[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
UNDERSTANDING THE FEDERAL RESERVE'S
PROPOSED RULE ON INTERCHANGE FEES:
IMPLICATIONS AND CONSEQUENCES OF
THE DURBIN AMENDMENT
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
----------
FEBRUARY 17, 2011
----------
Printed for the use of the Committee on Financial Services
Serial No. 112-8
UNDERSTANDING THE FEDERAL RESERVE'S
PROPOSED RULE ON INTERCHANGE FEES:
IMPLICATIONS AND CONSEQUENCES OF
THE DURBIN AMENDMENT
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
FEBRUARY 17, 2011
__________
Printed for the use of the Committee on Financial Services
Serial No. 112-8
U.S. GOVERNMENT PRINTING OFFICE
64-557 PDF WASHINGTON : 2011
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HOUSE COMMITTEE ON FINANCIAL SERVICES
SPENCER BACHUS, Alabama, Chairman
JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
KENNY MARCHANT, Texas BRAD MILLER, North Carolina
THADDEUS G. McCOTTER, Michigan DAVID SCOTT, Georgia
KEVIN McCARTHY, California AL GREEN, Texas
STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
BILL POSEY, Florida GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
Pennsylvania ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia JOE DONNELLY, Indiana
BLAINE LUETKEMEYER, Missouri ANDRE CARSON, Indiana
BILL HUIZENGA, Michigan JAMES A. HIMES, Connecticut
SEAN P. DUFFY, Wisconsin GARY C. PETERS, Michigan
NAN A. S. HAYWORTH, New York JOHN C. CARNEY, Jr., Delaware
JAMES B. RENACCI, Ohio
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
Larry C. Lavender, Chief of Staff
Subcommittee on Financial Institutions and Consumer Credit
SHELLEY MOORE CAPITO, West Virginia, Chairman
EDWARD R. ROYCE, California, Vice CAROLYN B. MALONEY, New York,
Chairman Ranking Member
DONALD A. MANZULLO, Illinois LUIS V. GUTIERREZ, Illinois
WALTER B. JONES, North Carolina MELVIN L. WATT, North Carolina
JEB HENSARLING, Texas GARY L. ACKERMAN, New York
PATRICK T. McHENRY, North Carolina RUBEN HINOJOSA, Texas
THADDEUS G. McCOTTER, Michigan CAROLYN McCARTHY, New York
KEVIN McCARTHY, California JOE BACA, California
STEVAN PEARCE, New Mexico BRAD MILLER, North Carolina
LYNN A. WESTMORELAND, Georgia DAVID SCOTT, Georgia
BLAINE LUETKEMEYER, Missouri NYDIA M. VELAZQUEZ, New York
BILL HUIZENGA, Michigan GREGORY W. MEEKS, New York
SEAN P. DUFFY, Wisconsin STEPHEN F. LYNCH, Massachusetts
JAMES B. RENACCI, Ohio JOHN C. CARNEY, Jr., Delaware
ROBERT J. DOLD, Illinois
FRANCISCO ``QUICO'' CANSECO, Texas
C O N T E N T S
----------
Page
Hearing held on:
February 17, 2011............................................ 1
Appendix:
February 17, 2011............................................ 77
WITNESSES
Thursday, February 17, 2011
Floum, Joshua R., General Counsel, Visa Inc...................... 43
Kantor, Doug, Partner, Steptoe & Johnson, on behalf of the
Merchant Payments Coalition.................................... 41
Kemper, David W., Chairman, President and CEO, Commerce Bank, on
behalf of the American Bankers Association (ABA) and the
Consumer Bankers Association (CBA)............................. 40
Michael, Frank, President and CEO, Allied Credit Union, on behalf
of the Credit Union National Association (CUNA)................ 37
Prentzas, Constantino (Gus), Owner, Pavilion Florals, and Life &
Health Fitness................................................. 36
Raskin, Hon. Sarah Bloom, Governor, Board of Governors of the
Federal Reserve System......................................... 2
Seltzer, David, Vice President and Treasurer, 7-Eleven Inc., on
behalf of the Retail Industry Leaders Association (RILA)....... 45
APPENDIX
Prepared statements:
Canseco, Hon. Francisco...................................... 78
Marchant, Hon. Kenny......................................... 80
Renacci, Hon. James.......................................... 82
Floum, Joshua R.............................................. 84
Kantor, Doug................................................. 101
Kemper, David W.............................................. 147
Michael, Frank............................................... 160
Prentzas, Constantino (Gus).................................. 174
Raskin, Hon. Sarah Bloom..................................... 179
Seltzer, David............................................... 192
Additional Material Submitted for the Record
Capito, Hon. Shelley Moore:
Written statement of various higher education associations... 199
Written statement of the Electronic Payments Coalition....... 200
Written statement of U.S. PIRG, Public Citizen, and the
Hispanic Institute......................................... 204
Written statement of the 60 Plus Association................. 211
Written statement of the Association of Kentucky Fried
Chicken Franchisees, Inc................................... 212
Written statement of the Independent Community Bankers of
America (ICBA)............................................. 215
Written statement of Senator Richard J. Durbin............... 220
Written statement of Hy-Vee.................................. 225
Written statement of the National Association of Federal
Credit Unions (NAFCU)...................................... 227
Written statement of the Network Branded Prepaid Card
Association (NBPCA)........................................ 230
Marchant, Hon. Kenny:
Written statement of the Texas Credit Union League........... 234
Perlmutter, Hon. Ed:
Letter from William A. Cooper, Chairman and CEO, TCF
Financial Corporation...................................... 236
Kantor, Doug:
Excerpt from a House Judiciary Committee hearing held on May
15, 2008................................................... 331
Kemper, David:
Written responses of the American Bankers Association to
questions submitted by Representative Capito............... 334
Written responses to questions submitted by Representative
McCarthy................................................... 337
Michael, Frank:
Written responses to questions submitted by Representative
McCarthy................................................... 338
Raskin, Hon. Sarah Bloom:
Written responses to questions submitted by Representative
Capito..................................................... 339
Written responses to questions submitted by Representative
Maloney.................................................... 340
Written responses to questions submitted by Representative
McCarthy................................................... 361
Written responses to questions submitted by Representative
Pearce..................................................... 363
Written responses to questions submitted by Representative
Westmoreland............................................... 364
Seltzer, David:
Written responses to questions submitted by Representative
McCarthy................................................... 368
UNDERSTANDING THE FEDERAL RESERVE'S
PROPOSED RULE ON INTERCHANGE FEES:
IMPLICATIONS AND CONSEQUENCES OF
THE DURBIN AMENDMENT
----------
Thursday, February 17, 2011
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 11:30 a.m., in
room 2128, Rayburn House Office Building, Hon. Shelley Capito
[chairwoman of the subcommittee] presiding.
Members present: Representatives Capito, Marchant, Royce,
Manzullo, Hensarling, McHenry, Pearce, Westmoreland,
Luetkemeyer, Huizenga, Duffy, Renacci, Canseco; Maloney, Watt,
Baca, Miller of North Carolina, Scott, Velazquez, Meeks, Lynch,
and Carney.
Also present: Representatives Green, Welch, Peters,
Perlmutter, Clay, and Cleaver
Chairwoman Capito. This hearing will come to order. I would
like to welcome everyone to the Subcommittee on Financial
Institutions and Consumer Credit's first hearing for the 112th
Congress.
Before we start, I would like to remind everyone briefly of
our rules. Ranking Member Maloney and I have agreed that both
sides are going to waive our opening statements in light of
this chaotic schedule that we have.
So normally, we would have 10 minutes for the purpose of
opening statements on each side. Without objection, we can have
all members' opening statements be made a part of the record. I
would like to remind the witnesses as well that you have 5
minutes to give your oral statements, and without objection,
your written statements will be made a part of the record.
The last item of housekeeping is to first of all say how
thrilled I am to have the gentlelady from New York as the
ranking member of this subcommittee. She has a long history of
dealing with issues, and I am very excited that we are going to
be able to work together on this subcommittee. But I would like
to recognize her for the purpose of making a unanimous consent
request.
Mrs. Maloney. Thank you. I join the chairwoman in welcoming
all of the witnesses who will be testifying today, as well as
the members of the subcommittee. I congratulate the Chair on
her appointment and express my deep desire to work
constructively to move forward in a positive way for our
country.
I am thrilled to be here. We have a very good panel;
welcome to Governor Raskin. Due to time constraints, I am
yielding back and will place my statement in the record. And I
am delighted that this thoughtful hearing is among our first.
Thank you.
Chairwoman Capito. Thank you.
I would also like to ask for unanimous consent for
Representative Welch to participate in the hearing. If there
are no objections, is is so ordered.
With that, I would like to say before I introduce our first
witness, this is obviously a topic of great interest to a lot
of people, so we are going to be listening very closely and I
appreciate everybody's weighing in on the topic. And hopefully
the point of this hearing is to hear all sides of the issue so
we understand it better. So with that, I would like to welcome
the Honorable Sarah Bloom Raskin who is a Governor on the
Federal Reserve Board.
STATEMENT OF THE HONORABLE SARAH BLOOM RASKIN, GOVERNOR, BOARD
OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Ms. Raskin. Chairwoman Capito, Ranking Member Maloney, and
members of the subcommittee, thank you for the opportunity to
discuss the Board's proposed Regulation II which the Federal
Reserve was directed to implement pursuant to Section 1075 of
the Dodd-Frank Act. Generally unnoticed by the customer, each
time a debit card is swiped to make a purchase here in the
United States, interchange fees are paid by the merchant to the
bank that issued the debit card.
Interchange fees are a controversial feature of the debit
card system. And their substantial rise in recent years has
precipitated a national and international debate about the
appropriate level of those fees. Supporters of the current
interchange system contend that interchange fees play an
important role in balancing the two sides of the payment card
market by encouraging merchants to accept cards and encouraging
card issuers to issue cards and consumers to hold and use them.
Critics of interchange fees contend that due to
characteristics of the debit card market, merchants generally
do not have the leverage to control their cost of accepting
debit cards. And network competition tends to result in higher
interchange fees as networks strive to attract issuers and
cardholders.
Critics of interchange fees note that non-card-based
payments take place without any such compensation being
provided by merchants' banks to consumers' banks. So for
Section 1075 of the Dodd-Frank Act, Congress engaged in this
debate and enacted a law that addresses the concerns of
interchange fee critics in several ways.
First, I will discuss what is referred to as the
prohibition on network exclusivity arrangement and routing
restrictions. Second, I will discuss the part of the law that
requires the Board to establish an interchange fee standard.
The statute exempts small issuers, government benefit programs,
and certain prepaid cards from this interchange fee standard
but it does not exempt them from the exclusivity and routing
restrictions.
Turning first to the prohibition on network exclusivity,
the statute requires the Board to adopt rules that prohibit
issuers and payment card networks from restricting the number
of networks on which a debit card transaction may be processed
to fewer than two unaffiliated networks.
We requested comments on two alternative interpretations of
this prohibition. One interpretation would require issuers and
networks to allow a debit card transaction to be routed over at
least two unaffiliated debit card networks, for example, one
signature-based network and one unaffiliated PIN-based network.
Another interpretation would require a debit card to have
at least two unaffiliated networks for each method of
authorization that can be used with that card, such as
signature and PIN. This latter approach would provide more
merchants with routing choice but would entail far more
substantial operational changes by networks, issuers, merchant
acquirers, merchants, and their processors.
Additionally, the statute requires the Board to adopt rules
that prohibit issuers and networks from inhibiting the ability
of merchants to route debit card transaction over any network
that may process such transactions. The proposed rule includes
examples of actions that would impede merchants' routing
flexibility. These network exclusivity and routing provisions,
along with the statutory provisions that give merchants more
flexibility to set differential prices based on method of
payment used, could promote competition among networks and
place downward pressure on interchange fees.
But let's turn to interchange fee standards. In addition to
these market approaches to constraining interchange fees, the
statute limits any interchange fee that an issuer may receive
for a debit card transaction to an amount that is reasonable
and proportional to the issuer's cost with respect to the
transaction.
To establish standards for assessing whether an interchange
fee meets this statutory reasonable and proportional
requirement, the law directs us to consider a number of things.
First, the functional similarity between debit card
transactions and checks which clear at par without interchange
fees.
The statute also directs us to distinguish between the
issuer's incremental cost to authorize, clear, and settle a
particular transaction which by law, we must consider. And the
other costs that are not specific to a particular transaction
which by law we may not consider. Given the statute's mandate
to consider the functional similarities between debit card and
check transactions.
Our proposal includes as allowable costs only those
incremental costs that the statute explicitly directs us to
consider. There is no single generally accepted definition of
the term ``incremental cost'' as it applies to a particular
transaction. So the proposal uses average variable cost as a
proxy. We have requested comments on whether other costs of a
particular transaction should be included as allowable costs
and how these costs should be measured.
The Board requested comment on two alternative approaches
for implementing the interchange fee standard. The first
approach is based on each issuer's allowable cost with a safe
harbor and a cap. The second approach adopts a cap that is
applicable to all covered issuers.
We also requested comment on different conceptual
approaches for implementing a fraud prevention adjustment to
the interchange fee standard. Comments on the proposed rule are
due by next Tuesday, February 22nd. We have already received
thousands of comments raising a variety of issues and expect to
receive many more in the next several days. The other Board
Members and I are reserving judgment on the terms of the final
rule until we have the opportunity to consider these comments.
As you can see, the debit card interchange provisions of
the Dodd-Frank Act raise a number of complex issues. The Board
is devoting substantial resources to understanding and
addressing these issues within the parameters established by
the statute. We welcome input from the public and from members
of the committee in this effort. And I would be happy to answer
any questions you may have.
[The prepared statement of Governor Raskin can be found on
page 179 of the appendix.]
Chairwoman Capito. Thank you, Madam Governor. And I would
like to lead off the questions. I appreciate your testimony. On
the issue of the exemption, on page five of your testimony, you
talked about the--and you said this in your statement that the
statute applies these provisions to all issuers, talking about
the exclusivity portion of it, including the small issuers and
the government-administered payment and other pre-paid
programs.
As you are well aware and you stated in your statement,
this is an issue that has brought many questions as to whether
the exemption for community banks and credit unions can
actually result in exempting them from the interchange fee. And
you mentioned in your statement pretty--and actually Mr.
Bernanke said today which I am sure you are probably not quite
aware of because he just said it in another committee, that
there are some risks that the exemption will not be effective.
Could you speak a bit about how this exemption can hold up
through the different parameters that you are charged with?
Ms. Raskin. Certainly. And thank you. Thank you for that
question. Yes, small banks are exempt. They are exempt from the
interchange rules portion of this section of the law. And they
are also made to be exempt in the proposed rule that the
Federal Reserve has put out for comment.
The small issuer exemption is looked at from the
perspective of asset size. So we have set a $10 billion level
and that is looked at from the perspective of the size of the
issuer as well as its affiliates and subsidiaries. But as you
note, small banks and credit unions do in fact have concerns
about this exemption. And they note in particular that the law
does not put a similar exemption that it has in the interchange
fee portion into the other portion of the law.
So the exemption does not apply in the provisions having to
do with network exclusivity and the routing restrictions. Just
to elaborate, Chairman Bernanke's earlier comments, there are,
I think, legitimate questions regarding how in fact small
issuers are going to in essence have this exemption work in
their favor because there is indeed no statutory authority
provided in the law that would permit the networks to in fact
engage in two-tier pricing.
So it is a matter of whether the networks in fact will put
two tiers of pricing in place and the extent to which that
pricing becomes maintainable or whether in fact it gets
rerouted by market forces.
Chairwoman Capito. Right. And the question being that if
you are an issuer from a community bank or a credit union, that
your interchange fee could remain higher, will there be, as you
said, dollar pressure to move customers towards the lower cost
interchange issuers?
The second question I have is on the fraud provision,
because this is the one that I have heard a lot about. And in
your statement, you mentioned that the--considering the
comments they received, the Board plans to issue a specific
proposal on the fraud prevention adjustment.
My understanding is that the Federal Reserve felt that the
language was written so tightly that to calculate for fraud
prevention was not included in the parameters of--when you were
looking at the cost, the incremental cost.
What do you mean by the comment? Are you actually going to
be calculating this? Or is this something that is going to come
through in the comments? Do you have a comment on that?
Ms. Raskin. Sure. The whole issue of fraud prevention cost
is dealt with explicitly in the statute. So, the statute has
directed the Federal Reserve Board to allow for a fraud
prevention adjustment that takes into account fraud prevention
cost. And essentially, what we are directed to do by law is to
develop standards for what those fraud prevention--
Chairwoman Capito. But not a pricing standard?
Ms. Raskin. It is actually silent on standards, but
essentially, the law requires us to develop standards. And what
we have done, because this is an area that I think is something
we want to learn more about, is in our proposed rule, we have
asked for comment on what fraud prevention costs might, in
fact, be. These are costs that we should consider before we
promulgate the final rule.
So we have, in fact, adhered to the notion that fraud
prevention causes something that standards need to be developed
for. And we really await, with some eagerness, the comments
that we receive and we will review them so that we can
determine what makes sense.
Chairwoman Capito. Right. Thank you.
I will turn to our ranking member for questioning.
Mrs. Maloney. Thank you very much, and congratulations on
your appointment, Governor Raskin.
As you may know, I had the honor of serving on a conference
committee with Chairman Frank and Mr. Meeks and Mr. Pearce and
Mr. Watt. Many of my colleagues were on this panel.
We did work quite a bit on the compromise language that we
put forward on interchange. And part of it was that everybody
be treated fairly and that the financial institutions be able
to recoup the price or cost of providing a service, but also
limiting it to a reasonable amount.
When do you think you will finish your review of fraud
prevention, which regrettably is becoming a huge issue, along
with identity theft and the other items that are part of our
financial system? When do you think that review process will be
over?
Ms. Raskin. By law, we are required to have final rules in
place by July 21st.
Mrs. Maloney. July 21st, okay.
Ms. Raskin. For effectiveness. And by April 21st, we need
to have--after we back up from the date of effectiveness, by
April 21st, we would need to have final rules in place.
So, backing that up further, the comment period is now
coming to an end, but there are still some more days to it, and
on Tuesday, the comment period ends. And as I noted before, one
of the issues we put out explicitly for comment has to do with
the fraud adjustment issue. So those comments are coming in and
we will consider them carefully after they are all in and make
a determination as to how to appropriately contemplate
including them or not in the rule.
Mrs. Maloney. In relation to the comment period, some
organizations, some constituents have suggested that the
process was not as thorough as it should be, that the Federal
Reserve should have had more time to study the issue and to
survey a wider set of financial institutions and retail
establishments.
Can you go through your review process and whether or not
you believe it was extensive enough? And what studies have been
done either by the Federal Reserve or by others? Can you
comment on your review process?
I know from the credit card bill of rights, which I track
daily, it was expensive and exhaustive. But this one, I have
not--with the elections and everything else--tracked as
carefully. So, if you could go through the details of the
review process, please?
Ms. Raskin. Certainly. It was quite a massive set of
efforts because, as you know, the Dodd-Frank Act passed July
21, 2010. So, from July to October, the Federal Reserve Board
staff engaged in a number of industry surveys; from July to
September, those surveys were developed in-house.
We essentially arranged for multiple public drop-in calls
for industry participants to comment on the draft surveys. I
should note that some calls had well over 100 participants and
there were more than 50 phone call lines that had to be opened
up for this process.
We accepted many written comments on draft. And the input,
I think, really did help us refine the survey instrument so
that by the time September 13th came around, surveys were sent
to all the covered issuers.
Surveys were also sent to payment card networks and to
large merchant acquirers. And what we indicated in those drafts
in those final surveys was that we would like the responses due
October 12, 2010.
Let me say a little bit about what those surveys, who they
went out to and what they covered. Essentially, there were
three major surveys: a debit card issuer survey; a payment card
network survey; and a merchant acquirer survey.
For the debit card issuer survey, it was sent to about 131
financial organizations which had over $10 billion in assets.
Of those 131 organizations, 89 responded with data, 13 did not
have debit card programs, 3 declined to participate, and the
Board didn't receive any communication regarding 26 of them.
The questions that survey included were very broad in terms
of cost. So, they not only included authorization clearing and
settlement costs, but included fixed and variable costs and
other broad definitions of cost.
In terms of the payment card network survey, that was sent
to all 14 networks which we believe to be active in debit
card--
Chairwoman Capito. Just a second. I am going to let you go
on, if you could kind of summarize it more quickly, because
this is an area of very great importance. So, we will try to
stick to the 5-minute--
Ms. Raskin. It was very thorough.
Chairwoman Capito. Do you think you need more time to study
this issue?
Ms. Raskin. I would leave that to your discretion. I can
complete the answer for the record and you can evaluate whether
you think it was something that we possibly missed.
Mrs. Maloney. I think that would be appropriate if we can
get in writing a review of your entire review system and other
studies that you know that are out there. Thank you.
Chairwoman Capito. Thank you.
Mr. Marchant, from Texas.
Mr. Marchant. Thanks, Madam Chairwoman.
The issue I would like to stress this morning is the claim
by the small banks and credit unions that the regulation of
this fee, lowering it from, according to everything I have been
able to read, 44 cents to about 12 cents, 12 to 15 cents,
results in a loss of the income of about $12 billion. Is that a
number that the Fed has recognized? Is that a recognized
number, is that a claim or--
Ms. Raskin. I have heard that number used.
Mr. Marchant. Is it a reasonable argument that this
regulation will limit the amount of fee income that the banks
and credit unions can charge?
Ms. Raskin. The interchange fee portion of the rule
essentially requires the Fed by law to look at the reasonable
and proportional cost that the issuing bank faces.
One methodology that we follow in order to try to
understand the broad nature of what those costs might be was
essentially to engage in the set of surveys that I described.
Interestingly enough, what those surveys revealed was a
broad range of average variable cost--and as I mentioned
before, the average variable cost proxy was used for
incremental cost. The language of the statute uses the term
``incremental cost,'' that was a little bit hard to translate
into something workable. And we thought the notion of average
variable cost came closest to it.
So, in our survey, we looked at a range of issuing banks
and tried to understand what their average variable costs were.
And we saw interestingly enough quite a range, so that there
are some issuing banks that can do this at very low cost and
others that do it at very high cost.
When the amount that you cite, of 12 cents and 7 cents,
when those amounts were arrived at, they were really derived
from standards regarding those average variable costs. So, the
7 cents, essentially, is the median point that we found in our
survey, so the median issuing banks that would be covered by
this proposed rule has average variable cost of 7 cents a
transaction, the 12-cent number was arrived at in terms of
looking at the 80th percentile of issuing banks that had
responded. So, 80 percent of the banks in the sample survey
were essentially at 12 cents or lower in terms of their average
variable cost.
Mr. Marchant. My concern is that at a stage in the
country's banking system where many banks are trying to rebuild
their capital base, they are trying to maintain some degree of
profitability, and they are desperately trying to stay open, in
many cases, especially the small banks and the credit unions
that we, at this time, decide that we are going to go in and
review standards and cap the amount of fees that they can
charge on this, in effect, lowering their profit, not allowing
them to put profit into their capital base and something that
is very, very counterproductive in this day and age that we are
in.
Why has it become so critical to do this now? Is there a
feeling--I understand that you have been instructed--the Fed
has been instructed to do it. But I don't receive any
complaints in my district from people who are complaining that
their debit card fees are too high or that their--that in fact,
they love their debit cards, they love the ability of the banks
to offer them a debit card and not have to pass on exorbitant
fees.
So, I think that--I would like for you to take more time, I
would like for you to consider the impact that this is going to
have on small to medium-sized banks and on their ability to add
capital to their banks so they can have more money.
Chairwoman Capito. Thank you.
Mr. Watt?
Mr. Watt. Thank you, Madam Chairwoman.
Governor Raskin, I know you can't control the pace of this
process, and you can't tell us whether we put you under too
tight of a deadline, but I need to push you a little bit more
on Mrs. Maloney's question. It seems to me that from what I
gather, you had at least a two- or three-stage process: a
survey; a proposed rule; and a comment period on one aspect of
this and not on the fraud cost aspect of it--9 months to do
something that we punted to you as a Congress, it wasn't the
House bill, it was in the Senate bill, we had to reach
reconciliation.
My question to you is not should we or ought we, the
question is whether you would benefit from a further extension
of time to evaluate these multiplicities of comments,
particularly on the fraud calculation section of this, and go
through a more thorough process.
Ms. Raskin. Thank you for that question, and I want to say
that we are doing--
Mr. Watt. I understand that, Ms. Raskin. I am just trying
to figure out whether you would benefit or wouldn't benefit.
Don't be vague. Either you would or you wouldn't.
Ms. Raskin. It is hard to--it is actually hard to know and
I am not trying to skirt that--
Mr. Watt. Okay, then, that is the answer. Okay.
Ms. Raskin. You know.
Mr. Watt. Let me go to the next question. If that is the
answer, then you don't have an answer, that is really what you
are saying--
Ms. Raskin. I am saying the comment period is still moving
strong and we still--
Mr. Watt. You know you are going to get a substantial
number of comments, you know you have gone through more stages
on one aspect of this than you have on the other aspect of it,
the fraud section, because you just said that. But I will draw
my own conclusions from that.
The other real question I have is whether there is
something in this rule that really addresses what we would be
trying to get to, I think in this whole discussion, and that is
whether--is there anything here that allows you to assess who
benefits from this process, whether the issuer benefits,
whether the merchant benefits, our ultimately beneficiary we
were hoping was the consumer.
I guess my question is, is there anything in what we gave
you as instructions to rule make about that would make some
assessment of whether this is just a fight between merchants
and issuers or whether ultimately the consumer really is going
to benefit from this cost reduction or cost shift.
I have been troubled by that from the beginning of this
discussion because I haven't been able to see how we ensure
that the ultimate beneficiary that we were advocating for--that
we all should be advocating for, consumers, really get the
benefit of this. Is there anything in the legislation or your
rule-making process that will allow you to address that?
Ms. Raskin. It is an excellent question and the consumer
effects are always in the forefront of our deliberations. The
statute itself didn't direct us to look at the consumer effects
but that is beside the point. The consumer effects are
something that we have tried carefully to articulate and to the
extent we can try to measure.
I am going to describe a little bit what those--
Mr. Watt. No, no. I am trying to figure out what in this
rule would do that? Is that what you are getting ready to say?
Ms. Raskin. What I am getting at is essentially, I think
the theory behind--
Mr. Watt. Oh, I know the theory. I am trying to talk about
the practice. Is there something in the rule that gets you to
that determination?
Ms. Raskin. Yes. The idea--
Mr. Watt. Okay, tell me what that is. I know the theory.
Ms. Raskin. The idea is that lower interchange fees, it is
argued, would lower cost to merchants who possibly in
competitive environments, could lower their cost to consumers.
That is one consumer effect. Not that that effect was directed
by Congress to be looked at explicitly but that is what
animates, I believe, the statute.
So, there is that one consumer effect. Another consumer
effect which may work in a different way has to do with debit
card holders who get rewards. Those rewards are often made
possible through higher interchange fees.
If those rewards were somehow to be reduced or changed, I
think that would be a factor that would be involved in
evaluating the consumer well-being. Similarly, we would want to
think about banks that charge fees for other services. If banks
were to change that portfolio of services, query as to whether
consumers would be helped or hurt.
So, I think that there are consumer effects, and my sense
from the statute is that these consumer effects animated the
statutes but they are not particularly noted explicitly.
Chairwoman Capito. Thank you.
We will go to Mr. Royce, from California.
Mr. Royce. Thank you, Madam Chairwoman.
I think some of the surprising things in life are the
things we all take for granted. And when I think about the
attacks on our payment system that occur every day, there are
attempts to find new innovative ways to create fraud. And you
look at the billions and billions of dollars that are invested
by card issuers and invested in the system, in building a
network that in such an extraordinary way today allows the
system to stay ahead, for the most part, to the extent that the
consumer himself or herself does not have to pay for that
fraud. There is a guarantee that the system works well enough,
and I guess what is surprising to me is how often, in most
cases, the fraud is actually discovered by these complicated
processes that have been developed to pick this up in the
process of the fraud being committed before the consumer ever
knows that she or he have been defrauded.
And so, you look at the billions that are invested into
that and I was going to ask, why does the proposed rule lack a
full accounting of several things? One would be the fixed cost
in all of this and the next would be the network fees and other
costs. But why did the Board omit adjustment for fraud
prevention cost or actual fraud cost? I ask that because in
watching the way in which fraud evolves so quickly, it is clear
that whatever we invested yesterday, it is not going to be
enough tomorrow to keep up with all the miscreants who are
finding new ways to attack the system.
Could I have your thoughts on that?
Ms. Raskin. Certainly. The fraud prevention costs, as you
can imagine, are probably something that are going to be
substantial. And I imagine that through this comment period, we
are going to be hearing about what those different programs
look like, what the technologies look like, what in fact the
parameters are for so-called legitimate fraud prevention
efforts.
And part of the reason for this comment period was really
to get a more robust understanding of what you are talking
about in making sure that essentially we understand what
efforts and costs go into fraud prevention. That said, I do
want to suggest something that the statute was silent on, and
that has to do with costs that are related to a particular
transaction that are not related to authorization, clearance,
and settlement. So if you read the law carefully, as we have
now done many times, the law directs us to look at a couple of
things.
We are supposed to consider, for example, functional
similarity, that is, the similarity between debit card cost and
debit card transactions as compared to check clearing. But, we
are also supposed to consider the incremental cost that is
incurred by an issuer when that issuer engages in authorization
clearance or settlement. And we are supposed to make sure that
those costs are specific--debit.
Mr. Royce. Okay.
Ms. Raskin. So, what you are suggesting in terms of fraud
losses, could be something that falls in a so-called bucket
that the statute is silent on, which doesn't mean that it would
be either--
Mr. Royce. Right, right. No, I understand your point but
there is going to be less bank incentive, clearly. There are
going to be fewer resources for fraud prevention and less
likelihood that the billions that need to be invested in the
future will be there.
Another point I was going to make is one that Chairman
Bernanke made today. He said we are not certain how effective
the exemption might be when it--as merchants might reject small
banks' cards, there are some risks that the exemption will not
be effective going back to the argument made earlier. Chairman
Bernanke said that there is a possibility that merchants won't
accept more expensive cards or the cards won't offer two-tier
pricing.
So as you look at all of these different issues that are
coming up, there is at a minimum some confusion about the
provision in this rule and if done incorrectly, this could be
the final nail in the coffin for many of the smaller financial
institutions, I think, that have been decimated by a weak
economy and piles of new regulations from Washington. And
larger financial institutions can maybe pass these costs on to
consumers, but this isn't the case for smaller banks.
And for those--I will yield back, Madam Chairwoman. Thank
you.
Chairwoman Capito. Mr. Baca, from California?
Mr. Baca. Thank you very much.
Ms. Raskin, one of the questions that was discussed earlier
about profits for small banks and others--how much profit--will
they still be able to make a profit?
Ms. Raskin. It is a very good question. The small banks and
small credit unions, in fact any small issuer, remember by law
are exempt from the interchange fee provisions. Whether or not
they still are able to make a profit is going to depend on the
market dynamics on how this all looks in the end. So, it will
depend on obviously what the final rule looks like, but it is
also going to depend on some of the things that Congressman
Royce pointed out, some of the different dynamics regarding
what kind of routing becomes, what the costs are of that
routing.
Essentially, a bank by bank kind of perspective is needed
because some banks have different portfolios of products so it
is going to depend, I think, particularly on the portfolio of
that issuing bank.
It is important to note that what I think the statute has
directed us to do is to look at one payment stream that is
related to debit cards. So, it is this interchange fee payment
stream. Now, there are other payment streams that are
associated with the issuance of debit cards, there are payment
streams that are associated with other kinds of cards, there
are other accounts and other kinds of products that banks offer
and all of those products have different revenue streams
associated with them. And it is complicated in terms--
Mr. Baca. But would it level the playing field in terms of
the debit card, because I am concerned from a diversity
perspective in terms of who is actually being charged ``X''
amount about--without the regulation it is quite open right
now, so diversity in certain areas would be charged ``X''
amount of dollars based on the debit card versus someone else.
Under the new regulation on the cap, this sort of sets a
standard that applies to everybody on a fair and equal basis
versus the way it was it before, is that correct, the
possibility?
Ms. Raskin. With the exception of what is carved out, so
with the exception of small banks.
Mr. Baca. Okay, let me ask another question. Another
critique about the proposed rule is the calculation of fraud.
You allow for two options: one based on new technology being
used; and the other being a small flag fee taxed on the
interest change rate.
Can you describe how you came to this conclusion, and in
your mind, should the calculation of fraud take into account
the overall amount of the transaction?
Ms. Raskin. Certainly. When we put out the fraud adjustment
rule, or a portion of the rule for comment, we really wanted to
hear from commenters, so we really wanted to make sure we were
hearing enough about the robustness of their fraud prevention
effort. We wanted to make sure we understood the variety of
them, essentially what they did and how they did them, what was
necessary in terms of cutting edge technology.
At the time we put out the rule, we did not know enough
really to set out definitive standards, and the idea--and the
proposed rule really opened the debate--was to make sure we
were hearing everything we needed to hear before we promulgated
something final.
Mr. Baca. Thank you. Other countries have taken steps to
curve the interchange fees much like the proposed rules that
would be done here. Can you comment on your analysis of other
countries' rules and the market's reaction? That is question
number one.
Question number two, could you see the benefits passed on
to the consumers or did you see the eliminated, or eliminating
the financial products offered to the consumers?
Ms. Raskin. Sure. I will talk a little bit about one well-
worn example which is Australia, actually. The Reserve Bank of
Australia actually regulates credit card interchange on a cost
basis. Aready we see, there is a difference here to what
Australia has done, which applies to credit card interchange.
We are obviously looking just at debit card interchange.
But essentially, the Reserve Bank of Australia was given
authority under something called the Payment Systems Act of
1998 to establish benchmark interchange fees for credit cards
and this happened in 2002. And then for signature debit cards
in 2006.
And so what the Reserve Bank of Australia did for credit
card interchange fees was they established the cost-based
benchmark with a cap and they capped it at a half of a percent
on an annual value weighted basis. For signature debit card
interchange fees, the Reserve Bank of Australia also
established a cost base benchmark and they capped it at 12
cents and that is in Australian 12 cents which I am told is
approximately the same in U.S. dollars.
So 12 cents per transaction, again, on an annual value
weighted basis. So although interchange fees for PIN debit
transactions are paid from the issuer to the acquirer in
Australia, in 2010, the Reserve Bank of Australia applied the
same 12 cents per transaction benchmark in debit interchange
fees.
Throughout all of this, what have been the--
Chairwoman Capito. Sorry. Can you just kind of wrap it up
there because--did you have a one-line summarization of the
question, which in my view was, what did this result in?
Ms. Raskin. Inconclusive in terms of prices to the
consumer.
Chairwoman Capito. Thank you.
Mr. Hensarling, from Texas.
Mr. Hensarling. Thank you, Madam Chairwoman.
Governor Raskin, I want to follow up on a question that my
colleague, Mr. Royce from California, was asking you. And I
want to make sure I understand this. I believe that essentially
your testimony is that in the interpretation of the Fed under
the statute, you cannot recoup fraud prevention because that is
a fixed cost, correct?
Is that a fair assessment of the Fed's interpretation? So
apparently, it is not?
Ms. Raskin. Not exactly, no.
Mr. Hensarling. Okay. What is it exactly?
Ms. Raskin. Okay. Let me--
Mr. Hensarling. I still don't understand this. And I have
been listening carefully.
Ms. Raskin. In terms of what can and can't be done, the
statute sets out allowable cost, it sets out disallowable cost,
but then there are costs like you mentioned which were not
explicitly put into either allowable or not allowable.
Mr. Hensarling. I thought I heard you say that actual fraud
losses may be a permissible cost to be recouped in response to
his question. Did I hear you correctly?
Ms. Raskin. You did.
Mr. Hensarling. Okay. And you also allow for the
possibility that fraud prevention cost may not be recouped, is
that correct?
Ms. Raskin. That is also correct.
Mr. Hensarling. Okay. So does that mean that we could end
up with the rather perverse conclusion that if a credit card
company prevents fraud, they don't recoup their cost, but if
they allow the fraud to take place in the system, you will
allow them to recoup their cost?
Ms. Raskin. Obviously, this is why we want to collect
comments. We want to make sure that when we hear of different
combinations of things that we don't allow what is a very
difficult statute--
Mr. Hensarling. The world works off of incentives. If I was
the credit card company and you wouldn't allow me to recoup my
fraud prevention cost, and you would allow me to recoup my
fraud cost, I guess I would allow fraud in the system. My guess
is that it would not be good for our economy.
Looking at the Federal Register of December 28th when you
asked for--to open up the comment period, you said there is not
a single, generally accepted definition of the term
``incremental cost.'' Yet again, you seem to interpret it in
such a way that fixed cost would not be allowable, but on page
8, 1, 7.3, 6, I read the Board requests comment on whether it
should include fixed cost in the cost measurement.
So it seems, and maybe I am misinterpreting something, it
seemed like on December 28th, you interpreted the statute to
permit fixed cost to be recouped but I think you are saying in
your testimony today that your interpretation is different.
Is this correct?
Ms. Raskin. Let me try to clarify what our understanding is
of the statute and it is a difficult statute to interpret so--
Mr. Hensarling. Could you help me here--is your
interpretation different today than it was on December 28th,
when you put out the--
Ms. Raskin. No.
Mr. Hensarling. It is not.
Ms. Raskin. No.
Mr. Hensarling. Okay. So on December 28th--I don't know; I
don't believe I am taking this out of context--the Board
requests comment on whether it should include fixed cost and
the cost measurement which it seems like if you are haven't
changed your legal interpretation on December 28th, you agreed
that you had the flexibility to put fixed cost into the
incremental cost measurement?
Ms. Raskin. And we requested comment to hear what those
costs might look like to see essentially whether we could move
them through another part of the statute regarding functional
similarity with checks, which is also required by law.
So we needed to understand what the dimensions were of the
different--
Mr. Hensarling. You think your hands are tied, but they are
not tied by that particular language, is that what you are
telling me?
Ms. Raskin. They are tied in various ways. But in terms of
that particular language, you are describing a part of--a
category of cost that the statute is silent on. And I think
what we need to do is understand what that category of cost
could--
Mr. Hensarling. I am trying to understand your legal
interpretation of where Congress may need to act, and where
Congress may need not to act, and it still appears to me you
are saying that fixed cost could be part of the transaction fee
that you set. I see my time is running out.
I know that under the statute, you were to consult with
other Federal agencies. I have to tell you, my mailbox is full
from community banks telling me that this is going to harm
their bottom-line. Let's put the consumers aside for a second.
We have discussed that, but a number of small community banks
said, ``We are going to get left off this system. It is going
to hurt our net revenue.''
I am concerned also, what is the impact on their bottom
line and did you consult with the FDIC, I know you are a bank
regulator--and the other bank regulators, ultimately what will
be the impact when fees by estimates are going to be reduced 73
percent?
Ms. Raskin. Yes. And the law requires us to consult and we
would consult anyway with our colleagues in the other banking
regulating agencies. And yes, so we have spoken to the FDIC,
the NCUA, the OCC, the Small Business Administration, and
others. We continue to have discussions with them, and as
recently as yesterday, the NCUA has essentially looked at the
issue of exempting small banks from not just the portion of the
law regarding interchange but the other portions as well.
Chairwoman Capito. Thank you.
Mr. Scott?
Mr. Scott. Thank you very much, Madam Chairwoman.
And welcome, Governor Raskin.
If there is one thing that I hope you will take from this
hearing this morning, it is that a delay in the implementation
of this rule is definitely in order. Several of my colleagues
have asked if that would be a benefit to you and the Fed.
I would like to rephrase that question. It is not the
question of whether the delay would benefit you, the question
is, would it benefit the American people and the institutions,
the financial institutions, the merchants, the people who are
on the ground who would have to make this work. And the answer
is yes, there are just some profound questions here, starting
off with what is reasonable and proportional.
It is questionable to me, a move from 45 cents down to 12
cents, that is a glaring 73 percent reduction. Is that fair? Is
that proportionate to the situation?
This debit card situation is beginning to be the fulcrum
around which our entire commercial retail system operates. Just
last year, I think the debit card transactions accounted for
over 35 percent of all of the transactions that were non-cash,
some 39 billion different payments there.
This is a profound impact. And I think we owe it to the
American people, to these institutions to be able to delay and
make sure that we get this rule right. So I hope and I admonish
you very strongly to put a delay on the implementation of this
rule without protections, for example, provided by debit
interchange fees, the networks can restrict some high-risk
retailers such as internet merchants from accepting debit cards
at all.
Was this taken into consideration when the Federal Reserve
developed its formula, that is a very serious question. My
colleagues have gone over the fraud adjustment issue that has
to be cleared up. It is the case of the larger cards issuing
banks with significantly higher volumes and will be able to
negotiate a smaller interchange fee than the smaller community
bank.
So has the Federal Reserve considered the potential anti-
competitive environment that this proposal would create against
smaller banks and credit unions, for example, that currently
issue these debit cards, these are very profound questions. And
what will this cost be to the consumer and the bottom line?
It all ends up. The banks are not going to pay for this,
the merchants are not going to pay for this, do you know who is
going to pay for this? It is going to be the American consumers
at the end of the line.
So we need to pause. We need to reflect on this and we need
to give this rule implementation the kind of serious study that
it needs to make sure we get it right and I am convinced and I
hope you will be convinced at the end of this hearing that we
need more time on this issue.
So let me just ask you this question. Do you feel that
there is a possibility that consumers eventually could bear the
majority of the burden of this regulation?
Ms. Raskin. First of all, let me tell you that I do take
your statement very seriously, and we are committed to doing
everything we can to get this right. We have engaged in a
process that is thorough and continues to be very thorough. We
are hearing all of the same kinds of comments that I imagine
you are, this is indeed very controversial, and we are trying
to take everything into account that has been presented our way
while still making sure we reflect what is in the law.
So I want you to know it is something that is taken very
seriously and I do hear you loud and clear.
Mr. Scott. With all due respect, Governor, would you
consider a delay in this in view of the points that we have
made this morning so far within this issue?
Ms. Raskin. I think that is Congress' prerogative. If, in
fact, you determine that these deadlines are unrealistic, then
of course we would adapt to those new deadlines. We would
continue gathering information and analyzing information as I
have heard today and we have been hearing through the comment
period. We would, most definitively, defer to Congress' desire
in that regard.
Mr. Scott. Thank you very much for your service.
Thank you, Madam Chairwoman.
Chairwoman Capito. Thank you.
Mr. Huizenga?
Mr. Huizenga. Thank you, Madam Chairwoman. I appreciate the
opportunity.
Governor Raskin, it is good to see you again, and I
appreciated our visit earlier. I think we are all hearing a
very common theme and, yes, I am sure we will hear from our
retailer and merchant friends a little later about that delay
or discussion of that. And I am trying to take it back maybe a
step more to the basic, since I am a freshman Member, I was not
here during the time of the writing of both the underlying Act
as well as this Durbin Amendment that was proposed in the
machinations that went into adopting that and what was going
on.
Ms. Raskin. That makes two of us.
Mr. Huizenga. Okay, we are on par then with this. So you
were talking about downward pressure on the Act and what was
happening. I am wondering if you didn't want any kind of
perspective as to the Fed's view of what and why there was not
any sort of this downward pressure on pricing pre the act.
And really, do we have any way of knowing the cost of
implementing this regulation? Is it going to be proportionally
beneficial to not only the large banks but the small banks as
have been indicated, the retailers and the merchants that are
going to be getting it and most importantly of consumers. Are
they going to actually be seeing any kind of benefit?
Ms. Raskin. I know these are all excellent questions and
different impacts that are all occurring in a dynamic
environment at the same time, and it is very hard to measure
exactly how one will affect another.
I will try on a couple of fronts to answer some of those
questions. In terms of the market structure, in most markets,
competition leads to prices going down. In payment card
markets, we have seen something that seems a little bit more
unusual where you have competition but interchange fees are
going up.
And so, there were clearly issues regarding market
structure, I think, that were animating the development of this
statute. I don't think it came out of nowhere. They are clearly
with the sense that merchants had prohibitions on how
essentially they could route transactions, but those
prohibitions had cost implications that they could not control.
Mr. Huizenga. And it could be that price pressure is
swimming upstream because of some of the expectations that the
consumers and/or regulations that have been put on those that
are handling those transactions?
Ms. Raskin. That is interesting. I don't know if I have
thought about it from that perspective exactly, but I think the
increase in fees has actually come--it will be hard to evaluate
the extent in which the regulatory environment has brought any
of that about.
But essentially, it is what they call a two-sided market
where you have the networks looking at fees both to the issuing
bank and to the merchant side. And typically, the networks use
those two sides to balance--to have credit cards and debit
cards accepted in the marketplace.
And it is a balance that had some kind of possibly perverse
pricing consequences. Essentially, we have issuing banks now
who are taking these directives from the networks and
increasing their interchange fees to merchants. So, there is
that characteristic.
The other characteristic that you pointed out has to do
really with the impact on consumers. And the consumer really
doesn't even know, right? When you swipe your debit card or
hand it to the cashier, you don't even know essentially that
there is an interchange involved. But that interchange fee is
somehow being paid for. And the impact of what changing the
interchange fees would do is something that has been postulated
would be of savings to the consumer. But we don't quite know.
Mr. Huizenga. It seems to me that we need to just blame
intergenerational expectations. The staff section doesn't carry
cash, the rest of us actually do. And we still want to go buy a
$1.90 coffee somewhere. And we expect to be able to use
whatever is convenient for us, not necessarily what is
convenient for the retailer or convenient for those of us who
are dealing with it.
So, thank you. I appreciate that and I look forward to
continuing to pursue that. So, thank you, Madam Chairwoman. I
yield back.
Chairwoman Capito. Before we go to the last--I would like
to ask unanimous consent to submit for the record letters from
the EPC, KFC Franchisees, the ICTA, NAFCU, U.S. PIRG, the
Prepaid Card Coalition, TCF Financial Corporations, an ACS
education letter, the Food Market Institute, Senator Durbin, IV
Supermarkets; as I said, there is a lot of interest.
Ms. Velazquez?
Ms. Velazquez. Yes. Thank you, Madam Chairwoman.
Governor, thank you for being here today. This is a very
important issue that has implications for both sectors--
financial institutions, small businesses--and as the ranking
member of the Small Business Committee, and a member of this
Financial Services Committee, I am very concerned about this
issue.
At a recent conference hosted by this European Central
Bank, policymakers and banking experts suggested adopting a
card fee system that took into account the cost that businesses
will pay to operate their own credit systems. This seems to me
only reasonable. Why weren't these costs taken into account in
the Fed's proposed fee cap?
Ms. Raskin. Thank you. The European Commission, as you
mentioned, did in fact initiate an investigation of cross-
border debit and interchange fees. And essentially, they used
different criteria that were not based on issuer cost. So they
arrived at numbers and I should say they look to be about a 0.2
percent interchange fee which is about 8 cents on an average
$40 transaction.
But the European Commission used criteria that were not
based on issuer cost. Our reading of the statute is that we
need to stay focused on issuer cost. And so, that was primarily
the focus of our effort in putting forth the proposed rule.
Ms. Velazquez. So, you are telling me that the cost
criteria that they used are different from what is in the
statute here?
Ms. Raskin. Yes, either that or else they look at criteria
that were even cost based. They might have looked at other
explicit customer consumer well-being kinds of matters.
Ms. Velazquez. Okay.
Ms. Raskin. They had a different set of criteria.
Ms. Velazquez. I would like to talk a bit about the
Australia experience. Since Australia placed a cap on
interchange fees in 2003, their Central Bank found a sharp
decrease in the availability of rewards and no conclusive proof
of lower prices for consumers, why do you believe that the
Fed's proposal to cap rates on debit cards in this country will
produce better results for consumers?
Ms. Raskin. Actually, I don't know. I don't know what the
results exactly will be in terms of the ability of merchants to
actually pass on costs to consumers. I don't know exactly. I
would say that theory tells us that if it is a competitive
market that the retailers would pass on those savings, but I
don't know exactly.
Ms. Velazquez. Theory dictated that in Australia and
apparently didn't produce the results.
Ms. Raskin. I am not exactly sure of that either, because I
think the results in Australia actually are difficult to
interpret. It is hard to know the extent to which the price
change had to with the factors outside of the change in the
interchange fee standard.
Ms. Velazquez. Okay. Thank you. Last April, the world's
largest card company voluntarily reduced interchange fees on
debit transactions in Europe to 0.2 percent of the total cost
of a transaction. In that same period, the same company
increased the same fees paid by U.S. businesses to almost 1
percent of the transaction total.
Are there any practical reasons why it should cost 5 times
as much to process a debit transaction in this country as it
does in Europe?
Ms. Raskin. It is a very, very important kind of
distinction and I would encourage you to ask that on the next
panel and see what kind of answers you get.
Ms. Velazquez. Thank you.
Chairwoman Capito. Mr. Renacci?
Mr. Renacci. Thank you, Madam Chairwoman.
And thank you, Governor, for being here.
Yesterday, I appreciated the opportunity to have some time
to spend with you and ask you some specific questions. A lot of
them are being asked again today about cost. And as I told you,
I come from a very unique perspective, because I have been
involved with banks, I have been a retailer, and I have been a
CPA who audited both.
So when it comes to my CPA background, I always look at
cost and what are the true costs of any transactions. And
yesterday, we had an--I asked you the same questions that many
of my colleagues are asking you, do we have all the costs?
If we are going to impose, as I called it yesterday a price
fix, and I know you corrected my by saying a standard. It
doesn't matter what we call it. If we are going to impose a set
fee, do we have all the costs to compare? I think your answer
yesterday and I think your answer today has been the same
thing. We do not have under statute the ability to look at all
those costs.
And that concerns me, because if we are going to come up
with a standard and you are being given this task to come up
with a standard rate, you need to be able to look at all costs.
Over the last couple of weeks, I have talked to retailers,
and I have talked to bankers, and I have had costs submitted to
me which I told you yesterday showed that they are a lot more
than 7 cents to 12 cents.
But truly the questions here is, how do we get to the right
standards, as you called it yesterday? And my concern is that
you have been tasked with only coming up with a standard and
your hands are tied at looking at all these costs. But also
available, that is not just fraud, there was--as a CPA there
are costs, there is overhead there is the labor, the
technology, all the things that are necessary to run a debit
card.
So my question for you is in moving forward in establishing
this final rule, would you be willing and able to identify, and
willing to identify and consider those additional costs? And if
you can't, because of statute, would you need a congressional
fix so that you can look at these things?
My other question is, and I know a lot of people talked
about delay, it is not about how fast we get it done; it is
about getting it done right. So, I have asked you a couple of
questions there. But would you consider looking at those costs
without a fix, a congressional fix?
Ms. Raskin. Thank you for that. And I have benefited
enormously from our conversation. The idea of cost is
absolutely critical in terms of getting this right. We want to
make sure that we are looking at all the costs possible. And
then I think it is fair to say we should sift those costs
through the parameters of the statutes to determine which would
be permissible by law assuming that is the law that we are
dealing with.
The surveys that we did turn out to have been quite
comprehensive in terms of gathering costs. While in the
proposal you are seeing a fairly narrow band of permissible
costs, for purposes of our methodology, we in fact, collected
quite a breadth of costs. So we went beyond the authorization
clearing and settlement costs.
We looked at fixed cost. We looked at all variable costs.
We essentially tried to get a broad understanding, now whether
it is broad enough for your CPA mind, I am not sure, but my
understanding is that it was a fairly broad based set of costs.
And what I am more than happy to do is make sure that we
provide that aggregate data to you and your colleagues so that
you could actually provide some kind of feedback regarding how
essentially that looks.
Mr. Renacci. But are you agreeing that all costs are not
being evaluated because the statute does not allow you to
evaluate all costs?
Ms. Raskin. We should evaluate. We need to look at costs,
okay. And we were trying to pull them out through the survey
and through this comment period we are going to continue--
Mr. Renacci. I guess I want to ask you, yes or no. Do you
agree that yes, there are costs that were not able to be
evaluated because the statute has limited your ability to look
at all costs?
Ms. Raskin. I don't know if I can answer it with a simple
yes or no, because we need to look at a lot of costs and move
them through the parameters of the statute and see whether they
would be permissible.
Mr. Renacci. Again, it is an interpretation, I understand.
But I think there are a lot of costs that were talked about but
really are not being evaluated. And we need to get them all. If
we are going to do this, we need to do it right. And I
appreciate the comments from my colleague on the other side who
said we need to delay this to the point to get it right.
A delay for just having a delay is not a good delay, but a
delay for doing it right is important.
Ms. Raskin. And again, a delay is fully within the
prerogative of the Congress.
Chairwoman Capito. Mr. Lynch?
Mr. Lynch. Thank you, Madam Chairwoman.
Madam Governor, I want to thank you for coming before the
committee and helping with us with our work. I do want to just
comment, the gentleman from Texas earlier mentioned that he
didn't hear any complaints on anybody in this district
regarding debit cards.
I just want to say that I heard a lot of complaints from
the merchants in my district and across Massachusetts about the
amount of money they were paying in these transaction costs.
And I get the sense that there was some overreach on the part
of the issue--on the part of the banks here and I am not sure
where reasonable is in terms of the cost that are really
related to the transaction. And I think that is what we are
trying to get at. But there is probably a lot of credibility in
the claim of the merchants and we are trying to get that price
down.
Now, you are limited by the language in the statute and I
understand that. And, with respect to the reasonable and
proportionate language in there, it further limits you in terms
of what you can consider in terms of incremental costs. One of
the things that you cannot consider is something that my
colleague from California, Mr. Royce raised earlier, and that
is the integrity of the system, the fixed costs, the
connectivity.
And in the Boston area where I represent, we have had a
huge, huge scandal there and a huge hacking incident with TJX
and Boston Chicken and--and 7-Eleven, 46 million credit cards
were stolen. The numbers were stolen with the PINs. These
hackers are getting much more sophisticated, and let's face it,
the way we transact business in the United States has changed
enormously. I think that these electronic transfers are 35
percent of the non-cash transactions now in the country.
I am tremendously concerned about the integrity of the
system and I am wondering if you think that you should have
been allowed to consider the--I guess the systemic cost and
maintaining a system that has integrity in light of all this
hacking and it is going every single day. We just prosecuted a
young fellow who got 20 years, but the damage that he caused
there was tremendous.
I just think that we have to make sure that we are
continuingly updating the systems that we transact business on
going forward. And would it help if we allowed--if Congress
allowed you to consider the underlying cost in maintaining a
system with integrity because I guess forgot to mention that a
lot of this happened because the merchants were storing the PIN
number and were storing the ATM numbers within their systems
and they were hacked out of that system.
It wasn't hacked against VISA or whoever the facilitator
was; it was some of these merchants. So there is a shared cost
in maintaining a system with integrity and I am just wondering
if we gave you a broader mandate, whether you might be able to
better protect consumers going forward.
Ms. Raskin. Thank you for that, and I, too, share your
concern about the integrity of the system and the importance of
fraud detection software and processes and systems that
essentially can help limit the kinds of experiences that you
have had first-hand experience of. In terms of your specific
question, the notion of cost-effective fraud prevention
technology is one that is currently in the statute.
So I fully anticipate that we are going to need to look at
exactly the questions that you are raising in the context of
the information that we are currently gathering. The comments
that are coming in now and continue to come in on this point
are going to have to be evaluated from the perspective that you
described.
Mr. Lynch. And, again, I am probably repeating the
questions that were previously asked, but in terms of the
timing of this, do you think that some measure of delay might
be in order here in order to get this right or do you think we
pretty much have it? I don't think you will ever get it
absolutely 100 percent perfect, but I would just be very
nervous about going forward with something that might inhibit
the system, given the widespread use of the system.
Ms. Raskin. I think you see how controversial this is and
how difficult and challenging it has been for us to make sure
we come very close to what Congress intended in passing this.
And, from that perspective, it is your prerogative regarding in
fact how much longer you want us to look at this regarding
essentially questions of timing.
Mr. Lynch. Yes. It is controversial, I think, and let me
just say this. I think we sometimes overlook the degree to
which we have transformed the way we conduct business in this
country with the respect to electronic transactions. I think we
take it for granted now. I try to explain to my daughters how
we used to go the bank on Saturday and try to take out enough
money in order to cover the whole week, and they just think
that is hilarious.
And, even my daughters have a debit card, which is
obviously a glitch in the system. But it is one more reason
that--two more reasons that we need to get this right. But
thank you and again, I appreciate it. Madam Chairwoman, thanks.
Chairwoman Capito. Thanks. Mr. Canseco?
Mr. Canseco. Thank you, Madam Chairwoman, and thank you,
Governor Raskin, for being here today and subjecting yourself
to questions. Let me just start off by saying that the breadth
of rule-making that has resulted from Dodd-Frank is just
extraordinary and I feel that the current timetable for
implementing this interchange rule is not sufficient for those
who are affected whether you are the consumer or the retailer
or the bank and it is going to be very difficult for them to
adjust. Would you support a delay of this implementation? And
with that, I am also echoing what the gentleman from Georgia,
Mr. Scott, and the gentleman from Ohio, Mr. Renacci, have asked
you before.
Ms. Raskin. Again, I would echo your concerns, essentially
this has been very difficult. I think we are doing a thorough
job. We are doing our best to meet the standard, it is
obviously your prerogative to extend the timing if in fact you
think that is warranted--
Mr. Canseco. I think it is highly necessary. But let me go
on to a question--one that is one of my main concerns with the
proposed rules by the Federal Reserve. It is--seemingly a lack
of economic rationale behind the rule in Dodd-Frank that
requires that interchange fees be reasonable and proportional.
And in the rule proposal that the Federal Reserve, it noted
there and found only limited examples and I am referring to the
Federal Register Volume 75 Number 248 Section 235.3 Subsection
A1 where in the middle it says, ``EFTA Section 920 does not
define `reasonable' or `proportional.' The Board has found only
limited examples of other statutory uses of the terms
`reasonable' or `proportional' with respect to fees.''
The Fed was tasked with creating a rule that not only
lacked an economic argument behind it, but was basically
unprecedented in this premise. This requires further
examination, would you not agree?
Ms. Raskin. What we have done best with what we have been
given and I agree that there are quite a number of provisions
in this set of directives that have been difficult to
interpret. And reasonable and proportional fall within that
category as do the notions of incremental cost, as do the
notions of what constitutes appropriate fraud prevention cost.
Mr. Canseco. But reasonable and proportional is so, so
broad that it really bears some very heavy study and more logic
behind it. Let me ask you this. What economic considerations
were given to the proposed rule by the Fed in order to--with
regards to reasonable and proportional?
Ms. Raskin. The terms ``reasonable'' and ``proportional''
are baked right into the statute and what we have attempted to
do through the construction of two possible alternatives which
are now, as you know, out for comment is try to embed what
those terms could possibly mean. So for example, in one
alternative, we have looked at a very issuer-specific kind of
way of evaluating the reasonable and proportional cost that is
again baked into the statute.
And so, one alternative essentially tries to determine what
the median average variable cost would be and give issuers the
ability to stay within that amount without any kind of
extensive compliance cost or proof, kind of matters--the idea
of having some kind of cap I think is only reasonable for
those--for those entities in fact that have very high cost. And
I think the Congress directed us to somehow try to bring those
costs into some reasonableness parameters.
Mr. Canseco. But it seems by reading the Federal Register
and your report that it was made by pure discretion as to what
reasonable and proportional was, that there was not actual
factual process that went into it other than being esoteric in
its nature. Is that true?
Ms. Raskin. No. I agree that ``reasonable'' and
``proportional'' are quite esoteric, but essentially what we
tried to do is anchor those terms with the results of the
surveys that we conducted and as I have described the process,
it has been quite thorough in trying to understand what those
costs and the range of those costs might be so that we can
somehow anchor those very vague terms.
Mr. Canseco. In the past, has the Fed been given such
discretion before on rule writing and if so, what was the
outcome?
Ms. Raskin. That is an interesting question. I can't speak
to the whole realm of interpretation that the Fed has been
asked to do over its long history. But I can state from the
perspective of statutory interpretation always that it is a
complicated task and that it is sometimes very difficult to get
meaning around words.
Mr. Canseco. Thank you very much, Governor. My time has
expired.
Chairwoman Capito. Thank you. Mr. Carney?
Mr. Carney. I am new at this. I have two lines of questions
that are similar to others that you have answered today. I
don't know that--I think I am a little bit more confused than I
was when I walked in the room about cause and effects here. The
gentleman from Ohio, my freshman colleague there, who is the
CPA, had questions and I thought they were right on point and I
will try to be direct. Do you feel like you understand all the
costs involved in these transactions?
Ms. Raskin. I feel that we are in the process of collecting
all the costs that could be involved yet.
Mr. Carney. You mentioned that in your testimony--I
apologize. I haven't had a chance to get all the way through,
but on page seven that you reached out and you have asked for
comment on other costs, other costs that should be allowable.
Have you gotten any preliminary feedback on that?
Ms. Raskin. We have gotten quite a lot of feedback, about
7,000 comments worth of feedback in fact and it is probably
premature to comment on it. Yes.
Mr. Carney. Fair enough. So we have thought a lot about
fraud, do you have a sense that you are allowed to consider all
the costs associated with fraud? We talked about fraud
prevention. I thought I heard you say or somebody say that it
does not include losses--does not include other, detection,
maybe other things. I don't know exactly that. Can you comment
on that, please?
Ms. Raskin. Sure. And it is interesting because the
statutory language for fraud, fraud losses with that piece
essentially says that the Board may allow for an adjustment to
the fee amount if, and I am skipping over pieces to just to
give you the relevant sections, if the issuer complies with the
fraud-related standards established by the Board which standard
shall and then it tells us what those standards need to do.
So it says those standards shall be designed to ensure that
any fraud-related adjustments of the issuer are limited to the
amount described in clause one above, which are the costs of
preventing fraud and takes into account any fraud-related
reimbursements. We have to figure out what that means and take
into account any fraud-related reimbursement. And then we have
in parentheses including amounts from charge-backs received for
consumers, merchants or payment card networks in relation to
electric debit transactions involving the issuer.
So the question of fraud losses, if you interpret--takes
into account to mean you look at it, that is one interpretation
in terms of what you do with those fraud-related losses or just
takes into account means to track it. In other words, don't
include it in your determination of standards for the fraud
prevention cost. So, this is difficult stuff and I--
Mr. Carney. So it, so do you feel like you understand it
clearly enough to make the kind of judgment that the Congress
is asking you to make there?
Ms. Raskin. Again, I really want to underscore that I
understand how important it is to get this right. But then
again, it is Congress who will need to--with the same concerns
that we have, and if it is something that you are concerned
about essentially and you want us to take more time, we would
do that.
Mr. Carney. And touch a little bit on fixed costs. I am not
sure I understand what they are, I understand what they are in
other contexts, the development of systems, capital
investments, all that kind of thing not able to recover this
cost in this context. Is that correct? Under what? What part of
that includes--I read your comment there on page seven or
eight. What part of that includes ongoing maintenance if you
will of existing systems?
Ms. Raskin. The overall standard just refers to reasonable
and proportional to the issuer's cost. Okay. So that is the
general bracing which by any definition would look to be fairly
broad. First, it would have to be reasonable and proportional,
but the first look in terms of cost appears to be broad in the
statute.
If you read through the statute, we are also directed to
take those costs into certain kinds of consideration. So in
other words, we need to consider the functionally of the debit
transaction and compare that functionally with the
functionality of checks. And so, we read that to mean that the
costs that we collect as being relevant need to be essentially
moved through that functional--
Mr. Carney. My time is up, I see, and I haven't gotten to
my other question, but thank you very much.
Chairwoman Capito. Thank you. Mr. Luetkemeyer?
Mr. Luetkemeyer. Thank you, Madam Chairwoman. Ms. Raskin,
do you realize that this morning here, you given very
conflicting testimony a number of times with regards to your
interpretation of fixed costs. You agree with Congressman
Canseco and Congressman Hensarling in their comments with
regards to previous statements made in December. With regards
to Mr. Renacci, you allow that you are taking surveys that
allow for fixed cost to be considered in your surveys and you
are doing everything, I quote, ``doing everything to get this
right.''
Yet in your written testimony, your written testimony says
the proposed rule interprets the incremental cost to be an
exclusion of fixed costs would be required. Which one is it?
Ms. Raskin. It is actually both.
Mr. Luetkemeyer. No, no, no. Yes or no? Which--we are not
going there--take up my 5 minutes--very quickly. Which one is?
Is it are we--are these guys right? Is your verbal testimony
correct? Or your written correct?
Ms. Raskin. I am afraid I don't see a conflict and I
could--
Mr. Luetkemeyer. I am sorry. I see a tremendous conflict
when you say in your testimony, your written testimony says,
``Proposed rule--incremental cost--dot, dot, dot--the inclusion
of fixed cost is required.'' There is a huge incongruence
there.
Ms. Raskin. Fixed cost may be considered for purposes of
the fraud protection adjustment and maybe that helps.
Mr. Luetkemeyer. Okay. Moving on. Have you done any studies
yet to show how the banks are going to make up the losses that
they are going to incur as a result of not being able charge an
appropriate fee for these interchange fees?
Ms. Raskin. No, we have not been--
Mr. Luetkemeyer. Okay. As a regulator, does it concern you
at all that the industry is going to lose $12 billion? That
your bank is going to lose $12 billion of income at a time when
a lot of the big ones in fact are in very tenuous situations.
Does that concern you at all as a Fed regulator?
Ms. Raskin. We always look at the loss of revenue streams
as a potential safety and soundness matter. So, yes, our
examiners would look at this very carefully depending on the
particular profile of the bank.
Mr. Luetkemeyer. How are you going to mesh what you are
doing with this rulemaking with what your regulators are going
to do?
Ms. Raskin. We are going to mesh it very carefully so that
we are going to make sure that once a rule is finalized, that
rule is put into examination guidelines and spelled out very
carefully for examiners that need to make--
Mr. Luetkemeyer. Are you going to make adjustments for your
banks with regards to the amount of income they are going to
lose when you go examine them?
Ms. Raskin. I am sorry. Did you say adjustment?
Mr. Luetkemeyer. Yes. And whenever you look at them and
their inability to increase their capital accounts, increase
their profit or loss for the year. Are you going to make any
adjustments?
Ms. Raskin. We will take this particular set of
regulations, should they be made final, into consideration in
our examination process.
Mr. Luetkemeyer. Okay. I have--we are going down a very
slippery slope here with this. And a minute ago, you made a
comment something to the effect that you agreed that we need to
be setting these prices so we keep those who are charging too
much, from charging too much. But basically you agree that we
are price--and as a government entity to set prices on the
private sector is unconscionable.
We are taking a huge step down a road we don't want to go
to, because suddenly we are starting to treat the banks and the
people who do the interchange fees whether Visas, MasterCards
or whatever as a utility company instead of a private sector
entity.
Do you agree with that statement?
Ms. Raskin. No, I don't think that a public utility--I
don't see a--
Mr. Luetkemeyer. You don't see setting the prices for a
business by the government is the same as setting prices for a
utility company?
Ms. Raskin. I don't see this as price fixing.
Mr. Luetkemeyer. Just a minute ago, you said that. You said
it just a minute ago. You said that we need to set this price
for those who are making more than this average, need to bring
their prices down.
Ms. Raskin. I possibly misspoke, but I don't view what we
are doing as setting prices. We have been told to set standards
and those standards had been promulgated and put forward--
Mr. Luetkemeyer. I have a real concern with the direction
of this entire bill, obviously. But what we are doing here is
the same as the credit card company or interchange fee company
here, we are not going to allow part of your cost of operation.
Just like telling a pizza place that delivers pizzas, we are
not going to allow you to put into your cost to your pizzas,
the person who drives the car or the car itself, all we are
going to let you do is charge for the gas. And that is what we
are doing here. And that is wrong.
Where are we going with this? Have you looked at the
possibility of what is going to happen if we don't allow debit
cards for a lot of folks, especially community bank folks,
instead of using debit card they use the credit card.
Ms. Raskin. That is--
Mr. Luetkemeyer. That is not even going to solve the
problem of cheapening the ability of the merchants to lower the
price to products. We are not accomplishing--are we?
We are shifting one way of payment to another. Would you
agree with that?
Ms. Raskin. This--
Mr. Luetkemeyer. Yes or no?
Ms. Raskin. This is something that the Congress has in
its--
Mr. Luetkemeyer. Are you taking that into consideration?
Ms. Raskin. No.
Mr. Luetkemeyer. Okay. Thank you, Madam Chairwoman.
Chairwoman Capito. Thank you. Mr. Perlmutter?
Mr. Perlmutter. Thanks, Madam Chairwoman. And Governor, let
me just say I have a lot of sympathy for the position that you
are in. The Durbin Amendment was added at the last minute. It
has been a controversial subject--interchange fees, merchants
with some legitimate points about their margins getting
squeezed as the price of gas goes up but the interchange fee
remains the same. They have some legitimate point.
On the other hand, I feel like you are in a box because you
have been prescribed with language that really makes it, in my
opinion, impossible for the network and the banks and the
credit unions to recover their costs. But forget about profit,
recover their costs.
So, you are in a pickle, and I appreciate my friends on the
other side grilling the heck out of you, but it isn't your
fault. Okay, you have to do what you have to do and we gave you
9 months to do it.
The beginning of the rulemaking says, ``The Board shall
prescribe regulations in final form not later than 9 months
after the date of the enactment of the Consumer Financial
Protection Act of 2010.''
So, I just want to say, I appreciate the effort that you
are making but I don't think you have been given all the tools
or the time necessary to come up with reasonable and
proportionate, you guys may call it esoteric, those are terms
of art that are used every day and every contract in statute
across the country. But you have to have time and the ability
within the statute to figure out what reasonable and
proportionate really means. We didn't give that to you.
So, I am one who is on the side of some delay here.
Probably, Congress has to go back and take a look at this, that
is my opinion, because of the language in here was done in
Conference Committee. I think it should have been opened to
much more discussion and I would like to introduce into the
record, if I could, a letter from TCF Bank. Thank you very
much.
And I would like to yield the balance of my time. I have
lots of questions, but you are just, in my opinion, in a
pickle. We have to--the statute doesn't deal with what was
always brought to my attention which was the margin the
merchants were able to deal with in escalating price scenarios.
It goes much further than that and I would like to yield my
time to Mr. Carney. So, you can ask your second question.
Mr. Carney. Thank you, gentleman from Colorado for that.
And really quickly, at least there was some discussion earlier
about looking into bank fees, revenue, and the effect on
consumers. Could you comment on that at all again?
And in particular, whether if you curtail fee income in one
area, an institution is going to look for it somewhere else. A
lot of that happened as a result of the Card Act and now we
have this provision here which could result in negative effects
on the consumer.
There was some discussion about that earlier, and I would
just like your thoughts on this, if you would?
Ms. Raskin. The market dynamics of these are really pretty
complicated and unclear. So, it is not exactly perfectly
quantifiable regarding what is going to happen and then what
magnitude anything would happen.
All I can really do is identify some of the potential
consumer effects and I think these are consumer effects that
you probably are aware of. But I really caution it by saying
that I don't know the magnitude of what--
Mr. Carney. Right, is this something that you are looking
at--there was some discussion about it earlier and you
mentioned that it was something that you are looking at and--
Ms. Raskin. We always look at it. It is very important to
understand the effect of any regulatory change on consumers and
especially in this area. So, yes, we do look at it, which isn't
to say that you will find the word ``consumer'' necessarily
displayed in the terms of the statute.
Mr. Carney. Thank you.
Chairwoman Capito. Mr. Pearce?
Mr. Pearce. Thank you, Madam Chairwoman. And thank you,
Governor. I think our friend from Colorado got it just right.
You are in kind of a pickle here.
In your discussion of cost, are the overdraft risks
associated, are they considered at all, the overdraft of the
debit cards, are they considered at all in the costs?
Ms. Raskin. I am not exactly certain what we did on that.
My recollection is that might have been something that we put
out for comment but I think I need to get back to you on that.
Mr. Pearce. No, because I suspected it is not included,
which is going to be, I am seeing headshakes through the group
behind you, which then leads me to the same discussion my
friends have been having.
How do we get it right if we aren't considering one of the
most basic risks that are associated with the debit card? And
as I--two amazing things happened last year along the campaign
trail. The first and most amazing thing is that a publisher of
a newspaper gave me a book, a big thick book titled, ``Atlas
Shrugged.''
The second amazing thing was I actually read some of it and
I was amazed that sitting here listening to your reading of the
law of what constitutes fraud and doesn't sounded just like
page 864 out of this book from the 1950s talking about the
government getting into the manipulation of the market.
And so as I sit here and think, the market should be
deciding who can run their affairs very well. They don't have
to read that big, thick book. And they don't have to target it
and get it right.
They need to get it right or go broke if they don't figure
out the costs. And so, we are asking you as the government to--
and I will use your words, set standards, which in effect sets
the price. You seem to want to not allow the word to be used.
So, I will--so you are going to set standards, which then sets
the price that should be set by markets.
And in that setting of standards, you, one of the deciders
is not even certain that one of the huge risks and because
people do, they overdraft and they can't get the banks right
now. Tell me if they don't have any protection against it. No
ability to reclaim that.
If you have a comment, I would welcome it, but I suspect
you are just in a pickle, I think like our gentleman said. I
will be quoting you the rest of the day, sir.
Do you have any comment? Is that a fair concern on the part
of the banks that they're stuck with the overdrafts without
being able to go back and get it? And by the time they take six
overdrafts in a year, now they have to set up a counseling
service in order to talk to the people who are overdrafting so
that they might see the wickedness of their ways and setting
out the banks in business of religion and correcting people
from their sins. And so, this is what we get ourselves into
when we allow the government to run the markets.
Ms. Raskin. Essentially. I will go to page 864 and do a
close reading of it, but I do want to make sure I answer the
question on overdrafts correctly, and we will go back to the
office and get a good reading of that and let you know.
Mr. Pearce. You see, my concern is that the Federal Reserve
with all of its expertise in reading a law and threading a
needle, my concern is that it is going to come up something
like your index on inflation, you declare that inflation went
up 1.6 percent last year and you have this tortured explanation
of why it only went up 1.6 percent.
But when I read the paper 2 days ago, I saw that gas went
up 69 percent, oil 127 percent, gold 60 percent, corn 78
percent, soy beans 43 percent. And I suspect when we get a
standard, it is going to not include many of the risk factors;
it is not going to allow businesses to thrive.
So, they are going to start shutting off customers from
access. We are going to unbank more people than we bank, all in
the name of protection of consumers, which has been arrived at
by this reading of the rules that I heard just a couple of
times ago when we are talking about the fraud protections and
the difficult stuff of getting this right.
And with all due respect, I suspect that we are
manipulating things to an extent here in Washington that
American people know is not correct. They know that they are
paying more for food. They know that inflation is happening.
But they can't get anyone to confirm it. And whether they are
going to see their cost, their ability--increase without
understanding why.
And the frustration that we are seeing across the America
that is causing people to walk around in the streets and
complain loudly is going to continue. And we are going to be up
here setting standards and making sure we follow exactly the
definitions that will make everybody feel really good.
So, you are welcome to respond and to disagree or whatever.
Thank you.
Chairwoman Capito. Do you have a comment or--
Ms. Raskin. No, I obviously take what you are saying very
seriously and you want to underscore that Congress has quite a
bit of prerogative in terms of rulemaking and lawmaking and
this is the law. And if there are changes that you would like
to see in it, we will of course faithfully execute them.
Chairwoman Capito. Thank you. Mr. Welch?
Mr. Welch. Thank you very much, Madam Chairwoman and
Ranking Member Maloney. I appreciate your willingness to let me
participate briefly. I was the sponsor of this legislation in
the House. It eventually passed in the Senate and was part of
the Conference Committee report. But there are two basic
questions as I understand it.
Number one, is it necessary to provide some regulation? And
then, number two, is the regulation that is being proposed
doing the job that needs to be done?
We had that debate last year about whether there was a need
for regulation, and my view was that there definitely was a
need for it. I was hearing from one merchant after another who
had no control whatsoever over the prices they were being
charged.
It was becoming an increasingly large cost of doing
business. They acknowledge, as I do, that credit cards and
debit cards are very good and very important. They are good for
consumers because they are convenient. They are very good for
merchants because they are secure transactions.
But what happened, as I understand it, is that without any
regulation whatsoever, the charges that have been assessed to
our merchants are the highest in the world. And that is I think
what drove--was the impetus of Congress passing this. I think
there had been some very good questions asked by members on
both sides about how you came to the rule that you came to.
I heard you say that your examination was thorough and
comprehensive and you are going to submit at the request of the
ranking member the chronology of what you did and how you did
it, so that the members are going to be able to come to their
own conclusions about that. But the one thing I want to ask
about is in--on the debit card, that is essentially a direct
transfer from a person's bank account, correct?
So, is there much of a fraud risk there?
Ms. Raskin. That is what we need to look at carefully,
because we have been receiving comments on precisely that point
and quite a number of comments.
So, I probably want to reserve judgment from the
perspective of making sure that we give all those commenters
the chance to be heard. But, essentially, we are looking
carefully at that question.
Mr. Welch. The debit card it comes right out of my checking
account, correct?
Ms. Raskin. Correct.
Mr. Welch. And if I have overdraft protection, which I now
have to sign up for that--is that debit will be paid and then
the bank will assess a fee to me on my account for the
overdraft, correct?
Ms. Raskin. As I understand it.
Mr. Welch. Mr. Pearce, I think, made some good points about
the market. But my understanding is the point of contention
of--is whether the market in fact was free and open on the
pricing side and historically, is it the case that when debit
cards were originally introduced, the transaction fee was very,
very small. The Maestro network was only charging $0.10 when
the Visa network was charging like a $1.30 on a $100
transaction.
Is that more or less correct?
Ms. Raskin. That is what I understand, yes.
Mr. Welch. And what Visa did quite effectively from a self-
interest standpoint is they raised the fees in order to
encourage banks to offer more and more of their cards and
penetrate the market. Is that more or less right?
Ms. Raskin. I believe so. But, now, you clearly know more
history on this than I do.
Mr. Welch. So, you have the credit cards--the debit card
was not so much competing with the checking account where there
is no charge to the merchant. They get 100 cents on the dollar.
They were competing with credit cards where the fees were
higher. And this was allowed to go on without any push back.
Merchants have literally no power individually to be able to
negotiate a price.
So, we got to this point where the charges to our
merchants, these are mom-and-pop stores as well as the Wal-
Marts and Home Depots, became the highest in the world. Do you
understand our charges are the highest in the world?
Ms. Raskin. I understand that to be the assertion, yes.
Mr. Welch. And I know that the Australian study came to no
specific conclusion about whether the consumer benefited when
the prices went down and you explained, as I understood it,
that there were other variables that you couldn't possibly take
into account.
But normal economics, if you are--you have one gas station
on a corner and there are three competitors, most of us when we
are filling up with gas, go to the one that is a penny or two
cheaper. And is there any reason to think that wouldn't happen,
that competition wouldn't force--I see my time is up.
Yes, thank you, I yield back.
Chairwoman Capito. Thank you. Mr. Duffy?
Mr. Duffy. Thank you, Madam Chairwoman. Governor Raskin,
first of all, I appreciate you being here today.
And I appreciate the number of people who kept coming to my
office on both sides of this issue to explain their position.
It seems like it hasn't stopped the last 2 weeks.
I guess I have a concern about what we are doing here, that
we are going to do here, that we are going to set a price in a
marketplace by way of Congress between $0.07 and $0.12.
I believe that the free market should be allowed to work.
And I don't think we are doing that here, and as I have talked
to a lot of different merchants out there, when we talk about
Congress potentially stepping in and mandating prices or
profits or salaries for their companies or CEOs, they take
great offense to that. But they seem to advocate for Congress
stepping in and advocating for price fixing in regard to Visa,
banks, and their fees.
My concern is, in Wisconsin we have, especially in my
district, quite a few small community banks and they have
expressed great concern over what we are doing here. And when I
look at the reports or the analysis that have been done, it is
my understanding that you have provided a survey to 63 large
banks, is that correct?
Ms. Raskin. I want to get you the exact numbers--
Mr. Duffy. Or is it fair to say that you didn't really do
any of these surveys with small community banks?
Ms. Raskin. The surveys that were done of issuing banks
were done of the institutions that would be covered by the
statute, and remember, the statute exempts institutions of $10
billion or less.
Mr. Duffy. But I think it is going to--
Ms. Raskin. --$10 billion or less were not included in the
survey.
Mr. Duffy. Right. But I think it is clear from your
testimony and from the comments of Mr. Bernanke that we are not
so certain that they are going to be excluded or this law is
not going to impact them. It seems quite possible that our
small community banks are going to be impacted by this rule,
but then you haven't included them in your survey. Is that
right?
Ms. Raskin. They have not been included in the survey.
Mr. Duffy. Right.
Ms. Raskin. And if you recommend, or suggest, it is
certainly possible for the exemption that exists in the
interchange fee portion of the law to also be carried over
pursuant to congressional direction to the network routing and
those restrictions.
Mr. Duffy. But this could affect our small community banks.
And having that potential impact, the only thing that is
beneficial is that we reach out to them and try to get their
input by way of a survey?
Ms. Raskin. Clearly, the impact on small banks, I think,
needs to be understood.
Mr. Duffy. So, it is fair to say then it might be
beneficial to have more time to talk to our community banks and
say, ``Let's take a look at what kind of impact this is going
to have on you.''
Ms. Raskin. I am happy to share the methodology that we
have followed. And you can look carefully at the surveys and
make it--
Mr. Duffy. Let me ask you something, in the time that is
remaining, can you get sufficient information from our
community banks by way of a survey?
Ms. Raskin. In the time that is remaining, I would argue--
Mr. Duffy. No?
Ms. Raskin. It depends on what comments we have received
today. And we have a couple more days.
Mr. Duffy. Now, there are a lot of folks who have suggested
that if the structure of the fee is changed, we are not going
to have free checking, and there are going to be more charges
to consumers in the banking side.
And then we will also argue that on the consumer side,
prices are potentially going to go down, because our merchants
are going to save maybe 0.5 percent, or 1 percent, or 2 percent
per transaction. Is that a fair assessment of how the argument
is going?
Ms. Raskin. There are arguments all different ways in terms
of what the ultimate impact is on the consumer.
Mr. Duffy. Do you think that Congress should step in and
mandate that merchants--that Home Depot and Wal-Mart and
Target--should be forced to reduce their prices by 1 percent or
1.5 percent if this law passes? Is that a proper role for
Congress?
Ms. Raskin. That is Congress' decision. It is certainly not
the Federal Reserve's.
Mr. Duffy. Okay. But it is the Federal Reserve's obviously
by way of Congress to look at how this interchange fee affects
merchants and banks and come up with a pricing structure that
you guys think is appropriate.
Ms. Raskin. That reflects the law that we have been given.
Mr. Duffy. And is it fair to say that you capped the top
fee at 12 cents?
Ms. Raskin. We have put out alternative approaches, and
that 12 cents fee represents the 80th percentile in the survey
that we have conducted of average variable cost. And so, 80
percent is the--of the people, of the institution--
Mr. Duffy. Have you capped that at 12 cents?
Ms. Raskin. Nothing has been done yet. This is a proposal.
Mr. Duffy. Do you anticipate it being capped at 12 cents?
Ms. Raskin. This is a proposal. And we are taking comments.
Mr. Duffy. So, it could be capped at 30 cents or 44 cents?
Ms. Raskin. We are looking at comments as they come in.
Mr. Duffy. Okay. I yield back, Madam Chairwoman.
Chairwoman Capito. Thank you. Do you have any questions,
Mr. Manzullo?
Mr. Manzullo. My only question is a follow up on what
Congressman Duffy spoke about. You acknowledge in answer to his
question that the smaller and community banks are impacted. And
yet, you neglected to get their input in the first place.
Wouldn't that lead you to the conclusion that the results
are flawed based upon your own testimony, Governor?
Ms. Raskin. It is certainly an honest observation. And in
fact, it is the case that when the survey went out because of
interests of complying with the statutory deadline that
Congress provided--
Mr. Manzullo. So, you were under the gun and you rushed to
judgment on this issue?
Ms. Raskin. I don't want to say we rushed to judgment
because we are trying to proceed carefully and we have had 9
months to do it. But it is very complicated--
Mr. Manzullo. I understand. But why couldn't you have
simultaneously brought in the community bankers and other
stakeholders with all the resources that you have as a Fed and
at least get their input on this?
Ms. Raskin. We are getting their input. We talk to them
frequently. They have--
Mr. Manzullo. But not upfront.
Ms. Raskin. They have submitted comments. And yes, there
have been--
Mr. Manzullo. But you didn't survey them.
Ms. Raskin. We didn't survey them because Congress exempted
them from the--
Mr. Manzullo. That doesn't make any difference. Your job
was to figure the impact on the consumer, and on the retail
industry, and on the banking industry. And just because they
were exempted, it does not mean that they were impacted. I
think that your survey and your studies are flawed and you
should miss that.
Ms. Raskin. Yes, I am not ready to admit that. I think we
have faithfully executed upon a very complicated--
Mr. Manzullo. I would disagree because you would have
stated in a direct answer to Congressman Duffy that those
smaller banks are impacted by this legislation. And yet with
all the hundreds and thousands of people that you have on hand
there in 9 months that you don't have the time, or the desire,
or the scholarship, or the interest to examine other people,
that would be the community banks that would be impacted by
this.
People make mistakes all the time. If you don't have all
the information before you and if they were not interviewed and
questioned in the first place, why would you then take a look
at their comments on the study as to which they have no input
in the first place? Why not disregard their comments as they
come in, then you would be consistent?
Ms. Raskin. Based on the comments we have today, we have
received plenty of information from small banks and small
credit unions, and their particular perspective is being taken
into account.
Mr. Manzullo. The problem is this, you came to a conclusion
without them being involved in the process in the first place.
And now, they are playing defense. They have to come back and
they have to show through their studies and--through their
studies without being given the opportunity that the larger
banks were given.
That is no way to come up with a regulation, Governor. It
is flawed. And it is disingenuous.
Ms. Raskin. I don't mean to be disingenuous. I am a
former--
Mr. Manzullo. You are not disingenuous. The study was just
disingenuous. I think the numbers here we are looking at and I
think what America is looking at is a study that is fair and
balanced, takes into consideration all the stakeholders, and
then comes to a conclusion as to what that charge would be.
I have the same people coming into my offices as
Congressman Duffy. Some are saying it is too high. Some are
saying it is too low.
What the incredible effect of business people being pitted
against each other in a way I have never seen before in my 19
years of Congress. I have never seen this before with a
criticism that has been leveled at it. And a lot of it has to
do with the fact that the people, that a large group of people,
the banks under $10 billion were excluded from this.
Their bigger concern also is that because they were
exempted, they could go on there and charge whatever they want.
That doesn't help them. They come under the force and pressure
of the price that you have set.
And if they truly have expenses that are greater than what
you have set, then they are going to be in the position of the
larger banks trying to woo away the customers of the smaller
banks saying, ``Oh, by the way, our swipe fees are cheaper. And
the way to get cheaper swipe fees would be for you to move your
accounts to the larger bank.''
I am just saying that those are some of the arguments that
we are hearing. And if they have been--you guys are shaking
your heads ``no'' back there. But maybe you are a part of the
people who had been questioned.
But we are talking about the people who were not questioned
and who wanted just a simple opportunity to be able to state
their case even if, in fact, they were wrong doing so wrong on
the facts they would have given you. Thank you.
Chairwoman Capito. I want to thank the Governor for her
patience for pushing back when we began and for her diligence
in answering the questions. Without summarizing, and I think we
still have a whole lot of questions left. And so, we are going
to have another panel. So, I will dismiss you from the panel.
And thank you very much.
Ms. Raskin. Thank you.
Chairwoman Capito. The Chair notes that some members may
have additional questions for this witness which they may wish
to submit in writing. Without objection, the hearing record
will remain open for 30 days for members to submit written
questions to this witness and to place her responses in the
record.
We will do a transfer quickly.
Okay. Sorry about that.
I would like to thank the panel for their patience. And we
are going to begin the second panel.
I think the first witness is the guest of the ranking
member. And I recognize her to make an introduction.
Mrs. Maloney. Thank you so much.
I am honored to represent Mr. Prentzas. And I thank you for
giving me the opportunity to introduce my constituent from the
great borough of Queens, Gus Prentzas.
Gus owns two businesses in my district: Pavilion Florals;
and Life & Health Fitness, a health club in Astoria. He is also
president of the Long Island City Business group and an active
member of the Queens community. And he has been a small-
business owner for over 20 years and is actively providing jobs
and services in the district I am honored to represent.
So, I welcome you Gus, and all of the panelists today. And
I very much look forward to all of your testimony. Thank you.
Chairwoman Capito. We also have another guest. The next
witness is a guest of Mr. Luetkemeyer. Would you care to
introduce your guest?
Mr. Luetkemeyer. Thank you.
Thank you, Mr. Chairman. My guest today is Mr. Kemper. I am
pleased to introduce him. He is the chairman, president, and
CEO of Commerce Bancshares Incorporated, an $18 billion
regional bank holding company based in Missouri.
He began his career with Commerce in 1978 as vice president
of commercial lending at the Commerce Bank of Tennessee. He was
president of Commerce Bancshares in 1982 and held a wide
variety of senior positions, being named chairman, president,
and CEO of Commerce Bancshares in 1991.
David is a graduate of Harvard University. He received a
masters degree in English from Oxford University and an MBA
from the Stanford School of Business. Dave also served in an
advisory capacity to Enterprise Holdings and Bungee North
America.
In his spare time, he is the vice chairman of the board of
trustees at Washington University and a member of the board of
trustees at the Missouri Botanical Garden and the Donald
Danforth Plant Science Center.
Mr. Kemper is also the past president of the Federal
Advisory Council of the Federal Reserve. As you can see, David
is involved in the financial services industry in a number of
different capacities. I appreciate him taking the time today to
be with us, and I look forward for his testimony.
Thank you, Madam Chairwoman.
Chairwoman Capito. Thank you.
With that, I think we will begin with Mr. Prentzas. And we
will proceed, as I said earlier, we would like to keep the
initial comments to 5 minutes so we can have time for
questioning. So, when you hear this, it means try to wrap it
up. You can see the light on your table there.
So, Mr. Prentzas.
STATEMENT OF CONSTANTINO (GUS) PRENTZAS, OWNER, PAVILION
FLORALS, AND LIFE & HEALTH FITNESS
Mr. Prentzas. Madam Chairwoman, thank you.
Madam Chairwoman, Ranking Member Maloney, and members of
the subcommittee, thank you for inviting me to share my views
regarding payment card swipe fees. My observations are based on
my experience as a small business owner in Astoria, New York.
From my perspective, these fees, for both credit and debit
cards, have long been out of control. In fact, they have grown
so large, so quickly, that I was forced to lay off an employee.
While I understand that the Durbin Amendment only addresses
debit card and not credit card fees, I believe this is at least
one step in the right direction.
Therefore, I fully support the debit card rules proposed by
the Federal Reserve and any other efforts to help curve swipe
fees.
I own some small businesses in Astoria, New York: Pavilion
Florals is a flower ship I have owned since 1998; and I have
owned Life & Health Fitness for the last 4 years. Both
businesses accept credit and debit card payments.
The health club is particularly dependent on credit and
debit cards as a form of payment because we charge monthly
membership fees and allow our members to set up automatic
payment plans via credit and debit cards for their convenience.
For the health club, approximately 78 percent of our payments
were received by credit and debit cards.
I pay a monthly interchange fee of approximately $380. And
I pay roughly the same amount for the flower shop even though
the health club revenues are double the amount. And I note that
the interchange I pay is not only based on the revenues I get,
but also a percentage of the sales tax I collect, money that I
don't even keep.
These fees have grown at an incredible rate. Indeed, they
have doubled in the last 2 to 3 years alone. Our prices
certainly have not doubled over the same period. So, there is
no question that these fees themselves are out of control.
In fact, these fees have increased so much, so quickly,
that I was recently faced with an unfortunate choice at my
flower shop. I could pay these fees or lay off an employee. I
was forced to lay off an employee because there were no
realistic alternatives to accepting credit and debit cards.
Visa and MasterCard are another form of currency and we
must accept them like we take cash. This is one reason why I
believe that the debit card fee limit is a step in the right
direction. Policymakers need to begin to see cards for what
they really are--a new form of currency.
Approximately 60 percent of the flower shop's sales are
paid by credit and debit cards, and 78 percent at the health
club. We expect the percentage to increase as more young people
patronize our stores.
Overall, for my small business, interchange fees have grown
more rapidly and significantly than all other expenses. And the
fact that I cannot control interchange fees the way I can
control other expenses is a huge problem for me.
But our interchange fees are what they are. And we have
absolutely no ability to change them or take our business
elsewhere.
Finally, I want to share my experience dealing with credit
card charge-backs to make clear that merchants like me are on
the hook when problems like fraud come up.
A charge-back is when the card company doesn't give me the
money for a sale even though it was properly authorized. My
flower shop deals with high-value charge-backs.
In fact, charge-backs I get at the shop are about one-third
of the amount of interchange fees I pay. That is a big loss of
funds on top of what I am already paying, and it offends me
when the card companies claim they guarantee payment. Nothing
is guaranteed.
I can do everything right and still lose a sale along with
a customer who has left my store with the flowers that I will
never see again. There have been times when I checked an I.D.,
obtained a security code, and checked a zip code to make sure
everything was authorized and in order. But when the card turns
out to be stolen, I have still been charged back for a sale and
lost the money on the goods. This is blatantly unfair. And
losing an entire sale takes a big bite out of my business.
Not only that, I have to pay the interchange fees on the
charge-back amount. Once again, I am paying for fees I don't
get.
In conclusion, I feel fortunate to be able to serve my
community as an owner of two small businesses in Astoria. The
increases that I am seeing in credit and debit card fees are
unreasonable.
If interchange fees, even debit card fees alone, were
reduced to a more reasonable level, I would have the revenue
that I could use to hire more people, offer discounts, and cut
prices.
I ask you to please support the Federal Reserve's proposal
and turn your attention to ways to bring some needed changes to
credit cards as well.
I thank you again for inviting me to testify. And I am
pleased to answer any questions you have. Thank you.
[The prepared statement of Mr. Prentzas can be found on
page 174 of the appendix.]
Chairwoman Capito. Thank you.
Our next witness is Mr. Frank Michael, president and CEO,
Allied Credit Union, Stockton, California, on behalf of the
Credit Union National Association.
Welcome.
STATEMENT OF FRANK MICHAEL, PRESIDENT AND CEO, ALLIED CREDIT
UNION, ON BEHALF OF THE CREDIT UNION NATIONAL ASSOCIATION
(CUNA)
Mr. Michael. Thank you, Chairwoman Capito, Ranking Member
Maloney, and members of the subcommittee.
Chairwoman Capito. You need to keep your microphone on a--
Mr. Michael. Thank you very much for the opportunity to
testify at today's hearing.
My name is Frank Michael and I run an $18 million--that is
``million'' with an ``M''--Credit Union in Stockton,
California, called Allied Credit Union.
We are not Bank of America. We are not Visa. We are not 7-
Eleven. We are small. And we strive to fulfill our mission to
serve our members every day. Our members want access to their
checking accounts which means the ability to use a debit card.
In fact, 1,100 of my 2,300 members use our debit cards.
Section 1075 of the Dodd-Frank Act will make it more
expensive for my members to access their checking accounts. And
I know that this is not what Congress intended because Congress
included an exemption for institutions like Allied.
When the law was passed, the chief proponent said credit
unions like mine would not lose any interchange revenues that
they currently receive. We were skeptical about this statement
in July.
And unfortunately, the proposed Federal rule makes it clear
that will not be the case. And here is why. There is no
guarantee that all the payment networks will operate a two-tier
system. Even though Visa has said it would, it is not clear
when it would start, for how long, or under what conditions it
would do so. Visa is just one of several payment card networks.
Who is to say the others will operate that way?
Even if they do, with the passage of time, market forces
will cause at least some convergence of prices for the two-
tiers and the absence of full implementation of the exemption
that Congress intended.
In our view, the Fed's proposal errs by failing to include
a provision enforcing the small issuer exemption. The Fed has
the authority to write rules for innovation of interchange
standards. And we would hope that the committee would encourage
the Fed to use its authority to enforce the exemption and
protect small issuers. In the absence of meaningful protection,
credit unions are rightfully concerned about the potential
impact that the regulation's other flaws will have on their
member institutions.
At its most basic level, the Fed's proposal says that if
you want to issue debit cards, you must do so under a set of
government-imposed restrictions that require the program to
operate at a loss because many of the costs of operating debit
cards have not been considered by the Fed under the statute.
Even for not-for-profit credit unions, the idea of government
requiring the operation of the program at a loss is abhorrent.
It flies in the face of safety and soundness.
Under the current proposal, we are going to lose money on
every transaction. The only real question is, how much? If the
carve out is entirely ineffective and credit union interchange
fees converge on the rate set for very large institutions,
credit unions will find their net income reduced by $1.6
billion. That represents about a third of credit unions' recent
net income. Such a reduction in income will lower capital of
debit card issuing credit unions by 10 percent after 6 years
absent any reaction by credit unions.
However, that is not where the story ends, certainly not
for credit unions. The real problem with this proposal will be
its impact on its consumers, including consumers on the margin
who may no longer have access to free checking. Credit unions
cannot absorb this lot. Let's face it, our regulator will not
allow it.
We are not-for-profit institutions but we are subject to
safety and soundness standards. Regulators will expect credit
unions to maintain current net income levels and replace the
lost revenue because credit unions must maintain at least a 7
percent net worth to be well-capitalized. The choices facing
credit unions are relatively straightforward and carry a
consistent theme: charge more to members for services or reduce
the services that members are offered. Either way, it is a bad
deal for members.
CUNA surveyed its members: 91 percent of credit unions
offering debit cards anticipate they will make changes to their
rates fees and/or services as a result of the negative impact
of this regulation. The four changes most often cited are:
number one, increase debit card fees; number two, increase NSF
fees; number three, eliminate free checking accounts; and
finally, number four, lower the deposit rates.
If the exemption for small issuers prove completely
ineffective, the $0.12 rate would require credit unions to
impose an annual fee in the range of $35 to $55 a card, a
transaction fee within the range between $0.25 to $0.35, or
some combination of the two. In order to maintain the pre-
reform revenue, there would be new fees for our members.
The timeline for formalization and implementation is very
short and the consequences are potentially devastating for
small financial institutions and consumers. There are problems
with the rule that the Fed can and should address but there are
significant statutory problems that Congress also needs to fix.
We urge Congress to stop, study, and start over. Enacting
the moratorium against implementation of the Fed's interchange
rules will provide time for the Treasury to study the
operational impact of the regulation on all issuers including
small issuers, the impact on the safety and soundness of
depository institutions, and the impact on consumers.
Then the Fed should start its rule-making process again,
taking into consideration the results of the study and set
standards for a rate which is proportional of full cost and
risk of the transaction.
Madam Chairwoman, it is important for Congress and the Fed
to get this right, otherwise consumers face high costs for
financial services and they aren't likely to recover those
costs from the merchant. We ask Congress and the Fed to stop,
study, and start over. Thank you very much for this opportunity
to testify in today's hearing. I am pleased to answer any
questions you may have.
[The prepared statement of Mr. Michael can be found on page
160 of the appendix.]
Chairwoman Capito. Thank you, Mr. Michael.
Our next witness is Mr. David Kemper, who has already been
introduced. He is the chairman, president, and CEO of Commerce
Bank, on behalf of the American Bankers Association and the
Consumer Bankers Association. Welcome.
STATEMENT OF DAVID W. KEMPER, CHAIRMAN, PRESIDENT AND CEO,
COMMERCE BANK, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION
(ABA) AND THE CONSUMER BANKERS ASSOCIATION (CBA)
Mr. Kemper. Good afternoon, Chairwoman Capito, Ranking
Member Maloney, and members of the subcommittee. My name is
David Kemper, and I am the chairman and CEO of Commerce
Bancshares. I am pleased to be here today on behalf of Commerce
Bank, the American Bankers Association, and the Consumer
Bankers association.
Commerce is a mid-sized Main Street bank founded in Kansas
City in 1865. Our 5,000 employees serve customers across 5
Midwestern States. Commerce is one of only three banks in the
country to hold Moody's highest rating for financial strength.
Last year, our business and financial strength was recognized
on the Floor of the House by Congressman Emanuel Cleaver and
former Financial Services Committee Chairman Barney Frank. We
did not contribute to the economic crisis by originating any
subprime products.
The Durbin Amendment and the Fed's proposed rule
implementing it will cost great harm to consumers. It will
affect banks of all sizes and their ability to revitalize local
economies.
On behalf of Commerce Bank and the thousands of banks
represented by the ABA and CBA, I urge Congress to take
immediate action to stop the proposed rule from being
implemented. This needs to be done to avoid the profound
negative consequences that the rule has for the payment system
and for consumers.
I would like to make four points to the committee today.
First, the Durbin Amendment and the Fed's proposed rule will
severely affect consumers everywhere, causing new fees and
pushing low-income customers out of the banking system. The
fact is that both consumers and merchants value debit cards.
They are faster at checkout, accepted worldwide, provide a
payment guarantee, and protect from fraud.
Debit cards reduce the need for cash and checks and the
cost of handling bad paper. The Durbin Amendment moves the
payment system backwards, taking a highly efficient system
where costs are shared by all who benefit, the one where
merchants are almost entirely excused from contributing.
Some have argued that lower interchange rates will bring
lower prices to consumers at checkout but this far from
certain. What is certain is that banks will have to find other
ways to recover revenue and this will ultimately lead to new
fees for the consumer.
Second, the Fed's proposal implementing the amendment
dictates that my bank and indeed every bank throughout the
country must lose money on every debit card transaction unless
we charge customers more. Let me put this in context, the
reality is that today's checking accounts have become debit
accounts.
Each month, our average active customer uses his debit card
26 times while writing only 5 checks. It costs Commerce Bank
about $230 per year to maintain a checking account, including
salaries, branch expenses, and issuing statements, among other
costs. Our overall profit margin for that checking account is
about $35 or 13 percent.
The Federal Reserve's proposal would cut our debit card
revenue by about 85 percent or $60 per account. This means our
profit on a typical checking account goes from $35 to a
negative $27. We will lose money on average for each account.
Mandating that banks cannot recover the cost of our most
popular consumer product is unfair, unprecedented, and just bad
public policy.
Third, the exemption for small banks will ultimately be
ineffective. Every community banker--and I have spoken to a lot
of them in the last 9 months--with whom I speak strongly
believes his or her bank will be severely affected by the
interchange price controls imposed on larger banks.
The economics are simple. Market share will flow to the
lower-priced product of big banks, forcing small banks to lose
customers if they don't follow suit. And finally, the process
Congress used was deeply flawed. The amendment was added to the
Dodd-Frank legislation on the Senate Floor at the last minute.
It was never the subject of any hearing in either the House
or the Senate and never voted on by this or any other standing
committee. A policy decision of such importance deserves much
more thorough consideration. Commerce Bank, and indeed the
banking industry, supported many of the key principles in Dodd-
Frank.
We are all for sound banks, strong capital, and consumer
transparency; however, the Durbin Amendment has nothing to do
with these principles. It will stifle innovation, lower
productivity in our economy, and force a number of our
customers out of the protection of the banking system. On
behalf of the ABA and the CBA, I urge you to take immediate
action to stop the Federal Reserve from implementing the
proposed interchange rule.
I would like to thank the committee for its time today and
I look forward to your questions. Thank you.
[The prepared statement of Mr. Kemper can be found on page
147 of the appendix.]
Chairwoman Capito. Thank you, Mr. Kemper.
Our next witness is Mr. Doug Kantor, a partner at Steptoe &
Johnson, on behalf of the Merchants Payment coalition. Welcome.
STATEMENT OF DOUG KANTOR, PARTNER, STEPTOE & JOHNSON, ON BEHALF
OF THE MERCHANT PAYMENTS COALITION
Mr. Kantor. Thank you, Madam Chairwoman, Ranking Member
Maloney, and members of the subcommittee. I appreciate the
opportunity to be here and share with you my views about the
Durbin Amendment and the debit card rule before the Fed.
If there is one thing that I would like you to take away
from my testimony today, it is this: that the banks right now
that issue debit cards all charge the same schedule of fees
when they are under the Visa umbrella. And those under the
MasterCard umbrella agree to the same schedule of fees as well.
This is the only area of their operations that we are aware
of where they all agree with their competitors to charge
precisely the same fees. On other things, they stand on their
own two feet, decide on their own charges, the same lending
rates, the same interest rates, they do that for themselves
each bank individually. Here, they charge the same thing and
lock arms in a centralized price-fixed way.
That is tremendously unfair to merchants across the country
and it has led to an explosion in these fees where, as you
heard in part from Gus Prentzas, from any merchants, this is
the second highest operating cost that they have only behind
labor but higher than rent. It is the fastest growing expense
they face, growing faster even than health care costs, and for
many parts of the merchant and retail industries, these fees
are far, far higher even than their profits every year.
That is a problem that cannot continue and the billions of
dollars that they are being paid cannot continue. And the thing
that is key here is the Durbin Amendment and the Fed's rule
presents these banks with a simple choice. It says, if you
would like to charge any amount of money that you would like,
governed only by the marketplace, go ahead, unregulated, just
don't do it through a centralized price-fixing mechanism.
The Fed's rule and the Durbin Amendment only apply to
centrally set fees. And so, if banks want to charge merchants
whatever they want to charge, they can go ahead and that is
fine. We believe in competition. Our members compete every
single day. If they are going to fix the fee centrally though,
there has to be some reasonable limits and that works where the
Fed comes into play.
And I think it is helpful to understand how we got here.
How we got here was that banks used to have a different
business model. The business model was, they tried to attract
consumers to give them their money. That was kept in the
checking account or in the savings account.
And the bank would lend out those funds that was their
capital, they would lend it out at a higher rate than the
interest they paid to consumers. It is a good business model.
It benefited everyone and still does. The consumers, however,
had to have a way to get at their own money.
One of those ways was checks. And almost 100 years ago, the
Congress and then the Federal Reserve by rule, prohibited the
analogy of interchange fees on checks, the exchange fees that
used to be there, now they are not there. Now merchants get 100
percent of the amount of the check when they accept the check.
Those are prohibited, and have been for a long time. We haven't
heard any lobbying against that; that was price fixing.
It has made the checking system much more efficient and
made it work quite well. Then banks came out with ATM cards.
That was a convenience to consumers. And in fact, some people
put ATMs out there and invested money to do that. Interchange
on ATM fees flows from the card holder's bank to the person
putting the investment to put out the ATMs. They are providing
a convenience.
But then they saw, hey, if merchants would take these cards
in their store, that is a great convenience as well. That not
only saves consumers in terms of convenience, it saves the
bank. Every time a debit card is used, the bank saves money
because someone didn't write a check. They used the debit card
instead. That has nothing to do with the interchange.
It also saves money because they didn't go to a teller and
take the teller's time to make a withdrawal. It saves the banks
money; there are tremendous benefits for banks in debit which
they don't tend to talk about when we discuss these types of
issues. Merchants have invested billions of dollars putting--
stores, accepting debit cards and protecting from fraud. I have
some of those numbers in my testimony, billions of dollars.
That investment isn't recognized through interchange to the
merchant although at first, it was. When these cards were first
introduced, that is precisely what happened for many merchants;
there was zero interchange for some. The merchants we repaid on
other instances to recognize that. However, over time that
system has changed, and because the price is fixed, those fees
have exploded to a point where merchants are suffering from
that and consumers ultimately, unfortunately, are footing the
bill.
Thank you very much. I realize my time is up. I am eager to
answer any questions you may have.
[The prepared statement of Mr. Kantor can be found on page
101 of the appendix. ]
Chairwoman Capito. Thank you.
Our next witness is Mr. Floum, who is the general counsel
for Visa.
STATEMENT OF JOSHUA R. FLOUM, GENERAL COUNSEL, VISA INC.
Mr. Floum. Thank you, Chairwoman Capito, Ranking Member
Maloney, and members of the subcommittee. My name is Josh
Floum, and I am Visa's general counsel and a member of our
executive team. We appreciate the opportunity to discuss the
Dodd-Frank Act and the Federal Reserve Board proposal relating
to the debit interchange and the routing of debit transactions
and the great harm to consumers and to small businesses that
may be caused by these government-mandated price and business
controls.
The Durbin Amendment was enacted through a really
extraordinary process with no consideration in any
congressional committee and no opportunity for the House to
consider debate or vote at all. The amendment will have
significant long-term consequences for consumers, for financial
institutions, for small businesses, and for the entire U.S
economy, consequences so fundamental and extensive that their
full impact may not be known for many years.
Because of this, Congress should consider extending the
implementation date and requesting an impact study on
unintended consequences. I would like to highlight the issues
that may lead to those unintended consequences. Turning first
to the price controls, there are three fundamental issues.
First, the proposed regulations would result in a $12 billion
annual value transfer to merchants, primarily to the big box
retailers.
This makes it virtually impossible for issuers to recover
the cost of the infrastructure and operations required to build
and manage a world-class debit system and discourages future
investment in fraud protection, in e-commerce, in mobile
payments, and other important innovations.
This country should continue to drive innovation,
technology, data security, and commerce. After all, digital
currency was invented here and this country shouldn't get in a
situation where it lags behind.
But, while the direct impact is on debit card issuers, big
and small, it is the consumer who ultimately will pay the cost
to advance the industry. The Federal Reserve Board itself
admits that its interchange proposal will permit issuers to
recover only a small fraction of their costs but explains that
``issuers have other sources of revenue such as cardholder fees
to help cover their costs.'' In other words, the Fed suggests
raising fees to cardholders.
Already, we are seeing that the Fed had it right. Many
banks have indicated that they will have to take the step.
Earlier this week, for example, the ICBA released a study of
its community bank members. More than 90 percent of them
reported that they will be forced to increase other fees to
consumers to compensate for the interchange regulation.
Importantly, and many members have mentioned this today, there
is no requirement or evidence that merchants will pass on this
windfall to consumers. In fact, the opposite appears to be
true.
When asked in 2008 whether consumers would benefit from
lower interchange fees, the retailer representative truthfully
testified, ``There is not a businessman who doesn't attempt to
keep the margin.''
Ranking Member Maloney, you asked me to discuss the routing
and exclusivity sections of this amendment, which were added
with even less discussion and analysis, and also have
significant unintended consequences. The retailers specific
intent in adding these provisions was to establish a system
that would further drive down their cost without regard to the
need for networks and issuers to get a fair cost for the
significant value delivered.
By requiring more than one network on a single card and
taking the routing decision away from consumers, the retailers
have set up a race to the bottom to drive rates down. The
retailers will seek the least expensive options regardless of
quality or value delivered to the consumer. This part of the
rule will only do more to stifle innovation and shortchange
consumers on new and improve payment services.
And unfortunately, the rule will have a particularly
significant impact on community banks and credit unions and on
the government and prepaid programs that rely in part on debit
card revenue to fund their operations. Many people have
concluded that these institutions and programs are exempt from
all the Durbin Amendment provisions, but as we have heard
today, the law does not exempt them from the exclusivity and
routing control provisions. Of note, the routing requirement
allows merchants, not consumers or card issuers, to decide how
debit card transactions are handled now and in the future.
The new rules deprive the consumer of the ability to choose
over which network transactions will be processed. Now, the
merchant will decide without notice to or consent from the
consumer how money from her DDA account is accessed. There is
simply no disguising if this is an anti-consumer provision.
The exclusivity and routing provisions also compromise the
security of debit transactions and compromise fraud prevention.
Investment in data security and fraud prevention can only be
made if there are sufficient economic incentives to do so and
the opportunity to--I will--if I can have more 30 seconds,
Madam Chairwoman--and the opportunity to recover the cost of
these investments. Finally, the exclusivity in routing
provisions add unnecessary cost and complexity.
In conclusion, given all of this uncertainty and the many
concerns being raised, we beseech Congress to extend
implementation of the Durbin Amendment and request an impact
study on unintended consequences. Thank you very much. I am
happy to answer any questions.
[The prepared statement of Mr. Floum can be found on page
84 of the appendix.]
Chairwoman Capito. Thank you very much.
And our final witness is Mr. David Seltzer, vice president
and treasurer, 7-Eleven, on behalf of the Retail Industry
Leaders Association.
Welcome.
STATEMENT OF DAVID SELTZER, VICE PRESIDENT AND TREASURER, 7-
ELEVEN INC., ON BEHALF OF THE RETAIL INDUSTRY LEADERS
ASSOCIATION (RILA)
Mr. Seltzer. Good afternoon.
I would like to thank Chairwoman Capito, Ranking Member
Maloney, and the members of the subcommittee for inviting me to
testify today on an issue that is important to the thousands of
franchisees who own and operate 7-Eleven stores.
My name is David Seltzer, and I am the vice president and
treasurer of 7-Eleven. There are more than 6,700 7-Eleven
convenience stores operating in 32 States nationwide. More than
5,000 of these stores are operated by small business
franchisees.
In fact, sitting behind me today is Dennis Lane, who has
been the operator of the 7-Eleven in Quincy, Massachusetts, for
more than 36 years. I welcome this opportunity to share the
views of 7-Eleven, companies of the Retail Industry Leaders
Association, and small business owners like Dennis, on the
topic of interchange reform. Putting this into perspective, a
typical 7-Eleven franchisee owns a single store, employs 8 to
10 people, and works 60 to 70 hours a week.
After payroll, interchange is the largest cost our
franchisees face and it is the only cost over which they have
no control. The proposed rule is critical to our franchisees
because it will provide meaningful relief. I acknowledge that
debit and credit cards are important to 7-Eleven, and as a
direct beneficiary of the credit and debit clearing system, we
expect to pay competitive fees for the use of the system.
At 7-Eleven, 49 percent of our sales are paid using
plastic, and 73 percent of these card transactions are on
either a Visa or MasterCard. Unlike all other business
expenses, the pricing mechanism for this clearing system is not
determined in a competitive manner. Over the past 8 years, 7-
Eleven credit and debit fees have quadrupled from less than $40
million in 2002 to $177 million in 2010. That is a 21 percent
average annual increase. Debit cards are now used for over 80
percent of our card transactions. According to the Kansas City
Fed, average PIN debit card interchange rates have risen by
more than 500 percent over the past 10 years.
In October 2009, MasterCard increased its Maestro debit
interchange rate by 98 percent. On small ticket transactions,
the fee can be more than 20 percent of the sale. When we spoke
to MasterCard executives regarding this rate increase, we were
told that interchange rates were non-negotiable.
Further, we were advised that MasterCard views banks rather
than merchants as their customer and the rates are set at
levels needed to entice banks to issue cards on MasterCard
rather than Visa. In other words, competition among the card
networks translates into higher interchange fees for merchants.
And as we have heard today, banks don't compete on or negotiate
interchange fees; the rates are the same.
As the Federal Reserve noted, the financial incentives in
the debit clearing services market work to encourage higher
costs and more risky debit transactions. In short, this market
is fundamentally broken. In 2009, we and our franchisees and
customers petitioned Congress to address this issue and nearly
1.7 million people in 285 congressional districts signed
petitions.
Since our petition drive, over 3 million more Americans
added their names to similar petitions sponsored by members of
the National Association of Convenience Stores. So now, more
than 5 million Americans have signed petitions calling on
Congress to reform interchange fees. We are delighted that
Congress responded last year and the resulting Federal Reserve
rule will lead to tremendous savings for hundreds of thousands
of small businesses.
These savings will translate into lower prices for
consumers, and more development and more economic activity in
communities throughout America. In fact, Dennis has already
hired a new employee in anticipation of the savings from the
debit interchange reform. Given the intense price competition
that exists within retail, there can be no doubt that debit
savings will benefit consumers.
As to the impact on the banks, I want to make it clear that
debit interchange legislation only affects about 100 financial
institutions, leaving more than 99 percent of all institutions
exempt. According to a recent article in the American Banker,
some analysts believe that community banks and credit unions
will benefit from this change as it will provide them with a
competitive advantage against the larger financial
institutions.
Madam Chairwoman, the facts are clear. The system is
broken. Anyone who accepts debit or credit cards, whether or
small or large businesses, and the more than 5 million
consumers who signed petitions agree that interchange reform is
necessary.
The Federal Reserve has proposed a rate structure, having
received substantial input from card networks, banks, credit
unions, and merchants. Though we believe the data submitted by
the banks to the Federal Reserve supports a lower rate
structure, we respect the process undertaken by the Federal
Reserve and recognize that the proposed rates developed through
this process will provide meaningful relief.
We encourage the Federal Reserve to complete its work to
provide some common sense to debit fees for businesses large
and small, and most importantly, their customers. Delaying this
process would only harm American businesses and consumers to
the tune of $33 million a day, or a billion dollars for every
month that passes. Thank you for the opportunity to appear
before the subcommittee this afternoon.
I would be happy to respond to any questions.
[The prepared statement of Mr. Seltzer can be found on page
192 of the appendix.]
Chairwoman Capito. Thank you.
I would like to thank all the witnesses, and I have so many
questions because honestly, conflicting information is what I
have been seeing streaming through my office. So, I am going to
ask some short questions and hopefully get some short answers.
Mr. Prentzas, you mentioned the cost of the debit
interchange has gone up. Has your business--has your gross
revenue gone up at the same time or is it a shift in the way
people are paying for your services?
Mr. Prentzas. It is a shift in the way people are paying
for their services, so the more they are using their debit
cards, the more interchange fees I am paying.
Chairwoman Capito. Right.
Mr. Prentzas. But, what creates a problem for a small
business person like myself and there are thousands out there
in the United States, is that we don't know until the end of
the month when we get that statement what our interchange fees
are going to be. That creates a very big problem when you are
trying to operate a business, not knowing what you are going to
end up paying.
Chairwoman Capito. Okay. Let me ask you this, do you decide
which routing your card goes on in all this?
Mr. Prentzas. No.
Chairwoman Capito. Okay. Who negotiates your fee for you?
Mr. Prentzas. The merchant company.
Chairwoman Capito. So, you go through like a merchant
payment--
Mr. Prentzas. Correct.
Mr. Kantor. If I could, Congresswoman, folks like us have
their own service providers who sign them up and provide
processing and we don't do that.
Chairwoman Capito. Okay. Mr. Kemper, on your debit cards
right now, do you have any charges at all associated with debt
for the consumer?
Mr. Kemper. No, we don't.
Chairwoman Capito. No.
Mr. Kemper. And as I said, it is extremely popular for
being used and it has basically displaced the check.
Chairwoman Capito. Right, I know. I am in that generation
where I am--he is writing checks, I am using my credit card,
but my kids are using their debit cards so--has the cost--Mr.
Kantor mentioned the cost going up, this is another conflicting
piece of information. Has your interchange cost on debit cards
gone up to the 98 percent that Mr. Seltzer mentioned?
Mr. Kemper. My view is that is primarily because the debit
card is the most successful product we have ever had.
Chairwoman Capito. Has the cost of the debit card--
Mr. Kemper. No, the cost as a percentage of sales to us,
and I think it is true pretty much across-the-board, has stayed
fairly constant. Maybe it has gone up a little bit, but I think
the dollars are driven by the volume because everybody is using
debit cards.
Chairwoman Capito. But if you had to average the average
cost of interchange fees over 10 years or let's say 5 years ago
because 7-Eleven made an assertion in their statement that it
has gone up 500 percent over the last 5 or 10 years. Is that--
Mr. Kemper. That would be nothing comp--I think that is
driven by volume. Our debit fees have gone up because they have
replaced checks and so the fees have gone up, as a percentage
of the retail sales, they have stayed very steady.
Chairwoman Capito. Okay.
Mr. Kantor. If I could, Congresswoman, just for a moment on
this question. Actually, the rates have gone up very
significantly over time. In fact, PIN rates were next to
nothing about a decade ago and so--
Chairwoman Capito. This is what I mean.
Mr. Kantor. Yes.
Chairwoman Capito. We are getting two conflicting--
Mr. Kantor. We are happy to give you those numbers and I
would know--there are a lot of things that are conflicting
here. Commerce Bank's Web site says they do charge some of
their customers for debit cards so there are a number of
things--the facts of the--
Chairwoman Capito. We will let Mr. Kemper--
Mr. Floum. May I respond, Madam Chairwoman?
Chairwoman Capito. I want to ask Mr. Michael something
because I really have only a minute 43 left. You fall into the
category of the under $10 billion, obviously, with your credit
union.
Mr. Michael. Well under, yes.
Chairwoman Capito. Yes. Did you submit any comments to the
Fed?
Mr. Michael. I have not had the time. And in fact, until I
was asked to speak in this hearing, I didn't have the time to
really investigate the effects of this. That is one of the
problems I think most have--
Chairwoman Capito. I would agree with that. Would it be a
safe assumption probably that your association--the Credit
Union National Association, I am sure has submitted something
representative of--because only two credit unions fall into
this category.
Mr. Michael. They are in the process of submitting two
separate comment letters to the Fed.
Chairwoman Capito. Thank you. Do you charge for your debit
card right now?
Mr. Michael. I have to, because I lose money on my
transaction accounts.
Chairwoman Capito. So you do it like a fee?
Mr. Michael. I have a fee on the transactions to try and
allocate the cost and--most use it. I have too much in fixed
cost and those fixed cost, I don't think they are being even
considered as part of the Fed study. And for a small
institution, that is a major portion of what we do.
Chairwoman Capito. Yes, I mean proportionately too, that
has to be a problem.
Mr. Michael. It is.
Chairwoman Capito. Because you don't have access to the
larger networks, then you don't have the--obviously the lawyers
and the accountants and everything else that has to go along
with finding a--with doing the correct fraud and protections
and all those kinds of things.
Let's see, the question that I really want to find out here
and I assume--I don't know if the Fed actually knows this or
not but is the cost--whether they have gone--I understand the
volume of business has gone up so your interchange is going to
go up because it is a greater part of your bottom line.
More people are paying with debit cards and so your
interchange fee is going to go up with that because you have
more people using the card.
Mr. Prentzas. Madam Chairwoman, if I may? As a small
business owner, what I am really confused about and try to
understand throughout this whole process and maybe some of the
banks can explain this to me is, how is an interchange fee
actually determined? There are so many different types of debit
cards out there with rewards where I as a small business don't
know what these fees are, what the percentages are, and I am at
the mercy of a bank, at the end of the month, they give me a
statement and tell me this is what you have to pay. And I have
no understanding of what I am paying or why I am paying.
Chairwoman Capito. Thank you.
Mrs. Maloney?
Mrs. Maloney. I want to thank all of the panelists for
their thoughtful testimony and I would like to ask this
apprentice, we talked a great deal about small businesses and
trying to help them here in Congress and wanting them to
prosper. They are the backbone of the economy. After Valentines
Day and being a florist, is the economy improving?
Mr. Prentzas. There is a lot of love in the air this year.
Mrs. Maloney. That is great to hear. Can you elaborate and
others on the panel on what you think this rule will mean for
you as a small businessman or as a bank or as a small community
bank? And if there is any savings, Mr. Prentzas, how would you
use those savings? What would you do with them?
Mr. Prentzas. Congresswoman Maloney, thank you for that
question. Actually, that is a very important question. As a
small business owner, we are in the business of competing
everyday. And every dollar that we could save will be in our
best interest to put it back into the market, into the
consumer.
That also includes lowering prices. That is what is going
to draw another customer to my shop and that is what is going
to help me create more revenue where I could hire people and
give the benefits that all Americans deserve. So, naturally, in
my situation and as a small businessperson, I think it is going
to trickle down to the consumer.
Mrs. Maloney. Okay. I would like to ask all the panel
members to comment on what they see as the benefit or perhaps
detriment to consumers with the implementation of this
interchange rule.
I have heard from financial institutions that this will
mean that fees on their customers in others areas may be
raised. And I have heard from merchants that high interchange
fees mean that the price of goods and services are higher.
I would just like Mr. Kemper, Mr. Seltzer, all of you, to
comment on what this means to you.
Mr. Kemper. Yes.
Mrs. Maloney. And to your customers and to the consumers.
Mr. Kemper. Great question. Josh used the number $12
billion to $14 billion that is going to come out of the banking
industry primarily to retailers and primarily to the top 1.5
percent of retailers who are doing most of the business.
That $14 billion is 16 percent of banking profits for last
year. Banks last year made about 6 percent on equity compared
to 19 percent for the 3 biggest retailers. So, banks have gone
through a tough time of rebuilding capital and are not
particularly profitable.
This payment system is the most stable income and
especially for small banks. We do a lot about the businesses,
we are in money management, we are in commercial. But for small
credit unions, for small banks, it is going to be devastating.
As I said, it is going to mean that our basic--system
product is going to be unprofitable. We are going to have to
raise fees. I think people have generally said we will be lucky
to recoup a third to a half of these kind of fees, it was going
to suppress profitability immediately, and we have a wonderful
system. We have to step back and look at what the value of this
system is, not what the cost.
I like to talk about the costs because they are very
competitive. They are cheaper than checks, they are cheaper
than cash, and a lot of studies have shown that. We have a
wonderful system that we could ruin. And Josh, Visa, a lot of
people are not going to be investing in the future in fraud, on
innovation, and we are going to go the wrong way.
Mr. Kantor. If I could address this question, because it is
an important one. What we have shown--and I cited in my
testimony, a study from Robert Shapiro, the former
Undersecretary of Commerce. And he took a look at this and said
if interchange fees, he looked at both credit and debit, were
just cost plus a reasonable rate of return, that would return
almost $27 billion to the pockets of consumers and create
242,000 new jobs in the United States.
If you look at just debit, those numbers are more than $10
billion to consumers and it is more than 95,000 new jobs
created. As prices go down, people buy more, and that is good
for everyone.
I would like to comment just again at the chairwoman's
helpful observation about talking about facts here. Mr. Floum,
in his written testimony, and again in his testimony early
today before the committee, quoted a small businessperson, Tom
Robinson, who testified a few years ago before the Judiciary
Committee on this issue. But that quote was cut off at the
critical point of that quote.
And Mr. Floum quoted Mr. Robinson in talking about passing
on savings to consumers as saying there is not a businessman
who doesn't attempt to keep the margin.
Mr. Robinson continued that statement. He said there is not
a businessman who doesn't attempt to keep the margin, but the
competition always drives it back out. And when you have a
competitive market, and we definitely have a competitive market
unlike some others, those benefits will go back to the
consumer.
I expect this was an honest mistake on Mr. Floum's part.
Unfortunately, this artificially truncated quote has been
floating around for a while. When there was a markup in the
Judiciary Committee, one of the Members who talked to him had
to read it in and correct it, and I would just ask that this
exchange in the transcript be made part of the record of this
hearing so that we get it right and make it clear that
merchants believe in free market and believe consumers will
save.
Mrs. Maloney. Thank you, and my time has expired. Thank
you.
Chairwoman Capito. Thank you.
Mr. Marchant?
Mr. Marchant. Thank you, Madam Chairwoman.
What I would like to focus on is the expense that merchants
no longer have to incur because of the debit card. In my life,
I have worked in stores where a great amount of the time that
the cashier and the management spent was in compiling the
deposit, taking the check, checking the ID, taking the hot
checks to the door as you walk out, and all the expense that
went into just making this simple transaction take place.
It seems to me that the debit cards have made a lot of the
positions that existed in your store, Mr. Prentzas, maybe you
don't have to have a fulltime version that does that now. Now,
you can--this debit card enables you to have safer
transactions, quicker transactions.
Would you admit that there is some value to that versus the
way it probably was when you started in business?
Mr. Prentzas. Thank you for that question.
What I could say to that is that I don't need that person,
but I also had to lay off one other person because of these
fees. And let me explain myself, Congressman. As a businessman,
you need to be able to understand what you are paying for.
When it comes to interchange fees, I don't know what I am
paying for and what these fees are. What is the rate of taking
card ``A'', or what rewards are on that? I don't know. I am at
the mercy, like I said earlier, of the statement that comes in
at the end of the day. So, yes, it might be convenient, but I
am not willing to give anybody a blank check to fill out a
portion for that convenience. I want to know what I am paying
for that convenience and how it is being derived at the end of
the day.
Mr. Marchant. Okay. So, your point is you don't know what
you are paying for. You don't know how--
Mr. Prentzas. Why it has been increasing so rapidly without
having any additional services?
Mr. Marchant. The other thing that I am noticing as I am
going down to the store is that with almost every transaction
that I try to make, the retailer is trying to push me towards
the transaction that the retailer would prefer that I make.
And the retailer absolutely does not want a check. Cash, I
am pretty sure is okay, but retailers no longer want a check.
The retailer really no longer wants a credit card because I am
assuming the credit card is still 2 to 3 percent. Is that a
standard bank charge for credit cards, Mr. Seltzer?
Mr. Seltzer. Mr. Marchant, for us, credit and debit are
right on top of one another and I think on average--our credit
rates are about 2.2 percent.
Mr. Marchant. 2.2 percent.
Mr. Seltzer. Our debit rates are about 2.1 percent of the
transaction, so they are right on top of one another. And, I
will speak to your other question. We absolutely believe there
is value in cards, we are willing to pay competitive prices.
And if there were competitive markets for this product, we
wouldn't be here. There is no competition within the card space
for debit cards.
Mr. Marchant. I think I might get to that if I have enough
time to get to my question. The retailer, though, now is--even
though there is no difference, I guess you are saying, between
credit and debit, they are pushing me towards a debit
transaction because I will now have to say that I don't--debit
or credit. That is a standard question now so there must be
some advantage to one transaction over the other.
Mr. Floum. Yes. Can I say a little bit about the facts?
Because the one thing I agree with Mr. Kantor about is that
facts are important. And there have been a lot of assertions
about facts.
Chairwoman Capito, I am happy to provide you with
excruciating detail about Visa's interchange rates. They are
transparent, they are on the Web site, they are public.
So, let's talk a little bit about the facts. You asked
whether the rates are going up because usage is going up or
because the percentage rates are going up, and this is very
important; it is because people are using debit cards more, and
merchants are accepting them more. That is a good thing because
they are less expensive than cash and they are less expensive
than checks so merchants are achieving savings.
The debit card rates on average 10 years ago were about 1.4
percent. Today, they are about 1.4 percent. Some rates have
gone up, some rates have gone down. The average effective debit
card rate has remained stable over a 10-year period. Any
assertion to the contrary, we need to look at the facts.
Credit card rates on average are higher, but the rates that
merchants pay for use of debit cards and credit cards in the
United States are far lower than what they pay in most other
countries. So, it is important to get the facts correct and we
would be happy to provide you with all of these facts for the
record.
Chairwoman Capito. Mr. Watt?
Mr. Watt. Madam Chairwoman, I think I will allow Mr. Scott
to go next. I missed the testimony, I do want to apologize for
that, but I am trying to get into the flow here.
Mr. Scott. Thank you very much, Madam Chairwoman.
This is very, very interesting and, as I said, it is very
profound. The issue, if I could frame it right is that
everybody here agrees we need to change the fee. The issue
becomes, what is reasonable and what is proportional?
Three of you have one set of feelings, and three of you
have the other. So--if you could briefly just share with this
committee what do you feel. What rate fee do you feel would be
proportional and reasonable?
Let me start with you, Mr. Kemper.
Mr. Kemper. Yes, thank you.
I think you have to go back. And I put this in my written
testimony about the different costs of payments. The merchant
can take checks, the merchant can take cash, the merchant can
take debit, the merchant can take credit cards. And debit cards
are the cheapest form of payment from a social cost. That is
not my view, that is a Brookings study, and we can show you
other studies.
So, it is a very competitive way of payment. It has huge
benefits for everybody, for the bank.
Mr. Scott. I want to get to quite a few little points.
Mr. Kemper. Okay.
Mr. Scott. So if you could just tell me, we are looking at
a range here from 43 or 44 to 12?
Mr. Kemper. As I mentioned, it costs us $230 for a checking
account. And lots of those costs are revolving around debit.
So, we have millions of dollars in cost of running our call
center, issuing statements in fraud, all kinds of things that
are not being included.
The Fed has too narrow a rule, and it is a train coming
down a track.
Mr. Scott. Do you have a figure? Do you have a figure,
let's say, from 12--
Mr. Kemper. My figure is that we have a huge amount of cost
that they are not even looking at.
Mr. Scott. Right.
Mr. Kemper. And that is why we say you have to delay this,
you have to step back and really understand the cost involved
in this.
Mr. Scott. The one thing you would say is 12 is certainly
insufficient?
Mr. Kemper. Twelve is certainly--that is one thing I will
say.
Mr. Scott. You don't want to say--
Mr. Kemper. It is insufficient.
Mr. Kantor. Congressman, thank you. It is a very helpful
question because actually I do not agree that the centrally
fixed interchange fee should exist at all. In fact, in seven of
the eight nations around the world that have the highest per
capita debit card usage, this fee does not exist at all.
It is important to recognize that, as I talked about in my
testimony, banks get tremendous benefits every time there are
customers.
Mr. Scott. I know, but I don't--I am just going to get--do
you have--
Mr. Kantor. There should not be a fee.
Mr. Scott. Period?
Mr. Kantor. It should be zero. They should have to set
their own fees at banks and not--
Mr. Scott. Twelve is even high to you?
Mr. Kantor. That is absolutely right.
Mr. Scott. Okay.
Mr. Kantor. It is far too high.
Mr. Scott. Let me go to the next point if I may, because we
have some merchants here, and I would like to get their
concerns about this.
Mr. Seltzer, let me ask you, you agree that if someone
provides a service and someone else profits off that service,
that the person profiting off that service should pay for that
service?
Mr. Seltzer. Absolutely.
Mr. Scott. How much business would you lose if you stopped
accepting the debit card transaction?
Mr. Seltzer. We sell groceries, we sell gasoline, so we
don't believe that debit transactions or debit cards have
increased purchasing volume for our consumers.
If we stop accepting cards because Visa and MasterCard have
been successful in transforming American purchasing habits from
checks to electronic checks as debit cards were originally
marketed--
Mr. Scott. Would you say you--yes, and you would lose
business 35 percent, 40 percent? Would it be in that range?
Mr. Seltzer. I don't know an answer to that. No retailer
can--
Mr. Scott. But it makes a certain portion of your business
possible. And you do feel that you should pay for that service.
Is that correct?
Mr. Seltzer. Again, if there were competitive rates or
competitive interchange--
Mr. Scott. Does 7-Eleven accept checks as a form of
payment?
Mr. Seltzer. We do in our company-operated stores and our
franchisees can--
Mr. Scott. Okay. Do you pay for a guarantee service, a
check guarantee service to make sure that check--that you are
covered?
Mr. Seltzer. We do on a guaranteed basis; checks are less
than half the cost of debit.
Mr. Scott. Yes, so it is less than half the cost of debits?
You would say that debit cards--how do they compare to the fees
that you pay out to the check guarantee service?
Mr. Seltzer. Debit fees are substantially more expensive.
Mr. Scott. Pardon me?
Mr. Seltzer. Debit fees are substantially more expensive.
And debit is not guaranteed at the end of the day. We take
chargebacks on debit.
Mr. Scott. Thank you, sir.
Thank you, Madam Chairwoman.
Chairwoman Capito. Thank you.
Mr. Royce, from California?
Mr. Royce. Thank you, Madam Chairwoman.
I was going to ask Mr. Kemper--you are with Commerce Bank,
right, Mr. Kemper?
Mr. Kemper. Yes, that is right.
Mr. Royce. Which, as I remember, never got into the toxic
mortgage mess that a lot of financial institutions did get
into.
Mr. Kemper. I am proud of that.
Mr. Royce. I read your testimony here. And I was going to
ask you, do you expect the ability of the system as it exists
now to combat fraud to be weakened if the proposed rule goes
through? And walk us through the logic as to why, if so.
Mr. Kemper. In the previous testimony with Governor
Raskin--and I think we were talking about the incentives on
fraud prevention and fraud, if you can't recover the cost of
fraud, you are going to have to put different restrictions.
First of all, I think you are not going to guarantee
payments on larger items, so that is really going to cripple
the debit system for everybody, for the consumer and for
merchants. And if you don't continue to invest, as we talked
about before, it is part of a rapidly evolving battle, and so
the card operators, the banks, we have to continually put a lot
of money into doing what we must to outwit the crooks.
So if you can't recover your cost and if you cut your fees
by 85 percent, there is no question that you are not going to
invest to cover fraud. And if you are not allowed to recover
fraud cost, you are going to have to put a lot of restrictions
on that so you don't take the losses on fraud. And that would
be devastating.
Mr. Royce. Let me ask Mr. Floum, too, on that front. I
spoke earlier when we had the representative of the Fed here
just about their concerns with the way in which fraud in our
society continues to evolve, the innovative ways in which
people keep trying to hack into the system and, also, the
evolution of this system where we are informed as consumers,
where it is found in advance of us finding it, in most cases by
the current system. But that system has cost billions and
billions of dollars to develop.
And I was going to ask you how often is your network
hacked?
Mr. Floum. Congressman, there are efforts to hack our
network multiples times every day. And, fortunately, up till
now there has never been a successful breach of our network,
not one, and we are proud of that. But that takes a lot of
investment. We invest at Visa alone $800 million a year in
preventing fraud and cyber attacks. The banks, our issuers
invest billions each year.
And if there is not an incentive and an economic return to
continue to invest and to safeguard the data security of our
payment network and our digital currency, that is a very
serious policy concern. I would respectfully submit we need to
keep ahead of the cyber criminals. It is not enough to be on
par with them. That takes a very sophisticated technology,
thinking ahead and significant investment.
Mr. Royce. Let me ask you then, do you think the system
will be less safe as a result of this rule if it is implemented
as is, without change or without study?
Mr. Floum. Whatever the regulatory environment, we will
always strive to make the system as secure as possible. And I
am sure the issuers will do the same. But without a return, and
if issuers have to operate at a loss, it makes it very
problematic and much harder to do so. And I fear that
competitors overseas, other networks will have an edge because
they are not constrained by artificial price controls.
Mr. Kantor. Congressman, could I have a word about this
fraud question--
Chairwoman Capito. Yes.
Mr. Kantor. --because it is an important one, and I think
it is helpful to recognize first that Visa's fees as a network
are not regulated by the Fed under the law or the Fed's
proposal, so if their investments are not affected, they can
continue to charge merchants, which they do, whatever they
desire to charge them.
But Mr. Hensarling made a very important observation during
the first panel that you don't want to create that incentive by
paying banks for their fraud losses--then they don't have the
incentive to get rid of those fraud losses. And so that
shouldn't be part of the analysis and in our view isn't what
is, is fraud prevention. And if in fact there are systems that
demonstrably prevent fraud, our view is--and we believe the law
says this and the Fed's rule accounts for them in the options
they put forward--those fraud prevention cost can be recovered
if they demonstrably reduce fraud.
Mr. Royce. Thank you, Madam Chairwoman.
Chairwoman Capito. Mr. Meeks?
Mr. Meeks. Thank you, Madam Chairwoman.
It is a very good hearing. And, I can recall when we
started this, I wish we would have had the time before we
passed the bill to have this kind of an intensive kind of
debate and conversation and it might have cleared it up and--
because, ultimately, what we are concerned about is the
consumers and all of you, whether it is merchant or whether it
is bank group or the person who is going to a bank or credit
union and our constituents. We want to make sure that they get
the benefit.
There is one question, that before I get into the main
question, I want to ask. And I don't know--backing off to Mr.
Scott. I didn't get quite the understanding because I know
usually, there is a lot of tax. How much does it cost or who
pays the cost if a check was bounced? If you gave the check,
what is the cost of the, you know--maybe, I don't know if
someone could answer that for me, Mr. Floum or someone from the
credit union or anybody. How much or what is the cost for a
bounced check?
Mr. Floum. The cost annually to merchants from bounced
checks far exceeds the total amount that they pay in debit
interchange. And as volume increases on debit cards, those
bounced check losses come down. So, again, this idea that debit
fees have gone up, I have said that is not true. The rate
hasn't gone up. The overall expense has gone up because more
debit cards are being used. That means merchants are saving
money because it costs them more to bounce checks, to pay for
bounced checks.
If you want to guarantee a check, you can go to a check
guarantee type of service. And the rate they are going to
charge you is 1.3, 1.4, 1.5 percent. So with that guarantee and
with the additional expense, and as Mr. Kemper said, it is not
just us who are saying this. Everyone would acknowledge who
studied it that the cost of checks far exceeds the cost of
debit cards per merchant.
Mr. Meeks. Quickly, please because--
Mr. Kemper. Sure. We are happy to bring in the numbers from
merchants. It is the case because, often, with the bounced
checks the merchant does get the money. There is--or otherwise,
and there are fees put on there just like the bank's $38
billion in overdraft fees. Merchants do put a fee, so it is not
the fact that merchants lose more money than they pay on--
Mr. Meeks. Let me just--this is another reason why, in my
viewpoint, we need to dig into this more because, too, I was
watching. That is what it meant. The first panel is watching
the Senate Banking hearing today. And there were two statements
that were made--one by Chairman Bair--that said that the Durbin
Amendment might not be helpful to consumers and has unintended
consequences and really needs to be fixed. He further stated
that the full policy ramifications might not have been dealt
with as thoroughly as they should have been. So we kind of
rushed it through.
And then there was also a statement--because I was
particularly concerned at that time with the effect that for a
small--for credit unions and for the smaller institutions, the
community banks--and so we put in an exemption what we felt
would protect them. So my question then is--and I think
Chairman Bernanke said that the exemption may not work.
So my question--and Mr. Floum, I will ask you, especially
with this network, because I heard you testified about network
exclusivity provision. How does that affect, if it does, small
issuers?
Mr. Floum. Thank you for the question, Congressman Meeks.
It affects small issuers greatly because although they were
exempted from the direct price regulation on the debit rate,
they are square in the crosshairs and exclusivity and routing
provisions. Those were put in during conference by RILA, the
large retail association, for one reason and one reason only--
and that was to suppress interchange rates and issuer revenue.
So what they do is they say that it is not enough that the
networks can't compete to have cards, but that there had to be
two networks on one card. Whether the cardholder wants two
networks or the issuer wants two networks or not, the choice is
taken away. And the choice is taken away from the consumer to
route the transaction. So someone is asking about thin pads and
merchants trying to steer-- at least consumers had a choice
before, but with the Durbin Amendment the choice is taken from
the consumers and merchants' route and with two networks they
want to set up a situation where they drive the interchange
rate down.
That was the reason. That was the intent. That will be the
effect. And, unfortunately, the credit unions and community
banks are not exempt from that provision.
Mr. Meeks. Do you have any comments?
Mr. Kantor. If I could, it is important to recognize a
couple of things here. One is that there is robust competition
in one place here--that is to drive interchange fees up. The
networks drive interchange fees up to get issuers to put them
on the card. That won't change even with the network non-
exclusivity and that will protect the small banks so that they
won't have to worry about their fees.
Visa has already said they will have a two-tiered system.
And there have been commentators like Christopher Leonard of
the American Banker, who said, ``This will allow the small
banks to win and have their cake and it eat, too.''
Chairwoman Capito. Mr. Renacci?
Mr. Renacci. Thank you, Madam Chairwoman.
And thank you all for being here.
Mr. Prentzas, Mr. Kantor, and Mr. Seltzer, there was a day
just very recently that I was a retailer. And Mr. Michael, Mr.
Kemper, and Mr. Floum, there was a day very recently that I was
on a bank board. So I see both sides of your story. The only
concern I have is in the long run, who is going to win and who
is going to lose?
If I was sitting on the retailer side, and even if prices
were able to come down, I know that the bankers have to make
these dollars up somewhere and those fees will wind up going to
the consumer. And, today, I am sitting on the side of the
consumer and wondering who really wins in all of this.
The other thing that I think we need to be very, very
careful of is that any time the government gets involved and
sets a price or a standard or a fix, whatever you want to call
it, it is a very dangerous precedent especially for the
retailers. So I am concerned about that and not comfortable at
all. But I do know that, from a retailer's standpoint, these
cards do allow you the opportunity to sell more. And I do know,
from a banking perspective, these cards do allow you to make
money.
The issue again is going to be, how does it affect the
consumer? My biggest concern today, though, goes back to all of
the testimony.
And, Mr. Kantor, I want to--two things you did say in your
testimony. You said that interchange rates should be based in
many cases with the foreign markets charge. I think you need to
be extremely careful there, too, because I am sure your
retailers would not want to have to charge with the foreign--
with some of the foreign market for selling things for. I will
give you a chance to speak.
And you also mentioned--the word early on in your
testimony--fixing fees and you said that the banks are fixing
fees. I am not too sure you want the government to fix fees.
So, again, let's be careful while we are talking about all of
these numbers.
But here is the question I have. After all of this
testimony, we are still getting down to we now have an
interchange fee that the Federal Reserve is saying should be at
a certain amount. And they put that amount inside of a specific
box. We didn't give through a statute the Federal Reserve any
opportunity to pick up all of the costs that are available.
You heard the testimony earlier that it could be an issue.
And for the retailers sitting on the panel, I am sure that if
you were stuck with a certain retail cost that was set by
somebody else and all you were told was you would want your
cost, you would want to make sure it is a fair fee and a fair
cost. So I am going to ask this primarily to the retailers.
Hearing the testimony earlier and hearing that you know
that this interchange fee is really--it is flawed in my
opinion. It doesn't take into consideration all of the cost.
And as I asked the previous person who testified, what do you
need to get this cost, I really didn't get an answer, so what
do you need?
But for your purposes, do you really want the Federal
Reserve to set a cost, a standard, as you called it, or do you
want it to be fair and reasonable? And are you willing to allow
there to be more time given to the Federal Reserve to have all
the details available so that they can come up with a fair
standard, as they call it?
Mr. Kantor. Congressman, I appreciate that. And thank you
for looking at this question so closely. What is helpful to
recognize here, as I said in my testimony again, is if banks
would compete rather than fixing the fees and set their own
costs, charge whatever you want and have a market system, that
is great with us, do it.
If they are going to fix the fees, we think frankly they
should not be allowed to charge anything by fixing the fees.
The Fed has been more generous than that in spite of the fact
that we advocated that they not do that and, instead, here you
can recover this cost plus a rather large rate of return on
those costs.
And so, here, I have gone through in my testimony the banks
have argued for a great many other costs to be included here.
Now, some of those are costs of the network, which, as I said,
aren't regulated. Some of those are the costs of the credit
program--
Mr. Renacci. I am going to run out of time, so I just want
to make sure are you willing to let more time to be allowed
from a retailer's standpoint so that actual reasonable cost can
be determined, or you are going to stand here or sit here today
and say, no, I don't want to waste any more time to have a
reasonable cost?
Mr. Kantor. The Fed has done a good job here so far.
Merchants have been--
Mr. Renacci. The Fed has said today that they did not take
into consideration all of the costs. So my question is pretty
specific--are you willing to allow that there will be more time
for the Fed to get all the costs outside of the box so that
they can come up with a fair interchange fee?
Mr. Kantor. We have waited more than 10 years too long
already.
Mr. Renacci. You are not answering my question.
Mr. Kantor. The Fed is getting it right. It should go
forward. If anything, the fees should be lower.
Chairwoman Capito. Mr. Carney?
Mr. Carney. Thanks, Madam Chairwoman.
First, let me apologize for not being here in the last--
when you made your opening statements. You may have heard the
questions that I asked the Governor earlier about the cost--and
we have been having some discussion about that.
I am just glancing through the testimony that was provided
in writing. I am interested in the banker's view of those costs
and if there are things that you don't take into consideration
or allowed allowable cost because presumably that will be in
the--part of the comment record and maybe you have already
submitted that, but could you summarize that for me, I guess,
Mr. Kemper?
Mr. Kemper. Yes. I would be glad to comment on that. First
of all, when you step back--and I said that in my testimony,
when you look at all of the social costs, debit is lower than
any other form of payment. And so, we talked about facts. There
are facts on that.
I mentioned in my opening statement that--and we talked
about with Governor Raskin that the Feds have really been
putting a box on this because of the language in Dodd-Frank on
how narrowly they can interpret what the costs are. It is
basically just the marginal electronic and clearing costs.
The other cost, we talked about fraud, and we paid millions
of dollars in fraud cost. That is a real cost. Our call center,
our 24/7 call center where we have 120 people, we have people
call up all the time about entries on their checking accounts.
They are doing far more debit transactions. And they are checks
or other forms of payments. So how do you allocate that? We
have to have systems for their payment system. Periodic
statements were required and we spend millions of dollars
sending our customers statements every month.
It is very difficult. And I think the whole--and there are
a lot of frauds. First of all, price fixing on an unprecedented
scale is very scary to me. But, secondly, telling businesses
that they can only price a product, our most popular consumer
product, at marginal cost just doesn't make any sense. And it
was very narrowly defined by the Fed.
So they are hamstrung on this. And so if we talk about it,
then it gets very important that we step back from this and
have a full debate like we are having today and really get the
cost right because I think--I have a lot of merchants who are
very good customers of mine. We want a fair deal just like the
merchants want a fair deal.
Mr. Carney. The second question I had this morning was the
effect on consumers. I didn't really have enough time to pursue
it. Could you outline what you think the effects will be on
your customers, I guess, and other fees that you might
otherwise have to--and you might now have to charge?
Mr. Kantor. In aggregate, it is $14 billion. As I
mentioned, it is 16 percent of bank--
Mr. Carney. $14 billion is--
Mr. Kantor. $14 billion is just taking that $0.44. And
cutting it--I think Josh mentioned 12, but it is somewhere in
between that. I am going from $0.44 to $0.07 and $0.12 cents.
And, basically, that is the transfer from the banks to the
retailers. Now, whether or not they lower cost, who knows?
Mr. Carney. But that is in a nutshell what we are talking
about in terms of--
Mr. Kantor. Yes. And as I mentioned in my opening
testimony, that would move our basic checking account where we
have a full cost of profit of maybe 13 percent to a loss of
probably 10 or 12 percent on every checking account and so we
are going to have to recapture. And, also, we really haven't
talked about it today.
But, certainly, people are going to fall out of the banking
system on this. And I have talked to Congressman Clay, who is
my Congressman from St. Louis. There are big issues on this
about the banking system has worked very well and you don't--
you want to keep people in the banking system because the
alternative is not good.
Mr. Carney. One of the things we have tried to look hard to
do in Delaware, and I am sure others have as well, is to try to
get people who aren't banks, if you will, to go to the banks
and checking the account fees and all that kind of stuff is a
barrier there. And I would not want to see that obviously
happen.
I mentioned this morning that some of the regulations with
the court act have had taken away some other revenue sources
for--on the credit card side. And so it is just really a
question of what the ultimate impact is going to be on the
consumer with this.
Again, I apologize for not being here earlier to hear your
testimony. I had to go out. And I will read it carefully.
Thanks very much for--
Mr. Michael. Representative, may I say something?
Mr. Carney. Yes, you may, please.
Mr. Michael. On the credit union side, just to let you
know, our consumers are our members. And as interchange rates
are dropped, this is going to be a direct transfer from our
members to the merchants. So that will--they will have to make
that up some way through some other sources--
Mr. Carney. What is the estimated loss for the credit
unions?
Mr. Michael. Again, what we are figuring right now that it
is going to be fairly substantial, about $1.1 billion a year.
They will be transferred to merchants. And I don't have a
guarantee that the merchants are going to take and give that
money back to my members.
Mr. Carney. Thank you.
Mr. Kantor. Yes, if I could?
Mr. Carney. No, you can't.
[laughter]
Sorry, I am just a freshman. I don't mess with the Chair.
Chairwoman Capito. You are a good man.
Mr. Canseco?
Mr. Canseco. Thank you, Madam Chairwoman.
The Federal Reserve Board has proposed these regulations in
an effort to implement the interchange fee provisions of the
Dodd-Frank Act.
Let me ask a simple question, starting with Mr. Kemper. How
did the Federal Reserve do in writing this rule, in your
opinion?
Mr. Kemper. I think the Federal Reserve, as I mentioned,
was hamstrung with some very specific language on what they can
do on incremental costs, and I think they narrowed. And I have
talked to--Missouri is the only State with two Federal Reserve
districts. And I know both persons very well and I have talked
with them.
I think there are a lot of questions on how they came up
with what they did and why they didn't include fraud and why it
was so narrow. But I think it took a very bad law and made it
worse and narrowed it down. And that is--and I think--I
listened to Governor Raskin, and I think you asked a lot of
good questions about what are the costs that should be in
there. And they are not in there.
Mr. Canseco. So you don't think that the Federal Reserve
did a good job in writing?
Mr. Kemper. I think they did a very thorough job, but I
think the outcome was not good. And I don't think it is right,
either.
Mr. Canseco. Thank you, Mr. Kemper.
Mr. Kantor?
Mr. Kantor. Thank you for that. I think that the Federal
Reserve has done a good job and a credible job of writing this
rule. It is not everything that we would like it to be, as you
heard. I think they have the room and should not have centrally
fixed interchange fees, whatsoever, allowed anymore by the
banks.
But they did a good, credible job going through it. And it
is substantial progress that will benefit everyone, in
particular, the consumer. And I would know, just with respect
to Mr. Carney's comment before, too, it is helpful to look
the--in Europe, they took a look at this question when they
moved to a 0.2 percent debit interchange, which is a little bit
lower than what the Fed proposed, and they found that there is
no relationship between the fees that banks charge their
customers checking and otherwise in the interchange fee.
In fact, if there were, had interchange fees tripled in
this country over the last decade, we would have seen bank fees
on the consumers fall dramatically. In fact, they didn't--those
increased dramatically to the $38 billion in overdraft just to
take one example.
Mr. Canseco. So they did well, Mr. Kantor?
Mr. Kantor. But I think they did well.
Mr. Canseco. And, Mr. Michael?
Mr. Michael. I think that, again, they have been hamstrung.
And they had some options where they could have--have made some
decisions, for example, enforcing--or requiring an enforcement
of the two-tier system could be something they could have done,
but they have decided not to do that.
I think there are issues in the definition of the cost. It
is not an incremental cost. It is really an operational cost
and it all has to be allocated out. But my operational costs
are not being surged for the process.
The final thing I am going to say is they have acknowledged
that the small--the exempt institutions will be dragged in.
They said that is a reality of what is going to happen. But
they haven't surveyed it. They haven't determined what our
costs are and included those as part of their determination.
Mr. Canseco. Thank you.
And, Mr. Floum?
Mr. Floum. Congressman, I think the Fed did not have enough
time and so it could not and did not do a thorough enough job.
They didn't consider all of the costs. They didn't survey the
small financial institutions. And they didn't include all of
the costs that even the narrow statute should have allowed them
to include such as fraud cost, such as network fees, such as
fixed costs, the investment cost to keep the infrastructure
safe, sound, and secure.
Mr. Canseco. Thank you, sir.
Mr. Prentzas?
Mr. Prentzas. I believe that the Federal Reserve is now
doing a proper job. Like I said, there might be more that has
to be done, but we are heading in the right direction.
The only comment I just want to make so maybe we could get
a down-curve grasp on this problem coming from a small
business. If you have 2 flower shops within a 50-mile radius,
those 2 flower shops could basically set their own prices. But,
now, if you allow four other flower shops to come into that
area, there is going to be competition. Who benefits at the end
of the day? The consumer.
This is what could happen here. If they allow the
competition to exist, where not two banks decide what these
interchange fees are, that, at the end of the day, it is the
consumer and the retailer who will benefit, including the
banks.
Mr. Canseco. Thank you, Mr. Prentzas.
Mr. Seltzer--because we are running out of time.
Mr. Seltzer. Sure. I think the Fed has, from our
perspective, gone through a very thorough process. I know that
we have spent considerable time answering their questions in
the fall as did banks and other institutions. So from our
perspective, they have done a very thorough job.
And there were things that--we think the actual cost of the
transaction is a bit lower than where the Fed came out. So we
think the rates could be lower, but at the end of the day, we
will trust the process and, in any event, we think that the
merchants and consumers in particular will benefit from their
actions.
Mr. Canseco. And just a very short follow-up question, if I
may, Madam Chairwoman?
If the Dodd-Frank bill was presumably inactive or cobbled
together in order to try to and pull back our economy from the
brink, were interchange fees a root cause of the financial
crisis?
Mr. Floum. No. No, they weren't, Congressman. They had
nothing to do with the financial crisis. And, in fact, they are
an engine for growth.
Mr. Canseco. Yes. Dodd-Frank was supposed to be about
protecting consumers. And the Durbin Amendment, unfortunately,
will have the opposite effect by harming consumers. So it
really was rushed and has no place as a part of a consumer
protection bill.
Mr. Kantor. And we would not surprisingly perhaps disagree.
The interchange fees in fact said some--lacks the underwriting
standards on credit cards system that will in fact be a
terrible problem.
Mr. Canseco. Thank you, gentlemen, very much.
Chairwoman Capito. Thank you.
Mr. Watt?
Mr. Watt. Thank you, Madam Chairwoman.
And I am going to confess to being old school. I don't use
debit cards. Just a fact of life--I am behind the times.
I want to ask a couple of questions here about--Mr.
Michael, let me start with you because I met with local credit
union people last week. I think only two, Credit Unions
National--exempt. Is that correct?
Mr. Michael. Yes, that is correct.
Mr. Watt. Okay, but the argument was that, ultimately, even
being non-exempt was not necessarily a good thing because the
fees get set so low for the exempt institutions, for the ones
who are covered, then the folks will flock to them because of
those lower fees. And so they seem to be now rethinking the
proposition and thinking that they may be ought to have been
covered.
What is your--this is not a trick question. I am just
trying to find out.
Mr. Michael. Yes. Basically, the intent of Congress--and we
thank you for trying to keep us out of this battle to begin
with--was to keep small institutions out of this interchange.
Mr. Watt. I understand that.
Mr. Michael. But the reality is because of the routing
provisions that are in there and market forces, it will drive
costs down to the lowest common denominator--
Mr. Watt. Okay.
Mr. Michael. --and yank them up on the other side. So I am
going to see what I received on interchange income drop to what
the largest institutions have.
Mr. Watt. Okay. I want to go to Mr. Floum because I
couldn't figure out why Visa is here. Visa doesn't issue debit
cards. And so I have to stay--you have the network, I
understand, or one of the networks. Is that your Visa's
involvement in this debate?
Mr. Floum. Yes, Congressman. We are the technology
platforms, so we operate the network that makes the banks able
to talk to one another.
Mr. Watt. Okay. And how many competitors are there in that
space?
Mr. Floum. There are many competitors in that space.
Mr. Watt. Okay. And how do you get paid for providing that
service to banks and whomever uses it?
Mr. Floum. We charge fees to the issuing banks and to the
merchant banks. We do not charge fees to merchants or
cardholders.
Mr. Watt. So your network is a convenience to them also, is
it not? It is a convenience to the banks, but it is not a
convenience to the cardholders--
Mr. Floum. Yes, it is.
Mr. Watt. --and to the merchants?
Mr. Floum. It is, sir. The merchants and the cardholders
are end users of the platform that we provide. And this is an
important point. I have heard a lot about the uniform
interchange fee being--
Mr. Watt. I don't mean to disturb you. I am just trying
to--in short, I am trying to understand how this works. As you
provide a network, what part of this fee are you getting for
providing the network as opposed to the financial institution
that ultimately has the account and the debit is being debited
against? What part of it goes to them?
Mr. Floum. Of the interchange fee, which is the subject of
the Durbin Amendment, the networks get nothing, no part of it.
Separately, we do charge a fraction of a percent fee to the
issuing bank and the acquiring bank. That is how we make our
revenue.
But, obviously, we are very interested in the health of the
debit card program because we are in the business of
facilitating that program.
Mr. Watt. And if somebody defrauds the system, is it the
network that is defrauded or is it the financial institution
that is defrauded? If somebody hacks into the system--
Mr. Floum. Let me give you some examples.
Mr. Watt. No. No, I am just trying to find out, who loses?
Mr. Floum. The issuers lose. They would bear the financial
responsibility, unfortunately. The breaches have occurred at
merchants--T.J. Maxx, Hannaford, and others who have stored
data in ways that could have been more secure. So there is
fraud directed at Visa, but it has never penetrated our
network.
The problem has been with third parties, but the issuers
bear the responsibility. And that is part of--
Mr. Floum. They are compensated by interchange.
Mr. Watt. Okay. So that is the fraud costs that the Fed
should be taking into account, is that what you are saying?
Mr. Floum. Correct. Fraud losses and fraud prevention
costs.
Mr. Watt. Even though it didn't go to your network? It goes
to them?
Mr. Floum. Yes. And the interchange fee we are talking
about is a revenue to issuers, correct?
Mr. Watt. Thank you.
Mr. Floum. Thank you.
Chairwoman Capito. Thank you.
Mr. Luetkemeyer?
Mr. Luetkemeyer. Thank you, Madam Chairwoman.
Mr. Kemper, I know a while ago Mr. Kantor made statements
to the effect that there is no correlation between bank fees
and interchange fees. Would you like to jump in on that
discussion to represent the banks, on how you structure your
fees and how you charge interchange fees?
Mr. Kemper. We look at our payment system and our payment
account as one account that we priced. And there are a lot of
different components in that. People write checks. People use
credit cards. People use their debit cards. And so we take all
of those into account and we look at what--just like any
business would look at--we would look at what our revenue is
and what our cost is and we will price that accordingly.
The system has worked brilliantly. And I think that is
what--everybody has benefited from this. When you go to a fast
food place now, they take debit cards, they take credit cards.
That wasn't true 5 years ago. When you were on an airplane,
they wouldn't accept credit and debit cards. The merchants want
to take it, the airlines want to take it because they don't
want to handle checks and they don't want to handle cash. We
see that.
So we like--the idea that you can strip out this marginal
cost on one component of payment systems to me just doesn't
make any sense because it is all wrapped together. We have to
support all of the--we have to support our call center. We have
to work with Visa. We have to support security. All of those
things flow together for our payment accounts. So we factor all
of that together in trying to carve out one area and price it
at marginal cost. It is just not the way business is done in
this country.
Mr. Luetkemeyer. If this price structure goes forward, what
are you going to do? What are you going to reprice? How are you
going to reprice your products or all of your products or just
the debit cards to make up for lost income, to continue to
provide the service? Are you going to continue to provide the
service?
Mr. Kemper. It is a very competitive world out there. And
there is PayPal, there are all kinds of non-bank kinds of
accounts. So the market will dictate how we can price up. But
there are 7500 banks in this country and they compete very
vigorously. So, sure, if we are going to lose tens of millions
of dollars of revenue and we are going to start losing as I
mentioned on every checking as a whole, we will price that up.
So costs go up to consumers.
But the debit card now is paid for by users. And, in fact,
as you use it, it is a user fee as opposed to spreading it out.
I think it is a very fair way to do it. But I guess the bottom
line answer is fees will go up significantly to consumers to--
the market will allow us. That is the way a free market system
works.
Mr. Luetkemeyer. Mr. Michael, you indicated that all of
your members are consumers?
Mr. Michael. That is correct.
Mr. Luetkemeyer. And, therefore, this is going to be a
direct charge back to them. Have you looked at your model yet
to see what is--how much it is going to cost? Or how you are
going to approach this? Are you going to continue to provide
debit card service? Are you going to pull it out of the system
of services you provider? How are you going to approach this?
Mr. Michael. First off, I need to, again, let you know that
we don't cover our cost with interchange. I have to charge--
currently $0.25 in these transactions to help cover the cost of
processes and transactions, and I still lose money.
Going forward, the issue is going to be I will have to
either adjust that price or find other locations and my
financial institution to do that. But I have a narrow range of
products, and larger financial institutions could take that
cost and past it off to another area. I can only basically add
it back into my deposit products such as my checking accounts
either through fees or through incremental fees on the debit
card transactions or checking account fees. Other institutions
will be able to go other directions with it.
Ultimately, in the end, if my fees get to be too high, I
will not be competitive in the marketplace and I will lose
members who will go to other financial institutions because
they will be able to get those products cheaper.
Mr. Luetkemeyer. Okay. A while ago, Mr. Floum, you
indicated that you had some data with regards to the cost per
transaction of cash, credit cards, and debit cards. Off the top
of your head, do you have the information just roughly which
one of those cost would be what your research shows?
Mr. Floum. I would be happy to provide that. I believe that
one bank executive has said that cost of cash ranges 79, 80
basis points. The cost of verified checks is 1.35 basis points.
But we can get you that information. And that doesn't include
fully-loaded cost, as Mr. Kemper said. If you look at the--cost
to all participants, cash and checks have even higher cost.
Mr. Seltzer. And I could tell you for 7-Eleven, the cash
costs are about 20 or 25 basis points. So the debit is on the
order of 8 times more expensive for us than accepting cash,
including the bank service charge that we incur on depositing
cash--
Mr. Luetkemeyer. What is your--on checks, etc.? What is
your cost on checks?
Mr. Seltzer. I don't know that one--
Mr. Luetkemeyer. And, now, and when--those checks, I am not
talking about the cost just to handle checks. I am talking
about the losses you incur on taking bad checks as well.
Mr. Seltzer. Less than 1 percent.
Mr. Luetkemeyer. One percent of the cost of the
transaction?
Mr. Seltzer. Of the transaction as compared to 2 percent
plus on a debit transaction.
Mr. Luetkemeyer. Okay, very good.
Thank you, Madam Chairwoman.
Chairwoman Capito. Thank you.
Mr. Clay?
Mr. Clay. Thank you, Madam Chairwoman. Let me thank you and
the ranking member for allowing me to sit in on this hearing
today. I find it quite interesting.
And I also want to take this opportunity to welcome my
constituent, Mr. David Kemper, here who is a pillar of our
community. He has been in business for a long time. And in the
interest of full disclosure, I am a customer of the bank.
Let me also say that there are other benefits to debit
cards. In my case, I have a 16-year-old daughter, and I utilize
the card to teach her the principles of banking. It is very
important for young people, especially those who think money
grows on trees. So it helps me with that.
And all of you appear to be a reasonable business group. I
know that this is driven by profit margins. But starting on
this end of the table, have you all--have the opposing sides
attempted to sit down outside of the Federal Reserve to try to
resolve this issue, and then be able to come forward with a
reasonable solution to offer up to the Federal Reserve? Has
anyone? I will start with you, Mr. Prentzas. Go ahead.
Mr. Prentzas. Okay. Thank you for the question. On my
level, at the small business level, no, the only thing I could
tell you is when I did call my local bank that handles my
accounts, they basically told me that they don't control the
interchange fees. They really can't do anything about that.
Mr. Clay. Mr. Michael?
Mr. Michael. I am certain that there are conversations that
have occurred. But I have to be honest with you; I wouldn't
have been privy to those. I am just too small to be included.
Mr. Clay. Mr. Kemper?
Mr. Kemper. I think you want to have the market determine
the price. I think we would all agree on that. I think we would
debate about whether or not there is enough competition, but I
just go back to--I have a lot of merchants who are very good
customers. Everybody has benefited from the program and we have
a real danger here if we don't do something, that the train is
going to go off the track here.
So I would just urge Congress to step back and really
examine a lot of the issues that have been brought up today.
Mr. Clay. Mr. Kantor, would you be willing to go outside of
the Federal Reserve and be able to offer up a solution that
both sides could agree to?
Mr. Kantor. We have many merchants in our coalition who
have tried to do that and then rejected both on fees on
different legislative and policy proposals in the past and
unfortunately, we have been rebuffed in any case. We are always
open to talking about good policy proposals here because we see
this as a broken market demonstrably so, that needs fixing and
the debit card piece is just the first step. Credit card fees
are even higher and much needs to be done there as well. We are
quite open to those conversations at any time.
Mr. Clay. Mr. Floum, any position on--
Mr. Floum. Actually, we are very happy to negotiate. In
fact, we have negotiated customized agreements with thousands
of merchants. We tried with 7-Eleven. We were unable to get to
an agreement, but that is the way it ought to work, though
negotiation, through free market rather than through government
intervention and price controls.
Mr. Clay. Thank you for your response.
Mr. Seltzer?
Mr. Seltzer. Sure. We have great relationships with a lot
of banks that we do business with in many other areas of our
business. We have gone to all the major banks before that we do
business with and we have asked them, can we have the
discussion with them regarding interchange.
The banks that are the beneficiaries, the direct
beneficiaries of interchange, say they can't talk to us about
it, that all of that goes through Visa and MasterCard. So the
banks won't have the dialogue about it. With Visa and
MasterCard, our experience has been that we have not been able
to have a meaningful, constructive dialogue with them regarding
these fees.
Mr. Clay. We know that fee increases will be passed on to
consumers ultimately. Mr. Michael and Mr. Kemper, what do you
estimate will happen to your customers as far those who still
want to use debit cards?
Mr. Kemper. Estimates and a number of people have said this
is that perhaps 5 percent of banking customers will fall out of
the system as banks raise prices. I don't know. It probably
won't be that magnitude to us--it would be tens of thousands
because we have 700,000 checking accounts.
And the cost of going outside the banking system, there is
an article I will send you that was done by Candice Troy who is
an A.P. personal financial writer and she said, ``What would it
cost me if I couldn't work with the banks?'' So she wrote this
article last October and she did it for a month and it cost her
$93, primarily cashing checks, getting prepaid debit cards
which they charge per item $1. And $93, that is $1,100 a year--
$1,100 and we figure that our cost, we are making about $260,
so it is a real danger when people go outside the banking
systems.
Mr. Clay. Thank you all so much. I yield back.
Chairwoman Capito. Thank you.
Mr. Hensarling?
Mr. Hensarling. Thank you, Madam Chairwoman.
To the panel, I heard your testimony. I had to step out for
much of the Q&A, so I may be plowing some old ground here. I
apologize about that.
Like many other members, I have heard from a number of
financial institutions in my State and in my district,
particularly dealing with the small financial institution
exclusion. I have heard from the First Financial Bank in
Hartford, Texas, and they tell me economic forces are going to
force their institution to adapt the same price level as the
large institutions.
And since the proposal doesn't permit their bank to cover
the cost of providing debit card transactions, they will be
forced to implement new service charges and other fees on
checking accounts.
I hear from First State Bank of Athens, Texas, who say that
if the formula applied to their bank caused the result in
revenues, it would not even cover switch and transaction cost,
much less cost to issue the cards, administer them, and cover
fraud losses.
I heard from Austin Bank, also in my district, ``We expect
a 70 percent reduction in our interchange fees which will
reduce our income by 14.74 percent. If net income is reduced,
so is our capital growth. That leads to less lending by
banks.''
So, Mr. Kemper, you are representing a number of the banks
here today. Why aren't these small financial institutions
convinced that they are going to be protected? And they
certainly don't seem to believe the consumer is going to be
protected.
Mr. Kemper. As I mentioned in my opening remarks, and I
think Mr. Michael has mentioned it too, that whenever you have
a low-cost alternative, they are going to take market share. I
think that is why the small banks don't think exemption will
work their way.
Chairman Bernanke commented on that this morning. I think
that this will hasten the consolidation in the industry and of
the community banks that are most at risk. And we see this all
the time. I said, we are a Main Street bank. We have banks in
Poplar Buff, Missouri; Hannibal, Missouri--Illinois. And our
profitability relates directly to how big the community is. The
smaller the community, the less profitable it is. It is a
simpler kind of model, the community bank model. They are much
more dependent on this kind of payment stream. So they are
going to suffer proportionally more because they are not in
other businesses.
Mr. Hensarling. Mr. Seltzer, in your testimony, you said
there was a ``lack of a properly functioning market
mechanism'', speaking of the payment card network. Do you view
there to be a legal barrier to entry in the payment card
network market?
Mr. Seltzer. By that, I meant that--we have never seen
another product like this.
Mr. Hensarling. But, no, I am just asking the question.
Does your firm believe there is a legal barrier to entry into
this market? Yes, no, maybe?
Mr. Seltzer. No. There is a practical barrier.
Mr. Hensarling. Okay, a practical barrier. Do you view it
as a natural monopoly? Do you have an opinion on the matter?
Mr. Seltzer. No.
Mr. Hensarling. We now have a rule, okay, so if we don't
necessarily have a natural monopoly, if we don't have legal
barriers to entry, I am not totally unsympathetic here. I take
you at your word as your testimony. This is very high cost for
you. I understand that, but I happen to patronize one of your
establishments in Lakewood, Texas. I have two small children.
They are thirsty. They drink a lot of milk.
So my first question is, we hear to some extent about the
benefits that can be derived here. If Congress does not act to
delay this for further study, when the Federal Reserve rule is
implemented, if I go to the 7-Eleven in Lakewood, Texas, in the
Lakewood neighborhood of Dallas, Texas, can I expect a gallon
of milk to drop in price? Can I expect a gallon of gas to drop
in price? Is the DVD from the Redbox machine you have in front
of your store going to drop in price?
Mr. Seltzer. I think when this goes forward, you are going
to see competition in every retail merchant. We compete every
day on gas prices. You mentioned gas prices. So my competitor
across the street--
Mr. Hensarling. So maybe, maybe not.
Mr. Seltzer. I either have to drop the price--
Mr. Hensarling. I expect you don't know the answer to the
question, but I want to make a point here. The question is, do
you know what the incremental cost is of producing a Slurpee?
Mr. Seltzer. Yes.
Mr. Hensarling. What is it?
Mr. Seltzer. I don't know specifically--
Mr. Hensarling. I just wonder how 7-Eleven would feel if
the Federal Reserve came in with a rule that said you can only
recover the incremental cost of selling a Slurpee. My guess is,
the ice and the fruit flavor don't cost a whole lot, but you
have a lot of fixed cost. My time has expired, but I think you
get the point.
Thank you, Madam Chairwoman.
Chairwoman Capito. Mr. Welch?
Mr. Welch. Thank you very much.
It has been informative for me to listen to everybody
because I go back to the basic proposition that the debit cards
and the credit cards are really essential for commerce. They
are incredibly important to the merchants. They are incredibly
important for the customers. I have a Rewards Card and I am
very happy that the cost of my trip to Disneyworld is paid for
by the merchants of America because that does get passed on to
them.
But here is the question, there are impacts of this
legislation. Cost will be shifted. But what might be good, it
is good if we have banks making solid returns so that they can
do the work that they do that is so important in our
communities. But it is not great if you have this
uncontrollable expense and you are a merchant. You have a
floral shop. You have a 7-Eleven.
And the question really is about what is fair and how do we
get fair pricing in this? Let me ask you, Mr. Kemper. Your bank
does have a tremendous reputation. You have done a lot of great
work in the community and you have a Congressman for a customer
who is not complaining. But if the Fed did take the time you
think they need to take, and they included what you fairly
thought was a fair consideration of the cost, would you accept
their authority to then make this recommendation as to what was
reasonable and proportionate?
Mr. Kemper. I wish I had Ayn Rand up here. But I would say
that the idea of government fixing prices is not the way the
system works.
Mr. Welch. Right. So, no, I can understand it. Mr.
Hensarling made that point, in fact, I think, quite
effectively. But so, what I am trying to find out is whether
this call for delay is really just another polite way of saying
you just don't want it done.
Mr. Kemper. No. I don't think it is good public policy.
Mr. Welch. Right.
Mr. Kemper. But having said that, I think the box that the
last Congress put the Fed in is a very tight, little box and I
think the Fed made it even smaller.
Mr. Welch. Right.
Mr. Kemper. And I think that the idea--if you are really
going to price based on marginal cost which you shouldn't, you
have to look at all the costs.
Mr. Welch. No. I am sorry. I hear you on that.
Mr. Kemper. Okay.
Mr. Welch. And whether it is a Slurpee or a debit charge,
you are going to be concerned about it. But the dispute that we
have here is whether there really is the market setting the
price on the debit and on the credit card transactions. That is
really the question.
If Mr. Prentzas wanted to get a better deal on his Visa
charges, Mr. Floum, could he call you up and do it? He is right
here.
Mr. Floum. Yes. In fact, the last hearing when that Rotten
Robbie was here from the gas stations, I told him that we would
be happy to negotiate with any merchant.
Mr. Welch. Okay. I have talked to literally hundreds of
merchants in Vermont and they tell me that is not the case. Mr.
Prentzas, tell me. He is offering a good deal here.
Mr. Floum. I am happy to give you my card and I would
invite you to call me after the hearing.
Mr. Welch. Let's get real here. That sounds good, to
maybe--with Wal-Mart, but Mr. Prentzas, have you had any
success trying to get--
Mr. Prentzas. I shop around to get the best rates out
there. And basically, every time I turn to a bank, they just--
the bank tells me that interchange fees are set. They have no
control over them. It is something that Visa and MasterCard
control.
Mr. Kantor. If I could--
Mr. Welch. Mr. Kantor?
Mr. Kantor. Congressman, thank you, and thank you for your
tireless work on this issue over time. That has been tremendous
in terms of advocacy for small businesses. What we have heard
from businesses all across the country is in fact that the
answer is ``no.'' They can't negotiate with the banks because
the banks all charge the same thing and won't depart from that.
And, no, they can't negotiate with the card networks either.
And, in fact, Mr. Floum made his offer to Tom Robinson when
he was here a few years ago. Tom Robinson followed up on that
and he was presented with a gag order that he had to sign which
would have prevented him from talking to Members of Congress
about this issue in the future if--as a first step before he
could ever negotiate.
A similar thing happened before when Senator Arlen
Specter's office had this conversation and folks from
MasterCard made a similar offer to folks from Giant Eagle. And
Giant Eagle--
Mr. Welch. I get the point.
Mr. Kantor. I answered them with ``no.''
Mr. Welch. If you could sit down and work something out,
that would be great. There is a lot at stake for American
businesses despite of--I have had great relations with my
credit unions, but we don't see to eye-to-eye on this one.
And I would say this to the community bankers, if you guys
were in charge, we never would have had the Wall Street
meltdown.
Mr. Michael. Can I make a quick comment here on this?
Mr. Welch. Sure.
Mr. Michael. I think that this law is bad public policy,
and I think the rules are bad public policy. And, the rules are
going to go in effect unless you as Congress go stand up and
say, ``We need to intervene and stop this for the time being.
We need to delay. We need to go back and take a look at this
rule.''
Mr. Welch. But I will ask the same question I asked Mr.
Kemper.
Thank you.
Chairwoman Capito. Mr. Duffy?
Mr. Duffy. Thank you, Madam Chairwoman.
I appreciate you all coming in and testifying and sitting
so nicely together.
I understand the concerns. I have heard from--as every
district--we have a lot of merchants in my district and my
community and I understand the problem that they convey to me
that they face with the interchange fees. But I do have this
overwhelming concern about the government stepping in and
fixing prices.
And, I guess, Mr. Floum, to you, with regard to Visa, was
this debit card philosophy developed by Visa?
Mr. Floum. We had a great hand in pioneering the debit
category and growing that category including the technology
platforms needed to deliver instantaneous guaranteed
transactions.
Mr. Duffy. And what did it cost Visa, $100,000, $200,00?
Mr. Floum. Congressman, over the years, billions and
billions and if you include the--tens of billions.
Mr. Duffy. Okay, fair enough.
Are you familiar with Mr. Kantor's organization?
Mr. Floum. Yes, very well.
Mr. Duffy. Okay, part of a lawsuit, challenging--
Mr. Floum. Sure.
Mr. Duffy. Okay. And were his clients investors in those
billions of dollars that Visa spent to develop this technology?
Mr. Floum. No, they were not.
Mr. Duffy. So you took the risk. You innovated the product.
And now, Mr. Kantor's clients enjoy that product. Is that
right?
Mr. Floum. Yes, sir.
Mr. Duffy. And is it fair to say by way of Visa that sales
have gone up for merchants who use this Visa product?
Mr. Floum. Without a doubt.
Mr. Duffy. So they sell more, is that right?
Mr. Floum. Yes, sir.
Mr. Duffy. Which would mean they would probably make more
money.
Mr. Floum. They make more money out of it.
Mr. Duffy. Okay. Mr. Kantor, you and your folks say there
is not enough competition in this market. Is that right?
Mr. Kantor. That is correct. There is price fixing now.
Mr. Duffy. But is it fair to say that your clients can use
cash?
Mr. Kantor. Can they use cash? Sure.
Mr. Duffy. Yes. And they can use checks as well, right?
Mr. Kantor. Sure.
Mr. Duffy. So there are three methods of payment that your
clients can choose to use if they so wish, right?
Mr. Kantor. There are many methods of payment, yes. The
problem is--
Mr. Duffy. --these are the Visa products, yes?
Mr. Kantor. Visa is one product, they have credit and
debit, but there is no competition among different cards and--
Mr. Duffy. But there is competition with the payment
method, right? You can accept checks, you can accept cash, or
you can accept Visa.
Mr. Kantor. Right. Thankfully, that was part of the Durbin
Amendment that we could discount based on those differential
prices.
Mr. Duffy. And so, we are talking about, what is the
appropriate charge here, right? Why don't your clients just
pass that cost onto the consumers? We will give you a 1.5--we
will give you a 2 percent discount if you use cash or check.
Mr. Kantor. There are two things. One, consumers are paying
these fees right now in the form of higher prices.
Mr. Duffy. But they don't see them, right?
Mr. Kantor. They don't see them, which is--
Mr. Duffy. So why don't you let them see the fees, pass it
on to them?
Mr. Kantor. We have started doing that. Since the Durbin
Amendment passed, there has been actually a large uptick in
cash discount, particularly, at gasoline stations and some
restaurants.
Mr. Duffy. And then--
Mr. Kantor. Visa has been quite aggressive about pushing
them not to do that--
Mr. Duffy. But what exactly is the answer to say, ``Listen.
Let's expose these fees and let the consumer decide whether
they want to use a credit card, check or cash.''
Mr. Kantor. It would not though engender competition among
different kinds of cards--Visa versus MasterCard versus--
Mr. Duffy. But why is that your concern? You have
competition of payment.
Mr. Kantor. Because if they don't compete with each other,
their only incentive is to keep driving fees up as it has been.
Mr. Duffy. But at what point do we say, this is the
appropriate role of government. I traveled in a campaign for a
very long time, and I like the example of Slurpees, but--and I
am a big fan of McDonald's. I ate a lot of it. But, I get a
super-sized Coke and what is the cost of a Coke? The water and
the sugar and the ice in the cup, $0.20? And they charge $1.50
or $1.80.
We should get involved and regulate the price of McDonald's
Coke. Is that how far we are going to go?
Mr. Kantor. If McDonald has fixed their prices with their
competitors, the government not only should, but would get in
trouble.
Mr. Duffy. I go to Burger King and I go to Taco Bell and
they are all the same price.
Mr. Kantor. They are competing. They are competing that
price down.
Mr. Duffy. I don't know.
Mr. Kantor. We fixed this. Trust me. Their profit margins
wouldn't be 1 percent to 3 percent. They are very well.
Mr. Duffy. But it is fair to say, if we look behind the
curtain, there are other expenses and costs that feed into the
$1.50 or $1.80 supersized Coke that I get.
With that, Mr. Kantor, do you think that the Fed has
analyzed all the costs that go into the fees that the banks
charge or interchange fees that are charged?
Mr. Kantor. I think they actually have not because there
are a lot of other costs ranging all the way from marginal to
semi-fixed that are part of that product.
Mr. Duffy. And thank you--one other question. Quickly, Mr.
Seltzer. You indicated that with the check guarantee service--
okay, that--what do you guys pay on average for a transaction
to your Visa, $0.44, $0.50?
Mr. Seltzer. The average debit transaction is about $0.29--
Mr. Duffy. $0.29. And you testified earlier that if you
have a check guarantee, you pay about half of that. Is that
right?
Mr. Seltzer. Sure.
Mr. Duffy. So you pay about 14.50 cents if you are going to
get a guarantee for a check.
Mr. Seltzer. Something on that order.
Mr. Duffy. And right now, the maximum you are going to pay
with Visa with this new rule is $0.12. Is that right?
I yield back.
Chairwoman Capito. Thank you for making all of us hungry--
Mr. Duffy. Congressman?
Chairwoman Capito. And I would like to go to Mr. Prentzas
because he is one of the weigh in on this and he is our bona
fide merchant on the panel. So if you could, in 30 seconds,
respond to Mr. Duffy.
Mr. Prentzas. Yes. Mr. Congressman, you made a comment that
let's leave it to the consumer to decide their form of payment.
I understand that my type of business, for example, is
basically by phone orders and also by the Internet. There is no
way I could accept the check or cash. My business depends on
somebody using that credit card and debit card.
On the other hand, you tell me it is not the place of the
government, the Federal Reserve--the government to oversee that
this is a billion dollar industry. It affects every single one
in this country. And when it doesn't affect everybody and thus
cause a billion dollar industry, I believe that the government
should be able to oversee what is going on. It has been done in
the past and it should be done today.
Chairwoman Capito. Thank you.
Mr. McHenry?
Mr. McHenry. Thank you, Madam Chairwoman, and thank you for
your leadership on this subcommittee and congratulations on
your subcommittee chairmanship.
Most of the great questions have been already asked. And it
is tough for me to follow Sean Duffy on anything.
Do you want my time, Sean?
But in all seriousness, this is a major issue, and Congress
was legislating when a lawsuit was ongoing and some of us had
some questions about that. But price fixing, this was--Mr.
Kantor, to your question here--to your comment, rather.
What Sean was saying in terms of $0.99 Cokes at all the
fast food restaurants, you could call that price fixing, that
is to be litigated by the courts. So in terms of representing
your coalition, do you conceptually think that the government
setting prices is the right path?
Mr. Kantor. What the government should do is get rid of
price fixing here and get rid of these fees and that is what
this amendment says exactly, if I may--
Mr. McHenry. Reclaiming my time, so in order to eliminate
price fixing, we need to have a regulator set the price. Yes or
no?
Mr. Kantor. Here, we need to have the regulator do
something. And we thought they should say no more price fixing
zero fees. Set them on your own. They have instead been more
generous to the banks and said, ``Oh, charge more than that.''
Okay.
Mr. McHenry. We just had testimony from Mr. Seltzer that it
costs, in essence, $0.14 for a check and $0.12 for the Fed's
regulation for debit. Is that a fair assessment, Mr. Kantor?
Mr. Kantor. It is. Unfortunately, that price difference
doesn't make up for the fact that Dave Seltzer, Gus Prentzas
and merchants like them get charged back for fraud transactions
and don't get a payment guarantee. He has bought one on the
checks and paid extra for that, debit cards don't give--
Mr. McHenry. Okay.
Mr. Kantor. The Fed found that in our numbers--
Mr. McHenry. Let's continue on this question here. And I
have had merchants tell me prior to this debate going back a
number of years that the cost of cash is a burden on small
businesses. If you are--especially 7-Eleven or during a lot of
transactions and so sticky fingers, taking money out of the
till is--and loss prevention is a cost and so there is a cash
cost.
And so I just want to better understand that cash cost.
This is a complicated issue, but it is hard to get an accurate
comparison. Mr. Seltzer, can you discuss that cash cost?
Mr. Seltzer. Sure. We calculated this, within the last year
or so. And as we calculate the cost of cash, we include all of
the bank service charges we incur for depositing that cash and
currency.
Mr. McHenry. What about losses?
Mr. Seltzer. We include losses.
Mr. McHenry. --okay. Yes.
Mr. Seltzer. And labor and everything else that goes into
it. And so at the end of the day, we see our cost of cash being
somewhere in the 0.2 percent to 0.25 percent range as we looked
at it.
Mr. McHenry. Okay--everything. Okay.
Mr. Seltzer. That is probably an eighth of what we see for
debit cards.
Mr. McHenry. So as a merchant, you don't like the deal you
are getting with debit, with credit. Okay. Why not simply say
no to credit and debit?
Mr. Seltzer. We are happy to pay a competitive fee for
debit or credit. The challenge we see is that every time we had
discussions with any of the networks, the answer we get back--
Mr. McHenry. No. No.
Mr. Seltzer. --change rate because we have to compete with
the other network.
Mr. McHenry. I know. I understand. But, why not simply say
no?
Mr. Seltzer. We would be out of business.
Mr. McHenry. You would be out of business. So there is--the
current value that they are producing for your business, debit
and credit is providing some value for you and your business.
Mr. Seltzer. That is right and if there were a competitive
market for this--
Mr. McHenry. Okay.
Mr. Seltzer. --and prices were set accordingly with--
Mr. McHenry. True. Okay. Mr. Kantor, are you going to
answer?
Mr. Kantor. I am very eager. There is a benefit. There are
also benefits to the banks because they save on the check
processing. What the courts have found is that Visa and
MasterCard have market power. And they found that there is not
an ability for merchants to say no, because of that market
power.
Mr. McHenry. Okay. Then, why not come to Congress and look
for a legislative fix in order to reduce that market power? It
is an untoward market power. Why not get a remedy in courts? It
appears that you just didn't like the remedy the courts were
offering. And the simple way to do this is to simply have a
regulator fix the price.
Mr. Floum--yes, my time is wrapping up, so I mean--
Mr. Floum. Yes. They have gone to the courts time and again
with this argument that a uniform interchange is price fixing
and every time the court has said no, you need to have
interchange, a uniform rate. That is what keeps the small
merchants, the small banks and low-income individuals in the
system.
If the banks set the rates themselves, then, sure, some
banks and some merchants would do fine, but the little guy
would drop out of the system. So let's not confuse the benefits
of a uniform interchange rate which the courts have found every
single time to be lawful with the kind of price fixing that the
government would impose under the Durbin Amendment.
Chairwoman Capito. I want to thank everybody on the panel
and the visitors for their attention. I think you raised some
interesting points. And I will go back to my original
statement, a lot of questions at the same time.
So I will dismiss this panel and again, thank you, and I
apologize for the late start. The Chair notes that some members
may have additional questions for this panel which they may
wish to submit in writing. Without objection, the hearing
record will remain open for 30 days for members to submit
written questions to these witnesses and to place their
responses in the record. This hearing is adjourned.
[Whereupon, at 3:40 p.m., the hearing was adjourned.]
A P P E N D I X
February 17, 2011