[Congressional Record Volume 154, Number 92 (Thursday, June 5, 2008)]
[Senate]
[Pages S5208-S5210]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. DURBIN:
  S. 3086. A bill to amend the antitrust laws to ensure competitive 
market-based fees and terms for merchants' access to electronic payment 
systems; to the Committee on the Judiciary.
  Mr. DURBIN. Mr. President, I rise today to introduce the Credit Card 
Fair Fee Act of 2008. This legislation will provide fairness and 
transparency in the setting of credit card interchange fees. This bill 
is companion legislation to a bipartisan bill introduced in the House 
of Representatives by Chairman John Conyers of the House Judiciary 
Committee and Representative Chris Cannon. The Conyers-Cannon bill 
currently has an additional 19 Democratic and 16 Republican cosponsors.
  This legislation is supported by the Merchants Payments Coalition, a 
coalition of retailers, supermarkets, convenience stores, drug stores, 
fuel stations, on-line merchants and other businesses. The coalition's 
member associations collectively represent about 2.7 million stores 
with approximately 50 million employees.
  Interchange fees may not be well known to most Americans, but they 
should be. Last year, U.S. retailers, and by extension their customers, 
paid approximately $42 billion in interchange fees to the banks that 
issue credit cards. The billions that are paid in interchange fees each 
year significantly cut into the profit margins of retailers and pinch 
the pocketbooks of consumers. And neither retailers nor consumers have 
a say in how these interchange fees are set within the Visa and 
MasterCard systems, which together account for over 70 percent of the 
credit and debit card market. The current lack of meaningful 
competition, negotiation and transparency in the setting of interchange 
fees represents a market failure, one that affects every American 
retailer and every American consumer.
  My legislation takes a measured approach to address this market 
failure. My bill would identify credit and debit card payment systems 
that have significant market power, and would permit the retailers who 
use those systems to collectively negotiate with the providers of the 
systems over the fees for system access and use. If the retailers and 
providers are unable to agree voluntarily on a consensus set of fees, 
the bill would direct an impartial panel of judges to consider the two 
parties' fee proposals, and to select the proposal that most closely 
reflects what a hypothetical perfectly competitive market would 
produce. As I will discuss further below, this approach will protect 
retailers and consumers by preventing credit card companies from using 
their market power to charge unreasonable fees through an unfair 
process.
  So what are interchange fees, and why do they pose a problem? 
Whenever a consumer uses a credit or debit card to make a purchase from 
a retailer, the banks and credit card companies involved in the 
transaction charge a number of fees that are passed on to the retailer 
and ultimately to the consumer. The interchange fee is one such fee. It 
is a fee charged by the card-issuing bank to the retailer's bank.
  Here is an example of how an interchange fee is charged. When a 
consumer buys $100 in goods from a retailer using a Visa or MasterCard, 
the retailer first submits the transaction information to the 
retailer's bank (the ``acquiring bank''). The acquiring bank submits 
this information, via the Visa or MasterCard network, to the bank that 
issued the card to the consumer, the issuing bank. The issuing bank 
either authorizes or denies the transaction. If the transaction is 
authorized, the issuing bank sends to the acquiring bank, via the Visa 
or MasterCard network, the purchase amount minus an interchange fee 
that is retained by the issuing bank.

  As a result of the interchange fee and other processing fees imposed 
upon the retailer by the acquiring bank, collectively, these fees are 
known as the ``merchant discount fee,'' the retailer typically only 
receives approximately $97.50 out of the $100 sale. In order to cover 
this cost and continue to make a profit, retailers typically raise the 
retail price of their goods, meaning that consumers must pay more 
regardless of whether they pay with cash or plastic.
  Visa and MasterCard set the interchange fee rates for all the banks 
and all the retailers that participate in the Visa and MasterCard 
systems. Those interchange rates are frequently charged as a percentage 
of the sale amount plus a flat fee; for example, an interchange fee 
might equal 1.75 percent + 20 cents per transaction. The interchange 
fee rate varies for certain types of Visa and MasterCard cards and 
transaction categories, and is typically higher for cards that involve 
rewards programs for cardholders.
  What is the rationale for assessing interchange fees? According to 
Visa, MasterCard, and the banks that issue them, these fees are used to 
pay for important functions within the credit and debit card systems. 
For example, interchange fees can be used to cover the costs of 
processing and authorizing credit card transactions, including the 
costs of ensuring data security and safeguarding against fraud. 
Interchange fees can also help protect an issuing bank from the risk 
that a consumer may not pay his or her credit card bill, which would 
leave the issuing bank on the hook for the amount that it gave to the 
acquiring bank at the time of a credit card transaction.
  In addition to covering these costs and risks, interchange fees have 
been used to generate income for issuing banks. This income can be 
retained by the issuing banks as profit, or can be devoted to other 
uses such as consumer marketing campaigns or rewards programs for 
certain cardholders.
  In addition to the benefits that interchange fees provide for issuing 
banks, Visa, MasterCard and their participating banks argue that 
interchange fees have also provided benefits to retailers and consumers 
by helping to make credit and debit card transactions more efficient 
and more prevalent. Visa, MasterCard and the banks claim that the 
growing use of credit and debit cards saves retailers from certain 
expenses involved with transacting business with cash or

[[Page S5209]]

checks. They also claim that their cards bring benefits to consumers, 
including extra convenience, the availability of short-term credit, and 
rewards programs that are offered to some cardholders.
  It is clear that interchange fees do play an important part in the 
credit and debit card systems, and that overall these systems have 
created efficiencies and benefits for banks, merchants and consumers. 
However, it is also clear that those who must ultimately pay 
interchange fees--retailers and their consumers--have no say in 
negotiating how much the interchange fees should be. As a result, 
interchange fees are being set at rates that would not be agreed upon 
in a competitive market, and that may favor banks to the detriment of 
merchants and consumers.

  Why are retailers unable to negotiate changes in Visa's and 
MasterCard's interchange fee rates? There are several reasons. First, 
because of Visa's and MasterCard's market power, the overwhelming 
majority of American retailers have no choice but to accept Visa and 
MasterCard as a method of payment. Credit and debit cards are currently 
used for over 40 percent of all transactions in the U.S., and that 
percentage is increasing, in part due to extensive marketing by the 
card companies and the banks. Visa and MasterCard control over 70 
percent of the market for credit and debit cards. Most retailers simply 
cannot survive unless they agree to accept those cards.
  Second, within an electronic payment system the only party with whom 
retailers are able to negotiate effectively is the retailer's acquiring 
bank, and interchange fees are not covered in those negotiations. In 
their efforts to obtain retailers' business, including the business of 
processing the retailers' credit card transactions, acquiring banks 
will negotiate and compete over many of the component fees that make up 
the merchant discount fee. However, the interchange fee is typically by 
far the largest component of the merchant discount fee, and acquiring 
banks do not negotiate with retailers on interchange rates nor do they 
compete to offer retailers lower interchange rates. Instead, 
interchange rates are set by Visa and MasterCard, who claim that their 
rates are set without the involvement of the banks. Accordingly, the 
acquiring banks tell their retailer customers that the interchange rate 
component cannot be negotiated or reduced below the level set by Visa 
and MasterCard.
  The interchange fee thus serves as a de facto price floor for the 
overall merchant discount fee--a floor that is fixed in a 
nontransparent, nonnegotiable fashion by card companies with 
significant market power. Although I have asked the credit card 
companies on several occasions for information that would help me 
understand the cost components that contribute to their interchange 
rates, it is still unclear how much profit margin is built into that 
floor. The margin may be significant, and as long as issuers and 
acquirers are happy with it, there is no incentive for card companies 
to help merchants and consumers by reducing it. Additionally, it should 
be noted that many if not most acquiring banks also serve as issuing 
banks, and therefore have almost no incentive to compete to lower the 
interchange rates that they themselves receive. Because the acquirers 
and issuers are often the same banks, no one negotiates with issuers 
about interchange fees on the retailers' behalf, and the retailers are 
left to negotiate for themselves.
  Third, while some retailers may try to negotiate directly with Visa 
or MasterCard to lower the interchange fee component of their merchant 
discount fees, most retailers have no leverage in these negotiations 
since at the end of the day they will likely have to agree to accept 
Visa and MasterCard in order to stay in business.
  As a result of this vast disparity in negotiating power, Visa and 
MasterCard can essentially impose interchange rates upon retailers and 
those retailers have no choice but to accept them. Furthermore, Visa 
and MasterCard also frequently impose take-it-or-leave-it contractual 
terms and conditions on retailers, such as acceptance rules that 
require retailers to honor all cards issued by that credit card 
company, even if the card is a rewards card with a higher interchange 
rate.
  Because there is no competition and no real retailer negotiation 
involved in the setting of interchange fees, it is not surprising that 
interchange fees are being charged at levels that would not be agreed 
upon in a fair and competitive market. This has been demonstrated in a 
number of ways.
  For example, as economies of scale and advances in technology have 
brought down the cost of credit card transaction processing in recent 
years, normal market pressures would suggest that interchange rates 
would have similarly decreased. But as noted in a March 29, 2008 Wall 
Street Journal editorial, ``The Visa interchange fee has increased over 
the past decade to 1.76 percent from an average of 1.5 percent. 
Economies of scale should be driving fees down, as in most other 
service-fee industries.'' In March 2006, the American Banker reported 
that ``according to the credit card industry newsletter The Nilson 
Report, interchange rates for Visa and MasterCard International have 
risen steadily every year since 1997.''
  Also, interchange fees continue to be charged as a percentage of the 
sale price, so even though the cost of processing a $1 credit card 
transaction is comparable to processing a $1,000 transaction, the 
interchange fee paid on that $1,000 sale is much higher and much more 
lucrative for the issuing bank.
  Additionally, Americans are paying higher interchange fees than are 
consumers in other countries who use the same Visa and MasterCard 
cards. According to a report by the Federal Reserve Bank in 
Minneapolis, U.S. interchange fees average around 1.75 percent, while 
in other industrialized countries such as Britain interchange fees 
typically average around 0.7 percent.
  In 2001, the total amount of interchange fees collected in the U.S. 
was $16.6 billion. By 2007, that amount grew to approximately $42 
billion, an increase of over 150 percent since 2001. What are banks 
doing with the tens of billions of dollars they are collecting in 
interchange fees each year? There is a serious lack of transparency on 
this issue, but one study indicates that only around 13 percent of 
collected interchange fees are devoted to covering the cost of 
processing credit card transactions. According to this study, the 
majority of the collected fees went toward profits for the issuing 
banks, rewards programs that benefit mostly affluent cardholders, and 
marketing campaigns.
  Visa and MasterCard and the banks that use them argue that their 
interchange fee rates are set at levels that best balance benefits and 
costs to card issuers and to merchants. If the card companies and the 
banks truly believe that interchange fee rates are already set at a 
level that is fair to merchants, it seems they should have no objection 
to formalizing a process for setting interchange rates that is fair and 
transparent and that gives merchants a legitimate voice in the process.

  That is what the Credit Card Fair Fee Act would do. This legislation 
would apply to widely-used credit and debit card systems. Recognizing 
that these electronic payment systems have become nearly as important 
to our consumer economy as cash and that most retailers cannot stay in 
business without accepting them, the bill would ensure that retailers 
have access to these electronic payment systems at fair rates and 
terms.
  Under the bill, if any electronic payment system has significant 
market power, i.e., 20 percent or more of the credit and debit card 
market, retailers would receive limited antitrust immunity to engage in 
collective negotiations with the providers of that electronic payment 
system over the fees and terms for access to the system.
  The bill would establish a mandatory period for negotiations between 
the retailers and providers over fees and terms. If the negotiations 
between the retailers and providers do not result in an agreement, the 
matter would be brought before a panel of expert Electronic Payment 
System Judges, who would be appointed by the Department of Justice 
Antitrust Division and the Federal Trade Commission.
  These Judges would conduct a period of discovery during which 
information about fees, terms, and market conditions for electronic 
payment systems

[[Page S5210]]

would be disclosed. At the end of the discovery period, the Judges 
would order a mandatory 21-day settlement conference to facilitate a 
settlement between the retailers and electronic payment system 
providers. If the settlement conference failed to result in an 
agreement, the Judges would conduct a hearing where each side would 
present their final offer of fees and terms. The Judges would then 
select the offer of fees and terms that most closely represented the 
fees and terms that would be negotiated in a hypothetical perfectly 
competitive market where neither party had market power.
  After choosing between the two offers put forth by the parties, the 
Judges would enter an order providing that these fees and terms would 
govern access to the electronic payment system by the merchants for a 
period of 3 years, unless the parties supersede this agreement with a 
voluntarily negotiated agreement. Decisions by the Judges would be 
appealable to the D.C. Circuit Court of Appeals.
  The Credit Card Fair Fee Act is modeled after the Copyright Royalty 
and Distribution Reform Act of 2004, which created a similar system for 
the use of copyrighted music works.
  Credit card companies and banks may claim that this legislation 
involves government price setting, but this is not the case. This 
legislation does not permit the government to establish on its own 
accord what the fees and terms for retailer usage of credit card 
systems ought to be. Rather, it sets up a process whereby retailers 
would be able to make their case as to what fees and terms are fair, 
and if the retailers and credit card providers fail to agree 
voluntarily on those fees and terms, independent judges would evaluate 
the parties' offers and select the offer that most closely resembles 
what the result would be in a fair and competitive market. In contrast, 
currently Visa and MasterCard can use their overwhelming market power 
to establish non-negotiable interchange fees and terms, and retailers 
are forced to abide by these fees and terms or else be denied access to 
payment systems that account for a huge percentage of all U.S. 
transactions. This type of unaccountable fee-setting runs far more risk 
of harm for retailers and consumers.

  Under my legislation, if the credit card companies and the banks are 
able to persuade the Judges that current interchange rates are 
justifiable, then the rates would remain as they are today. If, on the 
other hand, the retailers are persuasive in arguing that current 
interchange rates cannot be justified by competitive market dynamics, 
then the Judges would likely rule that alternative interchange rates 
would better represent the result of a perfectly competitive market. In 
either case, at a minimum the interests of retailers and consumers 
would be much better represented in this fundamentally important 
market.
  My legislation represents a measured approach to addressing the 
current market failure with interchange fee-setting. Other countries 
have addressed the problem of unfair interchange fees through far more 
drastic solutions. For example, Australia has imposed a system of 
direct regulation of interchange fees through its central bank, and 
Mexico's central bank has negotiated rate reductions with the card 
companies. My legislation represents a middle ground between the 
current flawed system and these aggressive foreign regulatory 
frameworks.
  In short, the Credit Card Fair Fee Act would address the market power 
imbalance between retailers and credit card companies in setting 
interchange fee rates. It would create a forum where these fees can be 
fairly negotiated by parties with equal bargaining power. It would 
ensure that interchange fees and terms are fair to both banks and 
retailers. And if retailers are able to negotiate interchange rates 
that reduce the transaction cost of doing business with plastic, it 
would be beneficial to consumers as well.
  How do we know that retailers will not just pocket any savings they 
get through any reduction in interchange fees that they are able to 
negotiate? We know because unlike the credit card interchange rate-
setting process, the retail industry is highly competitive, and that 
competition is largely based on price.
  Also, sometimes we hear the banks and card companies argue that if 
interchange fees are reduced, they will have to raise fees and 
penalties on cardholders to make up for the revenue shortfall. If these 
companies stand by this argument, I would expect them to stand by its 
converse and reduce their cardholder fees and penalties whenever their 
interchange fee collections increase. However, interchange fee 
collections have increased 150 percent since 2001, and we have seen no 
corresponding decrease in fees and penalties imposed upon all 
cardholders. Unless you are one of the small percentage of cardholders 
with a current balance, no annual fees, and a lavish rewards program, 
your issuing bank is probably taking two bites at your wallet--one with 
interchange fees and one with the fees on your statement.
  The Credit Card Fair Fee Act will protect consumers and retailers by 
preventing credit card companies from using their market power to 
charge unreasonable fees through an unfair process. This is important 
legislation, and I urge my colleagues to support its passage.
                                 ______