[Congressional Record Volume 157, Number 60 (Thursday, May 5, 2011)]
[Senate]
[Pages S2715-S2720]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
INTERCHANGE FEES
Mr. DURBIN. Mr. President, there are many issues which come before
the Senate, and some are simple and some are complex. The issue I am
going to speak to today is one which you are personally aware of, Mr.
President, as the Senator from West Virginia, and one that more and
more Members are becoming aware of. It is the question of interchange
fees or swipe fees.
For those who do not follow this closely, every time we use a credit
card or a debit card in the United States of America, the retailer or
merchant we do business with pays a fee to the bank that issues the
card. The fee is established by the major credit card networks, Visa
and MasterCard. They tell the banks how much they will receive each
time a customer uses these cards.
What it comes down to is the fee that is being charged, the debit
card fee, has become a subject of controversy. Let's go back in history
a little bit. I can still remember when people used checks, and some
still do but not as frequently. Now we use the plastic form of a
checking account. Instead of writing out a check and pushing it through
the banking system, and for a few cents watching it be processed, we
use a debit card. A debit card draws money directly out of our checking
accounts to the merchant we are doing business with.
So the debit card has, in fact, by a large measure, replaced checks--
and in many instances replaced cash--as more and more people are using
plastic for transactions. So I started hearing from merchants and
retailers all around the United States about the fee that was being
charged for debit card transactions.
Now, debit card transactions are different from credit card
transactions in this respect. When I use my credit card, I am going to
be billed each month for what I put on my credit card. There is a
collection issue: Will Durbin actually make his monthly payment? Will
he make it on time? Is he able to make the payment? And there is a
question about whether this is going to be processed.
So there is, I guess, an uncertainty involved in credit card
transactions and much less so when it comes to debit card transactions
because that money is coming directly out of our checking accounts to
the merchant. So in terms of risk, there is greater risk with a credit
card than for a debit card. Nevertheless, over the years what we have
seen is the swipe fee, or fee charged to a merchant for the use of a
debit card, keeps going up, up, and up.
People would say: Well, why don't the merchants and retailers bargain
with Visa, MasterCard, and the banks to make sure they do not have to
pay an increasingly large fee every time a person uses a debit card?
The answer is they have no power to bargain at all. Not at all. So
the retailer, the merchant, ends up accepting the debit card, swiping
the debit card, paying for the transaction, and then paying a fee, to
the point where one would ask: Well, how much of a fee is it?
The average debit card fee, found by the recent study of the Federal
Reserve, is about 40 cents a transaction. Now, 40 cents may not sound
like much if someone is buying a television--of course, though, it is
going to be a percentage fee--but think about 40 cents if a person
standing in front of you in line at the airport is buying a package of
bubble gum. That 40 cents is all the profit that retailer could ever
expect, and it is going right out the window. In fact, they are losing
money on the transaction because of the debit card.
So for years retailers and merchants, restaurants, convenience
stores, hotels, charities, universities, went to Visa and MasterCard
and said: You cannot keep just raising this fee. It is not fair to us.
You are not justifying it in terms of the costs of doing business, and
we are paying more and more out of each transaction, even though the
cost has not gone up.
Basically, Visa and MasterCard told them: Go take a hike. We are
going to charge what we want to charge. Take
[[Page S2716]]
it or leave it, buddy. If you do not want to take plastic, that is your
business. Try to do business without it. You cannot.
So retailers and merchants were on the losing end of this
conversation. So they came to me and said: Is there a way to do a study
on this issue and determine what is fair? So a few years ago I joined
with Senator Bond of Missouri, and the two of us, on the credit card
reform bill, asked for a public Fed study on fee and cost information.
Well, it turned out the banking industry did not want any study at all.
They killed our amendment for a Fed study and told people--all the
people in the Senate, Democrats and Republicans--vote against even a
study of the swipe fee, the debit card interchange fee.
So we ended up empty handed. The day came last year when we revisited
the issue. This time I came to the floor with an amendment and said:
Here is what I would like to do. I would like to give to the Federal
Reserve the power to promulgate a rule which says the fee charged for
the use of a debit card is going to be reasonable and proportional to
the costs incurred by the bank in processing this transaction. We are
going to put in a factor for fraud. If there is something they need to
add to take care of fraud, add it in. We went a step further. We said
this is not going to apply to every bank and credit union that issues a
debit card. We are going to exempt the overwhelming majority of
community banks and credit unions across America.
There are about 15,000 community banks and credit unions across the
United States---15,000. So we said: If your bank or credit union has a
valuation of less than $10 billion, you are not covered by this
reasonable and proportional law. You are exempt. At the end of the day,
it meant that about 100 banks across America were subject to this new
law and three credit unions. All the rest are exempt.
So you say: Well, Durbin, if you exempted all of these banks and
credit unions, almost 15,000 of them, and you only affected about 100
of them, how can this have any impact? Well, it turns out, of the
largest banks in America, three of the big ones--that would be Chase,
Wells Fargo, and Bank of America--really comprise nearly half of all
the debit card transactions in the country. Some say even more, 60
percent or even more. So by just making this a law that applies to the
largest banks, we are affecting the majority of debit card
transactions, and we are establishing a reasonable and proportional fee
for what the transaction is.
So the retailer and merchant, the person running the mom-and-pop
store or the person running a big box store is going to get fair
treatment in terms of how much is charged.
So you say to yourself: Well, how much are they charging now? The
Federal Reserve estimates they are charging about 40 cents a
transaction, and the actual cost to the bank and the credit card
company is about 10 cents. They are charging four times as much as they
should on each transaction.
How much money is it worth to the banks? The estimates range from
$1.3 to $1.7 billion a month--a month. Now, these banks, the big banks
that I am addressing with this law, they are not having little
collections outside the bank to keep themselves in business. They are
bringing in quite a bit of money. They are very profitable, and to say
that they should have a reasonable charge for retailers and merchants
across America, small businesses and large businesses alike, I do not
think is unreasonable. Remember, we exempted the community banks. We
exempted the credit unions. It is only the big ones that are going to
be affected by this.
Well, one would think I had done the worst thing in the world to
these banks and credit card companies. They have unleashed, with the
greatest fury they can possibly put together on Wall Street, this
attack against the Durbin amendment. They are sending out letters--
Chase is--to all of the people who have debit card accounts and credit
card accounts saying if this Durbin amendment goes through, we are
going to charge extra fees here and extra fees there.
Well, at the end of the day, that is the threat that we always hear
from them. The fact is, since they are virtual monopolies in their
business, they are increasing their fee charges regularly. People
across America know it. Every time we put in a reform, they race to
raise their interest rates and race to raise their penalties. They give
these ``free'' checking accounts loaded with penalties if you stumble
and do not pay on the exact day or whatever it happens to be.
So it has become quite a battle. It is a battle between Visa,
MasterCard, and the biggest banks in America versus the retailers and
merchants of America. They are both engaged. Now, the retailers and
merchants cannot hold a candle to the big banks and credit card
companies when it comes to their investment in this fight. But they are
trying valiantly, and we are organizing small businesses across the
United States--in Illinois, West Virginia, all over the place--to step
up and say: Come on. This is an important part of business.
Now, I ran into one of my colleagues on the Senate floor, and she
said: What I am worried about is even if you reduce the fee charged to
the retailer for using the debit card, how is that going to help the
customer? How is that going to translate into anything more than
profits for the business?
Well, Mr. President, in your family background, you have been
involved in business. If you have a competitor across the street,
whether it is a gas station, a drug store, a grocery store, a
restaurant, you know your price competition is an important part of
whether a person chooses your store over the other store. So when you
give the owner of the store a break on the fee that is being charged by
the credit card companies and banks, then you give them an opportunity
to engage in more price competition.
But what about Walmart? This is the monster of retailers in terms of
size, about 10 percent of all of the sales in America. I can tell you,
even with Walmart, Target is looking over its shoulder. It is watching
the prices of goods and deciding whether it can be competitive. So
there is competition at this level.
If we give retailers a break when it comes to the amount they have to
pay to the banks and credit card companies, I think it is going to end
up in consumer benefits. The consumer organizations, the major ones in
this town, support what I have done. They aren't supporting the
position of the big banks and credit card companies.
One of the arguments that comes down is interesting. The lion's share
of the argument against my amendment is not coming from the people
directly affected by it. We are not hearing as much in Washington from
those big banks on Wall Street or the credit card companies, and they
are the ones most affected by it. Why? They don't have much credibility
around here. These are the folks who came filing in for a bailout when
they made some pretty bad decisions and got billions of dollars from
the Federal Government to bail them out, and then, of course, they
turned around and gave bonuses and all sorts of high-level compensation
to their officers. So they are not the most popular crowd on Capitol
Hill. So they have brought in surrogates to argue their position, and
the surrogates, as my colleagues know, are the small banks and small
credit unions saying the Durbin amendment is terrible.
The first thing we have to say to them is: You are exempt. You are
not covered by the Durbin amendment. If you have $10 billion in assets
or less, you are not covered. Still, they argue, at the end of the day,
we think this might hurt us.
I have taken an extra step, beyond the law, to try to deal with some
of their concerns because I value these community banks and credit
unions. I worry they have now become part of the banking industry--in
capital letters--instead of what they were traditionally: our
neighborhood banks, our small town banks, our local credit unions. They
have now become part of this big banking industry thing. I don't think
it is healthy for them, and I don't think it is healthy for the economy
or for consumers. So what I did was go to the merchants coalition on my
side of this issue, the retailers, and ask them to put out a statement
of policy when it comes to whether they are going to discriminate on
the card that is presented.
Let me be more specific. If you are running a restaurant in Wheeling,
WV,
[[Page S2717]]
and somebody walks through the door and puts a debit card--these are
all debit cards--puts a debit card down to pay for the meal, will your
restaurant take a close look and say: Oh, that is a community bank with
a higher interchange fee than it might be with a card from Chase Bank,
for example? That is one of the concerns expressed by the community
banks and credit unions. Even though you exempted us, all these
retailers could discriminate against us because our swipe fee is higher
than it might be coming out of Chase.
We ended up with a letter--an important letter--which I have shared
with every one of my colleagues, and it is a letter from the Merchants
Payment Coalition, which I ask unanimous consent to have printed in the
Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
Merchants Payments Coalition,
Washington, DC, May 2, 2011.
Hon. Dick Durbin,
Majority Whip, U.S. Senate,
Washington, DC.
Dear Senator Durbin: We understand that some in the
financial services industry are claiming that the Durbin
Amendment exemption from interchange ``swipe fee'' regulation
for financial institutions with assets under $10 billion will
not be effective in practice because merchants will
discriminate against debit cards with higher swipe fees. On
behalf of the undersigned trade associations, and the tens of
thousands of merchants and retail locations we represent, we
are writing to make clear that we have no contractual or
practical ability to treat debit cards issued by small
financial institutions or credit unions differently than
those issued by large institutions. Furthermore, our member
companies are committed to customer service and it is not in
their interest to discriminate against debit cards that so
many customers carry.
Currently, merchants are subject to Visa and MasterCard
network rules that require us to accept all Visa and/or
MasterCard debit, regardless of which bank or credit union
issues the card. This is called the Honor All Cards rule and
we risk the threat of $5,000 per day fines--or higher--if we
break this rule, so we assure you that merchants have no
intention of violating this term of brand acceptance. These
rules also prevent merchants from pricing goods differently
based upon the financial institution that issued the card.
Additionally, even if these rules were not in place,
merchants have no practical ability at the point-of-sale to
distinguish between big bank and small bank cards, nor the
swipe fee rates associated with those cards. Indeed, in many
if not most retail environments, employees never see the face
of the card the customer is using: the customers swipe their
cards themselves.
Lastly, even if merchants could differentiate between card
issuers, there are no market or economic incentives to
discriminate against mid-sized and smaller financial
institutions' cards. If a customer wants to pay with a card,
merchants will let them use that card because the retail
industry is fundamentally all about competing to deliver
value and customer service. If merchants didn't accept the
card, they would risk losing the sale and losing the
customer; a risk very few in the competitive retail industry
are willing to take. Additionally, most consumers only have
one debit card in their wallet. We would absolutely prefer
they pay with that debit card, rather than with a credit
card, because while debit card per transaction rates have
grown exponentially over the past several years, credit card
swipe fees are far higher and continue to be a significantly
more costly burden on businesses of all sizes.
We appreciate the opportunity to set the record straight
regarding the many misrepresentations being made about the
Durbin Amendment, and you have our commitment that the retail
community across the nation will do its part to help ensure
that the exemption of financial institutions with less than
$10 billion in assets from the swipe fee reforms on debit
cards will work in the marketplace.
Sincerely,
American Beverage Licensees; Coalition of Franchisee
Associations; Food Marketing Institute; Interactive
Travel Services Association; International Franchise
Association; National Association of College Stores;
National Association of Community Pharmacists; National
Association of Convenience Stores; National Association
of Shell Marketers; National Association of Theatre
Owners; National Association of Truck Stop Operators;
National Council of Chain Restaurants; National
Franchisee Association; National Grocers Association;
National Restaurant Association; National Retail
Federation; National Small Business Association;
Petroleum Marketers Association of America; Retail
Industry Leaders Association; Society of Independent
Gasoline Marketers of America.
Mr. DURBIN. Thank you, Mr. President. Let me quote a few words from
it. This is a letter to me, dated May 2:
Dear Senator Durbin:
We understand that some in the financial services industry
are claiming that the Durbin Amendment exemption from
interchange ``swipe fee'' regulation for financial
institutions with assets under $10 billion will not be
effective in practice because merchants will discriminate
against debit cards with higher swipe fees. On behalf of the
undersigned trade associations, and the tens of thousands of
merchants and retail locations we represent, we are writing
to make clear that we have no contractual or practical
ability to treat debit cards issued by small financial
institutions or credit unions differently than those issued
by large institutions. Furthermore, our member companies are
committed to customer service and it is not in their interest
to discriminate against debit cards that so many customers
carry.
Currently, merchants are subject to Visa and MasterCard
network rules that require us to accept all Visa and/or
MasterCard debit, regardless of which bank or credit union
issues the card. This is called the Honor All Cards rule and
we risk the threat of $5,000 per day fines--or higher--if we
break this rule, so we assure you that merchants have no
intention of violating this term of brand acceptance. These
rules also prevent merchants from pricing goods differently
based on the financial institution that issued the card.
The No. 1 complaint of community banks and credit unions about
discrimination against their cards is addressed directly by this
letter. I have made this a part of the Record. It is being sent to
every Member of the Senate.
There is a second part of this argument. The question is whether Visa
and MasterCard, the networks, will continue to allow the community
banks and credit unions to charge a higher interchange fee than the big
banks. Under our law, there is no reason to change it. So I am
challenging Visa and MasterCard and these card networks to state
clearly and unequivocally, as this letter has stated, that they will
not discriminate against these smaller banks, community banks, and
credit unions. The merchants have come forward as a matter of record,
and it has been put in the Congressional Record this day, to say there
will be no discrimination. At the end of the day, if Visa and
MasterCard will make the same promise of no discrimination, then
ultimately there is no disadvantage to the community banks and credit
unions. None. Now the burden is on the big credit card networks to step
up to the plate.
I am sending a letter today to the president and CEO of the Illinois
Bankers Association, the Illinois Credit Union League and the Community
Bankers Association of Illinois and we are going to send it to their
national affiliates as well, sending them a copy of this merchants
letter so they can no longer make the claim that they are going to be
victims of discrimination by merchants and retailers and asking them to
now step up and join us in challenging Visa and MasterCard and the
major card networks. That, to me, resolves the most fundamental issue
that has been brought to the Members of the Senate. They can no longer
claim that these retailers are going to discriminate against them. As a
matter of record, they will not.
I think it is important for us to change this system, and I think it
is important for these virtual monopolies of Visa and MasterCard to be
held accountable. I think what we have done in passing this law and
giving the Federal Reserve the authority to establish this rule is the
right thing to do.
Now there is a big effort afoot to stop us. The Presiding Officer
knows that. They are lobbying such as I have never seen before on
Capitol Hill. You would think there was $1 billion a month at stake,
and there is. They are determined to stop the Federal Reserve from
issuing a rule which says that retailers and merchants across America
will be treated fairly. They are going to stop them, if they can, and I
am going to fight them all the way. I am hoping my colleagues who
joined me in this vote and those who share my feelings about small
business across America will stand with me.
I know the alternative. The largest banks in America and the credit
card companies have a lot of friends, and they are very powerful, but I
think we ought to give the Federal Reserve the chance to issue
reasonable final rules.
In fact, talk to any bank across the country, and they are going to
tell you that the current system is working just fine. They don't want
reform. They don't want any change. They
[[Page S2718]]
want to keep it as is. It is worth billions of dollars to the major
banks to keep this charge as is, at the expense of businesses across
America.
I favor transparency and I favor competition and I wish we didn't
have to bring the Federal Reserve into this conversation. But we looked
for a neutral regulatory agency that would establish a reasonable and
impartial fee, promulgate a rule, issue it after a public comment
period and implement it, and that is what we are striving to do.
The CEO of JPMorgan Chase, who is a friend of mine--or at least he
used to be--Jamie Dimon, has called interchange reform downright
idiotic. He spent a good portion of his recent annual shareholder
letter criticizing this reform. Chase has also sent a letter to its
customers warning about my amendment, and Chase is constantly
threatening to raise fees on its customers unless they stop the Durbin
amendment. A few weeks ago, I sent Jamie Dimon a letter and responded
to some of his criticisms. I ask unanimous consent that the letter be
printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
U.S. Senate,
Washington, DC, April 12, 2011.
Jamie Dimon,
Chief Executive Officer and President, JPMorgan Chase & Co.,
New York, NY.
Dear Mr. Dimon: In your recent annual letter to your
company's shareholders, you wrote a lengthy and dismissive
critique of the debit interchange fee reform legislation that
I drafted and that Congress enacted last year. You have also
been quoted describing my amendment as ``counterproductive,''
``price fixing at its worst,'' and ``downright idiotic.'' I
am compelled to respond, and I ask that you share this
response with your shareholders as well as your customers.
Clearly, debit interchange reform has displeased many in
the financial services industry. Your industry is used to
getting its way with many members of Congress and with your
regulators, and my amendment and the Federal Reserve's draft
regulations were not written the way you wanted. But that
does not mean they were written poorly or that the process
that created them was flawed. To the contrary, interchange
reform will carefully but firmly rein in the fee collusion
that your bank and thousands of other banks currently engage
in through Visa and MasterCard. The wisdom of this reform is
confirmed by the irrationality of the arguments that your
industry raises against it--arguments that are based upon
misrepresentations and threats rather than evidence or logic.
The American people deserve to know the real story about
the interchange fee system and the ways that banks in
general--and Chase in particular--have abused that system. I
have said and written much on this topic already, but I will
respond to five of your specific criticisms below.
1. Your letter claims that my reform amendment ``is an
example of a policy that has little basis in fact or
analysis.'' In fact, the amendment was drafted based upon
years of Congressional hearings, Government Accountability
Office reports, academic articles, and published studies by
the Federal Reserve's economists and payment system experts.
These analyses showed that the debit interchange system is
uncompetitive, inefficient, and harmful to consumers. Your
industry often acts like these analyses do not exist, so I
will explain what they reveal.
The debit interchange system is not a properly functioning
market. For years, card-issuing banks like Chase have agreed
to let the Visa and MasterCard duopoly fix the interchange
fee rates that banks receive from merchants each time a debit
card is swiped. The banks get the fees but they do not set
the fees. This system of price-fixing by Visa and MasterCard
on behalf of thousands of banks has gone entirely
unregulated.
There are two core problems with Visa and MasterCard's
fixing of interchange rates. First, centralized rate-fixing
does not give card-issuing banks incentive to manage their
operational and fraud costs efficiently. This is because all
banks in the network are guaranteed the same network-fixed
interchange rate whether they are efficient or inefficient.
Competition is absent and inefficiency is subsidized when
fees are set in this manner.
Second, Visa and MasterCard have incentive to constantly
increase interchange rates and there is no countervailing
market force to temper these fee increases. Visa and
MasterCard want as many of their debit cards to be swiped as
possible because they are paid a network fee by merchants
each time a card is swiped. By raising interchange rates,
Visa and MasterCard can entice banks to issue more of their
cards. Because Visa and MasterCard have enormous market power
and control around 80 percent of the debit cards in
consumers' wallets, merchants cannot realistically say no to
accepting Visa and MasterCard and have no leverage to
negotiate fee rates with them. There is no naturally-
occurring market force in today's interchange system that
would ever lead rates to go down.
So merchants are stuck with ever-rising debit interchange
fees that add up to more than $16 billion each year. These
fees not only affect merchants, but also universities,
charities, government agencies and all others who accepts
debit cards as payment. The fees end up getting passed on to
consumers in the form of higher retail prices for groceries
and gas. Consumers, and particularly unbanked consumers,
ultimately bear the cost of subsidizing the interchange
system.
We owe it to our nation's consumers and businesses to
ensure that the interchange system is efficient, transparent,
and subject to competitive market forces. Studies have shown
that Americans pay the highest debit interchange rates in the
world, and that these rates have continued to increase in
recent years. The Federal Reserve has also found that the
high interchange rates charged today far exceed what it
actually costs to conduct a debit transaction. Nearly every
other industrialized country has established reasonable
regulation over their debit systems, and these countries have
achieved improved efficiency, lower fraud, and consumer
benefits. The time has come for reasonable reform of the
dysfunctional U.S. debit interchange system, and my amendment
will make that reform a reality.
2. You say that ``it's a terrible mistake and also bad
policy for the government to get involved in price fixing.''
Of course, my amendment does not create price fixing--it
constrains the price fixing that Visa and MasterCard
currently perform on banks' behalf. Visa and MasterCard
cannot simply be trusted to fix interchange prices in a way
that is fair for all participants in the debit card system.
They have not proven worthy of that trust.
Last year Congress decided that there should be reasonable
regulatory constraints placed on Visa and MasterCard to
ensure that they cannot use their market dominance to funnel
excessive interchange fees to the nation's biggest banks. A
strong bipartisan majority supported my amendment, which said
that if Visa and MasterCard are going to fix fee rates on
behalf of banks with over $10 billion in assets, those rates
must be reasonable and proportional to the cost of processing
the transaction. It is important to make clear that if Chase
wants to set and charge its own fees in a competitive market
environment, the amendment does not regulate those fees. The
only regulated fees are those fees that banks let card
networks fix on their behalf.
3. You criticize the law Congress passed because it does
not consider ``the cost of fraud.'' Your comment highlights
how the current interchange system, which supposedly does
consider the cost of fraud, creates exactly the wrong
incentives when it comes to fraud prevention. Fraud rates are
far lower for PIN debit transactions than for signature debit
transactions, but Visa and MasterCard set higher interchange
fees for signature debit than for PIN ostensibly to cover the
higher cost of fraud. Banks now urge cardholders to pay with
signature in order to get the higher fees. For example, on
April 21, 2010, the American Banker reported that your own
bank sent a mailing to your debit customers that strongly
suggested they should ``always select'' signature.
Chase's practice of steering American cardholders toward
fraud-prone signature debit stands in stark contrast to
Chase's practices in Canada. The Chase Canada website
indicates that ``chip and PIN technology will become
available for all Chase Canada MasterCard and Visa cards in
2011.'' Your Canadian-based subsidiary Chase Paymentech
Solutions says on its website that chip and PIN technology
provides ``Enhanced Security and Fraud Reduction--Chip
technology is virtually impossible to copy and combining its
use with a PIN helps reduce lost, stolen or counterfeit
transactions.'' It is frankly inexcusable that your bank
would urge your American customers to ``always select'' a
fraud-prone technology while you provide your Canadian
customers with technology that enhances security and reduces
fraud.
In contrast to the current U.S. interchange system which
rewards banks for promoting fraud-prone signature debit, my
amendment will allow interchange fee increases only to those
banks that successfully prevent fraud. The Federal Reserve
can implement this in its final rulemaking by setting target
fraud prevention metrics and allowing increased interchange
for banks that meet those targets.
4. You say that Chase needs debit interchange fees to pay
for the ``fixed costs of servicing checking accounts and
debit cards'' such as ``printing and mailing of the cards,''
``operational and call center support to service the cards,''
and ``the costs of ATMs and branches.'' Here you are using
the old financial industry trick of first conflating the cost
of conducting debit card transactions with the cost of
offering other checking account-related services, and then
arguing that network-fixed debit interchange rates should be
used to cover this whole basket of costs. It is a clever
argument that aims to justify Visa's and MasterCard's
exorbitant price-fixed rates, but the shortcomings of this
argument are evident.
The costs you cite in your letter are costs which banks
should be incentivized to manage efficiently, and allowing
Visa to fix interchange fee rates across all its member banks
to supposedly cover these costs is a recipe for inefficiency
and excess. Card network companies like Visa are not
positioned to know what the appropriate level of cost is
[[Page S2719]]
for operating ``ATMs and branches,'' nor are they equipped to
determine how much of a particular bank's ``printing,''
``mailing,'' ``operational'' and ``call center'' costs are
attributable to debit cards instead of ATM cards or credit
cards. Further, Visa has no way of knowing if a particular
bank is using debit interchange revenue not to cover
legitimate costs but instead for rewards, ads, profit, or
executive bonuses. Indeed, because Visa itself profits by
incentivizing banks to issue more and more of its cards, Visa
has every incentive to inflate the interchange fees it fixes
to levels that compensate banks far in excess of their costs.
In order to correct these incentives for inefficiency and
excess, my amendment limits network interchange price-fixing
on behalf of the 3 biggest banks to an amount that is
reasonable and proportional to the costs that are necessary
to authorize, clear and settle a particular debit transaction
over the network's wires.
Also, your claim that interchange fees must be high enough
to cover all checking account-related costs is undermined by
the fact that banks also charge many other high consumer fees
under the premise of covering those exact same costs. Banks
like Chase charge consumers many fees for maintaining and
accessing funds in their checking accounts--monthly fees,
overdraft fees, failed payment fees, ATM withdrawal fees,
failure to maintain a minimum balance fees, account closing
fees, and more. Bank revenues from these consumer fees have
not gone down in recent years as interchange fee revenues
have gone up; to the contrary, bank revenues from consumer
fees have also reached record highs. I would draw your
attention to the November 12, 2008, Wall Street Journal
article entitled ``Banks Boost Customer Fees to Record
Highs'' and the July 1, 2009, New York Times article entitled
``Bank Fees Rise as Lenders Try to Offset Losses,'' both of
which discuss your bank and other banks' efforts to raise
consumer fees long before my amendment was ever written.
5. You say that the amendment ``potentially will harm
consumers'' because ``banks will be forced to lose money on
debit interchange transactions and likely will compensate by
increasing fees in some way for deposit customers.'' This
threat defies both facts and logic.
First, there is no evidence that banks cannot continue to
offer debit cards profitably with reduced interchange. As
Andrew Martin explained in the excellent January 4, 2010, New
York Times article entitled ``How Visa, Using Card Fees,
Dominates a Market,'' up through the early 1990s banks used
to offer debit cards even though they received no interchange
fees. In fact, many banks used to pay merchants for accepting
debit cards, because debit cards saved money for banks when
compared to the banks' costs of processing paper checks. The
current high-fee debit interchange system in this country
only developed because Visa entered into and took over the
debit market the mid-1990s through an antitrust violation,
and Visa then imported credit card-type interchange fees into
the debit space. Studies have shown that many other countries
enjoy vibrant debit systems with interchange fees strictly
regulated or prohibited entirely. In short, past experience
in this country and present examples in other countries
demonstrate that banks like Chase can easily continue to
offer debit card services without the excessive subsidy of
high interchange fees.
Second, if Chase follows through on threats to increase
consumer fees (beyond those increases you have already made
in recent years), market competition would suggest that many
of your deposit customers would take their business
elsewhere. In fact, many of those customers would likely take
their business to the small banks and credit unions who are
exempted from my amendment's interchange fee regulation and
for whom Visa and other debit networks have already agreed to
set a higher tier of interchange rates. And for those who
continue to speculate that my amendment will hurt small banks
and credit unions, I recommend they read Simon Johnson's
excellent analysis in the April 7 New York Times entitled
``Big Banks Have a Powerful New Opponent.''
In conclusion, I recognize that Chase will likely see
decreased revenue from interchange reform, but I urge you to
keep some perspective. Last year Chase had $17.4 billion in
profits--up 48 percent from the previous year--and a 15
percent profit margin. Your own personal compensation
``jumped nearly 1,500 percent to $20.8 million in 2010''
according to Reuters. In contrast, middle-class American
families are struggling to get by in a tough economy--an
economy that went south because of the banking industry's
unregulated excesses.
There is no need for you to threaten your customers with
higher fees when you and your bank are already making money
hand-over-fist. And there is no need to make such threats in
response to reform that simply tries to spare consumers from
bearing the cost of interchange fees that are anticompetitive
and unreasonably high.
Interchange reform is necessary and it is long overdue.
Right now the Fed is working diligently to craft a set of
final regulations that will reflect the comprehensive
information it has gathered and that will respond to the
valuable comments it has received. In the coming weeks I am
confident the Fed will produce a reasonable set of reforms
that will enhance the efficiency, competitiveness and
fairness of the debit system. This will neither be
``counterproductive'' nor ``idiotic.'' It will be good news
for all Americans.
Sincerely,
Richard J. Durbin,
United States Senator.
Mr. DURBIN. Thank you, Mr. President. I haven't had a reply yet from
Mr. Dimon. He called me. I called him back. That seems to be the end of
our exchange. But I would like to hear his response. I encourage him to
share my letter with the same shareholders and customers to whom he has
written. After all, in his shareholder letter, Mr. Dimon said he wanted
``analysis in the full light of day'' of the Durbin amendment, so I
figured he would want his audience to be informed on my position. I
don't think Chase has done that yet. I hope they will.
I know the banking industry prefers for the giant Wall Street banks
to stay in the background when it comes to this fight because they are
not that popular. Estimates indicate that about half of all debit swipe
fees go to just 10 big banks and the Big Three, Bank of America, Chase,
and Wells Fargo, make the most of all, well over $1 billion a year
each. But the banking industry knows the public isn't happy with big
banks, so the industry is using small banks and credit unions as their
public face in this battle. Industry argues that even though my
amendment exempts all but the largest 1 percent of banks from fee
regulation, the exemption will not work and small banks are going to
get hurt. Well, this letter makes it clear that when it comes to
retailers and merchants, there will not be any pain inflicted. They
are, in fact, exempt under the law and they will be exempt in practice.
As I said, I received a letter from 20 of the Nation's largest retail
associations that reaffirms what I just said. I think the letter is
compelling. In this letter, these merchant groups make it clear they
don't have the contractual authority, the practical ability or the
economic incentive to discriminate against small bank or credit union
debit cards. They point out that Visa and MasterCard contracts impose
strong penalties on them even if they try. Second, they point out that
in many, if not most, retail environments, the merchant doesn't have
the practical ability to distinguish between a small bank or a large
bank card at the point of sale.
I had Wendy Chronister, whose family owns a chain of gas stations in
downstate Illinois, come to my office and talk about this. I have known
her mom and dad a long time, and Wendy is running the business and
running it well. She said: Senator, for goodness' sake, when they put
the plastic on the counter we take it. We need the sales. We are not
going to argue with them about who issued the credit card or debit
card. That just stands to reason. They are not going to ask them to put
their debit cards away when they come to a cash register. They will
lose sales and customers if they do it.
Finally, the merchants make the observation that most customers only
have one debit card, so if you want to make a sale, they are going to
take that debit card.
What I have tried to do with this letter is to show that those on my
side of this debate--the small businesses, the retail merchants,
convenience stores, hotels, and restaurants across America--are trying
to be reasonable. Had the credit card companies and major banks been
reasonable on this issue, I never would have introduced this amendment.
They refuse--refuse--to bargain with the retailers and merchants. They
said it was a ``take it or leave it,'' and they did it in the obscurity
of retail contracts and regulations which are almost impossible to work
through.
I think those who are asking for a delay and study of this issue
should be called out for what they are asking. Every month they delay
means customers and consumers across America will pay over $1 billion
more in these fees on debit cards--money taken away from retailers,
taken away from small business, and taken away from our economy. When
these small businesses have the advantage they can get under the Durbin
amendment, they are going to be able to be more profitable, expand
their businesses, and hire more people. How many times have we heard a
speech on the floor that the key to economic recovery in America is
small business. If you truly believe, then you cannot vote for this
2\1/2\-year delay and study of this issue, if you truly believe
[[Page S2720]]
in small business. I think the issue is very clear.
I urge my colleagues not to fall for this game the banks and card
companies are playing. Don't let them delay and derail the swipe fee
reform consumers need so badly. The Senate has already voted to
establish a process for interchange reform. We should let that process
continue and we should let the Federal Reserve issue their rules, which
they are planning to do in just a matter of weeks, and I think at that
time we will see that there is a reasonable way to deal with this that
doesn't create a disadvantage for community banks and credit unions.
(Mr. CARDIN assumed the chair.)
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