, I
suspect that we would see nothing less than a revolt.'' This claim
could not have been more wrong. If consumers understood the existence
or the dimensions of the hidden, shadow-market fees assessed by the
banks and associations, they would truly rebel. Credit card companies
make billions of dollars each year through interchange fees, which
ultimately all consumers must pay, including the millions of Americans
without credit cards. Low-income cash-paying customers subsidize an
inflated rewards program that benefits only a small portion of
cardholders. The credit card market lacks the critical foundations of
healthy competition--choice and adequate information. As a consumer
advocate, I am gravely concerned about the fairness and legality of
bank schemes to increase credit and debit card fee income.
We applaud you for recognizing the problem and proposing thoughtful
legislation that offers the promise of remedying the interchange fee
problem. Along with other consumer groups, we hope to work with you on
this and other efforts to protect consumers from anticompetitive
tactics in this vital market.
Thank you for considering this testimony. I welcome your questions.
Senator Durbin. Ms. Chronister.
STATEMENT OF WENDY CHRONISTER, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, CHRONISTER OIL COMPANY
(d/b/a/ QIK-n-EZ CONVENIENCE STORES),
SPRINGFIELD, ILLINOIS
Ms. Chronister. Thank you, Senator Durbin, for inviting me
to speak today and share with you my views on interchange,
specifically as they relate to our business and our customer.
As you already said, I am the CEO of Chronister Oil
Company. It is a company founded by my father in 1967. Today we
operate 11 convenience stores throughout central Illinois,
Springfield and the surrounding communities, under the trade
name Qik-n-EZ. We sell fast food, packaged food, beverages,
other convenience store items, and we have from 4 to 13 fuel
dispensers at each of our stores and sell E-85 at each of our
stores.
I truly appreciate the opportunity to give this testimony
and tell you the dramatic impact that interchange fees have on
our business. And I will show you why Mr. Mierzwinski--pardon
if I butchered your name--is correct, that this is about our
customer.
We are in the business of convenience. The convenience
store business is wildly competitive today. Our competitors
include big boxes such as Wal-Mart or Meyer's. They include
drug stores like Walgreen's and CVS. They include liquor
stores, cigarette shops, grocery stores, and fast food shops
like McDonald's and their 99 cent coffee. And what that means
for us is that the old notion of convenience stores where you,
as a consumer, would go in and be happy to pay more for the
convenience or the immediate necessity of the item is not the
business that we are in today.
Qik-n-EZ will survive only if we have repeat customer
traffic, and the only way to have repeat customer traffic is to
deliver value every day to our customers.
For the first 5 months of this year, our sales actually
increased 17 percent compared to the same time last year, but
do not let that fool you. That was primarily all the rise in
fuel prices. Our gross profits actually declined 17 percent in
the same period last year, and out of our gross profit we pay
operating expenses.
So where do credit card and debit card fees fit into this
scheme? They are our second largest operating expense, behind
labor, in front of utilities.
I am going to take a minute to describe my stores in
particular because it puts it a better perspective. Our stores
average 5,000 square feet. We have at least 22 cooler doors. We
have big canopies, lots of light. In other words, we have big
utility bills. And we are trying to make investments to become
more energy efficient. That is expensive. But our utility bills
are sizeable. Our utility bills were less than 40 percent of
the credit card fees we paid last year.
With respect to labor, that is our largest cost. In our
industry, we are in the high end in labor. We believe people
are the most important thing in our business. We pay our people
well. We want it to be careers, not a job. So this is about
being able to continue to do that as well. Nevertheless, our
credit card fees represented anywhere from one-half to two-
thirds of that cost throughout the year.
Now, everybody who is in the retail business and is still
in the retail business knows that over the last couple of
years, you have had to really focus on your expenses and trim
costs where you could. With respect to labor, you can manage
schedules and you can have predictable costs associated. With
respect to utilities, you can make a decision to become more
energy efficient and make the investment. With respect to other
suppliers, you can go out and bid and get competitive pricing
and have predictable costs. But for our second largest expense,
credit card expense, we can do nothing, and in fact, we get
faxed a notice of increase in price. Sometimes we get it in the
mail, and we can do nothing.
So you actually stole my words, Senator Durbin, because if
the Federal Government cannot negotiate against MasterCard and
Visa and their member banks, how can I as the operator of 11
convenience stores in Springfield, Illinois do something about
it? That is a problem and that is why I am here today.
One of the most expensive items that we sell is a full
gallon of fuel. You have to understand where fuel fits into our
sales to understand the whole picture as well. Fuel sales
represent 63 percent of our total sales. Gas is very
competitive. I said we had to deliver a value proposition every
day to our customer. That means with gas the only thing I can
do is sell cheaper gas. We do price surveys at every one of our
stores four to five times a day and our competitors do the same
on us. So, believe me, we are competitive on fuel.
Nevertheless, while the consumer thinks that as gas prices
are going up on the street, maybe the retailer is making more
money. In fact, when they rise rapidly, we are generally losing
profit. Profit is measured in cents per gallon over the cost.
It is not measured in percentages. Ironically as the price of
fuel has gone up this first 5 months, our credit card fees go
up while our profit goes down.
You know, I talked about the expenses and things we can
manage, and it is reflected in the results. Our labor is about
the same this year as it was last year overall. Our utility
bills have gone up about 2 to 3 percent, and our credit card
fees have increased 43 percent this year.
I have talked a lot about our business, but it is also
about our customer. And you have to understand our customer
today. Our customer does not impulse buy anymore. Our customer
plans. They make lists. For us to be successful, they need to
want to come to our store and get a good value, and we have to
be able to offer it.
For our customer, debit and credit cards are a new form of
currency. 70 percent of our sales were with credit cards or
debit cards this year.
Now, I will say that I do not think that MasterCard and
Visa and member banks should just give us credit cards or allow
us to accept them for free. I just simply think that they
should be subject to the same kind of competitive environment
that anyone of our other suppliers is and that we are. To the
extent that we can reduce any costs whatsoever, it will be felt
by our customer. I agree with Mr. Mierzwinski. Our business is
so competitive that that has to be the result, and frankly, I
hope one of our competitors does not pass on that savings
because we will get their customers.
So thank you again for inviting me to speak today. This is
an issue that is extremely important to us. I thank you for and
wholly support the amendment that you made to the financial
reform bill that was passed by the Senate last month.
[The statement follows:]
Prepared Statement of Wendy Chronister
Chairman Durbin, Ranking Member Collins, and Members of the
Subcommittee on Financial Services and General Government, thank you
for inviting me to share my views on interchange fees. I am the
President and CEO of Chronister Oil Company. We own and operate 11
convenience stores in Central Illinois under the trade name ``Qik-n-
EZ''. Interchange or ``swipe'' fees constitute the second largest
operating expense in our stores. As is the case for all of our
competitors and other merchants, including the Federal government,
unlike other operating expenses, we have no ability to negotiate these
expenses. We operate in an extremely competitive environment. We
measure our ability to make a profit by cents. Approximately 70 percent
of our sales in the first 5 months of this year were credit card
transactions. The interchange fees associated with accepting credit and
debit cards are a significant cost of operating a convenience store. We
currently cannot negotiate these costs. As a result, the real cost of
the interchange fees is borne by the consumer because they inflate the
prices of the products we sell. I fully support the Durbin Amendment in
the financial reform bill passed by the Senate because this is
legislation that truly is for the consumer and what is good for the
consumer is good for retail business and ultimately for the economy.
OVERVIEW
Our company is based in Springfield, Illinois. My father founded
Chronister Oil Company in 1967. Our convenience stores are located in
Springfield, Illinois and surrounding towns. In addition to beverages,
prepared and packaged foods and a broad range of other convenience
store items, each of our locations has between 4 and 13 fuel dispensers
and each location sells E-85. We purchase ethanol and store it at our
bulk plant facility where we splash blend with conventional fuel before
distributing to our store locations. In addition to supplying our own
stores, we distribute finished product to other retail locations as
well as commercial and farm distribution businesses, among others.
Today, the convenience store industry as a whole includes
approximately 145,000 stores in the United States, a decline of 3-4
percent from last year. The convenience store industry sells nearly 80
percent of the gasoline in the nation and employs about 1.7 million
workers. It is truly an industry for small businesses and one-store
operators own more than 60 percent of convenience stores.
Indeed, the convenience store industry has engaged in petition
efforts in convenience stores throughout the country during the past
year. It is my understanding that 5.5 million consumers have signed
petitions in favor of swipe fee reform, a number that exceeds the
number of signatures delivered to Congress on any legislative policy
proposal. The Senate paid attention to this outpouring of support when
it passed Senator Durbin's Amendment to the financial reform bill with
a bipartisan vote of 64-33. I am hopeful that the conference committee
reconciling the House and Senate versions of that bill will maintain
Senator Durbin's language and provide some relief to my industry and
our customers.
the impact of runaway credit card fees on my convenience store business
In 2008, the total cost of credit card fees paid by our industry
was reported at $8.4 billion while convenience store gross profit was
reported to be $5.2 billion. Based on these statistics, credit card
fees alone were responsible for the loss in the number of convenience
stores across the country. However, I am here to speak to the impact
which credit and debit card expense has on our business and the
operations of our convenience stores. Credit and debit card fee reform
is important for the consumer and therefore good for the convenience
store business.
The convenience store industry is a highly competitive one. We are
in the business of convenience. However, we do not compete with
convenience stores alone for customers. Rather, inside our stores, we
compete with big box stores such as Wal-Mart and Meijer's, quick serve
restaurants including McDonald's, drug stores such as Walgreens and
CVS, liquor stores and cigarette shops and other convenience store
chains. Each of these retailers is competing for the same customer that
we are and we overlap product offerings with each of them. Each of
these retailers, like us, is in the business of convenience in one way
or another. Despite the fact that we cannot obtain the same cost
structure as a big box retail outlet, we have to compete with that same
big box for the customer. Indeed, the notion that a consumer will
accept significantly higher price point at the convenience store
because it is a one-time convenience is outdated and not true. The only
way we can be successful is by offering repeated value to customers who
will return and will make a Qik-n-EZ store part of their destination on
a routine basis. To accomplish this, we must deliver value to our
customers. Providing a good experience is essential but not enough. We
have to be competitive on price.
It is important to understand where credit and debit cards fit in
the scheme of our store operations. For the first 5 months of this
year, our total fuel sales have increased by approximately 17 percent
over the first 5 months of 2009 due to the higher cost of fuel and
corresponding higher prices. However, our company's overall gross
profit has declined 17 percent.
Out of our gross profit we pay operating expenses--our top three
expenses are labor, credit card fees and utilities, in that order. In
the first 5 months of this year, our labor expense remained about the
same as the same period last year, our utilities increased
approximately 3 percent and our credit and debit card expense rose 43
percent.
Our only operating expense that exceeds credit card expense is the
cost of labor. All but two of our stores are open 24 hours a day and,
even at the slowest times, we never have fewer than two persons on duty
in a store. We are proud to pay our employees well and, even at the
entry level, significantly above minimum wage. We have always offered a
full benefit package and 401(k) opportunities to all of our employees.
Still, credit card fees are approximately two-thirds of our total store
labor expense.
Our stores average 5,000 square feet and are much larger than the
average size convenience store according to industry statistics. In
most of our stores, we have at least 22 cooler doors per store, large
canopies with many lights over our fueling stations and neon signs, we
have cold winters and hot summers--in other words, we have high utility
costs 24 hours a day. In fact, we are trying to make investments in our
stores to make them more energy efficient--but this is an expensive
proposition. Nevertheless, despite utility inefficiencies, our utility
bills overall for the first 5 months of this year are less than 40
percent of our credit card expense.
During the first 5 months of this year, fuel sales accounted for
approximately 63 percent of our sales. On the street, we have to be
competitive. Everyone who sells fuel is measuring their gross profit by
cents per gallon over cost. We check our competitor's street prices
multiple times per day to ensure that we are competitive since
consumers have no loyalty when it comes to purchasing fuel. Generally,
during a period of rising prices, the cents per gallon profit for us is
declining. Ironically, during the same time, our credit card expense
per gallon is rising. On average, we estimate that we pay approximately
half of our gross margin per gallon of fuel sold to credit card fees.
Consumers are using credit cards and debit cards to make purchases
more and more frequently. The rising cost of fuel and the increasing
number of people who use credit are the primary drivers behind this.
For the first part of this year, nearly 70 percent of our sales were
card purchases. Approximately one-quarter of our card use was debit
cards, the remainder being credit cards. And, over the last few years
alone, interchange fees have grown more rapidly and significantly than
all of our other expenses. In contrast to other expenses, we have
absolutely no control over interchange fees. For example, we could
change employee schedules if we needed to reduce labor cost; invest in
new technology to reduce utility expenses; and we put our business and
health insurance needs out for competitive bid yearly to help keep
those expenses at a manageable (or at least predictable) level. With
respect to credit and debit card expense, we are faxed a notice of an
increase in fees and it is what it is. If we didn't take credit cards,
we could not compete and would certainly go out of business. We have no
ability to negotiate fees and we are powerless to deal with these cost
increases. Yet, given the competitive landscape we are in, we have an
increasingly smaller pot out of which to pay them. Costs that cannot be
controlled have a far broader, negative impact on the business than do
other costs.
This rise in credit card charges does not take into account the fee
increases that Visa announced effective in July. I do not know the full
impact of this yet; however, one company in our association estimates
that these hikes will result in a 5.9 percent increase in card fees
convenience stores will pay on fuel sales alone. And these increases
are not for interchange--they relate to the myriad of other fees the
card companies charge merchants, such as the Assessment Transaction
Fee, Partial Authorization Fee, Zero Floor Limit Fee, and various debit
card fees. Depending on the market dynamics, this could wipe out the
entire cents per gallon gross profit at any given time.
BACKGROUND ON THE DURBIN AMENDMENT
I understand that the Durbin Amendment will accomplish the
following, each of which will benefit the consumer:
First, the Durbin Amendment will give the Federal Reserve the power
to write rules ensuring that swipe fees on debit cards are ``reasonable
and proportional'' to the cost of processing. This is, in fact, an
overly generous standard for the card industry. Check transactions, for
example, cost banks more to process than debit transactions but
interchange fees have been completely prohibited on check transactions
since the early part of the last century. The check system has been an
efficient means of conducting commerce in the United States during all
of that time and it is long overdue for debit transactions--which are
simply electronic check transactions--to be treated in a similar way.
Second, the Durbin Amendment will allow merchants to give their
customers discounts when they use cards from a network with lower fees
or use forms of payment that are cheaper for the merchant. That means
that I could give my customers a discount if they use a Discover Card
(or Visa, MasterCard or American Express) if that card network is
cheaper. Alternatively, our stores could offer customers a discount for
paying by a debit card or cash, check or other means may be less
expensive for our company to accept. This simply means that credit card
networks will compete with one another, just like we have to compete
with other retailers selling the same products that we sell.
Smaller banks have raised the concern that the cards which they
issue will be treated differently than cards issued by significantly
larger banks. However, it is my understanding that the Durbin Amendment
will not allow a merchant to differentiate prices to the consumer based
on the card-issuing bank. Therefore, the concerns raised by smaller
banks are not well founded.
Third, the Durbin Amendment will allow merchants to set a minimum
or maximum amount for a transaction using a credit card. This is
necessary because each card transaction has a fixed fee portion in
addition to a percentage fee. For many small dollar transactions, that
fixed fee part of the transaction (which can be 10 to 25 cents) may be
more than the profit margin I would have earned on the sale. For some
products, in fact, such as newspapers, the fixed fee on the card can
sometimes exceed my cost of purchasing the product (such as on papers I
sell for 25 or 50 cents). While the Durbin Amendment does not prevent
our company from experiencing operating losses, the amendment would
allow us the basic ability to protect my business from a guaranteed
loss.
As a retail marketer and operator of convenience stores, I am in
favor of the Durbin Amendment and its focus on reforming credit and
debit card fees so that credit card companies and their member banks
are required to compete in the same way that any other supplier of
services is required to compete. This is good for consumer and will
ultimately benefit the economy.
CONSUMERS WILL BENEFIT FROM REFORM
Economics shows that in a functioning market, lower business costs
will mean lower prices and higher costs will mean higher prices. I
understand that those opposed to credit card fee reform complain that
the Durbin Amendment does not include a stipulation the retailers will
pass on cost savings to consumers. I can only speak to the convenience
store business. I cannot imagine that the consumer would not benefit.
As I previously described, our business is highly competitive and
consumer habits have changed. Peoples' preconceptions about convenience
stores as an expensive place to purchase products out of convenience or
necessity are generally of a business model that existed long ago.
Today, we are competing for the same customer that many other types of
retail are seeking. This customer is no longer an impulse buyer but
rather plans ahead and makes lists and doesn't spend the extra dollar
if it is not necessary or the product can be purchased elsewhere at a
lower cost. Already, we frequently lose money on products such as a
gallon of milk, a cup of coffee, a hot dog or a case of popular beer
because we have to price these products competitively in order to
maintain a consistent customer count in the store. If we cannot
maintain the customer traffic we cannot stay in business.
When it comes to selling fuel, we would always like to be the
lowest price on the street if we can maintain a sufficient profit
margin and we are always trying to be. No one wants to purchase fuel,
it is a necessity and the consumer looks for a consistently low price.
It is not surprising that the Department of Energy, for example,
conducted a study of retail gasoline pricing and found that 100 percent
of cost increases and 100 percent of cost reductions were passed
through to consumers in gas prices.
The current interchange fee system in the United States fools
consumers by hiding the large interchange fees that are built into
their purchases. One of the other witnesses here today, Ed Mierzwinski,
of U.S. PIRG, has stated: ``Interchange fees are hidden charges paid by
all Americans, regardless of whether they use credit, debit, checks, or
cash. These fees impose the greatest hardship on the most vulnerable
consumers--the millions of American consumers without credit cards or
banking relationships. These consumers basically subsidize credit card
usage by paying inflated prices--prices inflated by the billions of
dollars of interchange fees.'' In addition, the Consumer Federation of
America, Consumer's Union, and Consumer Action have all submitted
Congressional testimony criticizing the current system of interchange
fees because it is not fair to consumers and Americans for Financial
Reform, which counts these and many more consumer groups as its
members, has endorsed the Durbin Amendment.
The Hispanic Institute published an economic report on interchange
fees and wrote in a letter to Senators endorsing the Durbin Amendment:
``[W]e found definitively through economic analysis of transaction and
pricing data that consumers do currently pay interchange fees in the
prices of the things they buy and when those fees are lower merchants'
prices are correspondingly lower as well. This is proof, backed by
economic data, that those who argue against reform by saying consumers
will not benefit are wrong. Consumers will unequivocally benefit from
reform.''
Experience around the world demonstrates that consumer card reform
ultimately results in a benefit to consumers. It is my understanding
that every country in the world that has begun and completed a full
review of credit and debit fees has enacted reforms designed to further
regulate the card system. More than 20 countries, including, among
others, Great Britain, Australia and the European Union have taken
action that has benefited their consumers.
The Reserve Bank of Australia issued the following statement based
on its finding that savings from card fees reform were in fact passed
on to consumers:
``One issue that has attracted considerable attention since the
reforms were introduced is whether the cost savings that merchants have
received from lower merchant service fees have been passed on to
consumers in the form of lower prices for goods and services than would
otherwise have been the case. The [card] schemes argue that there has
been no, or little, pass-through, while the merchants argue that the
cost savings have been passed through. The Bank's estimate is that over
the past year, these cost savings have amounted to around $1.1 billion
. . . . This judgment is consistent with standard economic analysis
which suggests that, ultimately, changes in business costs are
reflected in the prices that businesses charge.'' \1\
---------------------------------------------------------------------------
\1\ Reform of Australia's Payment System: Preliminary Conclusions
of the 2007/2008 Review, Reserve Bank of Australia, at 23.
The European Commission also found that interchange fees harm
consumers. In December 2007, the Commission held MasterCard's
multilateral interchange fee illegal and Competition Commissioner
Neelie Kroes said that interchange ``inflated the cost of card
acceptance by retailers without leading to any advantage for consumers
to retailers. On the contrary, consumers foot the bill, as they risk
paying twice for payment cards. Once through annual fees to their bank.
And a second time through inflated retail prices . . . .'' Kroes
concluded that MasterCard's interchange ``acts like a `tax on
consumption' paid not only on card users but also by consumers using
cash and cheques.''
Economists with the Kansas City Federal Reserve Bank appear to
agree with consumer groups on some of the problems with the current
system for consumers. In a 2006 working paper titled ``Payment Card
Rewards Programs and Consumer Payment Choice,'' they wrote that rewards
programs and the accompanied merchant fee structure might work as tools
that distribute income from low-income earners to high-income earners.
The Durbin Amendment allows merchants such as our company to give
their customers discounts (either for using a cheaper card network or a
cheaper form of payment like checks or cash). Currently our contracts
with Visa and MasterCard prohibit us from giving these types of
discounts to our customer. It also means that they can agree on the
rules and impose them on us and prohibit us from offering discounts to
our customers. As consumers have picked up the use of debit cards, Visa
and MasterCard have joined together again to impose significant fees on
their use, out of proportion to the costs of providing a debit card.
Once again, we have no power to negotiate, as we have to accept these
credit and debit cards to stay in business.
It is slightly hypocritical for these credit card companies to
argue that we would not pass on a discount opportunity to our customer
and it also reflects a lack of understanding of the convenience store
business. As a marketer of convenience store items and fuel, we are
constantly looking for opportunities to deliver value to our customers.
In fact, our entire marketing plan is based on how to deliver value to
the consumer, especially in this economy. We welcome the opportunity
despite the complexity it brings to our marketing programs. To the
extent that interchange fees are reduced as a result of competition
among the credit card companies and/or the requirement of
reasonableness and to the extent we can offer discount pricing to
reflect those reduced fees, our customers will have increased spending
capacity.
It is equally hypocritical for the card industry to suggest that
the reduction in credit and debit fees due to competition or the
requirement that they be reasonable must mean higher credit card fees.
Credit card fees in their entirety are not a zero sum game in which the
card industry has the legal or constitutional right to earn a certain
total amount of revenue. The point is absurd when one considers that
interchange fees in the United States have tripled since 2001. Credit
card fees on cardholders were not cut by a third during that time; in
fact, consumer card fees have continued to rise hand in hand with the
increasing cost of interchange fees. This argument is simply a
reflection of the consumer card industry's insatiable hunger for fees
aided by their unfair and deceptive practices in charging them.
Indeed, the European Commission's Directorate of Competition
reviewed this claim and found, ``There is no economic evidence for such
a claim. First, the inquiry's data suggests that in most cases card
issuers would remain profitable with very low levels of interchange
fees or even without any interchange fees at all. Second, the
international card networks have failed to substantiate the argument
that lower interchange fees would have to be compensated with higher
cardholder fees.''
THE DURBIN AMENDMENT WOULD BRING REASONABLE REFORM
As I understand it, the Durbin Amendment is not about driving
credit card companies out of business. It is not about requiring credit
card companies and banks to provide a service at no cost to the user of
that service. I recognize the valuable service debit and credit cards
provide for merchants and consumers and know that our company will
continue to pay for the ability to accept credit and debit cards.
The Durbin Amendment means that the credit card companies will be
subject to a little of the same competition that we are subject to. If
one of them is willing to provide a more attractive rate, we can
promote it. If a consumer wants to pay cash or use a debit card, we can
offer that consumer a more attractive price because the costs
associated with these types of payments should be less. In effect this
allows the consumer to decide how to spending his or her money and know
something about the cost impact of that decision. If one beer company
were to offers a more competitive pricing strategy on its products than
another beer company, we could pass this savings on to our consumer
through a promotion and we do.
In addition to credit cards, debit cards have become the currency
of our customers. The Durbin Amendment provides for Federal Reserve
regulation of debit card interchange fees. Debit cards mean that a
customer is spending money that he or she has in their checking
account. Their use seems to have increased in popularity as people have
reined in reckless credit card spending. In addition, the costs
associated with processing debit cards are less than that of processing
a check and must be less than a credit card since there are no credit
losses associated with a debit card. While a debit card is less costly
for all constituencies and encourages greater fiscal responsibility by
users, the card companies and member banks have the ability and have
agreed to impose significant fees on the retailer or other merchant--
just because they can. A retailer can approach multiple vendors and
negotiate costs when acquiring goods to offer for sale to its
customers. In contrast, a convenience store operator has no choice but
to accept the fees imposed by the consumer card companies and accept
debit cards.
In addition to interchange fees, we pay processing fees and fees
associated with maintaining accounts at local banks. And, of course,
credit card companies will still charge consumers an array of interest
charges and fees. While credit card companies will not like reform,
they will continue to have many avenues to recover costs, compete, and
make profits.
Bank and credit card companies have suggested that the Durbin
Amendment will push the risk of fraud onto financial institutions. This
is the first time that I have heard financial institutions admit that
they don't cover the risk of fraud today. While they often talk about
their ``payment guarantee,'' the ugly truth is that financial
institutions push most of the risk of fraud onto merchants--while
simultaneously charging a company such as ours a huge fee. The Durbin
Amendment does not change the credit card companies' rules that allow
them to push most of the fraud risk onto merchants. All it does is make
sure the banks cannot take the same fraud costs out of merchants
twice--once through charge backs and once through interchange fees.
Again, the Amendment ensures that fees on big bank debit cards will be
reasonable and allows consumers to get discounts and doesn't change the
treatment of fraud one way or another.
Bank and credit card companies also argue that the Durbin Amendment
will shift costs from big box stores to consumers. We don't operate a
big box store. I was particularly concerned when research by the GAO
found that large businesses against which we now compete have an
advantage over small retailers like our company in the current system.
Our company pays a higher interchange fee rate now than do our big box
competitors. Small business needs this reform to survive and have the
same advantage and opportunity to offer value to customers as their
competing big business. Reform will actually help small businesses more
than large businesses because debit rates will have to be related to
the banks' actual cost of issuing them--not to the size of the market.
What small business retailers are fighting for is simply to have
reasonable fees and the right to give their customers a discount. The
fact that credit card giants prohibit merchants from giving consumers a
discount for using a cheaper card brand (such as a Discover Card rather
than a Visa) and prohibit merchants from giving discounts if they use a
cheaper type of payment (like checks rather than credit) cannot be
defended. Discounts for consumers are good things and the card giants
want to prohibit them in order to hide their fees so they can keep
raising them without anyone noticing. This doesn't protect consumers at
all. I am proud and appreciative to know that Senator Durbin,
representing my state, has taken the lead in exposing the credit card
companies unfair system and trying to change it. Reform will give real
help to Main Street businesses like mine and give a boost to our
economy that will help everyone.
CONCLUSION
I am speaking in support of the Durbin Amendment because it is the
right answer for the consumer and the survival of retail business. I am
privileged to operate a business and to serve my community in central
Illinois as a retailer. We employ approximately 150 people and
therefore are responsible for 2-4 times that number. I have a
responsibility to our employees to stay in business and to our
customers to provide exceptional value and service.
Our business is highly competitive. We focus our efforts on
delivering value to a customer that will result in customer loyalty. We
look at our margins in terms of penny profits, out of which we have to
cover and manage operating expenses. We have no ability to negotiate
credit and debit card fees that account for the second largest
operating expense and far exceed every expense other than the cost of
labor. Yet we are in the business of convenience and cannot stay in
business unless we offer our customers the ability to use credit and
debit cards--today, debit and credit cards are a form of currency with
our customer. The Durbin Amendment requires the credit card companies
to be competitive and allows us to deliver an option to our customers.
The amendment requires interchange fees be related to the actual cost
of providing them and that they are reasonable. There is no question
that the consumer will benefit from this as we are in the business of
providing the best value to our customers. There is no question that
competition will rein in the unrestrained increases in interchange
fees. There is no question that this alone will help retailers in the
convenience store industry to survive because it will lower the cost
for which they can deliver retail to the consumer. Accordingly, for all
of the reasons set forth above, I strongly support the Durbin
Amendment.
Senator Durbin. Thank you, Ms. Chronister. Your story
really tells the human side of this for us all in terms of a
small business in a competitive environment and the problems
faced because of these charges on credit cards.
Mr. Sullivan, if I went into McDonald's and ordered a
Pepsi, I am sure the clerk has been instructed, because I have
heard it over and over again, to remind me that they just sell
Coca Cola. They do not sell Pepsi. And they do that, of course,
to protect their own franchise and their arrangement with Coca
Cola.
So under current law, could I have a business that just
takes Visa cards and not MasterCards?
Mr. Sullivan. I am not aware of laws, sir, that would bar
the issuance or acceptance of one card versus another.
Senator Durbin. Not laws, but rules of your company.
Mr. Sullivan. Visa, as far as selections of lower cost card
types--first of all, merchants can and do negotiate total
acceptance costs----
Senator Durbin. Good. Hold on because, Ms. Chronister, tell
me about your negotiation with Visa at Qik-n-EZ. How did you
negotiate your interchange fees? Did you use your lawyers, or
did you do that personally?
Ms. Chronister. I am not sure how I would negotiate with
this.
Senator Durbin. You have not negotiated with them?
Ms. Chronister. No. I am not sure how we would do it. I do
not mean to be sarcastic, but I am sure I could find an 800
number. I am not sure who I would talk to.
Senator Durbin. So the 43 percent increase in your
interchange fees this year were not negotiated increases.
Ms. Chronister. No. We do not have any control over these
expenses. I asked my controller to give me some background on
the raises that we have incurred. I can look at some data. And
her response--I am not sure I liked it, but--was I do not
really keep track of this because we cannot do anything about
it.
Senator Durbin. So, Mr. Sullivan, you heard the testimony
from the Department of the Treasury and now from Ms.
Chronister. There is no negotiation going on.
Mr. Sullivan. Mr. Grippo did testify that he did negotiate
total acceptance costs with the acquiring banks, and merchants
can do that.
And there has been negotiations. We talked about the
Defense Commissary Agency. They do, in fact, get--it is a
Government agency--the grocery rate. The U.S. Postal Service
does have negotiated rates with the Government as do a few
other Federal agencies.
Senator Durbin. So would you give me an idea of the volume
of credit card transactions--I am talking credit and debit--
through Visa with the Federal Government that you think have
been subject to negotiated interchange fees?
Mr. Sullivan. I do not have those numbers with me, but I
would be happy to submit them to you, sir.
Senator Durbin. I wish you would.
[The information follows:]
When including all Federal Government merchant payment
volume, 66 percent of payment volume and 73 percent of
transactions receive a preferential Visa interchange rate. This
covers all payment volume processed through Treasury's
Financial Management Services (FMS) as well as other Government
agency payment volume processed through non-FMS acquiring
relationships. These payment volumes include the payment
volumes covered under the negotiated rates listed below as well
as the preferential interchange rates made available to
Government merchants, i.e., Visa Government-to-Government
interchange rate, Visa Emerging Segments rates for Government
transactions, and other GSA-specific interchange rates applied
to payment volume from Federal Government merchants.
Senator Durbin. And I hope you will take a look at Mr.
Grippo's testimony because he said--and I refer you to pages 3
and 4--``And although the Treasury has held direct and indirect
discussions with the card networks over the years in attempts
to reduce the Federal Government's card acquiring costs, rates
have never been open to negotiation.''
Mr. Sullivan. I will comment I have been at Visa 7 years,
and when Mr. Grippo was at FMS, I do not recall him ever asking
Visa to negotiate rates. Now, not to say he had not talked to
other people, but the Government has negotiated rates and for
the benefit of the Government.
In addition, we talked about--you talked about the SmartPay
program, sir. When a bank competes for that contract with the
General Services Administration, there are two important
evaluation criteria which determine who wins that contract. The
first one is price. By law, rightfully so, Government agencies
have to consider price in award of contracts. The second
critical component was card acceptance.
Senator Durbin. Mr. Sullivan, I am going to draw a
distinction here which I think you will accept. We were talking
about those who use credit cards to pay Government expenses as
opposed to those cards issued by Government agencies. It is
clear that the cards issued by Government agencies like the one
I showed earlier was a subject of competition, and as a result,
there are rebates being paid and there are some benefits coming
back to the Federal Government. But when it comes to the
acceptance of cards to pay for everything from the Veterans
Administration to Amtrak, I think Mr. Grippo is correct, and I
am going to give you a chance, if you will, please, to provide
us with information related to negotiations by your company
with Federal agencies to establish interchange fees.
[The information follows:]
I can confirm that the following Government agencies
receive a beneficial interchange rate on Government
transactions, two of which are negotiated rates: United States
Postal Service (USPS); Sallie Mae; and Defense Commissary
Agency (DeCA).
Senator Durbin. I would like to ask you this question too.
Is Joseph Saunders still the CEO of Visa?
Mr. Sullivan. Yes, sir, he is.
Senator Durbin. I wrote to Mr. Saunders last December and I
asked him whether Visa would commit to working with U.S.
regulators on ways to reduce interchange rates on transactions
across the country. Mr. Saunders replied on Visa's behalf and
said ``We do not believe regulation is appropriate or
necessary.'' That was his letter to me.
So, Mr. Sullivan, in November 2009, the Government
Accountability Office found that ``regulators in other
countries have worked with Visa and MasterCard to voluntarily
reduce their interchange rates. For example, on April 27, the
Wall Street Journal reported that Visa Europe agreed to cut by
60 percent the debit interchange rates it charges in nine
European countries and for cross-border EU transactions. The
highest debit rate in those countries is now 0.2 percent.
However, in April, at the same time Visa was reducing debit
interchange rates in Europe, Visa raised many of the
interchange rates that it charges for U.S. PIN debit
transactions by approximately 30 percent. Most of these U.S.
debit fee rates are significantly higher than the 0.2 percent
charged in Europe.''
So my question to you, why is Visa voluntarily reducing
interchange rates in Europe and other countries while raising
them in the United States?
Mr. Sullivan. Senator, those decisions are outside of my
expertise. I could not comment. I do not know the decisions or
the circumstances that surround that.
Senator Durbin. I will tell you there is one circumstance
that does surround it. In the European situation, there is a
government regulation that brings Visa and MasterCard to the
table. And as Mr. Saunders said, he does not believe that
government regulation is appropriate or necessary. I would say
to him it works pretty well in Europe and it is not working
very well here for our businesses and for our Federal
Government.
Ms. Chronister, do you think it is fair that Visa is
raising the interchange rates they charge in America while
voluntarily lowering the fees in Europe?
Ms. Chronister. No, certainly not. I guess I am glad you
asked me the question. I do not think there should be
interchange fees on debit, period, for that matter. I think of
debit as an electronic check, and the Federal Reserve for 80
years has said you cannot have interchange fees on checks. I
certainly suspect--but I do not know for certain--that a debit
card costs less to process than a check.
Now, with respect to Europe, the way I understand it, the
merchants go together and they went and they talked about it,
and they did not have a hard time getting them to drop it to
0.02 percent. And that is why we are here today. Right?
Senator Durbin. That is what this Government is supposed to
be about.
Mr. Mierzwinski, when you try to draw comparisons between
the cost of processing of a credit card transaction and a debit
card transaction, is there not an inherent difference?
Mr. Mierzwinski. I think you are exactly right, and that is
why I think your amendment goes after the important problem
that debit cards are being treated as if they are credit cards
when really they are a substitute for checks, not a substitute
for credit.
The banks first tried to take--and were pretty successful
at taking debit and moving it from the lower-cost PIN platform
owned by local banks to the higher-profit, higher-cost national
Visa and MasterCard credit card networks. This is the
difference between PIN or signature, or they say credit or
debit. At the register, what they mean, debit means PIN and
credit means signature. They were first successful at moving
debit to a higher-cost platform. Now they are moving cash to
debit, and it is clearly a substitute for checks. And I agree
with the merchants that it is much more like a check.
Senator Durbin. So, Mr. Sullivan, do you disagree? Do you
think that credit and debit interchange rates should be the
same, or is there less of a risk to Visa from a debit card than
a credit card?
Mr. Sullivan. Sir, I came here prepared to talk about
Government acceptance and use of cards in the Government. I am
unknowledgeable to answer that.
Senator Durbin. Well, then I am going to ask you another
question which probably will elicit the same answer. If Ms.
Chronister wanted to put in her convenience stores that she
would prefer cash transactions and would give a 2 percent
discount for cash or would say no credit cards for amounts
under $2--let us say that--is that prohibited by the rules of
Visa today for her to do that?
Mr. Sullivan. She could offer a cash discount, I mean, a
discount for people who want to pay with cash. She can use a
terminal that steers individuals to lower-cost cards as well
such as PIN. So merchants can do those. That is not against
Visa operating regulations.
Senator Durbin. Did you know that, Ms. Chronister?
Ms. Chronister. No. I do not know if we have a different
agreement, but I am not sure that that is actually true for us.
Also, I just want to say again that when we're talking
about these debit cards and these fees, at the end of the day,
these will get back--these do go back to the customer. Maybe it
is just my perspective as the operator of 11 convenience stores
and recognizing the competition and the competitive environment
we are in, but it will go back to our customer. And the reason
why that is good for me is because when our customer has more
dollars to spend, that is good for our business and it enables
us to survive.
Senator Durbin. Thank you.
Mr. Sullivan, you heard the earlier question I asked of Ms.
Cackley from GAO about the interchange fees charged to the
Government which I believe I can find here, but I think it was
$1.55. This was the MasterCard situation. So it may not be your
situation.
But can you tell me if there is a difference in the charge
on interchange fees by Visa to the Federal Government as
opposed to the fees that are charged to supermarkets? I used
the illustration of MasterCard where it is $1.55 and 10 cents
for the Government, and yet supermarkets are $1.27. Do you know
if the Federal Government is paying a higher interchange fee to
Visa than other commercial customers?
Mr. Sullivan. I can tell you because I know Defense
Commissary does pay the grocery rate. So they are paying the
same as grocery stores. I do not know, and I believe the postal
interchange rates are confidential. If I did know, I could not
tell you. But I do not know really what they are.
Senator Durbin. Are the commissary rates negotiated?
Mr. Sullivan. We negotiated with Defense Commissary, yes,
for those rates.
Senator Durbin. The interchange fee is negotiated with----
Mr. Sullivan. Yes. Yes, sir.
Senator Durbin [continuing]. Your company. All right.
And can you tell me what that is? Do you know what the
charge is, the interchange fee, for the commissaries?
Mr. Sullivan. What I understand is it is the grocery rate
which is the commercial rate.
Senator Durbin. And what about Amtrak? Do they negotiate
their interchange fee with your company?
Mr. Sullivan. To my knowledge, if I do not know if they
have negotiated or attempted to negotiate, sir.
Senator Durbin. I am not sure if they have or not, but I do
not think they have.
But anyway, you are going to provide me with information
about the actual negotiations that are taking place----
Mr. Sullivan. Yes, I will.
Senator Durbin [continuing]. In terms of these fees. All
right.
[The information follows:]
I can confirm that the following Government agencies
receive a beneficial interchange rate on Government
transactions, two of which are negotiated rates: United States
Postal Service (USPS); Sallie Mae; and Defense Commissary
Agency (DeCA).
Ms. Chronister. Senator Durbin.
Senator Durbin. Yes?
Ms. Chronister. There might be some confusion. You know,
there are so many different fees and costs surrounded by the
credit cards and debit cards that we pay. We are able to
negotiate with our processor, and maybe that is some of the
negotiation you are talking about. But interchange fees
represent 80 to 90 percent of the total credit card and that is
what we are concerned about today, not these processing fees.
So just in case we were----
Senator Durbin. That is a good point. Can we distinguish
that point, Mr. Sullivan? Are you saying--I know there is a
processing fee and an interchange fee. Are you saying that
interchange fees are being negotiated here with the Federal
Government?
Mr. Sullivan. Within the Government? Yes, sir.
Senator Durbin. I see.
Mr. Sullivan. You know, Mr. Grippo did say he did have
negotiations, in fact, very strict negotiations for his
acquiring services contract, but in addition to Treasury
negotiating total costs, several Federal agencies have
successfully negotiated a reduction in cost of interchange with
Visa.
Senator Durbin. And you are going to provide us with some
examples of that, some evidence of that, please?
Mr. Sullivan. Yes, sir.
Senator Durbin. Thank you.
Mr. Mierzwinski, before I ask Ms. Chronister, I am going to
ask you to kind of make a general statement looking at this
from the consumers' viewpoint which your organization focuses
on here. As we take a look at these increases in the charges
associated with credit and debit cards and the increased
incidence of the use of these cards, can you tell me what you
think the impact will be if this continues unabated on consumer
cost and costs of living?
Mr. Mierzwinski. Well, I think it is a broken market, and
that is clearly the problem here. These prices are going up
even though technology improvements suggest that the prices
should be going down, even though there are two other competing
networks that really cannot compete because these two biggest
networks have so much market power they are dictating the terms
of trade. So I think ultimately it is going to be bad for
consumers. Prices should not go up in a competitive
marketplace. They should decline. Consumers should have choices
and consumers should have information.
Yet, the operating rules, as I understand them from being
told by many merchants I have spoken with, when they do, in
fact, try to offer legal cash discounts--under the Truth in
Lending Act, cash discounts have been legal for years and
years--the operating rules--they come in with a hammer and they
say, oh, you are offering a discounted surcharge. We are going
to charge you thousands of dollars a day.
So merchants and consumers and the Government will all
benefit if we can impose some competition in this marketplace,
some transparency, some information, some choice. I think that
all of us will benefit with lower prices and more choices.
Senator Durbin. Ms. Chronister, let me ask you to close on
that note because I would guess, having been to your
convenience stores and looked at all the different products
that you offer, that there was competition for those who wanted
shelf space, wanted to sell their soda pop or whatever it
happened to be, and that you as a retailer picked the best
value you thought for your customers and tried to get your
suppliers to keep their prices as competitive as possible. So
is there any other part of your store, other than this dealing
with the credit cards, where you face this dearth of
competition?
Ms. Chronister. No. Certainly you are correct. If a beer
company suggests that they have a good cost for us on
something, we will put that out in front on sale and pass that
directly on to the consumer because that is our value
proposition to the consumer. Even if their competing brand does
not offer it, we are not going to drop their price.
We are asking to do the same thing, and your amendment
would allow us to do the same thing with MasterCard and Visa.
We could say, if we were able to negotiate better costs with
MasterCard, your price is more attractive if you use your
MasterCard versus Visa, the same with cash versus credit or
debit versus credit. To me, they are another supplier, and as I
said, we need to pay them but they need to be held in a
competitive environment.
Senator Durbin. Well, we all are very proud of our free
market economy, but at the heart of it, there is competition,
and I think that is what this hearing has been about.
Mr. Sullivan, you are a brave man to come and appear before
a Durbin subcommittee, and I appreciate your being here. I
really do. Thank you very much for being here. I am looking
forward to the follow-up information that you promised.
Mr. Mierzwinski, thank you, and to my neighbor, Wendy
Chronister, thank you. Glad you are here.
Ms. Chronister. Thank you, Senator.
ADDITIONAL COMMITTEE QUESTIONS
Senator Durbin. If there are any questions that are going
to be sent to the witnesses, I hope they will respond in a
timely fashion.
[The following questions were not asked at the hearing, but
were submitted to the witnesses for response subsequent to the
hearing:]
Questions Submitted to Gary Grippo
Questions Submitted by Senator Jon Tester
Question. In Ms. Puente Cackley's testimony, she describes the
substantial rebates that Federal Agencies received in return for making
purchases using credit cards, totaling $255 million in fiscal year
2009. What are the rebates that Federal Agencies receive used for? Are
there any regulations with respect to how these funds may be used? Is
there any reason why they are not returned to the Treasury to offset
the cost of interchange fees? What would the impact of higher
interchange rates be on the rebates that Federal Agencies currently
receive?
Answer. The GSA SmartPay program, which is not administered by the
Treasury, provides charge cards to Federal agencies to purchase general
supplies and services. The Treasury manages a wholly separate program
that allows Federal agencies to accept cards from the public as payment
for fees, fines, sales, donations, and other revenue transactions.
Under the GSA contracts with GSA SmartPay card issuers, Federal
agencies receive refunds based on their net charge volume, and the
refunds are returned to the appropriation funds that earned them. From
these appropriation funds, Federal agencies may use the refunds for
activities consistent with their statutory missions, such as purchasing
additional supplies or funding upgrades of administrative systems. The
refunds are governed by a number of laws and regulations, including
Office of Management and Budget Circular A-123, Appendix B, Chapter 7,
entitled ``Refund Management,'' and Treasury Financial Manual, Volume
1, Part 4, Section 4530, entitled ``Refund of Contractual Costs,'' in
addition to Federal appropriations law. These refunds are not unique in
that Federal agencies may receive or qualify for refunds and rebates
under many other types of Federal contracts.
Because the Federal card payment contract and the Federal card
collection program are managed by different agencies, using different
authorities, with services from different banks, and because Federal
agency purchase card activity is generally legally and programmatically
separate from the revenue collection programs, the Federal agency
refunds generated by card payments are not transferred to the Treasury
to defray the cost of card collections. Moreover, the Federal agencies
that earn the majority of refunds are likely different from the
agencies that incur the most interchange fees. Applying refunds earned
by one agency to offset the interchange cost of another agency could
reduce the use of purchase cards and therefore raise the administrative
costs of the Federal procurement process.
Changes in interchange rates would not have a direct impact on the
refunds that Federal agencies currently receive under the terms of
existing GSA SmartPay contracts. However, lower interchange rates could
result in a request from GSA SmartPay banks to renegotiate the
contracts to reduce refunds paid to Federal agencies. In addition
refund rates could change when the GSA SmartPay contracts are re-
competed, but this is not likely to occur in the short term because the
current contracts have a potential performance period of 8 years
remaining.
Question. In your testimony and in Treasury's Report to the
Subcommittee you discuss the importance of negotiating: ``terms that
are straightforward for issuers, acquirers and card networks to
implement, and that do not make Federal government transactions an
exception process for the global industry.'' Can you explain what you
mean when you say ``an exception'' to the industry? Are you concerned
about Federal government transactions being treated differently and if
so, why?
Answer. In this context, ``exceptions'' refers to technical
requirements that may necessitate systems or software changes solely to
process transactions with the Federal Government. Such exceptions could
not only cause operating problems for the industry, since many systems
are shared by thousands of participants to process transactions in a
common manner, but also could make it more difficult and more costly
for the Treasury to engage a collection bank, which would not be
inclined to significantly change its systems for one customer.
Legislation designed to reduce the Federal Government's interchange
rates should not require the card industry to make significant
technology changes to process Federal Government transactions
differently from other commercial transactions.
Question. In your testimony, you discuss the utility of
streamlining the many different interchange rates that Federal entities
pay. How would streamlining rates impact the cost of processing these
transactions? What would be the impact on Federal entities of a two
tiered system of interchange rates like the one included in Senator
Durbin's interchange amendment where different interchange rates would
apply to transactions based on the size of the issuer?
Answer. We believe that reducing the number interchange categories
would serve to lower the Federal Government's costs for several
reasons. Most important among these reasons is that the complexity of
categories, and the multiple fee levels within those categories,
frequently serves to ``downgrade'' transactions into higher rates based
on how a transaction is identified or reported. To give a simple
example, the manner in which the tax status of a transaction is
identified could result in the application of a higher interchange
rate, even though tax status should not be relevant to a Federal agency
transaction. The multiplicity of categories also makes it more
difficult to negotiate genuine rate reductions because, regardless of
the best rate that may be negotiated for a transaction type, any number
of variables would allow a card network to shift a specific transaction
into a higher rate category.
A system of two-tiered rates, such as the one embodied in Senator
Durbin's interchange amendment, should not affect the Federal
Government as an acceptor of cards, since it would not change a Federal
agency's internal systems or processes. Under the current model, the
Federal Government already is charged different rates based on
interchange categories and levels within those categories; adding tiers
would be no different. The operational effect of a two-tiered model, if
any, would occur in the central routing and processing systems of the
card networks and the card issuers.
Question. Mr. Grippo, in your testimony, you state that ``having
the ability to opt out of certain transactions based on cost . . .
would allow the Treasury to negotiate pricing terms on behalf of the
taxpayer from a more equitable position.'' Under a two-tiered system of
interchanges rates, would Federal entities be inclined to opt out of
higher cost transaction if they could?
Answer. In deciding whether to opt out of transactions, Federal
agencies would assess the overall interchange costs associated with a
given program, activity, or operating location and determine whether
cards were a cost effective method of collection. That is, an agency
would not review its costs on a transaction-by-transaction basis and
opt out of individual transactions based on the tier or rate associated
with the card issuer; rather, the agency would opt out by establishing
a policy not to accept cards, regardless of the card issuer, for groups
or types of transactions based on the overall costs to a program,
activity, or operating location. Under a two-tiered system of
interchange rates, Federal agencies might be less inclined to opt out
of transactions than under the existing system, because the overall
interchange costs of a two-tiered model likely would be lower than the
current single-tier system.
______
Questions Submitted to Alicia Puente Cackley
Question Submitted by Senator Ben Nelson
Question. How do you foresee the regulation of debit card
interchange fees impacting prepaid debit card programs used by States
to disburse government benefits and assistance?
Answer. Although various States are using prepaid Visa or
MasterCard debit cards for unemployment or other State cash benefits,
very few are using them for food and nutrition assistance payments
because of program funding and cost considerations. The food and
nutrition programs generally are excluded from the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 provisions governing
Federal Reserve regulation of interchange fees for debit transactions.
In addition, the Food and Nutrition Act of 2008 provides that no
interchange fees shall apply to electronic benefit transfer
transactions for Supplemental Nutrition Assistance Program payments.
(Public Law 110-246, title IV, Sec. 4115(a)(9) (codified at 7 U.S.C.
2016(h))). Retailers are also eligible to obtain free processing
equipment and accept these payments at no cost to them.
Similarly, a provision in the Dodd-Frank Act exempts debit cards
and prepaid cards \1\ provided for use only in a Federal, State or
local government-administered payment program from the cards that will
be subject to any rules regarding the reasonableness of fees that the
Federal Reserve is tasked with creating under that law, which should
preclude the impact of any lower interchange fees resulting from that
act from affecting issuers' willingness to participate in such programs
with States. However, States' use of Visa or MasterCard debit cards for
these programs does not eliminate the costs associated with
administering a benefits program, but instead shifts who bears some of
these costs from the State to the merchants that accept the cards and
pay the associated interchange fees.
---------------------------------------------------------------------------
\1\ This exemption applies unless the card is a general use prepaid
card for which the following fees may be charged (1) an overdraft fee,
and (2) a fee for the first withdrawal of the month from an automated
teller machine.
---------------------------------------------------------------------------
______
Questions Submitted by Senator Jon Tester
Question. In your testimony, you describe the substantial rebates
that Federal Agencies received in return for making purchases using
credit cards, totaling $255 million in fiscal year 2009. What are the
rebates that Federal Agencies receive used for? Are there any
regulations with respect to how these funds may be used? Is there any
reason why they are not returned to the Treasury to offset the cost of
interchange fees? What would the impact of higher interchange rates be
on the rebates that Federal Agencies currently receive?
Answer. According to information we collected for our 2008 report,
Federal entities differ in how they use their rebates. Two of the
Federal entities we spoke with return the rebates directly to the
location that originated the relevant transaction, one adds the rebates
into general income for the entity, and the other allocated rebates to
a working capital fund for use in various initiatives.
The Office of Management and Budget and the Treasury Department
issue guidance for covered agencies' use of rebates.\2\ According to
the manager of the General Services Administration, entities comply
with the guidance by, among other things, returning their card rebates
to the appropriation or account from which they were expended, and
using rebates for any legitimate purchase by the appropriation or
account to which they were returned. The manager of the General
Services Administration stated that if Federal entities were required
to remit these rebates to Treasury they might have less incentive to
use purchase cards.
---------------------------------------------------------------------------
\2\ OMB Circular 123-A, Appendix B, Ch. 7, and Treasury Financial
Management Manual Sec. 4530.
---------------------------------------------------------------------------
If interchange rates were changed, the amount of rebates that
government agencies receive could also be affected. The manager of the
General Services Administration purchase card program told us that
banks facing reduced interchange fee revenue might reduce the amount of
rebates Federal entities receive for using purchase cards. However,
government agencies have identified other benefits to using cards,
including estimated savings from avoiding manual and paper-based
acquisition processes that exceed the total rebate amounts. As a
result, potentially lower rebate amounts may not reduce the willingness
of government agencies to continue to use purchase cards.
Question. In your testimony, you discuss the utility of
streamlining the many different interchange rates that Federal entities
pay. How would streamlining rates impact the cost of processing these
transactions? What would be the impact on Federal entities of a two
tiered system of interchange rates like the one included in Senator
Durbin's interchange amendment where different interchange rates would
apply to transactions based on the size of the issuer?
Answer. Our testimony noted that both Visa and MasterCard have a
designated merchant category for Federal entities that provides for
interchange rates that are lower than those for many other merchant
categories. However, like other merchants that accept cards, the actual
interchange rate paid can vary across this category depending on the
type of card accepted or how it is processed. Our November 2009 report
noted that one way to mitigate the impact of interchange fee reductions
on smaller issuers was to exclude them from reductions or reduce rates
on only selected types of cards that smaller issuers may not issue as
frequently.\3\ If the level of interchange rates were to vary by size
of issuer--with cards issued by larger issuers carrying lower rates and
those from smaller issuers carrying higher rates, then the costs of
card acceptance by Federal entities would likely change based on the
extent to which Federal entities accept cards issued by larger issuers
versus smaller ones. Given that most cards are issued by larger
issuers, this likely means that Federal entities would experience
reductions in their card acceptance costs.
---------------------------------------------------------------------------
\3\ GAO, Credit Cards: Rising Interchange Fees Have Increased Costs
for Merchants, but Options for Reducing Fees Pose Challenges GAO-10-45
(Washington, D.C.; Nov. 19, 2009).
---------------------------------------------------------------------------
______
Question Submitted to Janet Langenderfer
Question Submitted by Senator Jon Tester
Question. In your testimony, you discuss the utility of
streamlining the many different interchange rates that Federal entities
pay. How would streamlining rates impact the cost of processing these
transactions? What would be the impact on Federal entities of a two
tiered system of interchange rates like the one included in Senator
Durbin's interchange amendment where different interchange rates would
apply to transactions based on the size of the issuer?
Answer. In my June 16, 2010, testimony, I stated: ``Our April 2010
statements for the 4 major card brands contained more than 200
different rates. We work aggressively to analyze our monthly
statements, looking for opportunities to cut our costs, and you can see
that our fees are based on a complicated rates matrix.''
This example was used to illustrate the size of the problem. While
the number of rates charged is difficult to manage, the bigger problem
is the complexity of the rates. In fact, the interchange rates applied
to Amtrak's transactions are ambiguous and mired in complicated
technicalities. The critical issue is that the large number of
different rates and the complexity of those rates--applied to
approximately 15 million transactions per year at Amtrak--makes the
effort to reduce interchange rates extremely difficult. Significantly
fewer rates with more direct qualifications (the ``streamlining'' to
which you refer) would make it possible--and economic--for Amtrak to
determine which transactions are receiving the most favorable rates and
how to get better rates for those transactions that are not.
When one looks at the rates listed on the web sites of the credit
card companies, it may appear that there are only three primary factors
used to determine the rates: merchant type; card product code (such as
debit card, corporate card, rewards card, etc.); and method of data
entry (such as Internet, automated self service, etc.).
Additionally, the sites show that in certain select categories,
there are also discounts for large volumes, but this does not apply to
Amtrak.
Much more difficult to discern from the published charts are the
long list of technical requirements needed for each transaction to
qualify for the lowest rate within its parameters. While some of the
parameters (such as merchant type or product code) are determined at
the time of the transaction, many of the technical details are not.
In order to be charged the lowest rate for a particular
transaction, all of the data must be submitted correctly by the
merchant. However, once that data is sent to the credit card company,
the merchant has no ability to control the integrity of the data it has
submitted.
The only indication that anything has gone wrong is when one looks
at a statement (at earliest a day later) which may show that a higher
rate was charged for ``technical reasons.'' Sometimes the technical
reasons can be traced back to a cause and the error can be fixed for
future transactions that may contain that error. Other times, no
explanation can be found.
On one occasion, after much persistence by Amtrak, the source of
one such technical problem was found and corrected. The error was not
made by Amtrak but by the credit card company itself. And yet, Amtrak
over-paid thousands of dollars in interchange fees over a 2-year
period.
The lack of clarity and trace-ability of the interchange rates is
by far the most pressing challenge for Amtrak. Interchange rates that
are based on ambiguous, opaque technical criteria are the true source
of higher costs for Amtrak.
CONCLUSION OF HEARING
Senator Durbin. The hearing of this subcommittee will stand
recessed.
[Whereupon, at 4:35 p.m., Wednesday, June 16, the hearing
was concluded, and the subcommittee was recessed, to reconvene
subject to the call of the Chair.]
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