[Congressional Record (Bound Edition), Volume 159 (2013), Part 9]
[Senate]
[Pages 12971-12973]
[From the U.S. Government Publishing Office, www.gpo.gov]




                       INTERCHANGE FEE RULEMAKING

  Mr. DURBIN. Madam President, I rise to speak about a Federal court 
ruling handed down yesterday that represents a tremendous victory for 
consumers and Main Street businesses across America.
  This ruling has to do with debit card swipe fees. Yesterday, a 
Federal judge in D.C. called for the Federal Reserve to lower the 
approximately 24 cent cap it set on debit swipe fees to a level that 
more closely reflects the actual cost of a debit transaction.
  This decision is a major win for Main Street merchants and their 
customers.
  It was urgently needed, because this decision corrects flaws in the 
Fed's rulemaking that had allowed Visa and MasterCard to triple the 
swipe fees they impose on many coffeeshops, convenience stores, 
restaurants and other merchants.
  I had filed an amicus brief in this court case, since the case 
involved a rulemaking based on a law that I had authored. I am very 
pleased that the court ruled the way it did, and I will take a minute 
to explain why.
  For years, I have been sounding the alarm about swipe fees, also 
known as interchange fees.
  The swipe fee is a hidden fee that is charged on every debit or 
credit card transaction. It is a fee that a merchant has to pay to a 
bank when the merchant accepts a credit or debit card that the bank 
issued. The fee is taken as a cut out of the transaction amount.
  These swipe fees are harmful to consumers and to our economy. They 
are hidden, they are anti-competitive, and they end up raising the 
price of everything we buy at retail.
  It is important to understand how these fees work.
  The vast majority of bank fees are set in a transparent and 
competitive market environment, with each bank setting its own fee rate 
and competing over them. But that is not the case with swipe fees.
  With swipe fees, the big banks decided they would designate the two 
giant card companies, Visa and MasterCard, to set fees for all of them. 
That way each bank could get the same high fee on a card transaction 
without having to worry about competition.

[[Page 12972]]

  Swipe fees have no transparency. Most customers and most merchants 
have no idea what kind of swipe fee is being charged when they use a 
debit or credit card.
  The swipe fee system became an enormous money-maker for Visa, 
MasterCard and the banks. They were collecting an estimated $16 billion 
in debit swipe fees and $30 billion in credit fees each year.
  Those billions are paid by every merchant, charity, school, and 
government agency that accepts payment by card--and the costs are 
passed on to American consumers in the form of higher prices.
  By 2010, the U.S. swipe fee system was growing out of control with no 
end in sight. U.S. swipe fee rates had become the highest in the 
world--far exceeding the actual costs of conducting a debit or credit 
transaction.
  There were no market forces serving to keep fees at a reasonable 
level. There was no competition and no choice. Merchants and their 
customers were being forced to subsidize billions in windfall fees to 
the big banks.
  I knew we had to change this situation.
  This is an issue of fundamental importance to our economy. Our nation 
is moving from a currency based on paper cash and checks to a system 
where American dollars are mostly exchanged through electronic 
transactions.
  We cannot allow Visa, MasterCard and the big banks to dominate the 
electronic payments system and use it to enrich themselves at 
consumers' expense. Remember, this is America's currency we are talking 
about. We have to ensure transparency, competition and fairness when it 
comes to electronic payments involving U.S. dollars.
  So I stepped in and introduced an amendment to the 2010 Wall Street 
Reform bill that for the first time placed reasonable regulation over 
debit swipe fees.
  My amendment said that if the Nation's biggest banks are going to let 
Visa and MasterCard fix swipe fee rates for them, then the rates must 
be reasonable and proportional to the cost of processing a transaction. 
No more unreasonably high debit swipe fees for big banks.
  My amendment passed the Senate with 64 votes and it was signed into 
law with the rest of Wall Street reform.
  The swipe fee reform law that I wrote directed the Federal Reserve to 
issue regulations to bring down debit swipe fee rates.
  In December 2010, the Fed issued a proposed rulemaking that called 
for debit swipe fees to be capped at 7 to 12 cents per transaction.
  This was a significant reduction from what had been a 44 cent average 
debit swipe fee, though it still allowed banks to easily cover their 
debit transaction costs, which the Fed pegged at just a few cents.
  However, after the Fed issued the draft rule, the big banks and card 
network giants turned their lobbyists loose on them. It was a lobbying 
stampede.
  They pressured the Fed to raise the debit swipe fee cap to a level 
far higher than 12 cents, because they claimed that there were all 
sorts of additional costs that the Fed forgot to include in its 
analysis.
  The Fed gave in, and in June 2011 issued a final rule that raised the 
cap level to about 24 cents--much higher than the actual cost of a 
debit transaction.
  Predictably, Visa, MasterCard and the big banks took advantage of 
this watered-down regulation that they had lobbied for. Visa and 
MasterCard promptly jacked up any swipe fee rates that were below 24 
cents so that this 24 cent ceiling became a floor.
  With Visa and MasterCard's rate increases, stores that mainly handle 
small dollar purchases like coffeeshops, convenience stores, and fast 
food restaurants are now paying far more in swipe fees than they did 
before.
  These merchants used to be charged debit fees that were a percentage 
of the purchase amount, and now they are charged around 24 cents no 
matter how small the purchase. Their customers ultimately pay the 
price.
  This was not a flaw in the law, which required a ``reasonable and 
proportional'' fee. Instead, it showed the danger of watering down the 
regulations that implement these laws. The banks and card companies 
lobbied the Fed for a loophole and when they got one, they ran through 
it.
  After the Fed issued its final rule and Visa and MasterCard promptly 
raised their swipe fee rates to the cap level wherever they could, a 
coalition of merchants led by the convenience stores filed a lawsuit in 
federal court.
  They argued that the Fed failed to follow the law in issuing its 
final regulation. They urged the court to order the Fed to rewrite its 
regulation in compliance with the statute.
  I filed an amicus brief in this case in support of the merchants' 
position. In my brief, I pointed out that when the Fed doubled its 
swipe fee cap between the initial rulemaking and the final rulemaking, 
the Fed cited the need to cover certain costs that the statute 
explicitly prohibited the Fed from including.
  The bottom line, I argued, was that the Fed came far closer to 
following the statute in its draft rulemaking than after it had bent 
toward the banks in its final rulemaking.
  The court agreed, and yesterday it ordered the Fed to rewrite its 
rules in compliance with what the law provides.
  Here's a key quote from the court's opinion: ``The court concludes 
that the Board has clearly disregarded Congress's statutory intent by 
inappropriately inflating all debit card transaction fees by billions 
of dollars.''
  The court also pointed out the problem with Visa and MasterCard's 
swipe fee increases on small dollar transactions. The Court said:

       By including in the interchange fee standard costs that are 
     expressly prohibited by the statute, the final regulation 
     represents a significant price increase over pre-Durbin 
     Amendment rates for small-ticket debit transactions under the 
     $12 threshold. Congress did not empower the Board to make 
     policy judgments that would result in significantly higher 
     interchange rates.

  The court concluded that the Fed must rewrite its regulation to lower 
the debit fee cap and to halt Visa and MasterCard's fee increases on 
merchants for small dollar transactions.
  Now, this process of rewriting the regulations will take some time, 
and I suspect there may be more litigation before this issue is over.
  But this court ruling marks a tremendous win for Main Street 
merchants and their customers who deserve the swipe fee relief that the 
law provided for.
  Fortunately for the Fed, there are some clear roadmaps for how it can 
fix its regulation. I pointed out in my amicus brief that the Fed's 
initial rulemaking, with its 7 to 12 cent cap, came far closer to 
reflecting the actual costs that Congress instructed the Fed to look 
at.
  The Fed should look again to its initial rulemaking as it works to 
rewrite its final rule.
  And just last week, the European Commission announced that it would 
seek to cap debit swipe fee rates throughout the European Union at 0.2 
percent of the transaction.
  Given that the average debit transaction is about $38, that works out 
to an average cap of about 7 cents--right where the Fed was in its 
initial rule.
  Congressman Peter Welch and I sent a letter last week urging the Fed 
to closely review the European Commission's debit fee cap and to 
incorporate it in the Fed's debit fee regulation. I believe the Fed 
will find the Commission's analysis and conclusions to be very helpful 
in rewriting its final rule.
  As we move forward on the path of reasonable swipe fee reform, I 
should note that Visa, MasterCard and the banking industry are probably 
not too pleased with this court decision.
  I suspect they will be up here on Capitol Hill very soon, screaming 
bloody murder and arguing that this court decision means the end of the 
world.
  I just want to point out that the banks and card companies have been 
spreading myths and using scare tactics about swipe fee reform for 
years. None of them have come true.
  They argued that swipe fee reform would devastate small banks. Yet 
separate studies by the Fed, GAO and the FTC have all found that the 
exemption

[[Page 12973]]

I wrote in the law for small banks has worked as intended.
  As it turns out, small banks and credit unions have thrived since 
this law took effect. Why? Because under my amendment, small banks and 
credit unions can continue to receive the same high interchange rates 
from Visa and MasterCard they got before far higher than the rates that 
their big bank competitors now receive.
  Also, the big banks argued that they would have to jack up fees on 
consumers to make up for the lost revenue from swipe fees.
  But we haven't seen that happen either, because there is transparency 
and competition when it comes to bank fees on consumers. In fact, we've 
gotten more transparency on these fees in the past few years as many 
banks have adopted a fee disclosure form developed by the Pew 
Charitable Trusts that I have strongly supported.
  As the banks' other scare tactics have faded away, they have resorted 
to arguing that the problem with swipe reform is that merchants haven't 
passed along enough swipe fee savings to consumers.
  This was a pretty hypocritical argument for them to make, because 
they knew that Visa and MasterCard had raised many swipe fee rates 
after reform took effect--a direct result of the higher cap that they 
had lobbied for.
  But even though many merchants have suffered under those swipe fee 
increases, we have still seen aggressive price competition and 
discounting by retailers since swipe fee reform took effect. Consumers 
have benefitted from this price competition, and they will benefit even 
more from this court ruling.
  In closing, I note that yesterday's court decision marks another 
important step in the effort to make sure the electronic payments 
system is reasonable and fair for American consumers and businesses. 
Our work is not over yet, but we are making great progress.
  I want to thank my colleagues and all the consumers, merchants and 
advocates across America who have joined me in this effort. This marks 
a big win for Main Street over Wall Street, and it wouldn't have been 
possible without this excellent coalition.

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