[Congressional Record Volume 156, Number 173 (Wednesday, December 22, 2010)]
[Senate]
[Pages S10995-S10997]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                            INTERCHANGE FEES

  Mr. DURBIN. Mr. President, I wish to speak briefly about interchange 
fee reform, an issue I have worked on for many years and an issue which 
was taken up just recently last Thursday when the Federal Reserve 
considered legislation we passed in the Senate and House of 
Representatives and sent to them to establish regulations. It was an 
effort to bring reasonable regulation to a $20 billion annual debit 
card interchange fee system industry.
  The Federal Reserve released draft regulations that will implement 
the new law Congress enacted. Back in May, when the Senate was debating 
the Wall Street reform bill, I offered an amendment. I am honored that 
64 Senators voted for it, including 17 Republicans. It was a bipartisan 
success. It is now the law of the land. The Federal Reserve is moving 
forward to make sure our law is implemented in a fair way.
  The Fed announced, according to their investigation, it costs the 
banks between 7 and 12 cents to process a debit card transaction. But 
the Fed reported that big banks and card networks charge merchants, 
retailers, charities, universities, and others an average debit 
interchange fee--not 7 to 12 cents--of 44 cents. The Fed has confirmed 
what consumers and retailers long suspected. They are being overcharged 
and gouged for each purchase

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made with a debit card. Merchants and their customers are being charged 
more than three times what the transactions cost.
  In the old days, if you paid by check before debit cards, the fee for 
processing the check was pennies, regardless of the face amount of the 
check. Now the debit card fee is 44 cents--three, four, five, six times 
more than the cost actually incurred by the banks because of the 
transaction.
  The draft regulations released propose to cap the interchange fees at 
the largest banks at 12 cents per transaction, give or take some 
conditions such as the prevention of fraud, which we built into the 
law. With the 12-cent cap, we could save businesses and consumers 
across the United States about $10 billion in the first year. Imagine 
what $10 billion will mean to a restaurant, a shop. Think of what it 
means to universities and other charities that collect through the use 
of debit cards--more money for them to use, more profitability, and 
that could lead to more employment and better business outlooks.
  At this point, I am hunkered down and ready for the fight that is 
coming. The biggest banks and credit card companies are going to do 
their best to influence the Federal Reserve to raise this interchange 
fee as high as possible, but we know what the reasonable costs are. We 
know these credit card companies and the big banks have been 
overcharging for years. Every time a credit or debit card sale is made, 
Visa and MasterCard take a cut of the transaction. Some of this cut 
they keep, but most of it is routed along to the bank that issued the 
card. This fee that goes to the card-issuing bank is the interchange 
fee, also known as a swipe fee. It skims an average of 1 to 3 percent 
off the top of every transaction. An estimated $48 billion in credit 
and debit card interchange fees were collected in 2008, around $20 
billion from debit cards.
  These fees come out of the pockets of everyone who accepts cards--
merchants, small businesses, charities, and government agencies--and 
the costs are passed on to consumers.
  Every bank says they need to charge fees to help pay for the cost of 
processing card transactions and fighting fraud. That is fair enough. 
But the banks do not set their own interchange fees. There is no 
competition here.
  Some of my Republican colleagues, who supported my efforts said we 
did not want to go this far to give the Federal Reserve this authority. 
But there is literally no competition when it comes to credit and debit 
cards. That is why the government has to step in. That is why we think 
the Federal Reserve is moving in the right direction.
  Go look at any bank's Web site and look to see how much that bank 
charges in interchange fees. You won't find anything.
  Why? Because for years, the banks have enjoyed a cozy scheme where 
they let Visa and MasterCard fix the interchange fee rates that each 
bank receives.
  This means banks do not have to compete with one another. They all 
receive the same fees no matter how much a particular bank actually 
spends to process transactions or to prevent fraud.
  The current interchange system is a price-fixing scheme. Visa and 
MasterCard set the fee rates that thousands of banks receive. Efficient 
banks and inefficient banks receive exactly the same fees.
  And Visa and MasterCard have so much market power over 75 percent of 
the market--that they can raise rates whenever they want to and tell 
merchants to take it or leave it.
  Merchants have no choice but to take it, because now over half of all 
retail transactions take place with cards. They can't say no.
  It is easy to see that the banks and card companies set up this 
interchange scheme. It benefits the banks that receive high fees and 
don't need to compete with each other or negotiate with merchants. And 
it benefits Visa and MasterCard, because they get their own network fee 
each time a card is swiped, and high interchange fees mean more banks 
will issue more cards.
  But the system is unfair to merchants and to consumers in the United 
States. They have to pay billions per year in these fees with no 
negotiation and no competition.
  The interchange amendment that I offered--and that is now law reins 
in these abusive fees.
  My amendment did several things.
  First, it said that if the big banks are going to let Visa and 
MasterCard fix fees on their behalf, the Federal Reserve should 
regulate those fees.
  The amendment said that any debit interchange fee that is set by a 
card network and passed along to a big bank must be regulated by the 
Fed to ensure that the fee is reasonable and proportional to the actual 
cost of processing the transaction.
  If a bank wants to charge its own fees to reflect the costs it bears, 
so be it. My amendment does not regulate that, and as long as those 
fees are transparent and competitive, I am fine with it.
  But if the banks all get together and decide to let Visa and 
MasterCard fix fees for them, that is where my amendment steps in.
  We know that banks today receive far more in interchange than it 
costs them to do debit transactions. They use their excess interchange 
subsidy to pay for things like ads, rewards programs, and CEO bonuses.
  The result of my amendment is that we will squeeze the fat out of the 
interchange system. Banks will still be able to use interchange to pay 
for necessary processing costs, but they won't be able to use this 
interchange scheme to take excessive fees out of the pockets of 
merchants and their customers.
  Second, my amendment said that if a bank takes steps to effectively 
reduce fraud in debit transactions, that bank can get an increase in 
their interchange rate.
  So instead of the current system, where Visa and MasterCard give 
banks the same interchange rate no matter how much fraud the bank 
allows, my amendment will actually incentivize banks to reduce the 
amount of fraud that takes place. The rules that the Fed institutes on 
this will mark a major step forward.
  Third, my amendment said that card networks cannot require that their 
debit cards all use exclusively one debit network.
  The story here is that there are a number of debit networks that 
merchants can use to conduct transactions. Until recently, most cards 
could be used on multiple networks. You used to see a number of debit 
network logos on each debit card.
  In recent years, however, the biggest networks like Visa have begun 
requiring banks to sign exclusive agreements under which they become 
the sole network on the banks' cards. This diminishes competition 
between networks and leads to higher prices. My amendment will restore 
this competition.
  Finally, my amendment said that card networks can no longer penalize 
merchants who try to offer certain discounts to consumers, like 
discounts for using debit instead of credit. This was a clear pro-
consumer provision.
  I know that my amendment has been criticized by the banks and by some 
of their allies in Congress. Those criticisms have generally fallen 
along several lines.
  Some have argued that my amendment is a problem because it involves 
price fixing.
  I agree that price fixing is a problem, but it is the current 
interchange fee system that represents price fixing.
  Don't take it from me even Visa admits that they fix prices for all 
their member banks under the current system. They sent a letter to the 
Fed on November 8 saying, quote, ``issuers do not in practice set 
interchange transaction fees; rather, these fees are set by networks,''
  My amendment tries to correct price fixing, not create it.
  Second, my amendment has been criticized because some think that it 
will not benefit consumers.
  I absolutely agree that interchange reform should protect consumer 
interests. And I would note that my amendment was supported by a broad 
range of consumer groups and by millions of consumers who signed 
petitions in support of swipe fee reform.
  Also, I note that the Fed met on October 13 with a number of consumer 
groups to discuss how to implement interchange reform.
  The Fed has posted online summaries of all its interchange meetings, 
and according to that summary, the consumer groups said they preferred 
that

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debit interchange fees be either de minimis or zero.
  Consumers support interchange reform because, as a November 2009 GAO 
study points out, it is under the current interchange system that 
``merchants pass on their increasing card acceptance costs to their 
customers.''
  The National Retail Federation estimates that each American family 
pays an extra $427 per year as a result of inflated prices due to 
interchange fees.
  Reining in soaring interchange fees reduces costs for merchants and 
consumers alike.
  Now make no mistake--I expect the banks and card companies will try 
to get around debit interchange regulations by creating new hidden 
consumer fees and by steering consumers toward less-regulated products 
like prepaid cards. We saw the banks do this after the credit card 
reform bill was enacted last year.
  But I want the banks and card companies to know that I will be 
watching, and I will make sure both the Congress and regulators step in 
as needed to prevent consumers from being fleeced.
  Finally, my amendment has been criticized because some say it will 
hurt small banks and credit unions.
  I have pointed out repeatedly that my amendment bends over backward 
to protect these small institutions. I don't want to drive them out of 
the debit card market, and my amendment won't do that.
  Nothing in the amendment enables merchants to discriminate against 
cards issued by small banks and credit unions. Merchants are still 
required by Visa and MasterCard contracts to accept all cards 
regardless of the issuer.
  And the amendment exempts banks with less than $10 billion in assets 
from interchange fee regulation. All but around 90 banks and 3 credit 
unions are exempt.
  These small banks can continue to receive the same high interchange 
fees that they do today and they will actually receive higher fee rates 
than their big bank competitors.
  If Visa and MasterCard are so protective of their big bank members 
that they decide to voluntarily cut the interchange rates that small 
banks receive, they will be doing so against their own profit motive--
and they may be doing so in violation of the antitrust laws.
  My amendment does not harm small banks and credit unions, and I will 
be watching to make sure Visa, MasterCard and the big banks do not harm 
them either.
  Finally, I will point out that the United States is actually late to 
the party when it comes to interchange regulation.
  According to an April 2008 report by the Federal Reserve Bank of 
Kansas City, banks have reached agreement with foreign governments to 
reduce interchange fees in countries such as Israel, Mexico, and 
Switzerland.
  Just this week, the European Union reached an agreement with Visa 
Europe to limit debit interchange fees to 0.2 percent in nine countries 
and for cross-border EU transactions.
  These countries are doing fine without excessive interchange fees. 
And the United States will do fine as well.
  In conclusion, the Fed's release of proposed interchange rules is an 
important step toward bringing relief to our nation's merchants and 
consumers.
  Now the Fed will commence a formal comment period on the draft rules, 
and I and many others will likely submit comments suggesting how the 
draft can be further improved.
  I look forward to this process.
  I again want to thank my 63 colleagues who stood up back in May and 
voted for my amendment to rein in the unfair debit interchange system. 
I look forward to continuing to work with them on this issue in the 
future.
  I know this fight will be engaged again next year. I am looking 
forward to defending what we have done and to move with Senator 
Menendez of New Jersey and others to deal with other abuses in the 
credit card industry, such as the prepaid debit card where there are 
vast overcharges of fees. We have to stand in this body for the 
consumers of America. They cannot afford the well-paid lobbyists in the 
hallways. We have to stand for them because those people are the 
backbone of our economy, and without our support, have limited voice in 
the decisionmaking that takes place in this Chamber.
  I yield the floor.
  The PRESIDING OFFICER. The Senator from Rhode Island.
  Mr. WHITEHOUSE. Mr. President, I ask unanimous consent to speak for 
up to 20 minutes in morning business.
  The PRESIDING OFFICER. Without objection, it is so ordered.

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