[Congressional Record (Bound Edition), Volume 157 (2011), Part 5]
[Senate]
[Pages 7383-7386]
[From the U.S. Government Publishing Office, www.gpo.gov]




                         INTERCHANGE FEE REFORM

  Mr. DURBIN. Mr. President, I rise to speak about the effect of 
interchange fee reform on small banks and credit unions.
  Interchange fees are not well known by most Americans. They are known 
as swipe fees or interchange fees, and they reflect the amount of money 
that is paid to a bank each time you use that bank's credit or debit 
card. You do not know it as a consumer that you are being charged extra 
when you buy something in a store, but prices are higher because that 
fee is being paid to the bank every time you swipe the card.
  Who establishes that fee? You would assume the bank does, but it is 
not so. The fee that is charged every time you swipe a card is 
established by the credit card companies. The big giants Visa and 
MasterCard decide exactly how much that fee will be. And you ask 
yourself: Well then, what voice does a merchant or a retailer have in 
how much that fee is going to be on each transaction?
  And the answer is virtually no voice. It is a price-fixing mechanism 
where Visa and MasterCard, the major credit card companies, establish 
the interchange or swipe fee to be paid to each bank, credit union, or 
financial institution that issues the credit or debit card.
  It is a lot of money. Each month in America--just on debit cards 
now--each month in America, they collect about $1.3 billion in 
transactions where people use debit cards. Now, remember, a debit card 
is like your checking account. You are drawing money directly out of 
your checking account to pay the merchant where you are doing business. 
It is not like a credit card where, in fact, they have to collect the 
money from you later. This is a situation where the money is taken 
directly out of your bank account. You would think, as with the use of 
checks in the old economy, this would be a low-cost transaction. And it 
should be.
  It used to be banks would process checks written to pay a restaurant 
or department store, charging pennies on the transaction--not a 
percentage of the transaction.
  Well, the Federal Reserve took a look at what is being charged for 
debit cards, where the money comes right out of your account. It turns 
out the average is about 40 cents a transaction. We asked them: Well, 
what is the reasonable amount that should be charged if you are going 
to take into account exactly how much it costs a bank to process a 
debit card transaction? They said it was closer to 10 or 12 cents.
  So merchants and retailers across America, on every single 
transaction involving a debit card, are paying an inflated amount of 
swipe fee or interchange fee, and most of those fees go to the largest 
banks in America. You see, almost 60 percent of all the debit card 
transactions really focus on three major banks. That would be Bank of 
America, Wells Fargo, and Chase. So there is a lot of money to be made 
in this business as long as they are using the debit cards and getting 
the swipe fees.
  We put in a new law last year which said the Federal Reserve should 
establish what is a reasonable and proportional amount to be charged 
for the

[[Page 7384]]

interchange fee for debit cards. As I told you, the initial 
investigation suggested it is around 10 cents; and the actual charge is 
40 cents.
  Now, these banks that are about to lose these major interchange fee 
receipts are very upset about it because as of July 21, the new law 
will go into effect which will bring the fee down to a reasonable and 
proportional level. So they are fighting this with tooth and nail. 
Today, I was at a breakfast here on Capitol Hill, and a group of 
lobbyists were there, and one came up to me and said: Durbin, your 
fight on the interchange fee has more lobbyists working in Washington 
than any other issue, on both sides of the issue. I said: I understand 
that. That was not my goal.
  My goal is really to help the merchants, retailers, and consumers. 
You see, when retailers are in a competitive atmosphere--if it is one 
gas station across the street from another--then saving 30 cents on a 
transaction can really be part of a decision by a retailer to lower 
prices to become more price competitive in a competitive free market 
atmosphere. That is what I am looking for. I want the consumers to be 
the ultimate winners. I want retailers and merchants to be treated 
fairly.
  Incidentally, for the record, what is the debit card interchange fee 
charged by Visa- and MasterCard-issuing banks in Canada? It is zero--
zero. There is no interchange fee in Canada because the government 
there said: We are not going to stand for this. You are really ripping 
off merchants, retailers, and consumers. We will not let you do it.
  The same thing happened in Europe. They brought down the interchange 
fees to dramatically lower levels.
  Well, in the United States the battle is on. If you had to pick a 
group with the lowest level of credibility when it comes to this 
institution or Congress--maybe even the American people--I guess next 
to politicians, you would have to say big banks, particularly the big 
banks that were bailed out by our Federal Government when they made a 
mess of things a few years back. So the big banks that issued the debit 
cards cannot come in here and lobby for themselves. The credit card 
companies themselves do not enjoy a very good reputation here either. 
Consumers know what a tough time it is to pay off those bills and the 
fine print they have to deal with in their contracts.
  So what these groups have done--the credit card companies and big 
banks--is to enlist small banks and credit unions to come and appeal to 
us, saying: We are in your city and community and the Durbin amendment 
can hurt us. What they do not say is the law we passed specifically 
exempts--specifically exempts--all banks and credit unions with a 
valuation lower than $10 billion.
  So of the 7,000 or 8,000 credit unions in America, how many have a 
valuation over $10 billion? Three. How many banks out of the 7,000 or 
8,000 have a valuation over $10 billion? Less than 100. So we are 
talking about 100 institutions that will be affected by this law; and 
the others are exempt.
  I rise today to speak about the effect of this interchange fee reform 
on these small banks and credit unions. Recently, the banking industry 
and some bank regulators have claimed that the small issuer exemption--
the $10 billion exemption--in last year's reform law may not work. The 
banking industry people said there are market forces that could 
undermine it. They are wrong. I respect their right to speculate on 
what might happen when reform takes place. But in response, I point out 
they simply have not provided any evidence to back up their claims.
  In fact, all the hard evidence about the interchange system leads to 
the opposite conclusion: that interchange reform will give small banks 
and credit unions competitive advantages against the bigger banks.
  This is not just my conclusion. It is the conclusion of prominent 
economists and industry analysts such as Andrew Kahr, who the 
``Frontline'' program profiled as one of the creators of the modern 
card industry, the plastic card industry, and former IMF Chief 
Economist Simon Johnson. In a recent online survey, even 60 percent of 
the American Banker's subscription-paying readers agreed that 
interchange reform will help small banks.
  So the Members who come to the floor and say: Oh, this terrible rule 
change that exempts banks with less than $10 billion in assets is going 
to hurt them, they are not only wrong on the facts, they are wrong in 
public opinion.
  The key point to remember is that the debit interchange system is not 
a properly functioning market. The interchange system has been designed 
in a way so normal market forces do not apply. No transparency. No 
competition.
  Last year, a bipartisan majority of my colleagues recognized reform 
needed to take place, and after years of studies and hearings, it 
became clear the interchange system was not going to cure itself. It 
was broken and unfair. The system was structured to avoid normal 
competitive market forces.
  Andrew Martin of the New York Times summarized the debit interchange 
system in his January 2010 expose. This is what he said:

       Competition, of course, usually forces prices lower. But 
     for payment networks like Visa and MasterCard, competition in 
     the card business is more about winning over banks that 
     actually issue the cards than consumers who use them.
       Visa and MasterCard set the fees merchants must pay the 
     cardholder's bank, and higher fees mean higher profits for 
     banks, even if it means that merchants and retailers have to 
     shift the cost to consumers.

  Martin went on to quote Ronald Congemi. He is the former CEO of the 
Star debit network, who talked about his network's struggle to compete 
with Visa.
  Mr. Congemi said:

       What we witnessed was truly a perverse form of competition. 
     They competed on the basis of raising prices. What other 
     industry do you know that gets away with that?

  James Miller, former Director of OMB and Chairman of the Federal 
Trade Commission under President Ronald Reagan, elaborated on this in a 
recent op-ed article titled ``The Debit Card Market Is Broken and Needs 
Fixing Now.''
  Here is what he wrote:

       Under this dysfunctional system, the networks' competitive 
     incentives are to raise fees rather than to reduce them. One 
     network raises its fees higher than the other to encourage 
     banks to issue their cards. Then, soon after, the other 
     network raises its fees for the same reason. The result is 
     rapidly escalating fees. . . . This broken system would not 
     survive were it not for the fact that Visa and MasterCard 
     represent a combined 90 percent of the debit market. . . . 
     Merchants are powerless to negotiate and can't take their 
     business elsewhere, so they are left with no choice but to 
     pay.

  In short, interchange is an abnormal market which has no naturally 
occurring market force to hold fees in check. Visa and MasterCard want 
as many of their debit cards to be swiped as possible. That is how they 
make their money. By raising interchange rates that merchants must pay 
to banks, the card companies entice banks to issue more cards. 
Merchants cannot refuse Visa and MasterCard and they cannot negotiate 
with them, so they are stuck with what they have to pay.
  Last year, Congress decided we can no longer simply trust Visa and 
MasterCard to fix interchange fees however they wanted. We agreed there 
should be reasonable constraints placed on the card networks to prevent 
them from using their market dominance to set unreasonably high fees on 
behalf of the Nation's biggest banks. We passed a law that said, when 
Visa and MasterCard fix fee rates on behalf of banks with over $10 
billion in assets, the rates, according to the Federal Reserve, must be 
reasonable and proportional to the amount it actually costs the banks 
to process the transaction.
  Congress did not have the information about how much it actually cost 
big banks to process transactions. The banks always kept that secret, 
even from the Government Accountability Office. So we directed the 
Federal Reserve to gather the information on the cost and put out a 
rule implementing the reasonable proportional standard. That is under 
way right now. The Federal Reserve believes they will report this rule 
toward the first part of June, and it will go in effect July 21.
  When it comes to small issuers, we said they are exempt. This means 
Visa

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and MasterCard can continue to fix interchange rates on behalf of small 
banks and credit unions in an unregulated environment such as they do 
today. It is status quo for them.
  Some people might say: Why would you let the credit unions and small 
community banks charge a higher rate to swipe the debit card then the 
big banks? You can make the argument that if you are going to protect 
consumers at every level, it should affect every institution. But we 
specifically exempted community banks and credit unions with valuations 
below $10 billion, believing that those community banks deserve a break 
and a helping hand. They have not shown much gratitude for that 
exemption.
  Under the reform law, the only way small issuer interchange rates 
would change is if Visa and MasterCard decide to change them. And Visa 
and MasterCard have no incentive to voluntarily lower fee rates for 
small issuers. Remember, in the interchange market, Visa and MasterCard 
compete to raise fees to win bank business. They want to have high fees 
so banks issue more cards.
  If MasterCard decides to voluntarily lower its small bank rates, 
those banks are going to jump over and start issuing Visa cards. Does 
that make sense for either of those two credit card giants? Of course 
not.
  So why would the small-issuer exemption not work? This is where some 
creative arguments have come into play. I wish to respond to those 
arguments I have heard.
  First, claims have been made card networks will not maintain separate 
tiers of interchange rates for big, regulated issuers and smaller 
issuers. The facts do not support this. Visa, the dominant network, 
announced in January it would, in fact, operate a two-tiered system, 
exactly the opposite of what all the lobbyists for community banks and 
credit unions are saying on Capitol Hill. Visa has said they will 
respect the interchange fee exemption for the smaller issuers.
  Other smaller debit networks have made the same announcement. The 
only company that has not is MasterCard, and they are expected to. 
Sure, the law does not require them to operate two-tiered systems, but 
the card networks will lose money if they do not. If networks want 
small banks to issue their debit cards, they have to offer interchange 
rate levels the small banks will be attracted to.
  Second argument. The American Bankers Association claimed last week 
that ``having two different prices for exactly the same product--
transaction processing--is not sustainable in a competitive 
marketplace.''
  But there is clear evidence to the contrary. Look at the current 
credit card market. According to GAO, in 2009, Visa had 60 different 
credit card interchange prices; MasterCard had 243. A merchant that 
accepts Visa or MasterCard credit cards might be charged any number of 
different interchange fees, depending on whether it is a consumer or 
corporate card and the type of rewards program.
  If you have one of these frequent flyer cards, there may be a higher 
interchange fee that is going to be charged to the company--to the 
retailer--where they accept your card. From the merchant's standpoint, 
they treat it as exactly the same product. It is a credit card. But 
there are many different interchange prices that the merchant might get 
charged.
  Visa and MasterCard have sustained this multi-tiered pricing 
structure for years. The American Bankers Association has to know that. 
Why would they state exactly the opposite? Because their biggest banks 
are the ones that are going to lose out if the consumers prosper under 
this new change.
  How have they been able to sustain this multi-tiered system, these 
card companies? Remember, the interchange system is not a normal 
competitive market. In this case, card networks impose rules on every 
merchant that requires merchants to accept every card with a network 
logo on it. It means, if you are running a store in Springfield, IL, or 
Denver, CO, and someone shows up with a Visa card, you have signed a 
contact that says: I honor every card with Visa emblazoned on it put on 
the counter. Even though I pay a higher interchange fee as a retailer 
if it is a big rewards card with frequent flyer miles, all the rest of 
it, you have got to take it. That is the contract law that binds these 
merchants.
  Third, the American Bankers Association has claimed that if big bank 
debit fees are reduced, merchants will discriminate and find some way 
to get customers to use big bank debit cards instead of small issuer 
cards. If this claim were true, we would surely see some evidence of it 
today because of multi-tier pricing in credit card interchange.
  Let me give you an example. For supermarkets, a Visa credit card with 
no rewards program currently carries an interchange fee of 1.15 
percent, more than 1 percent of what you purchase. That is the 
interchange fee if it is a simple Visa credit card, no rewards. But a 
Visa Signature Preferred rewards credit card has an interchange fee of 
almost twice that, 2.1 percent.
  By the ABA's logic, supermarkets right now would be discriminating 
against rewards cards and steering customers to nonrewards cards--but 
there is no evidence of that discrimination anywhere. I challenge the 
American Bankers Association to put up or shut up. If you have some 
evidence to the contrary, let's see it. If you do not, retract the 
specious claim.
  Why don't merchants discriminate? The merchant community sent me a 
letter a few weeks ago explaining in detail how they lack the 
contractual authority, the practical ability, and the economic 
incentive to discriminate. I also wish to add a commonsense point. Most 
Americans only have one debit card. If a merchant tells a customer not 
to use his debit card because it was issued by a small bank, the 
customer would likely do one of two things, not purchase at all or pay 
with a credit card. Credit cards carry much higher interchange fees 
than debit cards. How then would discriminating against debit cards be 
in a merchant's interest?
  When I talked to the merchants--like Wendy Chronister, who runs a 
whole slew of gas stations in central Illinois--took the business over 
from her dad, she is a great young woman executive--and she said: 
Senator, they put the plastic on the counter, we take it. If it clears, 
we move the transaction and move on to the next customer. We are not 
going to debate how many other cards you carry and where is the one 
with the lower interchange fees. We do not have time for it, and we are 
not going to put that kind of hassle on our customers.
  Fourth, some make the argument that the nonexclusivity provision of 
the reform law will clause small issuer exchange rates to go down. This 
nonexclusivity provision is often misunderstood.
  Until recent years, normally all debit cards were set up by banks so 
transactions could be run over one of multiple debit networks. But in 
recent years, the dominant networks, particularly Visa, have formed 
exclusive deals with big banks so transactions on the debit cards could 
only be run by one network. What they are trying to do--credit card 
companies are trying to do--is to monopolize the transactions as well 
as the cards.
  These exclusivity agreements are threatening to drive smaller debit 
networks out of business. This trend hurts competition and creates real 
barriers to entry for new networks.
  All the nonexclusivity provision in the new law says is that banks 
have to pick at least two unaffiliated card networks to enable on each 
debit card, and merchants get to choose which of those networks they 
want.
  You know what? I wish to say to my friends at the Wall Street Journal 
who write editorials saying what a bad idea interchange reform is: What 
we are talking about is something called competition. For the biggest 
business newspaper in the United States, you would think they would 
support something such as this.
  Nonexclusivity is not new. Last month, the Pulse Network released its 
annual survey of debit card issuers. Pulse said that when it comes to 
this nonexclusivity requirement, many

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issuers are already compliant, and we have not seen any small bank 
interchange rates decline as a result. It is another smoke screen, a 
red herring.
  The nonexclusivity provision gives the Fed broad discretion to lay 
out guidelines to make it more effective. The Fed also gets to choose 
the effective date. In short, this provision is not the bogeyman that 
some have made it out to be and is simply a safeguard that will ensure 
that Visa does not become the only debit network left in the market.
  What I have learned, after years of working on this complicated 
issue, is the following: Banks and credit unions will consistently 
oppose any type of reform. The American Bankers Association is 
legendary--it represents the banking industry--and the Credit Union 
National Association, which represents the credit unions, both have 
statements on their Web sites making it clear that there is no 
regulation of the interchange system they will support.
  Senator Kit Bond of Missouri, now retired, and I tried to negotiate 
with the banks and credit unions in 2009. We were thinking about doing 
an amendment to allow for greater interchange transparency and debit 
discounts. The banks and credit unions blasted a letter of opposition 
out before we even drafted the amendment.
  Now, the opponents of my amendment say what we need are 30 months to 
study this. Study it for what? I know where it is going to end up. We 
have been through this before. I have seen this movie. The American 
Bankers Association and the Credit Union National Association, now 
marching in lockstep on issues, are going to oppose any reform.
  The entire financial industry is making a killing on the current 
interchange system, to the tune of $1.3 billion a month. Do the math 
and figure out why this has every lobbyist in town working to defeat 
the Durbin amendment--30 times 1.3. That is pretty close to $40 billion 
that is at stake if the amendment to stop this Durbin change in the 
interchange fee system goes through.
  The change needs to go through. There is widespread consensus that we 
need to reform the interchange system to rein in Visa, MasterCard, and 
the biggest banks on Wall Street. I do not think anyone disagrees with 
that. In fact, I have seen polling across the country in every State, 
from virtually every political group--left, right, and center--where 
they overwhelmingly support interchange reform.
  The credit unions and community banks are selling a story which the 
public is not buying. In carrying out this reform, I have bent over 
backward to try to address small issuer concerns. I do not want small 
banks or credit unions forced out of the debit card market. That is why 
we exempted them. I want consumers to be able to bank at these 
institutions and use debit cards.
  I have tried to protect small banks and credit unions, even though 
they have made it clear they do not support any regulation of the 
system and even though they have fought me every step of the way.
  By exempting small issuers from fee regulation, we have left intact 
an interchange system that has worked quite well for small issuers, and 
that will almost certainly continue to work well. But let's be clear. 
There is only one way we can provide these small issuers with an 
absolute, 100-percent guarantee that Visa and MasterCard will give them 
interchange rates they like. There is only one way to do it. That would 
be to regulate the rates Visa and MasterCard fix for small issuers and 
make sure they are appropriate.
  I am happy to explore that. I can already tell you the small issuers 
are going to push back on that immediately.
  They want their cake and they want to eat it, too. They want no 
regulation. They want to be able to charge interchange fees that reach 
the heavens, and they don't care what happens to merchants, retailers, 
or consumers.
  I think we have already taken care of small issuers with last year's 
law, but if they have some suggestions on how to give even more 
assurance that Visa and MasterCard won't set their rates at 
unsustainable levels, I will listen.
  But make no mistake, I will not support any delay or repeal of the 
overall interchange rulemaking because this will let the big banks and 
card networks off the hook. We are very close to finally reining in the 
abusive interchange system and providing help to consumers and 
merchants. We cannot let the big banks and credit card companies avoid 
accountability yet again. They get away with too much.
  In closing, I strongly believe we need interchange reform. We need to 
bring fairness, competition, and transparency to the broken debit 
system. I will work hard to make sure this reform happens soon.
  I would think the fact that the opponents of this are trying to stop 
it before the Fed issues a rule is an indication that they don't even 
want to see what the rule looks like. Why? It is $1.3 billion a month, 
that is why. Change will cost the big banks big money. That is why the 
credit card companies and banks on Wall Street are fighting this.
  I have always tried to approach this issue in a reasonable way, 
focusing on facts. I am always happy to engage with others who share 
this approach, even if they disagree with me.
  I yield the floor.

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