[Senate Hearing 117-887]
[From the U.S. Government Publishing Office]
S. Hrg. 117-887
EXCESSIVE SWIPE FEES AND BARRIERS
TO COMPETITION IN THE CREDIT AND
DEBIT CARD SYSTEMS
=======================================================================
HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
MAY 4, 2022
__________
Serial No. J-117-59
__________
Printed for the use of the Committee on the Judiciary
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
www.judiciary.senate.gov
www.govinfo.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
56-659 WASHINGTON : 2026
COMMITTEE ON THE JUDICIARY
RICHARD J. DURBIN, Illinois, Chair
PATRICK J. LEAHY, Vermont CHARLES E. GRASSLEY, Iowa, Ranking
DIANNE FEINSTEIN, California Member
SHELDON WHITEHOUSE, Rhode Island LINDSEY O. GRAHAM, South Carolina
AMY KLOBUCHAR, Minnesota JOHN CORNYN, Texas
CHRISTOPHER A. COONS, Delaware MICHAEL S. LEE, Utah
RICHARD BLUMENTHAL, Connecticut TED CRUZ, Texas
MAZIE K. HIRONO, Hawaii BEN SASSE, Nebraska
CORY A. BOOKER, New Jersey JOSH HAWLEY, Missouri
ALEX PADILLA, California TOM COTTON, Arkansas
JON OSSOFF, Georgia JOHN KENNEDY, Louisiana
THOM TILLIS, North Carolina
MARSHA BLACKBURN, Tennessee
Joseph Zogby, Chief Counsel and Staff Director
Kolan L. Davis, Republican Chief Counsel and Staff Director
C O N T E N T S
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OPENING STATEMENTS
Page
Durbin, Hon. Richard J........................................... 1
Grassley, Hon. Charles E......................................... 3
WITNESSES
Kantor, Doug..................................................... 13
Prepared statement........................................... 38
Responses to written questions............................... 108
Karet, Laura Shapira............................................. 6
Prepared statement........................................... 65
Responses to written questions............................... 120
Kim, Charles..................................................... 12
Prepared statement........................................... 70
Responses to written questions............................... 122
Kirkpatrick, Linda............................................... 9
Prepared statement........................................... 76
Responses to written questions............................... 128
Mierzwinski, Ed.................................................. 10
Prepared statement........................................... 88
Sheedy, Bill..................................................... 7
Prepared statement........................................... 98
Responses to written questions............................... 131
APPENDIX
Items submitted for the record................................... 37
EXCESSIVE SWIPE FEES AND BARRIERS
TO COMPETITION IN THE CREDIT AND
DEBIT CARD SYSTEMS
----------
WEDNESDAY, MAY 4, 2022
United States Senate,
Committee on the Judiciary,
Washington, DC.
The Committee met, pursuant to notice at 10 a.m., in Room
226, Dirksen Senate Office Building, Hon. Richard J. Durbin,
Chair of the Committee, presiding.
Present: Senators Durbin [presiding], Whitehouse,
Klobuchar, Coons, Blumenthal, Hirono, Ossoff, Grassley, Cornyn,
Lee, Hawley, Tillis, and Blackburn.
OPENING STATEMENT OF HON. RICHARD J. DURBIN,
A U.S. SENATOR FROM THE STATE OF ILLINOIS
Chair Durbin. Good morning. This hearing will come to
order. American consumers today are rightly worried about
inflation and rising prices for the goods they buy. Today,
we're going to talk about a hidden fee that fuels the fires of
inflation across America every day. What they may not know is
that the swipe fee is contributing to the problem of inflation.
When swipe fees on credit and debit cards go up, as they just
recently did, it increases inflation and consumers ultimately
pay the price.
Ironically, this journey for me started in this very room
16 years ago. Arlen Specter was the Chairman of the Senate
Judiciary Committee. He called a hearing on swipe fees and
interchange fees. I attended because I was not familiar with
those terms, and I heard for the first time what a swipe fee
was. The fact that when I use my debit card and credit card, a
swipe fee was being charged to the retailer that I was
ultimately paying. Then I learned that there was virtually no
negotiation in those fees. Retailers were at the mercy of the
credit cards and banks in terms of what those fees will be.
There was no competition because we have a duopoly here
well-represented at this table, and that created a situation
where the market forces really don't work. They're not supposed
to work. They're not designed to work. And what's happened in
America, we all know. The statistics on the amount of Americans
paying with plastic tell the story. These are from 2020. I'm
sure after the pandemic and our change in lifestyle, they're
even greater.
The number of 2020 transactions involving debit cards, 86
billion. The amount involving credit cards, 41 billion. Between
the two, credit and debit cards, in 2020, 127 billion
transactions in America. How are we doing with cash
transactions? Thirty-two point eight billion. How about the use
of a check? Five. Five billion. We're becoming a nation that
clearly, maybe even a world, that pays with plastic. Today,
we're going to ask a few questions about how those payments are
made and the charges that are imposed. This Committee held a
hearing with witnesses from Visa and Mastercard 16 years ago to
discuss anticompetitive fees. We're back. Here's what I've
learned.
Visa and Mastercard control about 80 percent of the credit
and debit card market. They've established a system of fees and
rules that apply to every transaction of the billions I just
mentioned involving cards used by thousands of banks. Each time
a credit or debit card is used, Visa and Mastercard charge fees
that take a cut out of the transaction. You don't see it on the
check at the restaurant. It's there. Some of that cut they keep
for themselves. Most of it's given to the bank that issued the
card.
The fee that Visa and Mastercard require the merchant to
pay to the card issuing bank is called an ``interchange fee.''
It's usually charged as a percentage of the transaction plus a
flat fee, for example, 2 percent plus $0.10 per transaction.
That means when a card transaction of $100 is made, the
merchant gets less than $98 after the fees are deducted, and
merchants end up raising the prices of their products to make
up for the deducted fees.
You might ask, ``How much have Americans been charged in
intercharge--interchange fees by Visa and Mastercard since that
hearing 16 years ago in 2006?'' According to payment consultant
CMSPI, it's $794 billion all built into the prices retailers
have to charge and consumers have to pay. Interchange fees are
designed to avoid competitive market pressures. Banks get the
fees, but banks do not set the fees. Instead, the banks let
Visa and Mastercard set the fees on their behalf. So, the same
schedule of fee rates applies for all banks in the network.
This means that all banks in the network are guaranteed the
same interchange fee, regardless of how efficient or
inefficient the bank is in running a card operation or
preventing fraud. It's a gravy train.
When Visa and Mastercard raise interchange fees, banks want
to issue more cards because they make more on each swipe. Visa
and Mastercard profit when there are more swipes because they
take their own cut, called a ``network fee'', from the merchant
on each swipe. Merchants and their customers take it on the
chin. We're going to hear that firsthand today. What can
merchants do to try to keep the fee rates down? Not much. Visa
and Mastercard are the negotiating agents for thousands of
banks. If a merchant wants to be able to accept payment from
those bank's customers, they have to agree to Visa and
Mastercard's fees and terms.
I remember at that hearing 16 years ago, at that table, one
of the customers or one of the retailers had a stack about 3
inches tall. They had asked for a copy of the contractual
agreement with Visa and Mastercard when it came to imposing
fees. They quickly said this isn't the complete contract. They
would only give us part of it. Three or four inches tall. You
expect a grocery store, a restaurant to go through all this?
Bottom line, when fees go up, it cost more to use money. That
cost gets built into prices consumers pay.
Visa and Mastercard raised their swipe fees 2 weeks ago,
despite bipartisan opposition from Congress. It was obvious.
We're suffering from inflation. Don't raise these hidden fees
again. They did it anyway. Senator Marshall and I,
Representatives Welch and Van Duyne urged them not to do it.
They didn't listen, and we'll talk about it today. The credit
and debit card systems are not competitive marketplaces. When
you don't have real competition, what happens? You get higher
costs, less innovation, weaker security, and new potential
competitors get stifled.
It's a sweetheart deal for the dominant networks, for the
biggest banks, and for certain cardholders who have ritzy
rewards programs. The average small business and the consumer,
they pay the price. Other countries have figured this out,
incidentally. You can't have a fair system when you let
networks fix the swipe fees without competition or regulation.
The European Union, Australia, China, India, Israel, South
Korea, and more have stepped up to create reasonable swipe fee
limits. We have the Durbin Amendment that applies only to debit
cards.
In 2010, I wrote that law that placed reasonable limits on
debit interchange fees that Visa and Mastercard fixed on behalf
of big banks. It has generated a lot of talk over the last few
years and a lot of TV commercials. Boy, the big banks hate the
Durbin Amendment like the devil hates holy water. In the
absence of competitive marketplace, there needs to be some
limit on Visa and Mastercard's fee fixing. Here's a few steps
I'd like to suggest.
Let's have transparency and make it clear to consumers in
their monthly statements how much of their card purchases are
being deducted as interchange fees. You know you have the
information, and you know you can provide it. Maybe if
consumers knew how much of their cards were costing their
favorite restaurants and retailers, they'd use less costly
cards. Second, let's stop the practice of charging swipe fees
on the part of the transaction amount that is sales tax. That's
a swipe tax on top of a sales tax. Give the consumers a break.
Let's stop the exclusivity deals where Visa and Mastercard
tell banks they can't use any other network on their cards.
Let's give merchants a choice of card network options on each
swipe and each online sale. Let's make sure that someone
besides the dominant network plays a role in setting security
standards for cards. Security innovators and startups are being
shut out of the current system. Let's reduce inflationary
pressure by preventing network-fixed swipe fees from being
jacked up to unreasonable levels.
We've got a lot to talk about today. We're joined by a
distinguished panel. I thank them for joining this spirited
discussion. Let me turn to Senator Grassley.
OPENING STATEMENT OF HON. CHARLES E. GRASSLEY,
A U.S. SENATOR FROM THE STATE OF IOWA
Senator Grassley. First of all, Mr. Chairman, thank you for
holding this hearing. Thank you for working with us on this
side of the aisle to make sure that the interests of all
stakeholders are taken into consideration. I particularly want
to thank you for including financial institutions in the panel.
Interstate and swipe fees is the amount of money that
merchants pay for accepting a debit or credit card. These fees
vary depending on many factors, but in general, end up being
between 1 to 3 percent of purchases and I just learned
including sales tax. A great focus has been paid to these fees
as more and more consumers use credit and debit cards to make
their purchases. As many of my colleagues know, this is an
issue that has passionate voices on both sides.
Many Iowa businesses have complained that it seems that
these fees are high for accepting credit and debit cards for
purchases. These businesses want to give their customers the
option to pay using different methods, but that can be
difficult if fees are eating into already tight margins,
especially for small business owners. These may have to--they
may have to then pass along these costs to the consumer.
On the other hand, there are a number of benefits to card
usage for both consumers and businesses, including convenience,
security, and increased purchasing power. Consumers may spend
more money on cards than if they use cash. Consumers may also
benefit through rewards or cashback on their cards. There is a
balancing act here that we need to acknowledge and that any
future action should be carefully considered for possible
impact. I look forward to hearing from all of you on this
subject.
As this is a Judiciary Committee hearing, we're looking at
competition and whether interchange fees are set above rates
that would be found in the competitive market. Two witnesses
here today represent Visa, Mastercard, the two largest payment
networks in the United States, with over 80 percent share of
credit card market. I look forward from hearing whether these
rates reflect market forces. I think though that when a subject
like this comes up, particularly at the time, high inflation,
that's a factor that brings attention to a lot of expenditures
that people might feel are unnecessary.
It seems like every industry, including merchants and
banks, have been blamed by the President for inflation. That
blame game doesn't work as President Biden spends trillions of
dollars of money as fast as could be spent on a Liberal wish
list even when economists were warning--warning about
inflation. Earlier this month, Bureau of Labor Statistics
reported the 12-month increase of inflation for March was 8\5/
10\ percent year over year. This is the largest increase in
over 40 years. All of this obscures the actual rising costs
that Iowans have been hit with in the Midwest.
The price of ground beef, 24\1/2\ percent up; bacon, 26
percent up; pork chops, 23 percent; chicken, 31 percent; eggs,
22 percent. These are not luxury items, but absolute
necessities for family's dinner table. These staggering
increases are negatively impacting all Americans and must get
under control, and that's not by spending trillions more that
are being proposed. I yield.
Chair Durbin. Thanks, Senator Grassley. We have six
witnesses. Thank them for joining us. I'm going to give a short
introduction to each before they're recognized. First witness
is Laura Shapira Karet. She's Chair and CEO of Giant Eagle, a
supermarket chain headquartered in Pittsburgh, 470 locations
throughout Pennsylvania, Ohio, West Virginia, Maryland, and
Indiana. She has served as CEO of Giant Eagle since 2012,
previously served as the senior executive vice president, chief
strategy officer, and senior vice president of marketing. She's
worked for Giant Eagle since the year 2000. Has a bachelor's
degree from Amherst. Glad to have you here.
Second witness, Bill Sheedy. Senior advisor to Visa's chair
and CEO, position he's held since 2020. He's responsible for
strategic initiatives. Previously served as Visa's president of
Europe, North America, and Latin America. He helped lead the
company's restructuring in 2007 and its IPO in 2008.
Undergraduate degree from West Virginia University and an MBA
from Notre Dame. Thank you for being here.
Next witness is Linda Kirkpatrick, president of North
America for Mastercard. She's responsible for overseeing
Mastercard's operations and customer facing activities in the
U.S. and Canada. She's been with Mastercard since 1997, and she
previously served in a leadership role involving investor
relations, U.S. strategy and communication, U.S. issuers,
global rules and standards, compliance programs, and dispute
resolution management. She has a degree from Manhattanville
College. Thank you for joining us.
Next witness is Ed Mierzwinski. Close to it? Did I get it
right?
Mr. Mierzwinski. That's right.
Chair Durbin. That's because I represent Chicago. He's the
senior director of the Federal Consumer Program at the U.S.
Public Interest Research Group known as PIRG. Mr. Mierzwinski
has worked for U.S. PIRG since 1989, oversees the Federal
consumer program, helps to lead national efforts to improve
consumer credit reporting laws, identity theft protection,
product safety regulation, and more. Cofounder of the Americans
for Financial Reform. Received his undergraduate degree and
master's degrees from the University of Connecticut. Senator
Blumenthal, take notice.
Our next witness is Charles Kim, executive vice president,
chief financial officer of Commerce Bancshares, responsible for
all financial functions of the company as well as for the
company's strategic planning, marketing, technology, enterprise
operations, and consumer card business. He's been with Commerce
Bank. He received his undergraduate and MBA degrees from
Washington University in Saint Louis, the Hilltop.
Final witnesses is Doug Kantor. Since 2021, Mr. Cantor has
served as general counsel for the National Association of
Convenience Stores, previously practiced law at Steptoe &
Johnson, where he was general counsel to the Merchant Payments
Coalition among other organizations. In his career, he worked
as deputy chief of staff at the U.S. Department of Housing and
Urban Development and as a public-school teacher. Received his
B.A. from the University of Virginia, his J.D. from Yale Law
School. Again, thanks to all of the witnesses for being here.
It is customary in this Committee for us to ask you to take
an oath to tell the truth. If you'd all please stand and raise
your right hand.
[Witnesses are sworn in.]
Let the record reflect that all the witnesses answered in
the affirmative, which now gives them permission to proceed.
We're going to start with Ms. Karet.
STATEMENT OF LAURA SHAPIRA KARET, CHAIR AND CEO,
GIANT EAGLE, INC., PITTSBURGH, PENNSYLVANIA
Ms. Karet. Chairman Durbin, Ranking Member Grassley, and
Members of the Committee, I'm Laura Karet, CEO, president, and
executive chair of Giant Eagle, one of the Nation's largest
multi-format food, fuel, and convenience retailers with
approximately 34,000 team members operating more than 470
corporate and independently owned and operated store locations
throughout five Midwest states, including Pennsylvania and
Ohio. On April 22 of this year, with no negotiation or threat
of competition constraining them, Visa and Mastercard imposed a
fee increase that will cost Giant Eagle $1.3 million annually.
I appreciate the opportunity to talk to you today about the
impact of swipe fees on our business. I'm also proud to serve
as vice chair of FMI, The Food Industry Association. FMI works
with and on behalf of the entire food industry to advance a
safer, healthier, and more efficient consumer food supply
chain. FMI's membership includes nearly a thousand supermarket
member companies that collectively operate almost 33,000 food
retail outlets and employ approximately 6 million workers. Our
industry historically operates on razor thin margins of one to
2 percent.
We operate in a highly competitive market. As inflation has
driven prices higher, our customers have become even more
conscious of how they are spending their money, driving down
profits. There are three points I'd like to make today. First,
Giant Eagle's swipe fees have materially increased over time,
and the April 22 unilateral increase will only exacerbate this
problem. Visa and Mastercard together control 85 percent of the
market. On April 22 of this year, both Visa and Mastercard
increased the fees retailers pay, and they also created new
categories of fees. Every bank that issues credit and debit
cards adopted these fee increases without deviation or
exception.
In my estimation, this cannot possibly comply with either
the letter or the spirit of our Nation's antitrust laws. This
latest price increase fits the pattern we've seen for years.
Giant Eagle's been paying higher and higher payment fee costs.
Electronic tender sales make up about 82 percent of our sales
transactions for our company. Of the 82 percent that are
electronic tender, about 37 percent of the total sales are Visa
and Mastercard. When you look at the total card processing
fees, Visa and Mastercard make up over 62 percent of those
fees.
Over the past 4 years, our Visa and Mastercard fees have
grown from 57 percent of our total fees to 62 percent of our
total fees, while, at the same time, Visa and Mastercard sales
as a percentage of total sales have declined by almost 2
percent.
In stark contrast, during the pandemic, my company and
others like it were authorized by the USDA to accept online
payments from our customers using the Supplemental Nutrition
Assistance, SNAP, EBT cards. It's interesting to note that
those SNAP electronic transactions are completed securely
without Visa or Mastercard and without incurring any swipe
fees. It's hard for us to understand why SNAP EBT cards could
accommodate the changes necessitated by the pandemic, but Visa
and Mastercard used it as an avenue to raise prices.
Second, millions of customers suffer when swipe fees
increase. Because of the unilateral fee increases, Visa and
Mastercard, that they announced on April 22, my company and my
customers will be paying an additional $1.3 million in swipe
fees. This fee increase came on the heels of Visa reporting in
its March 22, 2022 quarterly financials that its profit margin
was just above 50 percent.
Third, there must be competition in the debit and credit
card markets. Visa and Mastercard's are the only vendors that
Giant Eagle cannot negotiate with. When Giant Eagle buys
ketchup or paper towels, its suppliers compete to give Giant
Eagle the best price. Ultimately, our customers benefit from a
competitive market. In contrast, Visa and Mastercard do not
compete for merchant business. The fees associated with
accepting any type of payment for a particular good should be
incidental to their transaction and certainly should not be
among our highest expenses.
This expense, swipe fees, is third only to labor and rent
that we face. I applaud this Committee for looking at ways to
achieve robust competition in the use of credit and debit
cards, similar to the robust competition we must take part in
every day. I would be pleased to answer your questions.
[The prepared statement of Ms. Karet appears as a
submission for the record.]
Chair Durbin. Thank you, Ms. Karet. Mr. Sheedy of Visa?
Make sure that button----
Mr. Sheedy. I'm sorry.
Chair Durbin. Good.
STATEMENT OF BILL SHEEDY, SENIOR
ADVISOR TO CHAIRMAN AND CEO, VISA INC.,
SAN FRANCISCO, CALIFORNIA
Mr. Sheedy. Good morning, Chairman Durbin, Ranking Member
Grassley, Members of the Committee. Thank you for the
opportunity to testify today.
For more than 60 years, Visa has enabled people,
businesses, and governments to make and receive payments
through its secure transaction processing network. I am pleased
to be able to share with the Committee the many ways in which
Visa works to promote safety, security, innovation, and
competition to drive economic growth and financial inclusion.
Recently, we have taken a number of important steps to support
the economy and to maintain the security, reliability, and
stability of our network. These steps are intended to help
businesses of all sizes, including those that may be struggling
due to the effects of the pandemic and consumers across the
country.
At the outset of the pandemic, we lowered interchange rates
for certain key segments, including grocery stores,
restaurants, and education. In April, we lowered interchange
rates for the majority of U.S. businesses. Visa is also taking
steps to make online payments more secure by encouraging the
use of secure digital tokens so that transactions can be
processed without sharing a cardholder's sensitive account
information and implementing changes designed to promote
accurate transaction processing.
As a payments network, Visa takes its role in setting
interchange rates very seriously, with the goal of fostering
balance, security, and stability while growing the overall
payments ecosystem. It is important to note that Visa does not
earn revenue from interchange fees. Our brand promise has
always been rooted in being the best way to pay and be paid. We
remain steadfast in our focus to deliver on this commitment.
Our success is based heavily on investing in and continuously
enhancing the security of our network, more so than any other
part of our business. Trust and security are the foundation of
everything we do.
In the last 5 years, we have spent over $9 billion on fraud
protection and security. In 2021 alone, our fraud prevention
programs helped merchants and financial institutions prevent
nearly $26 billion in fraud. Cardholders choosing Visa can
count on our zero liability protections on unauthorized
transactions. Visa stands behind every transaction with
programs such as zero liability and efficient dispute
resolution. Merchants who choose to accept Visa--excuse me.
Merchants who choose to accept Visa are guaranteed payment when
a transaction is properly authorized on our network.
Competitive pressures on Visa to maintain and improve upon
its reliability, innovation, and security have never been more
pressing. New competitors, new ways of paying, advances in
security, as well as cyber risks are emerging at a dizzying
pace. As consumers and merchants pay digitally more often,
getting into payments has become as easy as developing and
marketing an attractive app. The growing number of payment
options now available at checkout, especially online, is a
reflection of this competitive environment and the continued
expansion of consumer and merchant choice in payments.
In addition to cash, checks, and traditional U.S. payment
networks, we also compete today with digital wallets, buy now,
pay later solutions, Fintech and Big Tech, real time payment
systems, and cryptocurrencies. With the majority--with this
massively changing competitive environment, Visa's even more
clear about our first order priority. Our success depends on
our ability to deliver innovative, safer, more secure payments,
and a strong value proposition to consumers and merchants
alike. Payments will continue to evolve through new payment
uses, new business models, new frictionless commerce.
However, regulatory interventions focusing exclusively on
card networks could shift consumer spending away from networks
like Visa and to more expensive payment methods with more risk,
less reliability, and fewer protections in security. Visa is
proud of our security and fraud fighting tools. Another truly
important benefit of our network is that we level the playing
field between large and small players. The investments that
we've made have enabled small retailers and community banks and
credit unions to compete with larger merchants and larger banks
to deliver robust capabilities, positive customer experiences,
and security protections.
This has created a vibrant, competitive environment that
allows the American and global economy to thrive and grow. We
appreciate the opportunity to address the Committee on these
important issues, and I look forward to taking your questions.
[The prepared statement of Mr. Sheedy appears as a
submission for the record.]
Chair Durbin. Thank you very much, Mr. Sheedy. Ms.
Kirkpatrick from Mastercard.
STATEMENT OF LINDA KIRKPATRICK, PRESIDENT,
NORTH AMERICA, MASTERCARD, PURCHASE, NEW YORK
Ms. Kirkpatrick. Good morning, Chairman Durbin, Ranking
Member Grassley, and Members of the Committee. I'm Linda
Kirkpatrick, and I'm the president of North America at
Mastercard.
It is my pleasure to appear before you this morning to
discuss three things: first, the value that Mastercard brings
to merchants, banks, consumers, and governments; second, recent
interchange adjustments; and third, the robust competitive
environment in which we operate.
Having worked at Mastercard for 25 years, I can personally
attest to the value that we bring to our stakeholders. Our role
is to enable commerce in a safe and secure way. For banks, we
provide products that support their customer base, allowing
them to deepen relationships and extend financial tools to
consumers. For credit unions who help people buy homes and
start businesses, our products allow them to more effectively
support their communities. The value we bring to banks is
evidenced by the greater than 45 percent growth in cards in the
U.S. over the past 5 years.
For merchants, electronic payments provide them with
benefits and protections they don't receive from cash and
check. In addition to increased sales and operational savings,
merchants receive guaranteed payments even when consumers don't
pay their bills. Banks absorb these costs, which are, on
average, higher than the average merchant cost of acceptance.
Mastercard is deeply committed to small merchants. Within
the first weeks of the pandemic, we announced a $250 million
financial package to support them through this crisis. The
value we bring to merchants is clearly demonstrated by the
growth in global locations where our products are accepted,
which has nearly doubled over the last 5 years. This includes
an incremental 24 million small businesses since 2020.
For consumers, Mastercard products provide access,
convenience, and peace of mind. Consumers are never responsible
for fraudulent activity that may occur on their accounts.
Further, electronic payments kept commerce alive for consumers
and small businesses during the pandemic. In fact, the U.S.
Government used our products to quickly deliver critical aid to
vulnerable Americans. This value is clearly demonstrated by the
spend on our products in the U.S., which has grown by nearly 60
percent over the past 5 years.
To be clear, banks, merchants, and consumers are all
critical stakeholders for Mastercard. Their success is our
success, which is why we work so hard to find balance in the
system. In particular, I have personally spent many years
supporting and partnering with merchants across their co-brand
portfolios and other services. As part of balancing the
interests of all stakeholder groups, Mastercard sets default
interchange rates or the fees charged by cardholder banks to
merchant banks for the benefit of guaranteed payments,
transaction processing, and account servicing.
Mastercard does not earn revenue from interchange, nor do
we set the fee charged directly to the merchants. Our rates
seek to incentivize both card issuance by banks and card
acceptance by merchants. Without these rates, more than 90
million merchants would need individual contracts with
thousands of banks, which would be impractical.
In 2020, we announced our intent to adjust rates to reflect
current market conditions and investments. These adjustments
represented the first significant changes in over a decade.
After a 2-year delay resulting from the pandemic, we
implemented changes to our default rates, which included some
increases and some decreases, including for small merchants.
Based on our modeling, the net impact of these and other recent
changes is virtually neutral to the ecosystem.
Finally, I'd like to note that the payment industry has
never been more competitive than it is today. In addition to
cash and check, we aggressively compete with several global and
regional networks, and increasingly with buy now pay later
providers, person-to-person, and account-to-account services,
real time payment platforms, digital currencies, wallet
providers, and other forms of payment. There is no question
that the variety of payment options available to consumers is
robust. Mastercard does not hold or exercise market power. We
embrace consumer choice and have embedded this concept into our
business strategy.
In summary, we are deeply committed to supporting all of
our stakeholders, including merchants, banks, governments, and
consumers. We are extremely proud of the way our products
enable financial inclusion and choice to consumers and small
businesses to help them thrive. I appreciate the Committee's
time, and I look forward to your questions.
[The prepared statement of Ms. Kirkpatrick appears as a
submission for the record.]
Chair Durbin. Thank you, Ms. Kirkpatrick. Mr. Mierzwinski,
please.
STATEMENT OF ED MIERZWINSKI, SENIOR
DIRECTOR, FEDERAL CONSUMER PROGRAM,
U.S. PIRG, WASHINGTON, DC
Mr. Mierzwinski. Thank you, Senator Durbin. Chair Durbin,
Senator Grassley, Members of the Committee, I am Ed
Mierzwinski. I'm with the U.S. Public Interest Research Group.
We're a nonprofit consumer advocacy organization and serve as
the National Office for the State PIRGs.
All consumers pay more at the store and more at the pump
because of nonnegotiable, nontransparent fees that are set by
the card networks, not by the banks themselves. I want to point
out that, when I testified in 2010, Chair Durbin, before your
Appropriations Committee, that was on the matter that even the
Government couldn't negotiate the prices that it paid for
buying and selling things on its Government platforms.
It's incredible to me that even the Government is not big
enough to hold Visa and Mastercard accountable. The worst
problem occurs if you're a small--small merchant having to pay,
your probably second highest price of--cost of goods sold might
be higher, rent might be higher, but probably bank fees are the
next price--are the next highest fee that you pay. What do you
have to do because of the complicated rules that you discussed
in your opening statement, Senator Durbin, the inches thick
contracts, etc., etc.? They forbid the merchant from doing
anything to lower the costs in his store.
He's got no choice but to bake the price of these
overpriced swipe fees into the costs that everybody pays,
including--including the cash customers who might be low income
and they're probably subsidizing. Despite what all the
associations and the networks will say today, the bulk of the
interchange fee goes to pay for affluent consumer rewards
cards. It does not go to the other important issues of
security. Those are small items compared to rewards. I'm very
happy that you're holding this hearing.
I want to point out that there's really nothing to restrain
these networks in this--in this market failure that we have in
the card network ecosystem. When talking about percentage-based
fees, when prices go up because of inflation, the bank earns
more money without doing anything or without making anything.
Visa, I believe, has been quoted recently in earnings calls in
the press, ``Inflation is a net-net win for us.'' It is--it is
a market failure.
I want to commend the Durbin Amendment for going after some
of the key aspects in the debit part of the system. First, you
narrowly and proportionally--you capped fees to a reasonable
proportional basis on some debit cards but not all. Second, you
went after debit card routing, an important area that needs to
be fixed. The Federal Reserve is also working on a debit card
update to Rule II, which implemented the Durbin Amendment. That
would make it easier for merchants to pick and choose different
networks that are not owned by the incumbent players.
I want to point out that Europe and Canada are examples,
many other examples around the world, of places that regulate
these fees much more aggressively across debit and credit
networks. The fact is their interchange rates are lower and
lower. I believe Europe's rates under the interchange--
interchange fee regulation, IFR, I believe their rates are
about 10 percent of U.S. rates. U.S. rates are not really
restrained, and that's why we needed the Durbin Amendment.
That's why we need to expand the Durbin Amendment.
There have been some important actions taken by the
Department of Justice and the Federal Trade Commission. The
Federal Trade Commission doesn't have jurisdiction over banks,
but it does have jurisdiction over the card networks. And the
Federal Trade Commission has forced Visa to change the way that
consumers are told about their choices in using swipe card
machines. The Department of Justice in particular went after
Visa's acquisition of Plaid, a nascent competitor that does a
lot of important work.
I look forward to working with the Committee on other
solutions, and I strongly support your talking about having a
disclosure on your bank and credit card statement that says how
many swipe fees you've paid. Consumers don't know what a swipe
fee is. Then they would know. Thank you.
[The prepared statement of Mr. Mierzwinski appears as a
submission for the record.]
Chair Durbin. Thank you, Mr. Mierzwinski. Mr. Kim from
Commerce Bank.
STATEMENT OF CHARLES KIM, EXECUTIVE VICE
PRESIDENT AND CHIEF FINANCIAL OFFICER, COMMERCE
BANCSHARES, INC., KANSAS CITY, MISSOURI
Mr. Kim. Good morning, Chairman Durbin, Ranking Member
Grassley, and Members of the Committee. I'm pleased to testify
before you today on behalf of Commerce Bank team members who
serve communities up and down America's heartland.
Commerce is a midsize bank founded in Kansas City in 1865.
We're honored to employ talented people in almost every State
represented on this Committee. We offer a full suite of payment
services, including debit and credit cards for consumers and
businesses, and merchant card acceptance services that keep
money moving in those communities we're privileged to serve, as
well as all over the world 7 by 24, wherever our customers are
traveling or shopping, something that would be impossible
without interchange and the networks.
The views expressed in my testimony are broadly held among
my colleagues at the thousands of midsize and community banks
across the country. Just this week, letters have come to this
Committee signed by state banker associations, community banker
associations, credit union leagues, and minority-owned banks
from small to large, from public to nonprofit mutual banks, and
cooperative credit unions owned by their depositors, urban,
rural, and suburban. We're united in our view. Price controls
in the form of interchange regulation, like the Durbin
Amendment, harm consumers, harm small businesses, harm
competition, and harm communities.
What is interchange, and is there a competition problem
around it? Simply put, our payment system requires constant
investment and protection, and we need a fair way to pay for
it. I believe both banks and merchants should share in the
costs of the payment system. Banks and credit unions invest
billions into building and securing the payment system before,
during, and after the sale. Merchants contribute to those costs
by paying a small fee when they use the system to make a sale.
That's interchange. As a fee, it's just a convenient and
proportional way to pay their share.
When we compete for merchants' card business, it's
extremely competitive. We're up against many players trying to
give the merchant a slightly better deal. That used to mean
just other banks selling a card terminal. Today, there are many
independent providers competing. I think the average merchant
probably gets tired of hearing from people trying to sell them
merchant services.
Cards aren't the only choices today. There's Venmo, PayPal,
Square, Cash App, Clover, Toast, RTP, FedNow, same-day ACH, buy
now, pay later, new payment rails and merchant payment
solutions at all price points, including free and so more
costly than credit.
A decade ago, my bank's executive chairman testified in the
House and predicted that the Durbin Amendment would cause great
harm to consumers and will affect banks of all sizes. Now, the
data is in, and we can quantify the size of the harm and how
the promises made about protecting community banks and lowering
prices turned out to be empty.
Many consumers have lost access to free checking, minimum
balance and monthly fees are up, debit card rewards are scarcer
or nonexistent, and small merchants have seen their cost of
accepting cards rise. These are findings of the Federal banking
regulators and respected academics. Per research from the
Federal Reserve Board and Dr. Natasha Sarin, a University of
Pennsylvania law professor who is now a senior economic
policymaker in the Biden Treasury Department, banks were 35 to
40 percent less likely to offer free checking accounts
following the passage of the amendment.
For the largest merchants, this law has been a windfall,
and it's helped some get more market share. For smaller
businesses and financial institutions that can't tap into a law
that encourages consolidation and scale, the costs have been
steep. In fact, small banks and credit unions, which were
prominently proclaimed as exempt from the price caps, we've
seen their interchange revenue drop 30 percent per swipe on PIN
debit transactions.
This is a direct result of small issuers being covered by
the law's backdoor price controls known as routing mandates.
Merchants promised Congress they would reduce retail prices
after the law passed, but the FED found that nearly 99 percent
of merchants did not pass on any savings to their customers. At
the very least, this should make us skeptical about the current
demands and the debit routing rules, and that debit routing
rules should be expanded and extended to credit cards.
Our nation needs to keep up when it comes to payments,
technology, and security. That won't happen if we cut the
investment out of our own infrastructure. Countries like China
and Russia are investing heavily in innovating their payment
systems and will present a challenge to America's leadership in
this key area of national and economic security, yet policies
like the Durbin Amendment create rigid rules and investment
caps that limit our potential to do the same.
The payments world is rapidly evolving, and smaller
financial institutions are facing enormous costs to upgrade,
offer new products, and just stay in the game. Interchange is
an investment in American commerce, not a junk fee. I urge the
Committee to look at both sides of this story and put the
consumer first. Thank you again for having me.
[The prepared statement of Mr. Kim appears as a submission
for the record.]
Chair Durbin. Thank you, Mr. Kim. Mr. Kantor.
STATEMENT OF DOUG KANTOR, GENERAL COUNSEL,
NATIONAL ASSOCIATION OF CONVENIENCE STORES,
ALEXANDRIA, VIRGINIA
Mr. Kantor. Thank you, Chairman Durbin, Ranking Member
Grassley, Members of the Committee for having me here today and
for having this hearing. We really appreciate the opportunity
because we think this is an incredibly important issue.
The credit card market is broken. Visa and Mastercard
centrally set the fees that the banks that issue consumers'
cards charge. Those banks compete on every other price they
set, every other interest rate they set, every other part of
their business, but not here. They could do it here. There are
very big institutions. This is an incredibly concentrated
market with large institutions like JPMorgan Chase, Bank of
America, Wells Fargo. None of them are setting their own
prices. That doesn't make any sense. Then on top of that, Visa
and Mastercard set the terms by which cards are accepted, which
makes sure to insulate those fees from any other competitive
market pressure to make sure they can stay high.
They have an honor all cards rule that says to merchants,
``If you want to take any single Visa or Mastercard, you must
take every single one.'' The prices on these cards can be
incredibly different for these businesses. They can be factors
of twice or three times as high. By doing that and then
restraining merchants' prices and the price signals that they
can send to their consumers, they make sure there's no market
pressures here. That's why we have a market failure. It doesn't
have to be this way, and it shouldn't be this way. We need
competition in this market. That's the bottom line.
There's lots of discussion on this panel and has been
already this morning about how many other forms of payment
there are. This isn't about the other forms of payment. This is
about credit cards because, thankfully, we've had some reform
of debit cards, which has been quite good. On credit cards, we
have not. The interesting thing is, as folks on the panel talk
about, well, there's buy now pay later and there's
cryptocurrencies, there's all these other things. Yes, there
are. But installment loans and other things are not credit
cards. They're conflating these different markets.
Senator Grassley this morning talked about the rise in
prices in different markets, beef, chicken, other products.
Nobody on this Committee would think it acceptable if there was
a price fixing scheme going on in the beef market that caused
prices to be high, and someone else came in and said, ``Well,
don't worry. Everyone can just eat chicken. It's okay. It's
very competitive.'' That's not okay. We need to deal with the
competition problem and credit cards to have a fair deal for
merchants and consumers and, frankly, for the U.S. economy
because the $138 billion just last year that were charged in
fees that consumers don't see we all end up paying.
It does create this inflationary cycle particularly because
it is a percentage, most of it, a percentage of the
transaction. When there is inflation, that drives up prices.
And look. We're not saying Visa and Mastercard caused
inflation. They did not. Everybody can have their own opinions
there, but it does exacerbate it both because the fees are very
high and because the percentage way that their charge creates
this inflation. Look. That's what we would all expect when
there's no competition. It's very predictable.
One other thing I would like to say on this is we've heard
a couple things this morning about how there is a payment
guarantee for merchants. There is not. The Federal Reserve
every couple of years looks at debit fees in particular, and
they have found that merchants pay 56 percent of the fraud on
debit cards. Fifty-six percent. Now, look. I don't know what
everyone means by guarantee when they hear that word; but my
gosh, paying 56 percent does not say to me that our members are
getting a guarantee of payment. They're losing most of it when
there's fraud being committed. We need to have our facts
straight when we talk about this, and we need to have
competition in this market.
We all know that competition does work. It works throughout
our economy. We don't let folks set other people's prices in a
centralized way in other parts of the economy. When we have
that type of competition, prices are lower. We have more
innovation. Frankly, we've seen more innovation since the
Durbin Amendment on debit cards with more encryption and other
security types of innovations that came right afterward. People
have more money in their pockets when there's competition and
lower prices. They can spend more, and that consumer spending
helps drive the economy.
I really appreciate the Committee looking at this important
issue and look forward to the conversation.
[The prepared statement of Mr. Kantor appears as a
submission for the record.]
Chair Durbin. Thanks, Mr. Kantor. We'll have 5-minute
rounds of questions. I'll start. It turns out that the issue of
inflation was addressed directly by the chief financial officer
of Visa--I hope I pronounce his name correctly--Vasant Prabhu.
On the January 27th earnings call, he was asked how inflation
impacts Visa. His answer and I quote, ``Net-net. I mean, we are
a beneficiary of inflation.'' He also said, quote, ``To the
extent that there's inflation driving up ticket size, clearly,
it's beneficial to us.'' Let's put to rest the theory that this
has nothing to do with inflation. It appears to have some
relevance.
Can I ask you, Mr. Sheedy, incidentally, Ms. Karet told us
that coincidentally April 22 was chosen by both Visa and
Mastercard as the day to raise the fees. Was that just a
coincidence or coordination?
Mr. Sheedy. Senator, we did not----
Chair Durbin. You need to turn on your feed. Turn on your
mic, please. Thank you.
Mr. Sheedy. I apologize. Senator, we did not raise the fees
in April. In fact, 90 percent of businesses in the United
States see a change in their rates that were down by 10 percent
effective with the April changes.
Chair Durbin. Ms. Karet, were you wrong?
Ms. Karet. No. We got a 300-page amendment or a fee
schedule. We calculated exactly the fee increases for us. While
some fees went down, others went up significantly. The net
effect is our fees went up.
Chair Durbin. Both companies the same day?
Ms. Karet. Yes.
Chair Durbin. Mr. Sheedy, here's a customer who has some
evidence otherwise.
May I ask you, Ms. Kirkpatrick, you're in charge of
Mastercard North America. I want to ask you about these crazy
Canadians. How in the world can you explain this? In Canada,
there's a debit card system called Interac. It is the most
widely used debit card system in Canada. It reports it has one
of the lowest rates of fraud globally. The website for Interac
says and I quote, ``Interchange for Interac debit is currently
set at zero.'' How is it possible these crazy Canadians are
getting no charge of interchange fees on debit and have less
fraud? How can that possibly be?
Ms. Kirkpatrick. Senator, it's not the case that Canadian
merchants don't have interchange fees. There's value----
Chair Durbin. In the debit cards.
Ms. Kirkpatrick. There is value in the debit space that
consumers derive from transacting at merchants. There is value
that the merchants----
Chair Durbin. What do you mean by----
Ms. Kirkpatrick [continuing]. Receive.
Chair Durbin [continuing]. Value? You're going to have to
define terms.
Ms. Kirkpatrick. When merchants shop at a Canadian--when
consumers shop at Canadian merchants, they receive value
through the form of guaranteed payment, lower risk, purchasing
power. Therefore, there are interchange fees on debit
transactions in Canada, and it's a direct result of the value
that those merchants are delivering and that consumers are
driving.
Chair Durbin. Mr. Mierzwinski noted what's happening in
Europe. Let's stick with the program for a minute. Try to
explain to me the difference in debit and credit card
interchange fees in Europe where the European Union has set a
standard of 0.2 percent and 0.3 percent respectively, one-
eighth or one-tenth of which is charged in the United States.
Clearly, their system is much different than ours, and we have
no regulation. Other countries like Australia, Brazil, China,
India, Israel, Malaysia, and South Korea also limit interchange
fees.
What lessons can we learn from all of these countries who
decided that interchange fees are way too high in the United
States?
Mr. Mierzwinski. I think those countries know that the
credit card system is a market failure. The ways that the banks
are forced to accept all of the fees from the networks and the
consumers are forced to pay increased prices, they're not going
to have it. They're not going to have it. They said no. U.S.
Congress should strengthen the Durbin Amendment, expand it to
credit cards, and lower interchange across the board.
Chair Durbin. Make sure I understand the scope of
interchange fees. If I decided that I wanted to give money to
Catholic Charities for the people--Ukrainian refugees in
Poland, and I use my credit card or debit card to make that
donation, would you be collecting an interchange fee on that
transaction, Ms. Kirkpatrick?
Ms. Kirkpatrick. The interchange fees for--Mastercard does
have interchange fees or the banks do charge interchange fees
to consumers--or rather to merchants across all transactions
for the benefit that the consumers are receiving from that
transaction. There's a cost associated with servicing that
transaction and servicing that account.
Chair Durbin. The interchange fees also apply to sales tax
I'm paying on my restaurant bill?
Ms. Kirkpatrick. It does.
Chair Durbin. Why?
Ms. Kirkpatrick. It's the--again, it's the total value that
the consumers are deriving when they shop at a merchant.
Chair Durbin. Of tax on a tax?
Ms. Kirkpatrick. It's the total value. You can't just look
at interchange as one----
Chair Durbin. More than a total value.
Ms. Kirkpatrick [continuing]. As one element. You're
looking at the total cost of servicing that account, which
includes fraud, guaranteed payment, increased purchasing power,
and the ability to use that product anywhere Mastercard is
accepted.
Chair Durbin. We look at it across the world where
interchange fees are regulated and restrained, and we don't see
this rampant fraud.
Ms. Kirkpatrick. And----
Chair Durbin. Senator Grassley.
Senator Grassley. Yes. Before my 5 minutes starts, I'd ask
unanimous consent to add several letters from stakeholders into
the record.
Chair Durbin. Without objection.
[The information appears as a submission for the record.]
Senator Grassley. As of 2020, statistics show that Visa and
Mastercard combined for 84 percent of all-purpose--general
purpose credit cards within the United States. Some would
characterize this as a duopoly, able to extract above market
payments for their services. To Mr. Sheedy and Ms. Kirkpatrick,
what would be your response to these concerns? Do Visa and
Mastercard abuse market power? Then I'd like to have Mr. Kantor
and Ms. Karet listen and then respond. Mr. Sheedy, you want to
start out?
Mr. Sheedy. Yes, Senator. Thank you. Senator, we operate in
a highly competitive market. Merchants have never had more
choice at the checkout. Consumers have never had more choices
to be able to pay. And one of the things that I think is
important to understand about our payments network and the
level playing field that we set with interchange is the same
interchange flows through our network and gets passed to, in
the same exact manner, to thousands of financial institutions
across the United States, small banks and small credit unions
to larger players.
They all compete with one another and innovate in that
complex, very dynamic marketplace. Ultimately, the consumer
wins from that competition. When the consumer is empowered to
transact with products that are tailored for them and
investments are made in the system to manage risk and keep the
system secure with a high integrity and that consumer is
empowered to shop at the point of sale, the merchant benefits
from that flow. It's that balance that we're trying to
accomplish. Any notion that we're not operating in a highly
competitive market we fundamentally disagree with.
Senator Grassley. You have anything to add, Ms.
Kirkpatrick?
Ms. Kirkpatrick. Yes. I'd say the payments ecosystem has
never been more competitive than it is today. In addition to
the networks, as I discussed earlier, there are competition
that comes from buy now pay later providers, wallet providers,
digital currencies, regional debit networks. You know, the
definition of market power is really an institution that can
raise prices while also reducing consumption, and Mastercard's
motivations are the exact opposite.
We are motivated to drive more transactions through our
network. That is how we generate revenue. That is how we win.
By virtue of that, we are incentivized to create balance across
all stakeholders, both merchants and banks. If we set
interchange rates too high, merchants won't accept. If we set
interchange rates too low, banks won't issue. Therefore, our
goal is balance, and our goal is consumer value.
Senator Grassley. Mr. Kantor and then Ms. Karet.
Mr. Kantor. Thank you, Senator. Yes. That's not the way it
works. This is not a balancing of the marketplace because,
look, economists at the Kansas City Federal Reserve have looked
at this. They've said because merchants and retail in the
United States are so competitive, these fees can get set well
beyond any semblance of value up until the only break point is
where the retailers would actually lose money and go under for
accepting the cards. That's the one break point.
Look. In other markets, we don't say because something has
great value we allow price settings centrally rather than
competitive market prices to rule the day. As you talked about
in your opening statement with beef prices and chicken prices
and others, just because those are valuable products, we--many
of us need to eat them, right? To survive. Really important. We
wouldn't say, ``Oh, then they can just centrally fix the prices
and that's okay.'' There needs to be a market system to
discipline those prices. We don't have that here.
Frankly, the innovation in other kinds of technologies and
payments does not make up for the lack of innovation and the
antitrust problem in credit cards. In fact, it really shines an
incredible spotlight on the fact that we have not had that type
of innovation in credit cards, and those haven't advanced. The
market power of Visa and Mastercard have been incredibly
stubborn, and they've held on to that market, including ever
since the Department of Justice won a second circuit decision
finding, cert. denied in the Supreme Court, that both Visa and
Mastercard have market power in this market.
Senator Grassley. Ms. Karet, add but don't repeat.
Ms. Karet. I'll do my best. Thank you. I'd like to come at
this from a slightly different angle. Our average store carries
over 50,000 items, every single one of which is negotiated in
terms of price, how we market it, how we merchandise it.
When Procter & Gamble comes to talk to us about selling
Tide, of which there are, let's say, 50 different sizes and
flavors of it, they don't come in and say, ``You have to take
all 50.'' They don't come in and say, ``Take it or leave it.''
They don't come in and say, ``You can't promote it. You can't
incent people to do one thing versus the other.'' Visa and
Mastercard effectively control over 80 percent of the credit
market, and they are the only vendor which we cannot negotiate
with. It's a take it or leave it proposition. Again, I'm not an
economist, so I don't know what technically qualifies as a
duopoly. That said, to me, if it walks like a duck and talks
like a duck.
Senator Grassley. I have two questions I'll submit for
answer in writing.
Chair Durbin. Thank you. On the Democratic side, the order
on early bird rules Blumenthal, Whitehouse, Coons, and Hirono.
I note the presence of Senator Tillis. At this point, that'd be
Senator Blumenthal.
Senator Blumenthal. Thanks, Mr. Chairman. Thanks to Senator
Durbin for his leadership on this issue over many years and all
of us who have served at the State level--I served as State
attorney general for a number of years, as Mr. Mierzwinski
knows--are deeply grateful to you for your leadership. I'm just
a country lawyer from Connecticut. Ms. Karet, I spent a lot of
time on the road in Connecticut. I spent a lot of time in
convenience stores and pumping gas. I hear and see the anger of
consumers when they go to pay for what they buy. I know that
the credit card companies are not the only ones responsible for
the skyrocketing prices at the pump or any of the other
commodities.
There are big oil companies, and we're gripped by their
greed. They prioritize shareholder profits and keep supply
constrained and drive prices higher. That's one of the reasons
that I've helped to spearhead, with Senator Whitehouse, a
measure called the Big Oil Windfall Profits Tax Act, which
would establish a tax on industry profiteering and lower
consumer costs with relief rebates.
I am struck in your testimony that the vast majority of gas
for American consumers has seen its fees rise by as much as
26.5 percent. Consumers in Connecticut are hit by that increase
in fees. Twenty-six point five percent increase in a single
year as they are struggling with these higher prices.
I understand that the card industry says that they've
imposed a cap on those fees at a $1.10. That doesn't adequately
protect consumers, does it?
Ms. Karet. Senator, it's a wonderful question and you've
asked a--it's a very complex subject, as you know, because
we're dealing with global economy issues. Specifically, what
would you like me to respond to?
Senator Blumenthal. What I would like to know is how are
consumers impacted by that 26.5 percent increase?
Ms. Karet. As we all know, the retail price of gas is at
historical highs right now. That's directly related to the
commodity market where the price of a barrel of oil is also at
historical highs. It wasn't so long ago that oil was a, you
know, between $60 and $70 a barrel. At some point early on in
the Ukraine war, oil hit $140 a barrel. Retail pricing in
gasoline is one of the most competitively--competitively
dynamic markets that I am aware of. We follow street pricing,
and the margins are impacted as the cost of goods go up, so do
the retail prices.
Senator Blumenthal. Let me ask Mr. Kantor the same
question.
Mr. Kantor. Yes. Thank you, Senator. I think it's a really
important question. Our members sell about 80 percent of all
the gasoline across the country, including in Connecticut. We
have some wonderful members doing that there. The Energy
Information Administration has looked specifically at gasoline
pricing, and they divided up the country into the different
regions and found that there is 100 percent pass-through of
both cost increases and cost decreases into the retail price of
gasoline in every region of the country. These fees, without
question, get paid by consumers every day.
I will tell you, 26\1/2\ percent, it's an unbelievably high
increase. Our members are reporting to us that this year their
fees are up much more than that. We had a member we talked to
this week. Their fees are up 49 percent this year. This is
completely unsustainable in an industry where we know people
are upset about gas prices. Just, by the way, for the retailers
themselves, as gas prices go higher, their margins get smaller.
The FTC has documented this, but the fees get higher. At the
same time, we have members literally some during the past few
months who have sold at no margin just to try to keep some
market share.
Senator Blumenthal. The term has been used by the two
officials from Visa and Mastercard that this market has never
been more competitive. That it's highly competitive. They're
including in the market different companies like apples and
oranges, correct?
Mr. Kantor. That's exactly right.
Senator Blumenthal. Let me ask you. What can the FTC do in
the absence of legislation? Can it act to try to foster
competition?
Mr. Kantor. The FTC has investigated and done some good
things, for example, when there were problems with the way Visa
and Mastercard controlled what was happening with the payment
card terminals that accepted EMV chip cards. They've had some
other open investigations about actions by Visa and Mastercard
to try to block the competition on debit cards. There are some
things they can do, but they are limited because they don't
have jurisdiction over the banking industry.
The Department of Justice had taken some action as well. In
fact, their Antitrust Division has perhaps brought more cases
in the payments area than any other area over time. As you
know, litigation is hard. It takes a very long time, and it's
really best at finding compensation for past problems. Really,
Congress is best at designing, well, ``What's the way for the
future to look in terms of having a competitive market that
functions?''
Senator Blumenthal. Thank you. Thanks.
Chair Durbin. Thanks, Senator Blumenthal. Senator Lee.
Senator Lee. Thank you, Mr. Chairman. Anytime we're looking
at a competition issue, I'm always interested in how it affects
consumers and representing my State as I do, I'm always
concerned about how things affect Utahans. Utahans have
suffered through a particularly acute degree as a result of the
rampant inflation that has resulted from excessive Federal
spending. Since the beginning of last year, Utahans have seen
their monthly expenses go up more than $700 a month. Just their
ordinary monthly expenses. Talking $8,400 plus per year just to
buy the same basket of goods and services that they were
purchasing before. It's all more expensive now.
Whenever approaching this or any other topic in the
competition face, I'm looking at how this would affect them,
how it does affect them, and what, if anything, we ought to do
about it. With that in mind, Mr. Sheedy, let's start with you.
There are those who have argued that it's anticompetitive--it's
anticompetitive cartel behavior for banks through the Visa and
Mastercard networks to get together and collectively agree that
they're all going to change--charge the same interchange fees
to merchants. What's your response to that?
Mr. Sheedy. Senator, Visa sets the interchange fees, these
default interchange fees that pass from merchants, acquiring
banks to issuing banks. We do that on our own. We don't do that
with--we certainly do it with input from the marketplace. The
impact that the pandemic has had on merchants has been really
important to us. At the front end of the pandemic, we lowered
rates for supermarkets, restaurants, and education merchants.
More recently, 90 percent of the merchants in the system
will receive a 10 percent reduction in the rates that they
process. What's really important, I think, I'd like to stress
is we are not raising rates. The average rate in our system for
Visa credit has been flat since 2015.
Senator Lee. No, I get that, and I've got a limited time. I
just want to be clear what I'm asking. I'm asking you to
respond specifically to the charge that it amounts to cartel
behavior to agree to charge the same interchange fees.
Mr. Sheedy. We disagree, Senator. The setting of a default
interchange fee we feel is highly competitive in the ways in
which it delivers the same interchange fee to thousands of
financial institutions that then go into the marketplace on
behalf of consumers and merchants and compete and innovate. We
feel that the model works very well. In a system where you need
tens of thousands of banks supporting millions of cardholders
and millions of merchants, there's no way to operate the system
other than setting a default interchange fee.
Senator Lee. For there to be a network effect, in other
words. You need the network effect in order for your system to
work?
Mr. Sheedy. In order for there to be a coordination of
activity where consumers can transact from a card that's issued
by a credit union in Utah with a merchant in New York, online
or in person, you need to have a default interchange fee so
that you know how the economic flows are going to work. And
having that be the same interchange fee, irrespective of the
size of the financial institution, promotes competition.
Senator Lee. Mr. Kantor, what's your response to that?
Mr. Kantor. Yes. My response is, one, they don't need to do
that. I submitted with my testimony an article from NYU
economist Nicholas Economides, who has pointed out that because
of the concentration in the market, both on the issuing side
and on the acquiring merchant side, that just 90 contracts
would cover 72 percent of all the credit card volume. Those big
banks could easily set their own prices. You don't need that
going on. And there's been much more concentration since then.
The other thing I would note is that having the same fees
does not promote level playing field competition on the bank
side either. John Blum from the Community Bankers testified
previously before Congress in hearings, that their costs per
transaction, because they're a smaller institution, were much
higher than the largest banks. If you lock them in to the same
prices on higher costs, of course, they're not going to be able
to compete in the same way. Those large banks have won over a
lot of those small bank customers into the credit card market,
which is why credit cards is so much more concentrated than
debit cards as a result of that.
Senator Lee. Mr. Kim, go with me. If you want to respond to
this, that's great, too. I was also going to ask you
separately. What would happen to credit card rewards in a
universe in which you imagine that there's suddenly an
alternative network through which merchants could process
transactions?
Mr. Kim. The interchange pays for--I think roughly 60
percent of interchange revenue goes out in the form of rewards.
I do believe it goes, you know, not just to the wealthy.
Everybody loves the rewards. I think it's a much more broadly
distributed value that people of all socioeconomic classes
find. You know, in debit, there were debit rewards before the
laws changed. Those debit rewards largely went away because
interchange helped subsidize those things. You would see those
rewards go away.
Furthermore, you would see banks of my size and smaller and
maybe even somewhat larger--the economics of issuing credit
cards, it's not what it once was. There's lots of competition.
It's harder to do the big banks. I mean, it's interesting to
come back to the last question. Yes. Maybe you could cover.
Maybe. I don't even know that I agree that the largest banks
could negotiate with all the millions of merchants and set the
interchange. If they could, that would just put me out because
I can't.
Senator Lee. Mr. Chairman, I see my time has expired. I've
got one follow-up question I want to ask him that. Okay. If I'm
understanding you correctly, you're saying the banks would
still get paid for that transaction but get paid less and
likely rewards programs would be the, you know, a casualty of
them. There might be something left of them. There might not.
Mr. Kim. Yes. You know, depending on the rate, I assume
we'd get paid. Yes.
Senator Lee. Okay. If that's the case, couldn't one argue
that this is a manifestation of lack of competition and that
the price is being artificially inflated by lack of
competition, that consumer rewards provide a means of sharing
in the monopoly--in the rents, you might say, in order to
inflate demand and squeeze merchants. What's your response to
that?
Mr. Kim. You know, the purpose of rewards is not to squeeze
merchants. The purpose of rewards is so that you have a value
proposition that makes people want to use your card. The
competition--you know, the reward space is, is an intensely
competitive space. Again, it's hard for a bank my size to
compete with the likes of Chase that strikes a deal with
Southwest Airlines. Perhaps that continues. It wouldn't be as
rich. Again, it kind of puts me out.
Senator Lee. Thanks, Mr. Chairman.
Chair Durbin. Thanks, Senator Lee. Senator Coons.
Senator Coons. Thank you, Mr. Chairman. Thank you to you
and the Ranking Member for convening this conversation today. I
am glad to see that on this panel we have represented the whole
range of potential input, consumers, consumer advocates,
networks, merchants, and a bank that is a credit card issuer.
Clearly, I think we have to look at all of these four different
sides of the credit card transaction universe when attempting
to assess whether or not there's sufficient competition, what
capping fees would do, and what the consequences might be.
Mr. Kim, I'm glad you're able to testify today and provide
a bank issuer's perspective. I've heard from credit unions,
community banks, large banks in my State that are credit card
issuers, and they depend on interchange fees in order to be
able to support the credit cards that they offer to consumers.
Credit unions and community banks in particular are concerned
that a substantial decrease in interchange would mean they
could no longer sustain card programs that extend credit to
individuals who might otherwise not be able to access credit
cards.
I think the issue here isn't just losing rewards programs
but losing access to credit and losing the ability of smaller
issuers to participate and compete at rates that are lower than
you might get from major cards. How do issuing banks rely on
interchange to offer credit services, and what impact would it
be if that revenue substantially declined for your bank?
Mr. Kim. Okay. I think you're on the nose there with your
comments. You know, interchange is one source of revenue.
Interest and fees on the credit card are another source of
revenue. If that--one of the things that makes this lending--
making small loans is very expensive. That's why you don't see
a lot of people doing it. That's why it moves online where the
costs are lower. We've been pushed--a lot of banks have been
pushed out of the business because the revenue stream's just
not there. In fact, you know, the interchange used to make it a
more profitable business.
In fact, now that we pay the rewards out to the consumers,
it's squeezed that as well. I think what you would see--so the
very smallest of banks, they depend on larger banks like us to
help them issue credit cards. The margins there are even
thinner. I think you would just see that element of competition
of issuing cards from the smallest institutions, from credit
unions, from midsize banks, I think you'd see that just go
away. It would be the larger banks that have the scale that can
still do business in a profitable way.
Senator Coons. I mean, one of the challenges--I've also
heard from retailers in my State, a family-owned grocery store,
that their margins are so small that for them to pay an
increase in interchange or swipe fees, this is a--you know,
where you sit depends on where you're listening to.
On fraud and data breach, one of the concerns I've heard
from a credit union in Dover, Delaware is that covering the
costs of reissuing cards, of investigating, of paying off the
costs associated with a major data breach are not sustainable
for a credit union or a small bank without interchange. Mr.
Sheedy, is that something you've seen in your experience? Ms.
Kirkpatrick?
Mr. Sheedy. I'll start. Senator, the situation with fraud
and cyber risk and the risks associated with merchants and
consumers transacting online is an enormous issue. A decade or
so, we had a similar magnitude of risk at the point of sale
with counterfeit cards that had been generated primarily on the
part of data that had been breached by merchants and
cybercriminals. We addressed that with rolling out chip cards
and chip terminals.
We have the same issue facing us now online, and there's
roughly $10 billion of fraud annually online with merchants and
consumers transacting in a way that generates fraud. And among
the changes that we're making in--have made in April is to
encourage the adoption of secure digital tokens that will
authenticate the consumer and provide more guarantees and more
assurance to the merchants so that we can address that fraud.
It will require the merchants to do their part.
We have invested $9 billion, as I've mentioned, the last 5
years in fraud and security protections. Issuers are also
investing. We have to make the same type of push to address
this fraud online that we did in the physical point of sale
with chip cards.
Senator Coons. Thank you. I'm sorry. Mr. Kantor wants to
address that before I----
Mr. Kantor. Senator, if I could. Actually, you raised some
really important points, I think, in your earlier comments that
I thought would be helpful because we do have a track record
around the world of some reforms, and we haven't found in other
parts of the world the parade of problems that Mr. Kim and some
of his brethren talk about. In other parts of the world, credit
has still been available. Credit cards have still been used
very frequently, and there's still rewards and all those sorts
of things.
I also did just want to clarify that we as merchants--and
Laura Karet was clear about this in her testimony--we've not
asked for a cap on credit card fees. There's a different market
where we think there needs to be competition. Competition and
market prices will help us here in ways that get at the types
of problems you're worried about.
Senator Coons. Could I ask a closing question, Mr.
Chairman? I just would be interested, Mr. Mierzwinski, Mr. Kim,
Mr. Kantor, if you could just briefly speak to this question.
Now, that we have a decade of experience and what happened with
capping fees for a debit, do we know whether the imposition of
interchange fee caps led to lower prices for consumers and
better access for lower income borrowers, consumers in terms of
low-cost banking services? Mr. Mierzwinski, if I might, Mr.
Chairman.
Mr. Mierzwinski. Thank you for the question, Senator. I
think that there are a lot of pressures on banks to lower the
prices and to provide better services to lower-income
consumers. A lot of that is being done through partnerships
between banks and consumer advocates.
On the issue of bank fees and the price of banking, I think
the banks always look to figure out a way to blame the latest
regulation. They love to blame the Durbin Amendment. I can't
believe that the numbers are there to say that the Durbin
Amendment has hurt lower income or all Americans. I don't see
it.
Senator Coons. Chairman Durbin, my hunch is, I should
probably conclude this question at this point. I'd be grateful
if Mr. Kim, Mr. Kantor could briefly speak to it.
Chair Durbin. Sure. Let them.
Senator Coons. Briefly.
Mr. Kim. Yes. I would just say debit interchange is part of
a checking account, and checking accounts have become more
expensive for consumers. When that income went away, we had to
look harder at how we did business and how we price things in
order to make up for that. I would say last, in terms of like
access to rewards and things, people with debit cards
frequently are the more credit challenged folks. They can't get
a credit card. Their rewards went away that they got on debit
cards. I would say that's got to be limiting access.
Senator Coons. Mr. Kantor.
Mr. Kantor. Thank you, Senator Coons. Yes. Consumers have
saved tremendously. If you look at over the first 5 years of
the Durbin Amendment being implemented, the producer price
index that tracks wholesale costs that retailers pay was up 9.4
percent. The consumer price index that retailers charge to
consumers was only up 4.3 percent. There was still inflation,
small amounts, but it was--there was tremendous consumer
savings in that spread. Retail profit margins did not budge or
go up in the slightest. You know, this is something we should
put to rest here because it's a really good question.
Retail, in the United States, is one of the most
competitive markets there is in the United States or around the
world. Those profit margins--Laura's industry survives on 1.11
percent profit margins. The banking profit margins are over 30
percent, the highest industry sector that's tracked that way.
It's remarkable. Either--one of two things is happening when
the credit card industry argues that prices--consumer prices
don't flow through and costs don't flow through. Either they
don't believe competitive markets work, or they've been living
so long with centrally setting the fees that they've forgotten
how competitive markets actually work. Retail is unbelievably
competitive.
Senator Coons. Mr. Chairman, thank you for your forbearance
and for the broad range of testimony at today's hearing.
Chair Durbin. Thanks, Senator Coons. Let me add for the
record--I'm sure you're well aware--the infamous Durbin
Amendment did exempt banks with lower than $10 billion in
assets. That would not apply to Mr. Kim's bank. For those, the
Federal Reserve reported in 2021 that small banks and credit
unions receive 53.49 percent of total debit interchange fee
revenue in 2019. $13 billion even though they only conducted 35
percent of the total number of debit transactions. It turns out
the infamous Durbin Amendment was a boon to the small banks and
credit unions. Thank you. I believe Senator Tillis and Senator
Blackburn have worked out an agreement.
Senator Tillis. Senator Blackburn.
Chair Durbin. Senator Blackburn.
Senator Tillis. No, go ahead.
Senator Blackburn. You need to go.
Senator Tillis. I'm going to stick around anyway.
Senator Blackburn. You're going to stick around. Well,
thank you all. Thank you, Mr. Chairman. I want to stay. Mr.
Kim, let me come to you on this. I saw you shaking your head
about banking profits, and let's continue with that. Do you
want to----
Mr. Kim. Sure. I think those statistics--a lot of times
banks look at the revenue as net interest income. I think that
30 or 40 percent applies if you kind of--but if you go to--you
think about the grocer pays a lot for their costs. It doesn't
account for the cost of money. When you do that, the profit
margin becomes lower.
Senator Blackburn. All right. Ms. Karet, let me come to
you. I've talked to retailers and heard from some retailers
that talk about they have to eat this cost and they say it's
most harmful to smaller businesses, the mom and pops. When I
talk to people who are in the grocery and convenience store
business, they talk a good bit about this because this is
something that drives up the overall cost of doing business and
compliance, right?
Ms. Karet. Senator, yes. Thank you. Just to put this in
perspective, picking up on what was said earlier, we operate on
about a 1-percent profit margin.
Senator Blackburn. Okay. Talk to me a little bit about how
this contributes to this out of control inflation that we have
because, right now, inflation's at over a 40-year high. You've
got the cost of milk and eggs and bacon and coffee. Coffee's up
over 100 percent when you're buying a bag of beans. Talk a
little bit about that added cost and the impact on the
consumer, your consumer.
Ms. Karet. The way the credit card swipe fees work is their
percentages.
Senator Blackburn. Right.
Ms. Karet. When the price of goods go up, what's happening
is the credit card companies are getting a higher percentage on
a higher sale.
Senator Blackburn. Right.
Ms. Karet. That means there's more costs that we have to
bear and pass along to our customers.
Senator Blackburn. That means the price on the shelf for a
package of Oreos is going to cost more this summer.
Ms. Karet. That is absolutely correct.
Senator Blackburn. They're packing lunches for kids to go
to camp and making a peanut butter and jelly sandwich and
putting a couple of cookies in there.
Ms. Karet. Yes, ma'am.
Senator Blackburn. Okay. All right. Mr. Kim, I want to talk
with you. I had read the GAO study that talked about the
harmful impact of the Durbin Amendment. The comment was that it
was one of the most harmful laws and regulations in terms of
its negative impact on the availability of fundamental banking
services. Give me the explanation of how this has adversely
impacted the unbanked, the underbanked.
Mr. Kim. Yes. I can kind of come back again to--in, you
know, a lot of the underbanked and unbanked--but underbanked
would use debit cards--oh, sorry. Would use debit cards. The
underbanked would use debit cards. That contributed to the
revenues associated with those checking accounts and those
services that we offer them. Those revenues went away, and it
made the--it made us--it forced us to increase the costs on
those accounts. What you saw in the banking industry was a
decline in the amount of free checking that was offered.
You know, the banking industry is resilient and, you know,
we figure out how to overcome things. Over time, just like Ms.
Karet probably can do the same thing in her business, you
figure out ways to overcome challenges. Now, I think the
banking industry has a good record of offering services to the
underbanked. We've worked our way through that.
Senator Blackburn. How did this affect your total customer
mix? Did your customer base grow--did it as people moved to
debit cards?
Mr. Kim. You know, we probably saw sort of a, you know--
just, just our own statistics, we probably saw sort of a----
Senator Blackburn. Sort of static?
Mr. Kim. Yes, yes. A stagnation there. There's not as much
appeal at the lower end where the big numbers are.
Senator Blackburn. A change to the credit routing system,
would--what kind of impact would that have?
Mr. Kim. You know, again, I would say what that would do is
reduce the money available associated with offering credit
cards. It's kind of an expensive proposition for somebody our
size. It's been a declining profitability business for a number
of years for a number of reasons, competition, regulation.
It's, you know, one of the most--it's the most regulated
business we're in. We spend the most money on compliance
officers and responding to regulators in that business. There's
a lot of----
Senator Blackburn. Okay. Let me----
Mr. Kim [continuing]. You can get in trouble if you do
something wrong, and we get out.
Senator Blackburn. Right. My time is expiring. Ms.
Kirkpatrick, I've got a question for you. As a courtesy, I will
submit it because I want to know what your cost is because you
accept the responsibility for loss, for fraud, for things of
that nature. I'd like to know that percentage, what that means
to Mastercard each year, how much that costs you.
Thank you, Mr. Chairman.
Chair Durbin. Thank you, Senator Blackburn. Before I
recognize Senator Hirono, I'd ask consent to enter into the
Record the report of the American Bankers Association that in
2010, the year the Durbin Amendment was enacted, 53 percent of
Americans had free checking. Five years later, under the Durbin
Amendment, the American Bankers Association reports that the
majority of Americans, now 61 percent, have free checking. Free
checking has gone up, not down. Senator Hirono.
Senator Hirono. Thank you, Mr. Chairman. It's good to know
that the Durbin Amendment had some very positive impacts. Thank
you. Although I was told that I actually signed a letter when I
was in the U.S. House that raised questions about your
amendment. It's good to know that it all worked out. Oh,
goodness gracious.
Okay. Mr. Mierzwinski, you described in your opening
statement how credit card fees lead to higher prices for
consumers. I saw an estimate that the average American family
spends $700 a year as a result of higher prices due to credit
card fees. You said that the bulk of the interchange fees goes
to rewards programs. I was looking at a chart that is 2019. The
chart shows that based on household income, the lower the
household income, the greater the use of cash for payments and
debit cards.
For example, according to this chart in 2019, if you made
under $25,000 in household income, you generally paid with cash
55 percent of the time, 5 percent credit, and 31 percent debit.
Then if you're making over $200,000, then it would be 10
percent cash, 65 percent credit, 15 percent debit. Based on
what you testified, most of these reward fees go to higher
income people. That correct?
Mr. Mierzwinski. That's exactly right, Senator. The Federal
Reserve economists at the Federal Reserve Bank of Boston have
done studies that show the same thing. Essentially, the worst-
off Americans, people that don't have credit or debit cards,
pay these swipe fees, pay these increased swipe fees because
merchants, due to the rules that are imposed on them by the
dominant duopoly, Mastercard and Visa, they don't--can't do
anything else but to bake the fees into all of the costs that
all consumers pay, including low-income Americans.
Senator Hirono. Then while some of the really large
companies like Amazon and Walmart may be able to negotiate for
lower interchange fees, small businesses don't have that kind
of power.
Mr. Mierzwinski. That's exactly right. Thank you for that.
Senator Hirono. For Ms. Karet and Mr. Kantor, I have a
series of questions relating to the honor all cards rule. First
of all, can somebody just briefly tell me what that is? Then
what impact does this rule have on the fees paid by merchants
and often passed on to consumers, and would the elimination of
this rule result in greater competition and lower fees?
Ms. Karet. The honor all card pretense is that if you take
Mastercard or Visa, you have to take all of their products.
There are lower fee products and higher fee products. As a just
FYI, the higher fee products tend to be the reward cards that
we're talking about. Something that I think you should know is
that Visa and Mastercard are actively transferring customers
into the higher rewards cards. We end up paying a higher fee
overall.
Senator Hirono. A merchant can't say, I'm only going to
accept this type of Visa or Mastercard?
Ms. Karet. Correct. That's correct.
Senator Hirono. Isn't that a tying case?
Mr. Kantor. Senator----
Senator Hirono. Somebody mentioned antitrust.
Mr. Kantor. Yes. Senator, so, interestingly, there's two
pieces to this honor all cards rule, both of which are a
problem. One is that you have to take, if you're a merchant,
every single type of card even if they're very expensive to
take the least expensive one. That is destructive of
competitive markets on the rates on those cards.
The second one also is you have to accept the cards from
every banking institution under the Visa and Mastercard
umbrellas if you want to take any of them. What that does is it
tells these banking institutions, even the largest ones, that
they no longer have any incentive to go to a merchant and say,
``Hey, how about we come up with a deal to do business together
because all the merchants are required to anyway?'' That's
what's so destructive of this competitive market and why it
inflates fees to such a large degree.
Senator Hirono. If you were to eliminate this rule, would
that lead to--well, I think you just answered my question.
Would lead to greater competition?
Mr. Kantor. There's no question it would lead to more
competition. There are quite a few other rules, including the
setting of the prices that are problematic here that have to
get dealt with. That is one of the central things getting in
the way of real market competition.
Senator Hirono. Did you want to add something, Ms. Karet?
Okay. In a situation like that, I think there might have been a
case that went before the Supreme Court where a merchant said,
``I don't want to take all these. I have to take all these
different kinds of cards from one entity.'' That might be an
area for us to explore to eliminate this honor all cards rule.
Wouldn't merchants like that, especially small merchants?
Mr. Kantor. We think that would be a great area to explore
to open up the market. Yes.
Senator Hirono. Thank you, Mr. Chairman.
Chair Durbin. Thank you, Senator Hirono. Senator Tillis.
Senator Tillis. Thank you, Mr. Chairman. I do not want to
suggest that I would malign the Durbin Amendment. I think, like
all policy around here, some of it worked. Some of it may not
work. We always got to look at refreshing things based on the
circumstances of the day.
Mr. Kim, just to go back to the GAO report, can you talk
about--just a little bit more about the effect that the Durbin
Amendment has had on banking in general, the things that you're
most concerned with? Give me the top two if you have two.
Mr. Kim. The GAO report--you don't have to take my word for
it; take the Government Accountability Office--found it was
among the top five laws and regulations most cited as having
significantly affected the cost and availability of basic
banking services. That's a statement. There's other arguments
about those things. That's a fact.
Senator Tillis. As you're going through this, also, the
Federal Reserve Bank of Richmond indicated that nearly 99
percent of the savings realized from the Durbin Amendment were
not passed back to the consumer. I mean, I think we're here
ostensibly. I'm not a cheerleader for businesses. I'm a
cheerleader for consumers. I'm trying to figure out if we're
considering policy here that's going to have a net benefit to
the consumer. It would suggest that the Durbin Amendment
didn't. Is that accurate?
Mr. Kim. That's what that study would say. That's what the
facts in that study would say. You know, figuring out exactly
how price changes are passed on is a complicated thing. The
Durbin Amendment, it's been a long time ago, but that is the
fact in the study.
Senator Tillis. Mr. Kantor, if you want to briefly respond.
Although I'm the last one here, so I may be able to indulge the
Chairman a little bit, not too long, but.
Mr. Kantor. Yes. There's two quick things. One, on the
Federal Reserve Bank of Richmond, they made clear, actually it
does not say what some of the credit card industry says. Their
study was a survey, didn't look at any actual economics of
pass-through. They just did a survey of folks. It could not be
relied on to say whether it was pass-through or not. And they
also had bias issues they flagged in their survey.
Senator Tillis. Could it be fair to say though that if it's
at 99 percent, there may have been an unhealthy amount that
didn't go back to the consumers?
Mr. Kantor. No, they also asked the question wrong. See,
merchants don't set their prices by saying, ``Hey, this cost
went down. I'm lowering this price.'' What they say is,
``What's the market? I got to compete with the guy down the
street.'' Over time, their profit margins become very narrow,
like Karet indicated, and it goes down to their cost. We all
know that's how competitive markets work. Asking it was the
wrong way to get at it.
Senator Tillis. I want to get to something else. I just
want to see if my first impression--you know, when we talk
about the dollar amount increasing as the transaction amount
increases, is it also fair to say, Mr. Sheedy, Ms. Kirkpatrick,
that there's also a proportionate amount of risk and potential
default in payments involved? I mean, isn't a part of the
rationale behind the percentage going up is that there's a risk
of fraud in some of those that you've got to recapture it,
right?
Ms. Kirkpatrick. Yes. That assumption is correct. As
volumes increase, the risk of fraud increases. We've seen----
Senator Tillis. Talk a little bit about--so talk a little
bit about card not present and additional rising costs in the
area of the internet transactions and additional risk that
you've got to recoup some of the cost or you can't have an
operational business, something that's important for our
consumers.
Ms. Kirkpatrick. Yes. You know, Mastercard is spending
billions of dollars to protect consumers against online fraud.
Certainly, as volume increases, fraudsters get more
sophisticated. That means that Mastercard has to invest more to
protect against that fraud. We've spent billions of dollars to
protect consumers against fraud. Just last year, one of our
cyber and security tools prevented $10 billion in fraud for
consumers across the card not present environment.
Senator Tillis. Mr. Sheedy. Then I'm going to come--Ms.
Karet, I'm saving you for last.
Ms. Karet. Oh, great.
Mr. Sheedy. Senator, thank you. The consumers want to
transact online. They enjoy the convenience. Merchants find
that they can reach new customers and lower their costs to
provide services online. The difficulty is the way that the
system works at the moment as safety and security has been our
high priority. There's still too much fraud. There's still too
much uncertainty. One of the changes that we're making in April
and we created an incentive through interchange.
Interchange just isn't a pass-through. It's also a
mechanism by which we can make the system more safe and more
secure. With one of the changes that we made in April, we are
seeing a rapid adoption of these secure digital tokens to
better authenticate transactions online so that consumers and
merchants can more safely and assuredly transact. That's good
for everybody. It's good for merchants, good for consumers.
Senator Tillis. Isn't it fair to say that if we were to go
in and dramatically decrease what you could charge to recoup
the cost of your operations that you'd have to take a look at
the risk mix of people that you'd be even wanting to issue
credit cards to? I mean, wouldn't some of the most credit-
challenged people be hurt the most by this if you're having to
make a business decision about the population you could serve?
Mr. Sheedy. One way to answer your question, Senator, is
when interchange has been price regulated by governments around
the world in other markets, you see a narrowing of the issuance
of credit cards in those countries.
Senator Tillis. Yes. It's logical.
Mr. Sheedy. Those fees to those consumers end up going up,
and the features and the benefits they get from those cards go
down. We think that that would be a horrible outcome.
Senator Tillis. Ms. Karet, I'm very sensitive. We've got a
lot of retailers in North Carolina, across the Nation, a lot of
the recipients of Paycheck Protection Program, a number of
other things that we implemented in response to the impact of
COVID was to recognize that we've got a lot of businesses out
there on the bubble. I know that your sector is struggling
mightily with some of the shutdowns and other things that we've
been dealing with. Let's assume that the fees were cut in half.
Would that solve all your problems in your industry, or--the
answer in the laugh is all I needed.
I mean, a part of what we need to do if we're talking about
having a meaningful impact and a reduction in consumer prices,
there's a lot of other policies that we have to talk about
here. It's not going to make a big difference. You've got a lot
of supply chain problems. You've got a lot of inflationary
problems. Tell me a little bit about--if you could ask Congress
to act on any policy matter that would help the retail
industry, would this be on the top of the list, or are there
other things that we should be looking at to fix the
fundamental problems that businesses like yours are suffering
through?
Ms. Karet. Senator, thank you so much for asking that
question. If you will indulge me for 1 second, I'd like to----
Senator Tillis. I'll indulge you as long as the Chair will.
Ms. Karet. Hopefully, the Chair will also indulge me. I'd
like to go back to the fraud question because there's a very
important fact that has not been stated, which is the merchant
bears the cost of online fraud. When card is not present, the
merchant bears the costs of that fraud. What has happened
through COVID and through natural consumer behaviors is the mix
of shopping has moved online.
Our costs are also going up from that perspective. We're
talking about the cost and that these guys have invested, which
I believe they have in terms of anti-fraud. I just think it's
really important to remember we're paying the cost of online
fraud.
That said, so to answer your question in terms of what I
would want, the credit card swipe fee issue is one of the
biggest issues that we have that I think that the Government
has a role in. I don't know today what the Government could do
related to our inability to source toilet paper. That's
actually from old--that's the beginning of the pandemic. We
have plenty of toilet paper now. Credit card fees, as I've said
before, we operate on a 1-percent profit margin. Bank fees
today are our third largest cost. We actually pay more in bank
fees than we make.
What we are looking for is fair competition. Not asking for
huge regulatory things and caps and decreases. Look. If you
want to--if you want to have decreases, I'll take them. That's
not what we're asking for. What we're asking for is to create a
level playing field so that there's competition. What Doug said
before is exactly right. Competition works. In this industry,
there isn't any. I do believe that's the role of our Government
is to create level and fair playing fields.
Senator Tillis. I think, you know, I'm going to have a
hearing this afternoon that's kind of loosely related to this
subject. I also think it's something that we in our banking--in
my capacity in Banking Committee, we should take a look at
that. The--I believe in hypercompetition. I think that it's
incredibly important. If there is a basis for anticompetitive
behavior, we've got a Division in the DOJ to deal with it. I
think a lot of the things that we can do to kind of ease the
burden and address these issues I look forward to taking up in
the Banking Committee. Thank you all.
Chair Durbin. Thanks, Senator Tillis. By virtue of the
miracle of Zoom, I think we'll join the Senator from Minnesota.
Are you on board?
Senator Klobuchar. I am on board. Thank you very much,
Chair Durbin. I want to first ask, as you know, Mr. Chair, one
of my jobs is the Chair of the Subcommittee on Antitrust. I do
a lot in that area. I thought I would take a little different
approach and ask you about this, Mr. Kantor.
Today, a number of our witnesses have testified about a
lack of competition in credit and debit card markets resulting
in higher interchange fees that can harm consumers, merchants.
Do you think that stronger antitrust enforcement could lead to
more competitive credit and debit card markets?
Mr. Kantor. Thank you, Senator. I do think more and better
antitrust enforcement would be welcome here. It's needed. This
is an area where the Antitrust Division of the Department of
Justice has been active over time, as has the Federal Trade
Commission. There's a lot more to be done. These litigations go
on for a very long time, involve lots of economists. There are,
as we pointed out, big pieces of the puzzle that are still
unresolved, how the fees get set and the rules and restraints
that go around protecting those fees from market forces.
Absolutely. Some more enforcement would be welcome.
Senator Klobuchar. Very, very good. In your opinion, and,
you know, you've got an active Antitrust Division. You've got
interest in going after cases. In your opinion, what's the
impact of Supreme Court decisions like Ohio v. American Express
on competition in credit markets?
Mr. Kantor. We disagree with the opinion in American
Express v. Ohio. We think it will cause problems not just in
this area but, frankly, dealing with other technology platforms
which have been a focus I know, Senator, of your Subcommittee
and others in the Congress, and that could be problematic.
What's important to note, though, is that even under the
standard articulated in American Express v. Ohio, this credit
card market is an antitrust problem. There is plenty of
consumer harm in the record of cases that are going on right
now to show that, in fact, it's an antitrust problem.
That said, as I mentioned earlier, there's an important
role for Congress to play here to decide how competition should
work going forward so that we have some. These antitrust cases,
while very, very important, you know, courts really have a
different role in this. We want to pay attention to the
Congress's role here as well.
Senator Klobuchar. Very good. Yes. I mean, the way I look
at it--and this is off this topic. If you have monopolies,
which we have in the tech area--Google has 90 percent market
share--there's just no doubt. We have monopolies. That you have
to at the same time--and maybe this is what you're getting at
in a very different context. You have to ensure there's rules
of the road in place by industry so that if there's not going
to be a change through the courts--in my case with tech, which
will take years--you at least have to be able to make sure that
they're not preferencing their own products and creating an
anticompetitive marketplace. That's what this is about. Mr.
Kim, I have a question of you.
Mr. Kim. Sure.
Senator Klobuchar. You've testified that payment systems
require constant investment and protection and that interchange
fees cover much of that cost. We can all agree that card
transactions have to be safe, that cybersecurity issues,
threats, those things. Can you elaborate on the types of costs
that interchange fees help cover from the perspective of
midsize and community card issuers?
Mr. Kim. Sure. We have to have 7 by 24 customer service
available to our customers wherever they're transacting,
whatever time zone. When there are problems with transactions,
if we have to--if we're going on networks around the world that
are not as reliable, it's important for us to be able to choose
our networks because all networks are not created equally.
Sometimes we have to resolve problems there. We are constantly
looking at data to try to assess fraud. We had a substantial
fraud attempt with bots trying to open up accounts, open up
credit card accounts, and then, in turn, extract money from the
consumers and then ultimately us.
It's that kind of investment in data, investment in
information so that we can collect cell phone numbers and tell
people, ``Hey, this transaction went through on your card. Was
it really you?'' Can we do that instantaneously? Those are just
some examples of how we invest to make the transaction and
payment business work.
Senator Klobuchar. Okay. Very good. The question kind of
along the same line, can you talk about how you see midsize and
community card issuers fitting into the payment landscape now
and into the future? That's my last question.
Mr. Kim. Sure. It's--that's a challenging thing. You know,
we spend a lot of time looking at all the financial technology
firms that are getting into the business and taking away parts
of it from the traditional banking industry and how can we
partner with them effectively and--or compete against them.
Certainly, as many have said, you know, across may be apples
and oranges. I think it's all payments, so maybe they're all
apples. Lots of competition going on there. It's--and it's hard
for us, but we have to be nimble. We have to partner with smart
organizations that can help us with networks. You know, my
ability to process transactions internationally at all times of
the day depend on the networks and depend on the investment in
the networks. That's going to be--we have to have good
partners, and they have to be able to help us. That's how we'll
continue to exist in the payments ecosystem.
Senator Klobuchar. All right. Excellent. Thank you very
much. Thank you, Senator Durbin.
Chair Durbin. Thanks, Senator Klobuchar. I just have a few
questions. Mr. Kim, first, let me say that we did a little
research when you were added to the panel about Commerce Bank.
I'm familiar with, of course, living in the region. I want to
thank you for continuing to offer free checking even through
the onslaught of the Durbin Amendment. You continued to offer
free checking. It's noteworthy, and I want to make sure it was
part of the record. On your profitability, your bank's doing
pretty well. Would you agree?
Mr. Kim. Yes.
Chair Durbin. You're exempt--not exempt from the Durbin
Amendment because your valuation is over $10 billion?
Mr. Kim. That's correct. We are doing well, but we're
resourceful and we're nimble and we figure out how to do
things. I would say we did discontinue free checking for a
period of time, and we reintroduced it recently in the last
year.
Chair Durbin. Glad you did that. When you talk about your
profit margins, I won't repeat what we're reading here. I will
say, Ms. Karet, what you're dealing with, 1\1/2\ percent, is
about as thin as it gets in terms of vulnerability. The one
thing that you said earlier that stuck with me, among other
things, was that the change in fee came in a stack of papers
300 pages long?
Ms. Karet. It was a very large deck.
Chair Durbin. Did you have to hire a lawyer, or did anyone
go through this with you?
Ms. Karet. We're lucky enough that we have a good team of
accountants and lawyers to go through that. It's a very
complicated thing to understand, and I think purposely so to
understand what the fees are and how they're changing.
Chair Durbin. Mr. Cantor, Ms. Karet has said she has the
staff--professional staff to do this. You're representing
convenience stores. Some of them are large chains, but some are
not. How do they cope with this 300-page fee change?
Mr. Kantor. They can't. Sixty percent of them are single
store operators, and they don't even get the hundreds of pages,
frankly. They don't get any of this. They just take the
increases, and it is very difficult for their businesses.
One quick thing I'd note too with respect to this free
checking question I want to clear up because a couple of the
questions today dealt with this GAO report. GAO got a couple of
studies handed to it, at least one of which, I think maybe both
of which, were cited by Mr. Kim. What those studies did was
they looked at the decline of free checking starting in January
2009. The Durbin Amendment didn't go into effect until October
2011. There's actually almost 3 years of decline in free
checking while this was going on. I cite many, many articles--
I, I frankly ran out of the energy to continue citing them.
This was during the time of the financial crisis.
Yes, free checking was going away before the Durbin
Amendment ever happened. Mr. Kim properly cited the study for
noting that free checking even continued to go away after
passage of the Durbin Amendment, but it was over a year before
any of that took effect. The study notes that, well, we're not
going to look at other changes in Dodd-Frank because, you know,
they didn't take effect for more than a year after passage. All
of this is just a sideshow, frankly, one, to distract from
anticompetitive activity in credit cards, but two, to try to
discredit the reforms that occurred.
Losing free checking because of the financial crisis and
the difficulties banks were in at that time is not the same as
a reform that came into effect years later and that the ABA
numbers you cited showed actually went up when you look at the
right time period. Free checking has its own competitive market
dynamics that mostly has to do with interest rate environment
and how banks are competing and want to compete to get more
money in from depositors and the value they place on that. It's
an unrelated thing there.
Chair Durbin. Thank you very much.
Mr. Mierzwinski. Senator, could I add something on that GAO
report that I----
Chair Durbin. Sure.
Mr. Mierzwinski. The banks are relying heavily on this GAO
report that claims the Durbin Amendment has caused the downfall
of everything. It's not a study. It's largely based on a survey
of a few stakeholders that the GAO interviewed. Some
stakeholders said, ``What's the worst thing you've seen? Was it
the Credit CARD Act, or was it the Durbin Amendment, or was it
the creation of the CFPB?'' They'd simply--a small number of
stakeholders said the Durbin Amendment was bad. I am
unimpressed with the GAO study, the most recent one.
Chair Durbin. I have been edged out by COVID-19 as one of
the worst things we've ever faced.
[Laughter.]
Chair Durbin. At least for now. Who knows? You know, it
could get worse going forward. My bottom line is simple. It
goes back to 16 years ago when I walked in this room and saw
that stack of papers and had one of the customers of Visa and
Mastercard say, ``We can't even get the complete contract. They
give us the summary of it, and we couldn't read it if we
received it.'' It is so complex. It lacks any effort toward
transparency or simplicity.
Second, there is no competition. They announced the fee
changes, both companies, the same day. They're coming at you,
Ms. Karet. You know they are. It's a dual engine force in this
situation. I don't think that's healthy. I think if you believe
in the market economy, competition is part of it, isn't it?
Shouldn't it be? I mean, I think that's what most MBAs
conclude. Maybe even Liberals. I would say that this
conversation will continue. We're going to have a hearing on
this subject at least every 16 years.
[Laughter.]
Chair Durbin. I think the American people need to know the
story about these fees that cost merchants and customers and
why they're not disclosed. There's a reason. I think there'd be
a revolt even more strongly against them. We're facing
inflation, and the last thing the American people need is a
higher swipe fee. I wish both companies had resisted the urge
to make some money when they can.
The hearing record will remain open for a week. I have some
letters and statements, whether they're for me or against me,
or for or against the Durbin Amendment, all will be included in
the record. At this point, the hearing stands adjourned. Thank
you.
[Whereupon, at 11:57 p.m., the hearng was adjourned.]
[Additional material submitted for the record follows.]
A P P E N D I X
Miscelleanous submissions:
American Bankers Association..................................... 158
American Beverage Licensees (ABL)................................ 137
American Sale.................................................... 182
Bettancort, Jessica, Letter...................................... 188
Big Y Foods, Inc................................................. 180
Carlton's Men's & Women's Apparel................................ 193
Credit Union National Association (CUNA), American Association of
Credit Union League (AACUL)................................... 141
Credit Union National Association (CUNA), Jim Nussle, President
and CEO....................................................... 144
Electronic Payments Coalition.................................... 151
Food Industry Association (FMI).................................. 169
Heart 'n Home, Julie Wurr........................................ 186
International Franchise Association (IFA)........................ 178
Iowa Grocery Industry............................................ 176
Kennedy, Sean, Letter............................................ 211
Kindship......................................................... 195
Massachusetts Food Association (MFA)............................. 181
Minnesota Grocers Assocation (MGA)............................... 197
Miscellaneous Letters for the Record............................. 150
National Association of Federally-Insured Credit Unions (NAFCU).. 134
National Bankers Association (NBA)............................... 198
National Grocers Association (NGA)............................... 202
National Restaurant Association.................................. 210
National Retail Federation (NRF), May 3, 2022.................... 174
National Retail Federation (NRF)................................. 205
Nebraska Grocery Industry Association, Nebraska Retail Federation
and Nebraska Hospitality Association.......................... 201
Retail Industry Leaders Association.............................. 208
Riceberg, Tara, Letter........................................... 190
United States Hispanic Chamber of Commerce (USHCC)............... 212
Yedi Houseware Appliances........................................ 192
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