[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
CREDIT CARD FAIR FEE ACT OF 2008
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HEARING
BEFORE THE
TASK FORCE ON COMPETITION POLICY
AND ANTITRUST LAWS
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
ON
H.R. 5546
__________
MAY 15, 2008
__________
Serial No. 110-179
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
U.S. GOVERNMENT PRINTING OFFICE
42-373 PDF WASHINGTON : 2009
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COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas STEVE CHABOT, Ohio
MAXINE WATERS, California DANIEL E. LUNGREN, California
WILLIAM D. DELAHUNT, Massachusetts CHRIS CANNON, Utah
ROBERT WEXLER, Florida RIC KELLER, Florida
LINDA T. SANCHEZ, California DARRELL ISSA, California
STEVE COHEN, Tennessee MIKE PENCE, Indiana
HANK JOHNSON, Georgia J. RANDY FORBES, Virginia
BETTY SUTTON, Ohio STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois TOM FEENEY, Florida
BRAD SHERMAN, California TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota
Perry Apelbaum, Staff Director and Chief Counsel
Sean McLaughlin, Minority Chief of Staff and General Counsel
------
Task Force on Competition Policy and Antitrust Laws
JOHN CONYERS, Jr., Michigan, Chairman
RICK BOUCHER, Virginia STEVE CHABOT, Ohio
ZOE LOFGREN, California RIC KELLER, Florida
SHEILA JACKSON LEE, Texas F. JAMES SENSENBRENNER, JR.,
MAXINE WATERS, California Wisconsin
STEVE COHEN, Tennessee BOB GOODLATTE, Virginia
BETTY SUTTON, Ohio CHRIS CANNON, Utah
ANTHONY D. WEINER, New York DARRELL ISSA, California
DEBBIE WASSERMAN SCHULTZ, Florida TOM FEENEY, Florida
LAMAR SMITH, Texas, Ex Officio
Perry Apelbaum, Staff Director and Chief Counsel
Sean McLaughlin, Minority Chief of Staff and General Counsel
C O N T E N T S
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MAY 15, 2008
Page
OPENING STATEMENTS
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, and Chairman, Task Force on
Competition Policy and Antitrust Laws.......................... 1
The Honorable F. James Sensenbrenner, Jr., a Representative in
Congress from the State of Wisconsin, and Member, Task Force on
Competition Policy and Antitrust Laws.......................... 1
The Honorable Lamar Smith, a Representative in Congress from the
State of Texas, Ranking Member, Subcommittee on the Judiciary,
and Ex Officio Member, Task Force on Competition Policy and
Antitrust Laws................................................. 4
The Honorable Darrell Issa, a Representative in Congress from the
State of California, and Member, Task Force on Competition
Policy and Antitrust Laws...................................... 5
The Honorable Steve Chabot, a Representative in Congress from the
State of Ohio, and Ranking Member, Task Force on Competition
Policy and Antitrust Laws...................................... 6
WITNESSES
Mr. Thomas L. Robinson, Vice President of Regulations, National
Association of Convenience Stores
Oral Testimony................................................. 8
Prepared Statement............................................. 10
Mr. Joshua R. Floum, General Counsel and Corporate Secretary,
Visa, Inc.
Oral Testimony................................................. 32
Prepared Statement............................................. 33
Mr. Joshua Peirez, Chief Payment System Integrity Officer,
Mastercard Worldwide
Oral Testimony................................................. 71
Prepared Statement............................................. 74
Mr. John Blum, Vice President of Operations, Chartway Federal
Credit Union
Oral Testimony................................................. 80
Prepared Statement............................................. 82
Mr. W. Stephen Cannon, Chairman, Constantine Cannon, LLP
Oral Testimony................................................. 93
Prepared Statement............................................. 95
Mr. Edward Mierzwinski, Consumer Program Director, U.S. Public
Interest Research Group
Oral Testimony................................................. 115
Prepared Statement............................................. 117
CREDIT CARD FAIR FEE ACT OF 2008
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THURSDAY, MAY 15, 2008
House of Representatives,
Task Force on Competition Policy
and Antitrust Laws
Committee on the Judiciary,
Washington, DC.
The Task Force met, pursuant to notice, at 11:02 a.m., in
Room 2141, Rayburn House Office Building, the Honorable John
Conyers, Jr. (Chairman of the Task Force) presiding.
Present: Representatives Conyers, Lofgren, Jackson Lee,
Cohen, Sutton, Smith, Sensenbrenner, Chabot, Cannon, Keller,
Issa, and Feeney.
Staff present: Stacey Dansky, Majority Counsel; Perry
Apelbaum, Majority Staff Director and Chief Counsel; Stewart
Jeffries, Minority Counsel; Sean McLaughlin, Minority Chief of
Staff and General Counsel; and Brandon Johns, Majority Staff
Assistant.
Mr. Conyers. We are going to start the hearing even though
the Ranking Member of Antitrust isn't here. But since I have
the former Chairman and the Ranking Member here, I think it is
safe to begin. And I know he is on the way.
But I am glad that everyone has come together this morning
to examine together the Credit Card Fair Fee Act, which is H.R.
5546.
Last year, there was a hearing on the topic of credit card
interchange fees. And I was surprised by the depth of the
problem facing merchants. Members on both sides of the aisle
seemed equally concerned about these fees and the effects they
ultimately have on consumers.
And so, after deliberation with Chris Cannon, we have
brought together a bill to be examined this morning. We hope it
will go a long way toward restoring some balance between
retailers and the credit card companies.
Now, just a couple of things, and then I am going to yield
to some other Members for any remarks.
We do not think that this is regulation of the industry. We
think that this measure we are examining addresses potential
anti-competitive aspects of interchange fees. We think that
lower interchange fees will help merchants and consumers and
lower prices.
And, with that in mind, we want to hear what you all think
about it.
I would like to yield to the Chairman emeritus, Jim
Sensenbrenner, for anything he might want to say.
Mr. Sensenbrenner. Thank you very much, Mr. Chairman.
First of all, I would like to ask unanimous consent that a
statement by the Electronic Payments Coalition be placed in the
record at this point.
Mr. Conyers. Without objection.
[The information referred to follows:]
Mr. Sensenbrenner. Mr. Chairman, I am going to be very
brief. Let me say I think this bill is a very ill-advised bill.
It is going to have a lot of unintended consequences in the
eyes of the Chairman and its supporters.
One of the things that plastic has done to benefit
merchants is that they don't have accounts receivable of their
own. They get paid right away when people use a credit card to
pay for their purchases. And the credit card company basically
assumes the risk of somebody not paying their bill.
When I started out practicing law, I represented a mom-and-
pop grocery store, and there were a number of folks in town
that never seemed to want to pay their bills. And, as a result,
I had to try to collect the money and really wasn't very
successful in doing so. And, as a result, the small-business
operator ended up having to absorb the loss by basically being
good people and extending credit to folks in town.
The credit cards, in the way this is set up now, insures
the small-business operator from having to deal with those
kinds of losses. But nothing in life comes free, and part of
that is paid for by the interchange fees that merchants that
accept credit cards take.
So I think that we are going to have to look at the impact
on small business of this legislation, as well as the impact on
consumers and on merchants that take the credit cards.
And I think that the current situation is actually a big
plus for both consumers who pay their bills as well as small-
business operators. And I will talk a little bit more about
that later.
Mr. Conyers. Thank you, Jim.
Could I turn now to the Ranking Member of the full
Committee, Lamar Smith?
Mr. Smith. Thank you, Mr. Chairman.
Mr. Chairman, America has gone through a radical
transformation in the way it pays for its goods and services.
Ten years ago, almost 80 percent of all financial transactions
involved checks or cash. Today, fewer than half of all
purchases are conducted that way. And 3 years from now,
consumers are projected to use credit and debit cards for over
70 percent of all their purchases.
Properly used, credit cards offer many benefits for
consumers and businesses alike. For consumers, they offer fraud
protection, payment flexibility, the ability to track purchases
and collect airline miles, for example. For merchants, they
offer guaranteed faster payment and the opportunity to expand
businesses through Internet and phone sales.
Some studies have shown that consumers who use credit or
debit cards at the time of purchase are likely to spend more
than they would otherwise with cash or checks.
Of course, this growth has not come without its cost.
Consumer groups complain about credit card practices that they
think are unfair or illegal. Merchants, too, have had their
complaints.
In 2005, the 2nd Circuit affirmed a settlement in which
Visa and MasterCard paid $3 billion. The settlement arose from
a case brought by a group of retailers who claimed that Visa
and MasterCard had illegally tied the acceptance of their
credit cards to their debit card offerings.
Today, retailers continue to claim that Visa and MasterCard
are charging excessive fees for the acceptance of their cards
and that these fees are ultimately passed on to consumers. A
group of retailers have brought a series of Federal antitrust
suits challenging the way that Visa and MasterCard set these
interchange fees, and that suit is pending in the Eastern
District of New York now.
For their part, the credit card companies maintain that the
setting of credit card interchange fees is a necessary part of
their business that maximizes the number of consumers who are
willing to carry their cards and the number of merchants who
are willing to accept them.
In considering this legislation, my primary concern is how
it will affect the American consumer. Will the consumer pay
less for goods and services if interchange fees are reduced for
merchants? Will those lower prices be offset by reduced credit
card benefits and higher charges and fees on credit cards?
Retailers have raised some serious questions regarding Visa
and MasterCard's business practices. For example, the credit
card firms must answer who sets the interchange fee and how is
it set. How much competition is there? Do merchants really have
options when it comes to accepting Visa and MasterCard?
In the end, though, the ultimate question is how this bill
will help the American consumer.
And, Mr. Chairman, I will yield back the balance of my
time.
Mr. Conyers. Thank you.
Darrell Issa of California?
Mr. Issa. Thank you, Mr. Chairman.
And thank you for this continued process of evaluating what
is, for me, a global competitiveness issue. As you know, in the
current form I haven't signed on to the bill, but I have signed
on to exactly what caused that bill to be brought.
We have two interesting dichotomies here. On one hand, the
efficiency of a global and universally accepted card system has
benefited us and the rest of the world. On the other hand, the
rest of the world has become convinced that the fees were too
high and, in most cases, both Europeans and other nations have
artifically lowered those rates.
Recognizing that when we look at competition, if my Visa
card represents 1 percent in Spain and 4 percent in the United
States, American competitiveness is at stake.
I deny no one--I repeat, no one--the ability to make as
much profit as they can justify. But when you have, by
definition, a monopoly--and I don't say that in a perjorative
way; in fact, we need a universal system, we need a system
that, in fact, is so complete as to have that kind of reach and
power--you have a situation in which the United States
government has an obligation to assert sufficient control to
ensure that America is not put at an unfair disadvantage.
To that end, I believe that the bill's attempt to have
transparency is critical, to deal with competitiveness on a
global basis is critical. I also believe that although it is
well-intended, that there may need to be additional safeguards
for two reasons: one, to make sure that this is an American
solution and not simply an attempt to get to a global rate
quickly; secondly, I believe that if Visa's rates, by an arm's
length relationship equivalent, are to be lowered, as I am sure
many of the authors would hope them to be, that it be a soft
landing.
So at the appropriate time, when this bill is mature, I
intend on offering some input for amendments. But today I look
forward to hearing from all the parties about how, in fact, we
can find a situation in which countries are paying dramatically
less for the same service with my same credit card.
And last but not least, quite frankly, I will be asking one
critical question, and that is, why is it that when I have
discount rates of perhaps double between the highest and
lowest, I cannot pass that on in any way, shape or form to the
consumer? It is an all-or-nothing. I think that, in fact, has
allowed competitiveness but not competitiveness that the
consumer truly understands is being paid for by the merchant
that he or she does business with.
Mr. Chairman, thank you again. And I yield back and
appreciate the time.
Mr. Conyers. Thank you very much, Darrell Issa.
Congresswoman Zoe Lofgren, Chair of Immigration.
Ms. Lofgren. I don't have an opening statement, but when we
are ready, I would like to introduce my constituent who is a
witness.
Mr. Conyers. All right.
I turn now to the Ranking Member of the Antitrust Task
Force, Steve Chabot of Ohio.
Mr. Chabot. Thank you, Mr. Chairman.
And I, first of all, want to apologize for being a couple
minutes late. I am also the Ranking Member of the Small
Business Committee and just came from a hearing there. A very
interesting hearing, we were talking about the high price that
the grocers, the restaurants, snack foods, you name it, how
that is related to energy, how it is related to ethanol and
requirements that a certain amount of ethanol be utilized
nowadays. And very interesting hearing, but I do apologize for
being late for this. That is why I was late.
And I want to thank the Chairman, the very distinguished
gentleman from Michigan, for holding this important hearing.
And we have an expert panel of witnesses with us, and I
know we all look forward to their perspectives. And, therefore,
I am going to keep my remarks very brief.
The hearing this Task Force held last year and the
resulting bill that we are examining today demonstrate how
technology has changed the way individuals, businesses and the
markets interact with one another. Credit cards have brought
consumers and merchants together in ways never thought
possible.
There are more than 14,000 card issuers in the United
States today, with 1 billion cards in use. Experts predict
that, by 2009, U.S. consumers will spend more than $5 trillion
using electronic payment systems.
In my district, in Cincinnati, I have heard from all
sides--banks and credit unions and retailers and grocers and
merchants of all types. So I know this is an issue that is of
great interest to an awful lot of people and affects many
Americans. So I know that all Members are interested in hearing
all sides to this issue.
As I have said in these hearings over the last year, in my
view, Government intervention is not always the best remedy,
and we must be very careful not to do more harm than good.
Today's hearing is about whether the market for credit cards is
flawed to the extent that Government intervention is warranted.
And, again, as I mentioned, I have been trying to listen to
every different party, individual, business that has an opinion
about this, to make sure that, when this Member ultimately
acts, will do so having considered all points of view.
So, again, Mr. Chairman, I want to thank you very much for
holding this hearing. And I will yield back the balance of my
time.
Mr. Conyers. Thanks, Steve.
Go ahead, Zoe.
Ms. Lofgren. Thank you, Mr. Chairman.
I appreciate the opportunity to introduce two of our
witnesses today, both from my part of California.
First is Mr. Tom Robinson, who I have known for many, many
years. He is the CEO of the San Jose, California-based Robinson
Oil Corporation and has been with the company since 1974.
Last year, Tom was named vice chairman of government
relations for the National Association of Convenience Stores,
which is the association for conveniece and petroleum
retailing.
He earned his bachelor's degree in economics from Santa
Clara University at home. He is the past president of the
Society of Independent Gasoline Marketers of America and is
active in the California Independent Oil Marketers Association.
He is also a member of the 25-Year Club at the Petroleum
Industry.
And he and his wife Lynn reside in Los Gatos. They have two
adult daughters and an adult son, all of whom have followed him
in the family business.
And it is a pleasure to see Tom here in Washington.
I also would like to introduce Josh Floum, who is also a
native Californian and serves as the executive officer and
general counsel of Visa, Incorporated, which is based in Foster
City, California.
Mr. Floum helped lead Visa through its recent merger,
creating a global company and its IPO in March of this year.
And that was the most successful IPO in U.S. history, despite a
down economy.
Mr. Floum is a former antitrust trial attorney. He is a
graduate of the University of California at Berkeley. He earned
his J.D. from Harvard Law School.
He is a longstanding member of the Lawyers' Committee for
Civil Rights and a senior legal advisor to Earth Island
Institute, a nonprofit conservation organization.
I am really very happy that these two individuals are here
from California. They don't agree with each other on this
subject, which just shows the value of our diverse community at
home.
So I yield back, Mr. Chairman.
Mr. Conyers. Thank you.
Welcome, gentlemen.
Mr. Robinson, why don't you begin our discussion?
TESTIMONY OF THOMAS L. ROBINSON, VICE PRESIDENT OF REGULATIONS,
NATIONAL ASSOCIATION OF CONVENIENCE STORES
Mr. Robinson. Chairman Conyers, Ranking Member Chabot, and
Members of the Committee, thank you for the opportunity to
provide my views regarding the Credit Card Fair Fee Act, H.R.
5546.
My name is Tom Robinson, and I am president of Robinson Oil
Corporation. Robinson Oil operates 34 Rotten Robbie gas
stations and convenience stores in northern California.
I am here today representing the National Association of
Convenience Stores, NACS, which represents an industry of more
than 145,000 stores, of which more than 60 percent are owned by
one-store operators.
I want to thank you for holding this hearing today.
Let me start by stating clearly: NACS fully supports this
legislation and urges you to move swiftly toward enactment.
Credit card interchange fees hurt my customers, who, in the
end, pay for them and hurt my business. In today's market, many
convenience stores will not survive without the action of this
critical issue. The Credit Card Fair Fee Act will help fix this
problem.
Right now, there is no market for interchange fees. The
fees are fixed by the banks, hidden from the public and forced
on merchants in a take-it-or-leave-it offer. Right now, the
banks act collectively but merchants cannot.
The Credit Card Fair Fee Act would create a market for
interchange fees for the first time by allowing merchants and
the card associations to negotiate on equal footing.
The card associations claim there is no problem with the
current system. If I were able to fix prices with my
competitors and make more than $40 billion per year doing it, I
suppose I wouldn't think there was a problem either. Of course,
just because the price fixers want to keep doing business the
same way doesn't make it right.
I am not an antitrust attorney; I am a businessman. But I
know I cannot agree with my competitors to charge the same
price. Yet that is precisely what the banks that issue credit
cards have done for years.
From my perspective, the best way to understand the
antitrust problem is looking at what would happen if the same
situation prevailed in my industry.
NACS does not, and never has, set the prices or terms for
which member companies charge the public. But let's just say
that we set a default price for a gallon of gasoline at $9 and
that every member of NACS across the country charged that
default price.
The speed with which this Committee and the Justice
Department would haul us in front of them for agreeing to a
default price would be dizzying. I would fully expect someone
to fit me for a not-very-fashionable yellow jumpsuit.
Yet that is precisely what Visa does with its banks and,
separately, what MasterCard does with its banks. All these
banks that are supposed to compete with each other charge the
same default interchange fees, and the rest of us have no
choice but to pay them because of the huge combined market
power Visa and MasterCard wield with their banks.
And don't just take my word for it. The Kansas City Federal
Reserve has found that merchants like me have no realistic but
to accept Visa and MasterCard.
The impact on my industry is incredible. And, in fact, I
think there are slides up there on the board. If you take a
look at these charts, you will see that in 2006 the industry
paid more to accept cards than it made in pre-tax profits, $6.6
billion to $4.8 billion.
The 2007 figures are simply incomprehensible. My entire
industry made pre-tax profits of $3.4 billion. Note that our
profits went down by more than $1 billion at the same time card
fees increased by $1 billion, to $7.6 billion. And we received
nothing more for this additional $1 billion or for the billions
of additional dollars these fees increased in prior years.
Processing the card swipe probably cost Visa and MasterCard
less than before, but now we are paying far more than double
our profits simply to accept cards. It is clear that the price
for the cashless society is way too high if you let the credit
card industry set the rate.
Every time you buy gasoline, I ask you to remember this:
The station you are buying it from is likely paying more than
twice in much in fees than it is making, and every time gas
prices go up, the card fees go up right with them.
If you are concerned about prices at the pump, you need to
be concerned about interchange fees. These fees have simply
taken over our industry. My business is more for them than it
is for me.
I don't even time to describe the ways that Visa and
MasterCard create anti-competitive and abusive rules to make
the situation even more difficult for businesses like mine, but
I am happy to answer questions regarding these abuses.
The bottom line is that we need legislation to at least
make this playing field level. The Credit Card Fair Fee Act is
a critical first step to bringing market fundamentals to this
nonexistant market.
Critics of this bill say it is a Government price-fixing
proposal. Nothing could be further from the truth. The bill
provides merchants an opportunity to negotiate reasonable terms
with the card associations. However, if a deal cannot be
reached, there must be a way to resolve the differences.
In the event a deal is not reached, each side will present
a final offer. The bill simply identifies a decisionmaker to
pick the offer that is closest to what is happening in the
competitive market. At no point does this bill allow judges to
independently come up with the price of interchange. They do
the minimum necessary to say which side has the better offer,
and that is chosen.
This is just the type of approach that appeals to me as a
businessman. I negotiate the prices and terms of nearly
everything that happens in my business. This is the way
American businesses operate. What I need is the ability to
present myself to the card associations and to the banks in the
same way they present themselves to me, as a group. The card
associations should not be afraid to negotiate on an equal
footing with merchants.
Thank you for your time, and I would be happy to answer
questions.
[The prepared statement of Mr. Robinson follows:]
Prepared Statement of Thomas L. Robinson
Mr. Conyers. Thank you very much.
Attorney Floum, welcome.
TESTIMONY OF JOSHUA R. FLOUM, GENERAL COUNSEL AND CORPORATE
SECRETARY, VISA, INC.
Mr. Floum. Thank you, Mr. Chairman and distinguished
Members of the Committee. My name is Josh Floum. I am an
executive officer and the general counsel of Visa. I have
prepared some written testimony, which I would request be
submitted for the record.
Mr. Conyers. Yes, yours and everyone else's as well,
without objection.
[The prepared statement of Mr. Floum follows:]
Prepared Statement of Joshua R. Floum
Mr. Floum. Thank you, Mr. Chairman.
There was also a report released just today from the GAO
entitled, ``Credit and Debit Cards.'' May I also request that
that be submitted for the record?
Mr. Conyers. Without objection, it will be.*
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*The May 2008 GAO report, ``Credit and Debit Cards,'' has been made
a permanent part of this record and is archived at the Committee on the
Judiciary. The report may also be viewed on the Internet at the
following address: http://www.gao.gov/new.items/d08558.pdf.
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Mr. Floum. Thank you.
I appreciate the opportunity to appear before this
Committee. And what I would like to focus on today are
interchange fees. I am sure that this Committee will deliberate
and take action based on the facts and only the facts, so let's
get right to them.
Electronic payments provide extraordinary value to
retailers, to consumers and to the economy. Visa connects over
29 million retailers, over a billion cardholders, and over
16,000 large, small and very small financial institutions.
What we do, what Visa does, is provide the backbone or
provide a platform for innovation in electronic payments,
products and services. What we do not do is issue cards; we
don't extend credit. We don't set the rates and the fees to
retailers and consumers, which have been the subjects of other
hearings. That is not our function.
What is interchange? And this is widely misunderstood.
Interchange is a transfer fee from one back to another that
enables millions of stakeholders to participate in the system.
Interchange is not revenue to Visa. Interchange is not a
fee to retailers. Visa has no incentive to set interchange fees
too high or too low. It is not our revenue.
The reason that we set interchange fees are to drive growth
in electronic payments, which replace legacy systems such as
cash and check, and we think that electronic payments are much
more efficient and beneficial to consumers, retailers and the
economy in general. That is why we set interchange rates; it is
not our revenue.
Now, let's dispell a rumor that we have heard a lot about
interchange rates increasing. They are not increasing. They
have remained flat for 10 years, even though today's payment
services are much more valuable than they have ever been in the
past.
And, finally, our rates and processes are wholly
transparent. We have answered all the calls for transparency.
All of our rates, all of our rules, there are telephone books
thick of them. They are available on the Internet. And we have
done that largely in response to the merchants saying that they
would like to look at them. We have made them all available.
Now, I mentioned that our services have improved and become
much more valuable. The chart up here depicts, on the bottom
left, what we call the old knuckle-buster. Remember? That is
how credit cards used to work. They were metal, you dragged it,
you had carbon paper.
And even though the rates have remained flat for all of
this time, we have innovated into incredible new categories:
Debit cards, they don't carry interest rates or late fees. They
are an electronic access to your checking account. Debit is
bigger for us now than credit. We have gotten into community
cards: local universities, firemen's credit union cards, et
cetera.
All of that enabled by Visa. E-commerce couldn't exist at
all without electronic payments. And we are going into mobile
and contactless into the future.
So our products are more valuable. The electronification of
the point of sale--over 99 percent of transactions at the point
of sale now are electronic instead of cash and check. We have
reduced fraud rates. We have increased acceptance. And we have
lowered cost relative to cash and check.
Just today's GAO report, released today, the Government
found that with respect to the Government, the Government has
paid $380 million in acceptance fees for electronic payments in
2006, and they have saved $1.7 billion. I am not saying this;
this is the GAO. So you can see the cost savings by using
electronic payments.
We provide retailers with guaranteed payment. And, as some
of you have commented, it is the card issuers who bear the
credit risk, not the retailers.
Now, let's just dispell this rumor once and for all, if we
can. These are our rates; these are our interchange rates. And
you can see, from 1998 to 2007, on an average blended basis,
they have remained relatively stable at about 1.6 percent. So
the rates have not been going up.
What has been going up is the use of electronic payments,
which, yes, it costs more in paying electronic payments
acceptance fees, but retailers save more not having to handle
cash and checks. And it is indisputable that the economy, as a
whole, benefits from this efficiency.
Now, what the price-control legislation--and it is price
control. It takes rate-making out of the hands of the
marketplace. It would give it to three judges. There are
subpoenas and depositions. And it would take the free market
and turn it into a regulatory proceeding.
And we believe that that poses a triple threat to
consumers. And I spoke to Mr. Mierzwinski about this yesterday.
I want to have continuing discussions with the consumer groups.
Because this is an anti-consumer bill, with all respect, Mr.
Chairman. And I know you care greatly about consumers in your
district. But what happens when interchange is artificially
suppressed?
We have seen it now twice in other jurisdictions. The
retailers don't lower their retail prices. They simply keep the
revenue at the expense of the local community banks. So that is
threat number one to consumers.
Threat number two to consumers is they pay more for cards,
and they get fewer rewards. The Reserve Bank of Australia,
there is a quote--they are the regulators. They found that
themselves. And in today's GAO report, just released, on page
36, the GAO concluded that lowering interchange in Australia
meant that--this is a quote--``cardholders have experienced a
decline in the value of credit cards, reward points for most
cards, and an increase in annual and other consumer credit card
fees.'' So consumers pay more; that is the second problem.
And third, the retailers, they have sued us 54 times. And
in their lawsuit, they want to impose additional checkout fees
on consumers who use cards.
So that is a triple hit to consumers.
Now----
Mr. Conyers. How much longer will you need?
Mr. Floum. Two minutes, Mr. Chairman, if I may?
Mr. Conyers. All right, without objection.
Mr. Floum. Thank you.
Retailers can and should negotiate their merchant
discounts. And they should not pay the sticker price. There are
16,000 financial institutions within the Visa system that would
love to do business with Mr. Robinson, and they compete with
each other to provide merchant discount rates in a very, very
competitive marketplace.
Now, I have up on here a Web page from Mr. Robinson's
group, the National Association of Convenience Stores, telling
gas station owners how to negotiate their merchant discount
rates. And it says right on here that they offer interchange
plus 6 cents. That would bring his rate from $2.50 down to
$1.75. So I am not sure why they are not taking advantage of
it.
Finally--and we do have Mr. Blum from the community banks
and credit unions here--default interchange provides very
important protections for the 13,000 local community banks and
credit unions who are able to issue cards in competition with
the larger banks. Suppressing interchange would harm these very
small local financial institutions.
Thank you, Mr. Chairman.
Mr. Conyers. Thank you, sir.
We now turn to Mr. Joshua Peirez of MasterCard Worldwide.
He has served as group executive for global public policy and
associate general counsel, and formerly was a partner with
Clifford, Chance, Rogers and Wells.
Welcome to our hearing, sir.
TESTIMONY OF JOSHUA PEIREZ, CHIEF PAYMENT SYSTEM INTEGRITY
OFFICER, MASTERCARD WORLDWIDE
Mr. Peirez. Good morning, Chairman Conyers, Ranking Member
Chabot, and Members of the Task Force. My name is Joshua
Peirez, and it is my pleasure to appear before you today on
behalf of MasterCard to discuss H.R. 5546.
We are brought together by a basic commercial dispute.
There are some merchants who would like to pay less to accept
payment cards. We fully understand the desire to reduce the
cost of doing business, and we have attempted to help them
achieve this objective.
Merchants are an essential part of our system, and we are
deeply committed to addressing their needs. Let me repeat that:
Without merchants, there is no payment system. And as a result,
we have attempted to address all the issues raised by the
merchants in this dispute.
Merchants said that they did not have access to the
interchange rates set by MasterCard. In response, we now public
interchange rates on our Web site. These rates provide an
extraordinary tool for merchants to use when negotiating with
their banks.
It is our hope that merchant groups will be encouraged to
use this tool to better educate themselves and their members on
the full range of negotiating opportunities that exist today,
rather than seeking to arbitrarily lower merchant discount fees
through Government intervention.
Merchants have also said that they wanted to see our rules.
In response, we posted all of the rules that apply to merchants
on our Web site a few years ago, and we continue to publish
more and more rules so that all of our operating rules will be
available soon.
Almost 2 years ago, gas station owners said that rising gas
prices were adversely affecting their profits when they
accepted our payment cards. In response, we have capped
interchange fees on gas sales. In addition, MasterCard has
lower rates for supermarkets, utilities and convenience
purchases to encourage acceptance by these types of merchants.
Merchants can use all of these tools to negotiate better
terms. We would like to work with the Task Force to ensure a
deeper understanding of the opportunities for negotiation.
Our interchange cap for gas sales provides a good example.
We announced the cap in September of 2006. We expected gas
retailers to use this information to negotiate lower fees and
to point to our initiative to lower the fees from our
competitors. We have been disappointed that most gas merchants
have not taken advantage of this opportunity.
The merchant lobbying groups have made other statements
that are patently false. For example, they have been saying
that merchants cannot discount for cash. This is simply not
true. Under our rules, merchants are permitted to discount for
cash, and each merchant is free to choose the manner in which
the discount is offered.
They also state that merchants cannot tell card holders the
fees they pay when they choose to accept a payment card. Again,
this is not true. MasterCard permits any merchant to disclose
its merchant discount fees to consumers. MasterCard also
permits merchants to disclose their interchange fees to
consumers.
The merchant lobbyists have even claimed that MasterCard
has a rule that requires a merchant that accepts MasterCard to
accept it at every one of its retail locations. There is no
such rule.
We are concerned that the opportunities to negotiate are
being cast aside for litigation and legislation. While the
merchants seek legislation claiming that existing antitrust
laws are inadequate, they are telling a different story in
their litigation on these same issues.
I would like to offer a quote from Craig Wildfang, the lead
attorney representing the merchants in their litigation against
MasterCard. He said in November of 2007, just recently, ``I
actually don't think that the antitrust laws are in need of
much reform. Although the Antitrust Modernization Commission
considered many proposals and proposed a few, I don't think
that anyone has really made a persuasive case that the U.S.
antitrust laws are not working well to achieve their goals of
enhancing and preserving competitive markets.'' We agree.
And so did the Antitrust Modernization Commission, on which
two of the merchant representatives sat, when it concluded that
antitrust exemptions, like proposed here, should be strongly
disfavored, as they ``undermine, rather than upgrade, the
competitiveness and efficiency of the U.S. economy.''
As the Task Force considers these important issues, please
note that the parties in the litigation have agreed to
mediation, which began last month. If a resolution is achieved
through mediation, it will resolve the litigation and all the
issues raised in this basic commercial dispute.
In closing, Mr. Chairman, we deeply appreciate your
concerns about this issue. We are committed to working together
to fully address your concerns and resolve this commercial
dispute without the need to move forward with legislation.
While we agree with you that free-market negotiation
provides the best way forward, we have concerns about price
controls and the antitrust exemptions in the legislation that
would enable the merchants to negotiate in ways that violate
the antitrust laws today, rather than negotiating in a free
market with the antitrust laws in place to protect consumers.
I am prepared to answer any questions you may have. Thank
you.
[The prepared statement of Mr. Peirez follows:]
Prepared Statement of Joshua Peirez
Mr. Conyers. Thank you very much.
We have been called to the floor for--all right, we will
try to get in one more witness.
Mr. John Blum, vice president of operations for Chartway
Federal Credit Union. He has 20 years of experience managing
operations, both in retail and within the military.
We have your statement, and we would like to hear from you
now.
TESTIMONY OF JOHN BLUM, VICE PRESIDENT OF OPERATIONS, CHARTWAY
FEDERAL CREDIT UNION
Mr. Blum. Thank you. Good morning, Chairman Conyers,
Ranking Member Chabot and Members of the Committee. My name is
John Blum, and I am testifying on behalf of the National
Association of Federal Credit Unions.
I serve as the vice president of operations for Chartway
Federal Credit Union, headquartered in Virginia Beach,
Virginia. Chartway has more than $1.2 billion in assets and
serves over 160,000 members.
NAFCU and the entire credit union community appreciate the
opportunity to participate in this hearing.
The electronic payment system has proven to be one of the
most important advances in the financial services marketplace
and is tremendously beneficial to consumers as well as
merchants. Retailers reap tremendous benefits in the form of
increased sales, reduced costs for overhead, substantially
fewer fraud losses, and immediate payment for goods and
services.
I would like to focus today on the benefits of the current
system, specific to the credit union community, and our
concerns with H.R. 5546.
The electronic payment system is incredibly important to
the credit union community. The system allows us to compete
with the largest financial institutions. Credit and debit card
products are important tools in developing and fostering
relationships with our members. And interchange fee revenue
helps cover the considerable cost of maintaining this system.
Capping interchange fees would provide an advantage to
large financial institutions at the expense of credit unions.
We are much smaller than national banks. Consequently, the
credit union community will find it more difficult to offset
the losses from a cap on interchange fees. In contrast, large
banks will be able to internalize the loss.
H.R. 5546 authorizes a three-judge panel to set a single
rate for a payment system. Credit unions have a higher per-
transaction cost for processing card payments. Further, credit
unions make up an extremely small percentage of the financial
services market. This panel may be compelled to set the rate
based on the cost for larger institutions, as they process
significantly more transactions. Smaller institutions would
then receive the lower cap rate even though their actual costs
are much higher.
And it will be doubly painful for credit unions. First, it
will be more difficult to provide our members a credit or debit
card without increasing costs elsewhere. Credit unions have a
number of restrictions on their activities, as well as stricter
capital requirements. As a result, credit unions have fewer
avenues to offset any losses created by a cap on interchange
fee income.
Second, if credit unions cannot afford to offer card
services to their members, they will lose an incredibly
important relationship-building tool.
For many financial institutions, interchange fees are not a
huge income-generating engine. Last year, Chartway processed
over 14 million transactions. The fees generated by each
transaction are not pure profit. The system does not simply run
itself. Chartway employs 11 people for debit card support, and
we contract with a large service provider for our credit card
portfolio.
Interchange fees help offset the significant fraud losses
associated with plastic cards. In 2006, there was over $1.1
billion in plastic card fraud losses. In nearly all situations,
the financial institution covers these losses. Chartway
reimburses all members in full for any fraudulent transactions.
We spend nearly $425,000 a year to cover fraud losses and
related insurance. These statistics do not account for a number
of other costs associated with each instance of fraud,
including issuing new cards and time spent working with members
who have been victims of fraud.
It is important to note that debit cards and some credit
cards generate little income outside of interchange. At
Chartway, 34 percent of our active credit card accounts are
paid in full at the end of every month. We do not receive any
interest income on these accounts. In fact, Chartway is
essentially providing these customers a short-term, unsecured
loan at no interest. Interchange fees help cover these costs.
In conclusion, NAFCU opposed H.R. 5546. The electronic
payment system has been incredibly beneficial to merchants. We
understand why retailers would like price controls. However, we
are wary of the Government interfering with a valued product
that is used by millions on a daily basis. Further, we do not
think the Government should dictate prices between private
parties.
A cap on interchange fees will harm credit unions. As not-
for-profit cooperatives, we will suffer, finding it more
difficult to offer credit and debit card services to our
members. Those credit unions that remain in the card business
will have to adjust, by either raising interest rates,
decreasing dividends or reducing services.
As financial cooperatives, the ultimate cost of this
proposal will be shouldered by the 90 million Americans who are
member owners of their credit union.
Thank you. And I would be happy to answer any questions the
Committee may have.
[The prepared statement of Mr. Blum follows:]
Prepared Statement of John Blum
Mr. Conyers. Thank you, Mr. Blum.
We have been called to the floor for several votes. I will
leave you to the tender mercies of Andrea Culebras, who will--
identify herself--so we can go back to the conference room. And
if you want to go downstairs to the deli, you can get a quick
lunch. And we will reassemble as soon as the votes are over.
And so we stand in recess for a short period of time. Thank
you very much.
[Recess.]
Mr. Conyers. The Committee will come to order.
I would like to welcome Steve Cannon, chairman of the law
firm of Constantine Cannon, an experienced antitrust lawyer.
Served as senior vice president, general counsel, and secretary
for Circuit City stores. Was responsible for FCC/FTC regulatory
and antitrust matters.
He was also a partner earlier in a firm where he
concentrated in antitrust law. And he has also been chief
antitrust counsel for the Senate Judiciary Committee from 1981
to 1984.
So you are familiar with the process.
Mr. Cannon. Just a little bit, sir.
Mr. Conyers. Welcome.
TESTIMONY OF W. STEPHEN CANNON, CHAIRMAN, CONSTANTINE CANNON,
LLP
Mr. Cannon. Thank you.
Mr. Chairman and Members of the Task Force, Ranking Member
Chabot, thank you so much for the opportunity to appear before
you today to testify on this issue of extreme importance for
the millions of merchants in this country and the consumers
they serve every day.
We appreciate your leadership, in particular, on this bill.
We endorse it enthusiastically and hope that the Committee will
pass it at its earliest convenience.
Mr. Conyers. Could you pull the mike a little closer,
please?
Mr. Cannon. Okay. Is that better? Oh, there we go. Do you
want me to start over?
Thank you, sir. We very much appreciate this. We represent
today millions of merchants and obviously the consumers that
they serve in this country every day. It is vitally important
to the Merchants Payment Coalition. We applaud the bill. We
think it is a terrific solution to a big problem. And we
endorse it enthusiastically.
You know, a few minutes ago, Mr. Floum told you that Visa
doesn't really care about what the amount of interchange is
because they get no revenue. Now, that raises a really
important question, which is, who really should be at this
table?
And I will tell you, while we are hearing today from the
small banks and credit unions, you really should not lose sight
of, really, who Visa and MasterCard are. And while there are
approximately 14,000 financial institutions of all sizes that
issue some sort of payment cards, the top 10--the top 10--banks
in this country control 88 percent of credit card receivables.
These banks, Mr. Chairman, do not negotiate with merchants
to set interchange rates, as you would expect in a competitive
market. Rather, acting through their agents at Visa and
MasterCard, the banks collude to set high rates and onerous
terms, and they tell the merchants to take it or leave it.
Governments around the world have scrutinized the conduct
that you are looking at today, and their conclusions are the
same as ours. Visa and MasterCard's interchange scheme is anti-
competitive, it is certainly anti-consumer, and it needs to
change. This system truly represents a market failure that
needs an immediate fix.
Contrary to what you hear, merchants do not want or need
price controls or industry regulation. What they do need is a
fair chance to negotiate market-based rates and terms, and that
is exactly what H.R. 5546 provides.
Merchants do not object to paying a competitive market
price for the ability to conduct payment card transactions.
They do, however, object to paying a price set by colluding
banks.
We set forth a pretty detailed analysis of your bill. We
obviously think that it works, it works well. It is based on
something that the Committee has blessed and worked on for many
years in Title 17, involving sound recordings. And that is in
great detail in my written testimony.
But suffice it to say that this is not a price-control
bill. The fate of the parties, under your legislation, is in
their hands at all times from beginning to end. They have the
ability to negotiate. They have the ability to give a final
offer. And it is completely in their hands. So you will hear
``price control, price control, price control,'' but saying it
a million times will not make it so.
Let me address something today that everyone is going to
focus on, which is the impact of this legislation on all of us
as consumers. I can tell you, coming from Circuit City for 10
years, there is no more brutally competitive industry than the
retail industry.
I remember when a plasma television at Circuit City sold
for $35,000 10 years ago, and today that television sells for
$1,000. Technology and competition does wonderful things.
And on the banks' argument, the side of the banks have
simply argued that if their cartel-set interchange fees are
lowered, the banks will merely raise their fees to their
customers. You know, this is a truly remarkable argument. No
bank is entitled to the illegal revenues from high cartel
prices. Visa and MasterCard banks around the world continue to
issue cards even though interchange fees in many countries are
significantly lower than they are in the United States.
One more thing I would like to address, with your
indulgence, Mr. Chairman, and that is that, listening to the
prior panel and seeing Mr. Floum's chart, I would urge you not
to be fooled by that chart. As you might note, it is in terms
of percantages and not in terms of fees. And while a percentage
may or may not go up a certain amount, fees have gone up by
billions of dollars for doing exactly the same thing. So I
would encourage you to think about this in absolute terms.
And I also note that Mr. Floum said proudly that fees had
not gone up much since the days of the knuckle-buster. I
thought technology was supposed to drive prices down, not keep
prices the same, especially when they have been developed in
such an anti-competitive and anti-consumer form.
So I see my time is up. I appreciate the Committee's
indulgence and look forward to answering your questions.
[The prepared statement of Mr. Cannon follows:]
Prepared Statement of W. Stephen Cannon
Mr. Conyers. Thank you so much.
Ed Mierzwinksi, are you an attorney?
Mr. Mierzwinski. No, sir. Consumer advocate.
Mr. Conyers. All right. We have that title. I was going to
bestow another one on you, but I am not authorized.
Mr. Mierzwinski. Okay. [Laughter.]
Mr. Conyers. Mr. Ed Mierzwinski, consumer advocate in the
office of the National Association of State Public Interest
Research Groups. He has been testifying since 1989 and has been
before Congress and the State legislatures on a wide range of
issues.
And we are very happy to have you here. And your written
testimony is already in the record, and you may add any
comments you would like at this time.
TESTIMONY OF EDWARD MIERZWINKSI, CONSUMER PROGRAM DIRECTOR,
U.S. PUBLIC INTEREST RESEARCH GROUP
Mr. Mierzwinski. Thank you very much, Mr. Chairman and
Members of the Committee.
As you said, I have been working here in Congress since
1989 as a consumer advocate for the Public Interest Research
Groups. And over that period of time, the consumer advocates,
our group and other organizations, have tried to rein in the
unfair practices of the issuing banks and other unfair
practices of the card network associations. And it has been
very difficult, over the years, to get any changes made.
Lately, we have seen some progress. We are running a
campaign on college campuses to go after unfair college credit
card marketing. Recently, the Federal Reserve Board of
Governors joined the consumer advocates' call to rein in the
unfair practices of the card-issuing banks.
And for years, the merchants have been trying through a
number of strategies, litigation strategies, convincing the
Department of Justice to investigate, to go after the anti-
competitive practices of the bank networks, which, until
recently, were owned and controlled by the biggest banks.
And I am unconvinced, completely unconvinced, that there is
any competition in this marketplace. The so-called 6,000
issuers are really dominated by the very small number in the
tight oligopoly of issuers that dominate the marketplace.
For many years, those issuers have the Office of the
Comptroller of the Currency at their back. They could do
whatever they wanted. They could change the rates at any time,
for any reason. They could impose mandatory arbitration on
consumers, preventing us from getting any justice.
And the merchants have faced the same problem. So when we
look at this issue, it is a very significant issue for us.
Consumers pay too much; merchants pay too much. And when the
merchants pay too much, it affects consumers. Consumers pay
more at the store and more at the pump, because of the
collusive nature of the agreements that are forced on them with
no negotiations, no transparency, by the bank associations.
And I am very concerned for the unbanked. I am very
concerned that the 27 million people who pay cash at stores are
paying part of the cost of interchange. They are paying part of
the cost of my rewards.
And I believe that it is fortunate that your Committee is
shining light on this important issue. And you have certainly
got the attention of the industry, based on the size of the--
the filled seats in the room.
What we are very pleased with is that your legislation, the
Credit Card Fair Fee Act, would create a non-price-control
mechanism. It would force negotiation, increase transparency,
without going to price controls.
I have, you know, worked against the banks for many years.
They do their polling. They know that ``price controls'' is an
evil word on Capitol Hill, so they use it in almost every
statement that they make about every piece of legislation.
But I want to say that your bill is much more elegantly
crafted than that. I believe it is a common-sense approach to
the problem that will force the two sides to the bargaining
table.
I am unconvinced with the little pieces of the Australian
report that have been extracted by the bank witnesses or by the
network witnesses. I think the reports are much more complex
than that. I think you see in Australia that there has been
more competition developed. There are new kinds of lower-cost
cards out there. Debit card customers are getting lower rates.
And I think that the Committee, I am sure your staff, will
take a very close look at what is really happening in the other
countries that have restricted or banned or changed the way
that the interchange system is forced on the merchants. And I
encourage you to continue to do that.
But we are simply not in any way convinced that the price
to consumers will go up or that the merchants won't pass along
any savings. There will be changes in the marketplace, but
there are consumers that need to be considered, including the
cash consumers and including the consumers who carry a balance
and have the basic credit cards, the classic credit cards.
If I carry a balance on a credit card, I shouldn't have a
rewards card in the first place. One-percent rewards against up
to 36-percent interest? That is not going to help me very much
at all. And some consumers out there, the ones that I care
about, are paying 36-percent interest under the unfair
practices that many of the issuers are imposing upon them,
although the Federal Reserve is trying to stop it.
Again, we are very encouraged by sunlight being the best
disinfectant, that your Committee is shining on this issue. We
look forward to working with you to try to get the card issuers
who have demonstrated market power according to the U.S.
courts, that have prevented the merchants from negotiating
fairly with them, that have raised the prices that all
consumers pay--your legislation is important step forward. We
look forward to working with you on it.
Thank you.
[The prepared statement of Mr. Mierzwinski follows:]
Prepared Statement of Edmund Mierzwinski
Mr. Conyers. Thank you very much.
I thank all of you.
You heard the Members of Congress, and you have heard your
fellow panelists at this witness table.
Mr. Robinson, what say you now about the subject matter
that brings us here? In other words, has anything deepened your
resolve or made you wonder more or had you nearly blow your
stack or what? [Laughter.]
What are your feelings about the measure at this point?
Mr. Robinson. I guess a couple of things.
One, it has not reduced my resolve. And I think just to
truly hit on a couple of points for me is that, one, I am not
anti-plastic. I do recognize that they provide benefits. The
concern that I have, which I think has been stated more than
once and clearly stated, is that there is a complaint about
anti-competitive behavior, which, you know, occurs with, you
know, what we see in the high rates and some of the abusive
rules.
And, you know, we do hear the comments that this is some
sort of price control, and I hope that that has come across
clearly that this solution is not a price control mechanism.
So those are just a couple of my thoughts.
Mr. Conyers. Thank you.
Attorney Floum?
Mr. Floum. Yes, sir. Well, I am struck today hearing from
Mr. Robinson and the other witnesses for the Merchants Payments
Coalition. They acknowledge the value that electronic payments
brings to them, but they want it for less money. Well, I guess
that is the way of the world, but the way to handle that is
through the marketplace and through negotiation.
And I hope if we have dispelled anything today, it is that
we and the acquiring financial institutions stand ready and
willing and eager to negotiate. If we at Visa thought that
lowering interchange rates would drive more volume, we would
lower them tomorrow. So we would like to negotiate with the
merchants so that they would prefer our products. That is the
free market, not price controls.
And with all respect to the witnesses, if you look at the
bill, with subpoenas and depositions and three administrative
law judges who would set a single price, that is not the free
market. That is regulatory intervention setting prices.
So I remain as concerned as when I started about the bill
and what it would do, particularly to consumers.
The final point, if I can, Mr. Chairman, is we hear about
subsidization and the problem with cash spenders subsidizing
card users. And we think that the subsidy runs in the other
direction. I quoted from the GAO report where, with the
increased use of electronic payments, the GAO, the Government,
was saving more money. The use of electronics is cheaper for
merchants than cash and check. And so, as the volume goes up,
their savings goes up. If there is a subsidy, it runs in the
other direction, and electronic payments drive efficiency.
Thank you, Mr. Chairman.
Mr. Conyers. Mr. Peirez, what say you?
Mr. Peirez. Thank you, Mr. Chairman.
I am actually encouraged, to a limited extent, in listening
to my colleagues, Mr. Cannon and Mr. Robinson, in that I think
the crux of their complaint is really about one thing and one
thing only: a claim that there is some alleged anti-competitive
conduct as a result of allegation of market power and that that
causes an inability to negotiate. I think everything else
becomes noise, but ultimately that is their core complaint.
And the reason I am encouraged is, if that is really the
crux of the complaint, luckily for us we have a very effective
system of antitrust laws in this country that have proven to be
able to address these types of things, including when Mr.
Cannon's firm brought a case against us in the past, not just,
as Mr. Cannon would have us believe, for past conduct but also
in changing future conduct.
Now, we don't think that that case will prove out to have
any of the allegations that they make be true. But if, in fact,
that is the crux of the complaint, then indeed the best defense
against alleged anti-competitive conduct is enforcement of the
antitrust laws for the purpose of free, competitive markets, as
was found throughout the report from the Modernization
Commission.
And I gave one quote, but I will give one other: ``The
antitrust laws stand as a bulwark to protect free-market
competition. They prohibit anti-competitive restraints that
harm consumer welfare.''
So I think that enforcement of those laws, if, in fact,
there is a problem, is the best recourse, rather than trying to
set up an alternate process to address the same thing.
Thank you.
Mr. Conyers. Thank you.
Mr. Blum?
Mr. Blum. Thank you, Mr. Chairman.
My concern, listening here today, is that perhaps we are
using that noise a little bit to cloud the issue, and that for
some reason we have some oversimplification of what I view as a
very complex system.
I think we are missing some of the transference-of-
technology issues that we have talked about, where we seem to
have a perception that it is as easy as swiping the card and
then we somehow gouge some merchant for simply swiping the
card.
You know, I would just bring to everybody's attention that
the transference of risk, the transference of float on the
funds, you know, the transference of maintaining the system
from a check-or a cash-based retailer to a card-based processor
is moved over on my side.
So I am just concerned that there is some
oversimplification of that issue, that we are using the noise
to speak about ``if technology has been that improved, why
haven't costs gone down,'' I would challenge--the gas industry,
as an example. I was surprised to hear that MasterCard capped
the interchange on gas purchases.
I think if this technology is so simplified, I would like
to see the merchants apply it at the pump, so that when I use
my MasterCard to fill up an SUV, that the price of gas, when I
exceed whatever their cap is, begins to be lowered. I don't see
the technological, you know, advances that they are using to
challenge what we have done with the interchange income.
Thank you, Mr. Chairman.
Mr. Conyers. Thank you.
Before I go to Mr. Cannon, Mr. Mierzwinski?
Mr. Mierzwinski. Mr. Chairman, I think what is interesting
to me as a consumer representative is that the tricks and traps
that have been imposed on consumers seem to be paralleled in
the merchant association relationship.
The consumers don't always know and don't have the right to
go to court. The consumers have their rates changed at any time
for no reason. The kinds of ways that the banks have tried to
expand the volume of sales on consumers through the use of
rewards and other things--it just strikes me as a parallel.
And I know that consumers have no ability to negotiate with
the banks, and the merchants are saying they have no ability to
negotiate with the card associations. I am not surprised.
Mr. Conyers. Yes.
Mr. Cannon?
Mr. Cannon. Mr. Chairman, it is interesting, Mr. Floum, a
few minutes ago, and Mr. Peirez, both of whom are friends of
mine, keep talking about, ``We like to negotiate,'' or, ``We at
Visa'' or ``We at MasterCard like to negotiate.'' But if you
remember what Mr. Floum said at the beginning of the hearing,
is Visa or MasterCard don't really get the benefit of
interchange, but what they get is dues and assessments, is what
it is called.
So, again, the question we have is, who is the proper party
to negotiate with? Now, what you don't see here today is
Citicorp or Chase or one of the other very large banks that
control the vast majority of credit card receivables in the
country. And to my knowledge, Mr. Chairman, I don't know of
anybody that has ever successfully sat down with Citicorp or
Chase to negotiate an interchange rate.
It is really not an issue of market power here. Your bill,
obviously, has a screen there that talks about market power.
The question here is, how did we get to be where we are today?
How did these rates get to be as high as they are today?
And the point is, we got this way because of a price-fixing
agreement that goes on today between large banks. The fact that
it is Visa and MasterCard that help control it and run it is
important, but keep your eye on, I would submit, the most
important players here, which really are not at this table.
Mr. Conyers. We should have invited other witnesses? Is
that what you are telling me?
Mr. Cannon. I think it would have been a great idea; I
think it would be terrific.
Mr. Conyers. We may have to have a second hearing. I hope
they would respond without the use of the processes that follow
nonresponse. But we will see.
Ranking Member Steve Chabot?
Mr. Chabot. Thank you, Mr. Chairman.
And I come from the philosophical perspective that less
government is better and less regulation is generally better
than more and that markets should be free and unfettered and
unencumbered to the greatest degree possible and that
competition is good for consumers.
On the other hand, you know, I want consumers to pay less
and be able to stretch their paycheck as far as possible and
hopefully be able to, you know, save as much as possible, maybe
invest a little, and better the family. And I want retailers to
be successful and hopefully employ more people, especially in
the 1st District of Ohio, in Cincinnati, which is my district.
So if each one who would like to, if you could make your
best case, your best argument as to why, in this particular
case, it is appropriate for us to regulate more because of the
various issues that we have discussed and in previous hearings.
Because I think this is really a very important issue.
Mr. Robinson, you would be welcome to go, and we will just
go right down the line, anybody that wants to take a shot at
it.
Mr. Robinson. Thank you.
I agree with you, I agree with you, that less regulation is
better, especially when you have a competitive market. I think
that our complaint is that this is not a competitive market.
And so you have to do something to make it competitive.
I have heard that we have the ability to negotiate. I think
that negotiating ability is illusory. I mean, I don't think
that exists.
There is an example that was showed up there about NACS
having negotiated this deal on the interchange fees. I think it
is important to understand what NACS negotiated. NACS did not
negotiate interchange. It only negotiated the processing fee.
And if you were to use the example, it is kind of like having
no ability to negotiate on the refrigerator, you just get to
negotiate on the delivery charge. And that is the situation.
So, you know, we would love to have the ability to
negotiate. We would love to have a competitive market. And that
is the reason that we think, since it is not--we don't have the
ability to negotiate, we do not have a competitive market, and
that is the reason that we are here talking to you today.
Mr. Chabot. Okay. Thank you very much.
Mr. Floum?
Mr. Floum. Ranking Member Chabot, thank you for the
question.
There is no need to regulate or for the courts to determine
that there is any kind of problem unless there is market
dysfunction. That is the only reason that there would need to
be intervention either by the legislature or by the courts.
There is absolutely no evidence of market dysfunction. If
Visa was a monopolist, as the merchants like to claim because
it is very rhetorical, what we would be doing is we would be
lowering output and raising prices. That is what monopolists
do. But instead, as I have mentioned, our rates have not gone
up over 10 years, and over 30 years they have gone down
significantly.
Diners Club was the first credit card network. It charged a
7-percent merchant discount rate. Today's average Visa merchant
discount rate is a third of that. And our interchange rate has
remained flat at 1.6 percent.
So we are not raising prices. And we are not restricting
output, because everyone wants to use our cards and millions of
more merchants are accepting the card. So there is no indicia
of market dysfunction.
My colleague here says, ``Well, the volume goes up, so the
rates should come down.'' That is what they are saying today.
But, again, that ignores the incredible innovation in our
business. It is not the same Visa product; it is not at all.
Fraud rates have come down. It is much more automated. It works
a lot better. And instead of one product, we have 10.
So the fact that we have held rates flat I think is quite
remarkable, given the innovation in our products and the
tremendous benefits that we drive to consumers, retailers and
the economy in general.
Thank you.
Mr. Chabot. Thank you.
Mr. Peirez?
Mr. Peirez. Thank you.
First, I am further encouraged that Mr. Cannon still
considers me a friend as we continue through these hearings.
So, more good news.
But I would like to take off on the refrigerator example
for just a second, because I think it is very illustrative. And
I would say that what is really at issue here is negotiating
about the refrigerator versus the condenser, the ice tray, the
shelving inside, and the other pieces like the power cord.
Ultimately, merchants negotiate for MasterCard acceptance
the fee that they will pay. They negotiate that every day, and
no witness has ever claimed they don't, with the hundreds of
merchant banks that are out there and independent service
organizations that are out there that provide those services.
And those fees have gone down over time, as you would expect
them to.
That is no different--and I think this is a very important
point--than the way that merchants negotiate with American
Express. No merchant has claimed that they must accept American
Express. They can't say that they have monopoly power, as we
have heard, or now, you know, Mr. Cannon saying it is not
simply a question of market power, it is a cartel. Okay, fine,
same issue, antitrust at its core. They can't claim AmEx is a
cartel or ever has been. We don't believe we are either. But
they can't claim it as to AmEx. They have always negotiated
with AmEx; they say that all the time. And they pay more for
AmEx than they pay for MasterCard and, I believe, for Visa.
At the end of the day, the merchants can negotiate the fees
they pay. They also have the ability to negotiate certain
interchange fees. There are examples I would be happy to go
through with any Members of the Task Force, those examples, in
great detail.
But separate and apart from that, they negotiate the
merchant discount fees they pay every day. They pay less for
our system than a system that doesn't have all the alleged
antitrust problems that they are claiming here in American
Express.
And I would also point out that merchants are the ones who
initially invented credit cards. And it costs merchants much
more money to run their own system than to use ours.
And there is nothing that prevents merchants today from
keeping their own cards, creating their own cards, offering
cards together for acceptance. Many of them are utilizing rails
built by companies that are just coming into the market, like
Tempo and others, today. Merchants invited Discover. Sears
invented it; ended up selling it. But there is no reason why
merchants can't do that, as well.
So there are many opportunities for them to change costs,
reduce costs, or otherwise. But ultimately they pay less for
our cards than if they did it themselves. They pay less for our
cards than they do for AmEx, where they don't allege any
antitrust problems and they don't allege an inability to
negotiate. And I will leave it at that.
Mr. Chabot. Thank you.
Mr. Chairman, do the other witnesses have time to answer,
or should I yield back?
Okay, if the last three could maybe make it relatively
brief, because I think they have covered a pretty wide range
there, but if you could maybe make it short.
Mr. Blum. Thank you, Ranking Member Chabot.
My concern on any kind of legislation is that, you know, if
enacted, from a credit union perspective, the adverse or
unintended consequences are not necessarily visible here in
this bill.
First of all, I have heard about protecting the consumer.
Nowhere in this bill, in this regulation, says that once the
three-judge panel decides on some sort of capped rate that the
consumer benefits directly from it. There is no legal
requirement for that reduced, if you will, interchange to be
passed on.
Secondly, I think that if you were to cap a component, from
a credit union position, of interchange, you would also have to
cap my fraud. You would have to cap my responsibility for fraud
losses by, you know, another large retailer's disclosing
information that cost me money. You would have to cap my cost
of overnight funds for those immediate settlements and my back-
end processing costs. And if you don't regulate those as well,
you are attempting to regulate a component of the industry that
is, as I said, very complex.
Thank you, Mr. Chabot.
Mr. Cannon. Mr. Chabot, all I would add is that you would
legislate when you have a market dysfunction, as you say, or a
market failure. What is the market dysfunction here? It is the
collusion and it is the price-fixing that has gone on over a
large number of years. That is the market failure; that is the
market dysfunction.
I would also have to add, for Mr. Floum, one more time, he
needs to talk about what his increase in revenue or fees are,
not what his increase in his rates are. There is percentage,
and then there is absolute revenue, and that is a very
important distinction.
The other thing I would also say is, in terms of the
merchant discount fee, that is true, the merchant discount fee
is both interchange and processing fee on top of that. But I
will tell you, by comparison, processing fees is like
negotiating for the flea on the tail of the dog. It is a very
small part of this, and they know it.
And they know that negotiation is not possible on
interchange. And I have never heard of anybody who has gone to
a bank like Citibank or Chase and said, ``We have successfully
negotiated interchange rates.''
Mr. Mierzwinski. Thank you, Mr. Chabot.
Mr. Cannon and Mr. Robinson have pointed out that there is
no ability to negotiate anything other than the merchant
processing fee. I have no information to dispute that.
As a result of your hearings, the merchants are finally
starting to see little bits of the industry's paper and their
rules. They kept those hidden for years and years. They are
trickling them out now. They may be available.
So I think there is just a clear example of market failure
here. The companies have market power; they are abusing it.
But I want to point out just another example. It was
pointed out earlier that debit cards have no interest on them,
so we only need the revenue from interchange to make money on
the debit cards.
There are a lot of unfair practices related to debit cards
and consumers. The cheapest and safest, most secure kind of
debit card is when you use your pin. Some companies charge you
a fee to use your pin and give you a reward to use the
unsecure, signature-based debit card.
They are also gaming the system of how much money you have
in your checking account. We have heard about the $42 billion
they make in interchange. $17 billion a year goes to the banks,
in terms of tricking consumers into using their debit cards
when they don't have any money in their accounts, allegedly.
So I think there are just a lot of unfair practices out
there. And, again, I will just say what is happening in the
merchant universe seems parallel to what has happened in the
consumer universe. We have the Federal Reserve stepping in on
the consumer side, in the consumer universe, and I think it is
fortunate that the Judiciary Task Force is stepping in on
behalf of the merchants.
Mr. Chabot. Thank you very much.
And thank you to all the panel members.
Mr. Conyers. Thank you very much, Steve Chabot.
I turn now to Sheila Jackson Lee, the distinguished
gentlelady from Texas.
Ms. Jackson Lee. Mr. Chairman, thank you very much.
I want the audience to recognize that there has been a
series of these very important Task Force hearings that I
really believe shed light on crucial and important issues.
I hope the witnesses will take to heart the interest of the
Members in ensuring that the legislative fixes, which we happen
to believe have merit, are in fact an effective pathway.
So I want to thank the Chairman for his initiative. And I
hope the witnesses will take this as an opportunity, as I have
seen that you have done, to be instructive.
Mr. Robinson, my question to you is why, in the marketplace
as it is now postured, you cannot survive or you cannot find a
remedy on the interchange fees, in terms of some mutual
agreements.
Mr. Robinson. Let me be clear. Are you asking me why they
won't negotiate with me?
Ms. Jackson Lee. I am asking you why the market is not
helping you at this point. So you can answer it in any way you
so desire. Why do you need the legislation?
Mr. Robinson. I believe that we need the legislation
because the banks and the credit card companies have a, sort
of, favored situation, where they have the ability to set rates
and they can give us those rates in basically a take-it-or-
leave-it type of a situation.
We do get to negotiate with them on things like the
processing fee. I used the delivery charge on the refrigerator
analogy, and Mr. Cannon used the flea in the dog analogy--that
is probably closer to a better analogy.
So the reality for us is that we do not have the ability to
negotiate with them currently. And, you know, they keep saying
that we have the ability to negotiate, but just because they
say it doesn't make it so.
So that is why I believe that we need this legislation.
Ms. Jackson Lee. Mr. Cannon, build on that. Why do you not
have the ability to negotiate? Interchange fees are represented
by the industry to pay for their risk, pay for their processing
and paper. They represent that there is some market discussion
of retailers who, every day, can shout out to them and get
relief. What is your response to that?
Mr. Cannon. Ms. Jackson Lee, first, let me thank you on
behalf of the merchants for cosponsoring the bill. We
appreciate that very much.
But, secondly, it is important to focus on what this means.
There is so much discussion about negotiation. And it is
important to understand this tiny little bit and then the rest
of it, which the bulk of this is the interchange fee, set by
and between banks with Visa and MasterCard.
Ms. Jackson Lee. The bank of the merchant and the bank of
the issuer?
Mr. Cannon. No, ma'am. No, ma'am. All of the banks--the
banks that all get the interchange fee are the issuing banks.
So that is the Citis and Chases. And, as I said earlier----
Ms. Jackson Lee. And some of them may be banks of
merchants?
Mr. Cannon. Oh, banks of merchants--oh, sure. Well, if you
are an issuing bank and you issue a credit card, then that
interchange comes back to you, absolutely, no doubt about that.
But the point there is that is not negotiated. And----
Ms. Jackson Lee. So you are suggesting that the merchant's
bank--I happen to go to Joe Smith Bank. It is my friendly
neighborhood bank. They have been knowing me, I have been
having mom-and-pop grocery store for 20 years. You are
suggesting that that bank who has issued me a card will not
advocate for me, the merchant?
Mr. Cannon. Oh, that is absolutely true.
Ms. Jackson Lee. You need to make it clear on the record.
That bank is the bank of the merchant.
Mr. Cannon. Oh, sure. Well, it is the merchant's acquiring
bank. That is where----
Ms. Jackson Lee. I understand.
Mr. Cannon. You are a merchant, you have to have a banking
relationship or a credit card--so you have that bank be your
acquiring bank. That is fine. That bank can also be an issuing
bank. And it is the issuing banks that get the interchange. And
that is how that works.
So you have to understand--and there are banks all over
this country that are both issuing banks and----
Ms. Jackson Lee. And acquiring banks. All right.
Mr. Cannon. They certainly are.
Ms. Jackson Lee. So let's go to the point of why the market
does not work. You are saying the merchants are put at a
disadvantage. Let's see if we can get it precisely why.
Mr. Cannon. The market does not work because, as the system
exists today, there is no ability for the merchants, the
merchant community, to negotiate, to try to do something in the
marketplace.
Now, retailers, as a whole, and certainly Tom, they are
used to negotiating for every single thing, every aspect of
their business, every day, except when it comes to credit card
acceptance. And they have learned long ago that that just
simply is not a possibility.
And the reason it is not is because of how this has
developed over time. Because you have all of these banks, which
over the years have essentially gotten together and agreed,
this is going to be the amount that we are going to charge each
other. And, as you know, there is litigation on this today,
there are 50 lawsuits in New York, that are alleging that that
agreement constitutes price-fixing, good old-fashioned price-
fixing, getting together.
I worked at Circuit City. I knew that Circuit City and Best
Buy couldn't get in a room and decide what the price of TVs are
going to be. However, you have these independent entities,
these independent banks that get together----
Ms. Jackson Lee. With no intervention. With no oversight,
no intervention.
Mr. Cannon. Well, you know, Visa and MasterCard is
obviously a private entity. These banks are private entities.
In the end, these are rooms full of competitors. And I can't
get in a room with my competitors and fix the price of
anything. And that is what has occurred over the years.
And so we have today a situation where we have enormously
high interchange fees, as we believe it--by the way, one study
showed that, in terms of the amount of money that it cost to
actually provide the service, is 13 percent of the total of
interchange. That means that is a roughly 87-percent profit
margin. I would love to have that, but I can tell you that----
Ms. Jackson Lee. Let me give equal time to Mr. Floum.
Mr. Floum, look precisely at the legislative fix or the
legislative structure, which, in laymen's terms, I believe,
simply opens the door to the retailer or the merchant to sit in
the room and to give antitrust immunity or to be able to
protect that discussion where you can come out with a rate that
is fair.
What Mr. Cannon said seems to be shocking, that you have an
80-percent turnaround on profit. And I respect the fact that
you have paper, machines, you have risk. What is wrong with
having this kind of protection for you to have a discussion
that just includes a third party and a protection against
antitrust laws?
Mr. Floum. Thank you for the opportunity to respond,
Congresswoman.
There is nothing wrong with negotiation. That is the free
market, and I think everyone at this table is in favor of the
free market and the opportunity to negotiate.
What is wrong with the bill is it is a negotiation with
subpoenas and depositions and a three-judge tribunal that would
ultimately determine the rate, and that is not the free market.
Now, if I could just explain about interchange, because I
think that there is a complexity to this which is important to
understand. Again, the interchange rate is an interbank
transfer fee. It is not what the merchants pay. The merchants
pay merchant discount rates. And they should and can negotiate.
Now, as to this--I have heard at least 10 times, it is
price-fixing, it is a cartel, it is competitors getting in the
room. There have been four courts in the United States that
have looked directly at this issue, whether interchange is
unlawful under the antitrust laws in the United States. Every
single one of those courts has found that interchange is pro-
competitive and is lawful.
You couldn't have a system without interchange. Because we
have 16,000 banks--and you might go to Joe Smith Bank and buy
something, and your bank is Joe Smith Bank, and you might buy
something from a merchant who banks with Chase, in order for
that transaction to happen instantaneously, securely at the
point of sale, there needs to be a rate that is predetermined.
That is what interchange is.
Nobody has suggested, that I am aware of, in the world that
interchange should be abolished. Instead they are saying it
should be lower. And----
Ms. Jackson Lee. If you would yield to me for a moment?
Mr. Floum. Yes, ma'am.
Ms. Jackson Lee. I need to put on the record that I think
the magnitude of the profit and the return that you are
getting, 641 million credit cards and growing, $1.7 trillion--
so even if this is a competitive fairness, meaning that you are
already competitive, the returns are enormous and the retailers
are suffering.
But I understand that, as the legislation is structured,
there is an arbitration, there is a first step. There probably
could be an agreement without yielding to the legislative fix
if it would work, if you would work and let it work in the
marketplace by listening to the merchants and the retailers.
The problem we saw was that the only people that were part
of the interchange--and you have right risk that should be
addressed--was enormously one-sided. We couldn't find a way to
get in the door. You haven't shown us the way to get in the
door.
We would be happy if you would have a structure, a private
market structure for these individuals to get into the door.
This gives them the door opening.
And we want to look for a way that this works. But I think
the fact that there is an arbitration first and then the court
gives you some relief. And I hear what you are saying, and I am
not unsympathetic. But I am very sympathetic to a sector of the
marketplace that seems to be shut out.
If you want to finish the sentence.
Then I will yield back, Mr. Chairman.
Mr. Floum. Thank you again, Congresswoman, for the
opportunity.
I am not sure if you were in the room----
Ms. Jackson Lee. Probably in another hearing.
Mr. Floum [continuing]. When I mentioned that interchange
revenues do not come to Visa or MasterCard. We don't receive
those revenues. We set interchange to try to grow our system.
Now, with respect to negotiation, I would love to talk to
Mr. Robinson right after this hearing or any other merchant who
would like to discuss how they can drive volume to our network
in return for incentives and other ways that they can offset
their costs. So we are very much in favor of those discussions.
Ms. Jackson Lee. Just one sentence, Mr. Chairman.
I hear you, Mr. Floum--I am sorry if I am saying it
incorrectly. But let me just say this. The banks and the card
have--I don't want to use this very strong word of
``collusion,'' but they certainly have an opportunity to speak
to each other.
And I think that is the crux of our concern. And I will
allow you to think about that, as others question you, to be
able to clarify that point for us.
Mr. Chairman, I thank you very much, and I yield back.
Mr. Conyers. Thank you so much.
The Chair recognizes the distinguished gentleman from
Florida, Ric Keller.
Mr. Keller. Well, thank you very much, Mr. Chairman.
And, Mr. Robinson, I understand your stores operate under
the term Rotten Robbie? Is that right?
Mr. Robinson. That is correct.
Mr. Keller. Did Visa and MasterCard give you that nickname
of Rotten Robbie, or how did that nickname come about?
[Laughter.]
Mr. Robinson. You really want that story?
Mr. Keller. Well, if you can tell it in about 10 seconds,
because I have about 20 other questions for you.
Mr. Robinson. Well, as a small marketer, we needed
something that was catchy and that somebody would remember
without having a major oil company budget. And so we picked
that name because people would remember it.
Mr. Keller. All right. Well, thank you. I am known as
Rotten Ricky, but for different reasons. [Laughter.]
Mr. Robinson. They might be the same.
Mr. Keller. Yes.
Mr. Floum, I am going to start with you.
And I am going to ask you all some questions on both sides,
so if it seems rough at times, it will be easier later for both
of you, time permitting.
You made a statement that I thought was pretty surprising.
Some stuff I could agree with, but the one statement that
really surprised me was, ``Interchange rates have not increased
over the past 10 years.''
And before this Committee, on July 19, 2007, we have Steve
Smith, the CEO of Food City, from Virginia. And he testified
that in the 1990's his grocery stores were paying 1 percent
interchange fees and now they are paying 2 percent, more for
premium cards. He seemed like a pretty credible witness to me,
frankly.
Last week, on May 7, 2008, Bill Douglas, the CEO of a
convenience store chain called Douglas Distributing, testified
that 10 years ago they were paying 1 percent interchange fees
and now they are paying 2 percent on average, more for premium
fees. He seemed pretty credible to me.
Do you agree with me, sir, that, in fact, the Visa
interchange reward-based premium cards have gone up over the
past 10 years?
Mr. Floum. Congressman Keller, yes. And if I could take a
minute to talk about rewards cards, I think it might be
instructive for the Committee. I would just ask my colleague to
put up a chart, if I may, that discusses reward cards.
Our blended, average interchange rates have remained flat,
as I mentioned, over the past 10 years. We have introduced
debit cards that have lower interest rates, pin debit----
Mr. Keller. Right. And I have your chart. And I only have 5
minutes, so let me say, if you look at that chart, back in
2002, you only had, like, 13 percent of people using these
premium cards and now you have 63 percent, or two-thirds of the
credit market is these premium cards, right?
Mr. Floum. Correct.
Mr. Keller. Okay. And so, if now you have two-thirds of the
market with premium cards, and premium prices have gone up,
then, in fact, these folks like Mr. Smith and Mr. Douglas were
telling the truth when they are saying they are having to pay
more for credit card interchange fees.
Mr. Floum. For rewards cards, yes, Congressman.
But I would just like to highlight that what Visa has done
is gotten into a market niche that was occupied by American
Express. These are high spenders. Typically they have rewards
cards, travel and entertainment, jewelry stores, high-end
merchandise. And look at our rates compared to American
Express. They are 60 basis points lower. So it is less
expensive for the retailers, thanks to the fact that we have
gotten into this space.
Mr. Keller. They have gone up over 10 years, especially
with premium cards. And the fact of the matter is, the guy
sitting next to you, Mr. Robinson, with his small convenience
store, is absolutely required to accept the Visa premium card
along with the basic Visa cards, correct?
Mr. Floum. Yes, that is correct.
Mr. Keller. Okay. And if the solution here is that he has
the ability to negotiate with Visa and MasterCard under the
free market principles, as has been suggested by you and
counsel for MasterCard, and 10 years ago the interchange fees
were significantly less, around 1.2 percent according to one of
your charts, then would you agree today that Mr. Robinson and
his company will only, going forward, have to pay 1.2 percent
interchange fees?
Mr. Floum. No, Congressman. And it depends--again, we have
brought debit cards to Mr. Robinson and amazingly electronified
his business so that he can operate on the low margins. We have
enabled his business to prosper. And the debit cards are
lower----
Mr. Keller. I agree totally about the debit cards; you are
100 percent right.
But my point is, this guy doesn't have the ability to
negotiate with you, because Wal-Mart is the biggest employer in
the whole country, Fortune 1 on the Fortune 500, and they had
to bring a suit, resulting in a $3 billion settlement, because
they themselves don't have the ability to negotiate.
And so, if they don't have the ability to negotiate with
you to get lower rates, how the heck is a small, mom-and-pop
convenience store in a position to negotiate lower rates on
these premium reward cards that Visa offers?
Mr. Floum. Well, Congressman, I showed before this is Mr.
Robinson's organization. This is NACS, and this is how to
negotiate with first data for a low merchant discount rate. So
he can and does negotiate through the National Association of
Convenience Stores, which sell, I think, 85 percent of the
retail gas in the country.
Mr. Keller. Okay.
Mr. Chairman, my time has expired, but let me just say to
Mr. Floum, I have a lot more questions and lot more that you
will like to answer, other than those. And I want to get to the
other side, too, to be fair. And hopefully, as time goes by, we
will have a chance to get to the rest of them.
We have important folks waiting, so I will yield back the
balance of my time, Mr. Chairman.
Mr. Conyers. Thank you very much, Ric Keller.
The Chair recognizes Lamar Smith, Ranking Member of the
full Committee.
Mr. Smith. Thank you, Mr. Chairman.
Mr. Cannon, let me direct a couple of questions toward you.
If this bill, H.R. 5546, passes, what I want to know is
what you think the consequences of the bill might be. Which is
to say, how much--and presumably the rates would be lowered as
a result of the bill. How are you going to benefit? How are
consumers going to benefit? Is it going to mean an increase in
profit to you, or is it going to be lower prices to consumers?
Who is going to benefit if this bill passes?
Mr. Cannon. Well, I can tell you, Mr. Smith, right now the
merchant community, and I believe justifiably so, believe that
rates today are wildly beyond competitive rates. And if, in
fact, you got to a----
Mr. Smith. Could you answer my question, though?
Mr. Cannon. Yes, sir.
Mr. Smith. My question is, are consumers going to benefit?
And if so, why and how?
And, by the way, I don't mind that you would make more
profit. I have nothing against profits. But I am just trying to
get an answer as to who would benefit. Are consumers going to
benefit from lower prices, or are you going to benefit from
higher----
Mr. Cannon. Well, Mr. Smith, in this country, and coming
from a retail background, as you know, I have seen this every
day for 10 years. And all I can tell you is, of course
retailers can't agree what they are going to do or not going to
do among each other; that would be a violation of the law. But
I cannot fathom that, as brutally competitive as retail is
today, that somehow merchants would be able to keep a certain
amount of benefit, of money, and not see that enter the
competitive fray. Just knowing what I know about it, to me it
seems really impossible to fathom.
However, I will say this. I think that, in terms of how
this should be viewed, that it is absolutely going to be pro-
consumer and that these benefits will flow into consumer
pockets.
Mr. Smith. Obviously, benefits go to merchants from using
credit cards. You get instant payment, you get more business,
you don't have bounced checks, you get timely payment and so
forth. Why isn't that worth a cent and a half on every dollar?
Mr. Cannon. Oh, Mr. Smith, you are not going to have
merchants tell you that there is not a benefit here. You know,
the credit system today is certainly a benefit.
Mr. Smith. Right.
Mr. Cannon. But the question is, it may be a benefit, but
why are we paying the rates we are paying today? Is it a result
of a competitive marketplace, or is it a result of an antitrust
violation and a market failure?
Mr. Smith. So you don't think you are getting your money's
worth?
Mr. Cannon. I think that is an understatement, sir.
Mr. Smith. Okay, thanks.
Mr. Floum, let me go to you. The appearance here, with Visa
and MasterCard controlling 80 percent of the market, is that
there is not enough competition. At least, that is the optics
on it.
Is there a time that you can point to where Visa has
lowered its rate on a merchant or a group of merchants because
they threatened to use another credit card or they threatened
to use cash or they did use cash or they did use another type
of credit card?
Mr. Floum. Absolutely, Congressman. There are all kinds of
examples of where we have lowered rates, particularly to drive
increased use in certain market segments. Supermarkets, we have
lowered our rates dramatically. Gasoline, we are lowered our
rates over time. Utilities, which was not a sector that worked
for payment cards, we introduced low rates to drive volume.
Quick-service restaurants--here is an example. We hear
about how retailers can't live without Visa or MasterCard.
Well, McDonald's and other fast-food companies did very well
without credit cards for years and years and years. Now they
are using them. Why? Because it drives even more benefits to
those retailers.
So we have rates that go down, rates that go up--it is very
complicated--in order to drive usage in particular sectors.
Mr. Smith. Okay, thank you.
And can you, Mr. Floum, or can any other member of the
panel today tell me a breakdown of how interchange fees are
used? In other words, I have been told that about 13 percent of
the fees go to processing, maybe 44 percent go to benefits,
something like that. Is that generally accurate, or can you--
and the rest would be profits. Can someone give me a breakdown
on where those interchange fees go and how they are used?
Mr. Peirez. Congressman, I can try to explain it in a very
simple way, which is the interchange fee revenue that is
received by the issuing bank is far, far, far less than the
fully loaded cost----
Mr. Smith. What I would like, though, is some specifics. I
gave you some percentages; are those percentages accurate, or
are they not accurate?
Mr. Peirez. They are not accurate because there are no----
Mr. Smith. Okay. What are the accurate percentages?
Mr. Peirez [continuing]. There are no direct--from an
accounting perspective, there is no direct way to equate----
Mr. Smith. You can't tell me what the cost of processing
is? You can't tell me what the cost of benefits are, how those
fees are used?
Mr. Peirez. What I can tell you is that any individual bank
that receives the fees can account for it in many different
ways. But it is their costs of loans, the cost of funds, as you
heard Mr. Floum say----
Mr. Smith. Okay, well, what is the average? If you can't go
by specific--I mean, if you want to go by specific industry,
forget that. Go by the average. Give me an order of magnitude.
Mr. Peirez. I would say that you could take the entire
amount of interchange fees and it won't cover the full cost of
lending and float.
Mr. Smith. What part of interchange fees are used for
processing?
Mr. Peirez. I don't believe that interchange fees are
directly used for processing. And I would be happy to walk
through----
Mr. Smith. I thought that was one of the arguments made.
Mr. Peirez. It is one of the arguments that the merchant
side is making.
Mr. Smith. So you are saying that none of the interchange
fees are used to pay for the cost of processing.
Mr. Peirez. What I am saying is that interchange fees----
Mr. Smith. Well, didn't you just say that or not? Did I
misunderstand something?
Mr. Peirez. No. What I am saying is that the interchange
fees are used by the issuing banks in order to cover some of
their costs.
Mr. Smith. Right.
Mr. Peirez. Different issuing banks may use it for
different things, but it ultimately is far exceeded by their
costs of lending, their cost of float, their cost of credit
risk assumption, their cost of fraud, as Mr. Floum laid out.
Mr. Smith. I know I have some more time, because the
precedent has already been set. So I want to yield Mr. Keller a
couple of minutes. [Laughter.]
But having said that, I am disappointed you didn't answer
my question.
I will yield the balance of my time, at least 2 or 3
minutes, to the gentleman from Florida, Mr. Keller.
Mr. Conyers. Who said you had any more time? [Laughter.]
Mr. Smith. I was going by the precedent set by my colleague
from Texas, Mr. Chairman.
Mr. Conyers. Okay.
Mr. Keller. I can wait another round, Mr. Chairman.
Mr. Conyers. Oh, no. Go ahead.
Mr. Smith. Just 2 minutes.
Mr. Conyers. Go right ahead, Ric.
Mr. Keller. Okay.
Mr. Floum, let me go back to you. You made a statement
earlier about prior case law said that you guys haven't
violated antitrust laws. Correct?
Mr. Floum. Yes, sir.
Mr. Keller. And, in fact, I pulled the most recent
decision, the 9th Circuit case of Kendall v. Visa, just handed
down, March 7, 2008. And you are certainly correct in that. And
I want to walk through the gist of what that says for our
nonlawyers.
MasterCard, Visa and some banks were accused of essentially
engaging in price-fixing, conspiracy and collusion. And the
court gave the plaintiffs a chance to amend their complaint to
be more specific and tell us the details. And they came back,
and they, after deposing a couple key witnesses, had no
details, just legal conclusions. And the court said, I am
throwing it out. It is not enough just to make legal
conclusions. They said, specifically, tell us who did what to
whom, where and when?
Is that a fair summary?
Mr. Floum. Yes.
Mr. Keller. Okay. I then pulled the most recent class
action litigation in the Eastern District of New York against
Visa and MasterCard. This is a 98-page complaint. You are
familiar with this certain litigation?
Mr. Floum. I am.
Mr. Keller. Well, I decided to spend all night reading this
98-page complaint from cover to cover, and what I found was, in
fact, more just legal conclusions.
And I will give you a quote: They collectively fixed
interchange fees. These are illegal. MasterCard and Visa, by
agreeing separately and together to establish and implement and
maintain a price-fixing scheme whereby they fixed
supercompetitive credit card interchange fees, nothing more
than legal conclusions once again.
Is that a fair summary?
Mr. Floum. I think that is very fair.
Mr. Keller. Okay. With that as the basis, let me just ask
you--and I am going to ask you directly, Mr. Peirez, as well,
with your high position at MasterCard--Mr. Peirez and Mr.
Floum, have you ever had conversations, or anyone between
MasterCard and Visa, where you talked about acting together to
fix the interchange fee rates at a certain amount?
Mr. Floum. Absolutely not.
Mr. Keller. Have you ever conspired with each other or with
banks to raise interchange fee rates?
Mr. Floum. No, sir.
Mr. Peirez. No.
Mr. Keller. Have you ever colluded either with MasterCard
or any bank on the planet to set interchange fee rates?
Mr. Floum. No, sir.
Mr. Keller. Okay.
Mr. Mierzwinski, do you have any evidence, in terms of
disgruntled employees, witnesses, documents, letters, anything
that would contradict the testimony of MasterCard and Visa that
they have never engaged in illegal price-fixing, conspiracy or
collusion?
Mr. Mierzwinski. The consumer groups don't have anything
like that. I don't know whether the merchants do.
Mr. Keller. Mr. Cannon, do you have any specific evidence,
as requested by the 9th Circuit Court of Appeals, to contradict
what you heard today?
Mr. Cannon. Well, Mr. Keller, a couple things about that.
Number one, the issue here isn't alleged conspiracy between
MasterCard and Visa. I don't think there are allegations about
that.
Mr. Keller. Well, that is actually--that is the issue.
Trust me, I didn't need my Ambien for this----
Mr. Cannon. Let me put it this way. From the merchants'
perspective, the question here that we raise is the
conversations, agreements, et cetera, between the banks. And
that is the Visa system and the MasterCard system. And, in
fact, that is what this legislation is directed to do and
pointed at doing, is making sure that that negotiation--excuse
me, the agreement on that side is somehow eliminated and that
negotiations start with this legislation.
But the point is, on Kendall, as you know, virtually no
discovery done on that. Really, a motion to dismiss----
Mr. Keller. Depositions were taken of MasterCard and Visa.
Mr. Cannon. I believe that is correct.
Mr. Keller. All right. Massive amounts of discovery, I
believe, in New York, at this point. To my knowledge, I don't
even believe that Visa or MasterCard or the parties in that
case have even raised Kendall as determinative of--that case
would have been dismissed----
Mr. Cannon. I am thinking you are going to see it, down the
road, raised.
Mr. Keller. Since you brought up this legislation, you are
a fan of it, let me ask you this about this legislation. One
thing is very different in this Conyers bill than the Copyright
Royalty Board, and that is this: When this three-judge panel
hears the decision--and let's say it is Mr. Robinson's little
company versus the big banks and MasterCard and Visa--they are
bound by what each side makes as their final offer.
So, for example, if Mr. Robinson says, ``I want the 1-
percent interchange fee rate that we used to have 10 years
ago,'' and MasterCard and Visa and the banks say, ``No, we want
a 5-percent interchange rate,'' that judge panel is required to
take either 1 percent or 5 percent. He cannot pick something in
the middle like 3 percent.
Is that correct?
Mr. Cannon. He would have to pick whatever comes closest to
the standard----
Mr. Keller. But is that a correct statement?
Mr. Cannon. Yes, sir, absolutely.
Mr. Keller. Okay. And that is the difference in the
copyright royalty situation.
Mr. Cannon. Sure, that the judges on the CRB are
essentially allowed to make their own decision. The whole idea
behind the legislation, as I understand it, is you wanted to
make sure that the fate were still in the hands of the parties.
And so, therefore, you would assume that perhaps negotiation
offers would come fairly close to each other. You don't know
for sure.
Mr. Keller. I just wanted to clarify that.
And I will get to other questions later, Mr. Chairman.
Thank you for indulging us, and we yield back the balance of my
time for now.
Mr. Cohen. [Presiding.] The gentleman from Utah?
Mr. Cannon of Utah. I thank the Chair, but I had to miss
part of this hearing because I had some War College people in
my office, and I needed to spend time with them.
Mr. Issa has been very patient. I would appreciate it if
you would pass me over and give time to Mr. Issa.
Mr. Cohen. All right.
Mr. Issa?
Mr. Issa. I thank the Chairman since I have the Army War
College next.
I think because this is an antitrust Task Force, I should
start off by full statement. I do know Mr. Cannon. I did sell
to Best Buy and Circuit in my last profession. And they do hate
each other, and they do fight bitterly to the bottom. The only
sad truth is that when they can't make a profit after they have
beat down the prices, they usually come back to the
manufacturers or suppliers like myself. So my experience makes
Steve a friend and an acquaintance sometimes.
For the rest of the panel, I am sure I would have loved you
all if I would have been a vendor, equally. [Laughter.]
Mr. Robinson, I am going to work with you for a moment,
because I view myself and I view everyone on this dais--we are
on the board of directors, not the executive committee, but the
board of directors of the United States of America, Inc. We
have an absolute responsibility to make sure that we do
everything we can to maintain the opportunity for America to be
competitive around the world.
And the antitrust laws, since the time of Teddy Roosevelt,
have been all about making sure that America is competitive,
because in the long run competition makes America do better
globally.
I am going to ask you, if you could have the so-called 1-
percent rate that is available in Spain and you could open a
bank account in Spain and run your millions of dollars through
that account at that rate, knowing that it is a global market
and those funds would be transfered for a de minimis amount
back into U.S. dollars, would you do that today?
Mr. Robinson. Yes.
Mr. Issa. So the absence of a global market in which other
countries' merchants--the gas station in Madrid--has a lower
cost of a transaction, even if it is my credit card, my premium
United Airlines Mileage Plus card, even if it is that card,
they have a lower cost of transaction than you do. Is that your
understanding?
Mr. Robinson. That is my understanding.
Mr. Issa. Okay. I have a ``no'' next to you from Visa, so I
want to be fair.
My understanding is that some countries, many countries
around the world have set rates, and the rates are lower than
what Mr. Robinson pays today.
Mr. Floum. Thanks for the opportunity to respond,
Congressman.
Mr. Issa. You are welcome.
Mr. Floum. The merchants pay a merchant discount rate to
accept cards. And the merchant discount rate in the United
States is not higher than many countries in the world. It is
right about the middle of the pack. The interchange rates have
been reduced by regulation in certain places like the U.K. and
Australia. But that, again, is not the price that merchants
pay.
So I think Mr. Robinson's, if he did compete with gas
stations, maybe he does, in other parts of the world, their
acceptance costs are about the same as his. So it is not the
case that acceptance costs are lower in other parts of the
world.
The interchange rate may be, but, again, that is just an
indirect cost, not the costs that they merchants pay to their--
--
Mr. Issa. I appreciate that, but I never had an indirect
cost that I didn't consider when I went from my top line to my
bottom line. Tell me why that doesn't make Mr. Robinson more
competitive if he is able to avail himself of a lower
difference between selling price and net cash.
Mr. Floum. Oh, certainly, Congressman, that would help him.
Again, but his cost is his acceptance cost, which he pays to
his acquiring financial institution----
Mr. Issa. That is now in Spain.
Mr. Floum. That is what he wants lowered. That is what he--
--
Mr. Issa. Right. So he is going to go to Spain, and he is
going to work out a deal with the Bank of Madrid. And he is
going to accept people at his gas stations in dollars, okay, on
U.S. credit cards like mine, but, in fact, it is going to be
transported back electronically in real time every 2 hours,
batched, through the Internet, and he is going to receive U.S.
dollars transfered on a daily basis for the few dollars it
takes, $10 for a wire transfer, of millions of dollars a day.
Now, what in the world, in a global market, is he not able
to avail himself of that? And wouldn't that make him more
competitive? He thinks it would.
Mr. Floum. Can we put up the chart on the different
countries? Because I think that might help, Congressman----
Mr. Issa. Well, the point, though, is that there is a
difference in these rates. And, look, I only care about America
being competitive and markets working. If a market works in
China or in Australia or in Spain or anywhere in the European
Union--we are talking about particularly in developed
countries--and it works more efficiently, in that you accept
the transaction for less money, and it would make his business
more competitive or more profitable, whichever, then I think he
has a right to avail himself of it.
And that is not what the bill is about. That is one of the
reasons I haven't signed on to the bill, is I am trying to deal
with global competitiveness, because that is the
responsibility--so, as I am trying to dissect this, what I see
is somebody somewhere gets a better rate, even with my credit
card today, than he gets.
And in a normal market--and Steve Cannon, obviously, is
very aware that the products sold at Circuit City come from
anywhere in the world and they come de minimisly into the
United States, as far as exchange fees, if you will, in order
to give him the absolute best product at the lowest price on a
global basis.
My question to you--and I am going to indulge the Chair
like some of the previous ones, but this is important--is, this
Committee, as we are considering legislation, regardless of
whether the draft legislation becomes law, why shouldn't we
ensure that the most favored price you give to any like company
is available to his?
And we are talking about based on a cost basis, not
necessarily based on your target markets, because target
markets are kind of a monopolistic thing. Cost and
profitability tends to be more a free-market-type decision, and
certainly on a global basis.
So, as I looked at all these things--and, look, I want to
be a fan of every one of your interests, and the only way to do
that is to ask the tough question here, which is, if you could
work for less in Spain, why can't you work for less for Mr.
Robinson or for Circuit City or anyone else if, in fact, in a
normal global market they could simply open a bank account in
Spain?
Mr. Floum. Well, Congressman, it is a very important
question. We are a global company, and it is very important to
us, as well.
I apologize. I don't think I have Spain on--oh, I do have
Spain on this chart. So you can see that, in the United States,
the overall acceptance costs are slightly higher than----
Mr. Issa. But what is the lowest one on the far left? I
can't see it from here.
Mr. Floum. That says Denmark.
Mr. Issa. Okay. He is now doing business in Denmark, is in
a global market---- [Laughter.]
I got to tell you, he skipped Spain, he went right to
Denmark. And, by the way, he picked up cheese on a premium with
every transaction.
Mr. Floum. Again, the acceptance costs are set by the
acquiring banks in these different countries. The interchange
rate is just a part of that. And, for the most part----
Mr. Issa. But if he went to Denmark and put a bank account
there, he would do better.
Mr. Floum. He would do better, in terms of the acceptance
costs in Denmark, that is correct. But he would do worse than
in the Netherlands.
Mr. Issa. And I am going to close out, and I am only going
to say that I would like to hear just short answers from the
others.
When I look at Denmark and I look at--or Belize or anywhere
in the world, but I will pick Denmark--if everybody in the
United States today skipped their U.S. bank, went to Denmark
and said, ``How low will you go in total cost?'', knowing that
the interchange fee starts off low and knowing that they can
put hundreds of billions of dollars in transactions through
Denmark, do any of you believe for a minute that, in fact, you
wouldn't find banks there willing to operate on an incredibly
thin sliver to give Mr. Robinson and Circuit City and Best Buy
and all the other companies a more competitive rate when they
are trying to offer the lowest price to the consumer?
I will give you all the time to answer, and then that is
it. I have run out of time to ask.
Mr. Floum. I can't argue your point, Congressman. But if
you look at Australia, which I believe is on--maybe it is not--
or the U.K., where there has been regulation, consumers are
paying more on the other side of the equation. So interchange,
in part----
Mr. Issa. That is why I am going to Denmark.
Mr. Floum. Okay. Well, in Denmark, we have to look at what
consumers pay in Denmark.
Mr. Issa. Yes, sir?
Mr. Peirez. Sir, what you will see, Congressman, is, if, in
fact, all the U.S. merchants started contracting with a bank in
Denmark in this scenario, what you would see is U.S. consumers
paying more on their cards, you would see less cards made
available to U.S. consumers, you would see rewards or other
benefits go away from any of those consumers, you would see the
period of float time go away or be charged for, you would see
interest rates increase, and many other things which are
detailed as a result of exactly what happened in Australia in
the study I have submitted with my testimony.
So, yes, for a short period of time maybe it would appear
like things are doing better, but the long-term impact would
ultimately be that you would end up in a situation where credit
cards here--and if you look at all these markets that are on
Mr. Floum's chart, this is the one market that has the most
robust, competitive marketplace for cards, the most consumers
benefits and the best products available, the most diverse set
of products.
So I think it is very important not to just look at one
piece of the equation and say, ``Well, that fee would be driven
down.'' There would be consequences, and we are seeing them
play out in some markets today.
Mr. Issa. Mr. Blum?
Mr. Blum. Thank you, Congressman.
I think, in your example, as a Federal credit union not
authorized to operate in Denmark, I would lose significant
market share and membership and, you know, the member services.
I certainly wouldn't applaud or encourage any of my members to
move away from me, to move overseas.
And my only concern here would be the currency transactions
fees, the volatility of the currency market, what might happen
switching their U.S. dollars to the Danish krone and back to
U.S. dollars multiple times.
Mr. Issa. Mr. Cannon?
Mr. Cannon. Mr. Issa, I believe that merchants in the
United States would be delighted to take the Denmark rate
today.
Mr. Mierzwinski. One point that hasn't been made yet, Mr.
Issa, is that the credit card industry is the most profitable
form of banking by far. And that is according to the Federal
Reserve, not me. So I think the banks could absorb this. And I
think if the merchants went to Denmark, they would figure out a
work-around.
But right now, consumers in the United States are paying an
awful lot for their credit cards, whether or not they get these
so-called rewards.
Mr. Issa. Well, thank you.
And thank you, Mr. Chairman.
I very much believe that we need to make sure that we
maintain a robust and efficient system in the U.S. So lest
anyone think I am inviting them to move their dollars offshore,
I am not. But I do want to make sure that all of us realize
that USA, Inc., has to be the most competitive in the world.
And that is a goal, I think, of all of us on the dais.
And, with that, I yield to the gentleman from Florida for
another 2 minutes. [Laughter.]
Mr. Keller. I will let the gentleman from Utah go, and then
if we do another round of questions, I will take it afterwards
and seize one of them, the principals here. But thank you, Mr.
Issa, for yielding. I do have some questions, but I will let
him go first.
Mr. Cohen. Mr. Cannon?
Mr. Cannon of Utah. I think, Mr. Chairman, that is the last
time I am going to defer to Mr. Issa. [Laughter.]
Not because his concerns are not interesting, but because
other matters press on us all.
Mr. Peirez, you were talking about all the competitiveness
and the options that we have in the American market, and that
is true. But it is not because of the interchange fee or the
way we regulate it as opposed to other markets. It is because
America is a more robust place to do business. So we actually
really want to keep that environment where we are.
But you listed a series of fees that are going to go up.
There is a dramatic difference between the fees you just
listed--and I think others, Mr. Floum and others, have talked
about those fees--and the interchange fee. That is, if you are
going to add a fee on a credit card, the person who decides to
use that credit card will understand those fees because they
are explicit, as opposed to the interchange fee, which, really,
nobody ever gets to talk about.
Isn't that the case?
Mr. Peirez. Thank you, Congressman. I think that is a very
important question.
I think that whenever a consumer goes to a merchant and
uses any form of payment, there are costs inherent in----
Mr. Cannon of Utah. But please just answer the question.
The question is, is there not some benefit from having explicit
costs versus hidden costs?
Mr. Peirez. Again, Mr. Congressman, I don't believe there
are hidden costs. I believe that when a consumer goes to a
merchant and chooses how to pay for a good or service, there
are many costs involved. And I think as Mr. Floum stated
earlier, it is our belief that many other forms of payment,
like using a card from the retailers, American Express----
Mr. Cannon of Utah. Pardon me. Let me just get in here,
sir. You listed a series of alternative costs that could be
imposed on that transaction. The one thing that is very
consistent about those alternative costs is that they are
understood, or at least available for understanding, by the
consumer. Whereas, the consumer has no idea about what or how
much the interchange fee is, and he has no way of accessing
that, and the merchant has no way of negotiating that. That is
a hidden cost.
But regardless of the term we are using here, is there not
something better about costs that are more transparent?
Mr. Peirez. We absolutely have no problem with transparency
and encourage merchants to go ahead and tell consumers exactly
what those costs are for them when they are making----
Mr. Cannon of Utah. And when did you start encouraging
merchants?
Mr. Peirez. We have always allowed that. We have never----
Mr. Cannon of Utah. You have always allowed that? Did you
have a practice of telling merchants they can't offer cash
discounts, they can't tell what the cost is?
Mr. Peirez. We do not have a practice----
Mr. Cannon of Utah. Ever?
Mr. Peirez. Ever.
Mr. Cannon of Utah. We had a panel some time ago where two
merchants were surprised that that was the case, because they
had been told somewhere in the system--is it Visa that is doing
that, and not you guys?
Mr. Peirez. I honestly don't know what Visa does. You can
ask Mr. Floum.
But I can say that we do not and have not disallowed
discounts for cash. We were surprised to hear that merchants
actually thought they couldn't do it, and we are encouraged now
that we can tell them they can.
Mr. Cannon of Utah. Thank you.
You said in your earlier testimony that--you talked about
several things that you are making public, like you are posting
rates on your Web site, you are publishing ``more and more,'' I
think was the term you used, of your rules.
When did you start doing that?
Mr. Peirez. Well, we have always, again, permitted the
banks that contract with merchants to provide the merchants
with----
Mr. Cannon of Utah. No, no, no. I am asking--you took
actions that you touted a few minutes ago----
Mr. Peirez. About 4 years ago was the first time that we
did it.
Prior to that time, we had a rule that required the banks
that contracted with merchants to provide the rules to those
merchants in their merchant agreements. We were made aware by
merchants that they did not feel that they had access to those
rules. So 4 years ago, we published what we believe to be the
set of rules that were covering merchants.
We were told by merchants and asked by merchants for other
things, which we have now published. And we are now going to
publish all of our operating rules and are in the process of
doing so.
Mr. Cannon of Utah. Good. And when did you ramp up the rate
at which you began publishing?
Mr. Peirez. Well, we have published the first set 4 years
ago. We published another set about 3 or 4 months ago. And then
we have been starting, in recent days, to now get the rest of
the materials ready to be published.
Mr. Cannon of Utah. And when did you start publishing your
fees?
Mr. Peirez. We started publishing the fees in the fall of
2006.
Mr. Cannon of Utah. Good. I think the discussion over this
bill and in the direction of the bill has actually had a
salubrious effect on the transparency of this market. We
appreciate that.
Mr. Floum, I just wanted to be fairly clear. You have been
very clear and very consistent in talking about your fees and
those fews--the percentage of that fee has been stable over the
last 10 years. During that same period of time, the amount of
transactions has skyrocketed.
Mr. Floum. Yes, sir.
Mr. Cannon of Utah. And, therefore, the gross income, the
revenue, has skyrocketed.
Mr. Floum. Yes, sir.
Mr. Cannon of Utah. And at the same time, virtually all
other electronic transaction processing fees have plummeted. So
I suspect that the actual cost of accounting for the
transaction--that is, processing the transactions--has become a
lesser part of the interchange fee, has it not?
Mr. Floum. Again, Congressman, the rates have remained the
same, and the value of those products has increased
exponentially----
Mr. Cannon of Utah. But you have contractors out there,
Visa, I believe, has contractors out there who process
transactions.
Mr. Floum. We process them over VisaNet. We own many
computers, and we have a----
Mr. Cannon of Utah. But you also have subcontractors out
there that do--I got approached last weekend by somebody who
does it and was concerned about the effect of this bill. So you
have other people that actually perform services for you.
Mr. Floum. On the card-issuing side and on the acquiring
side, there are many third-party processors, yes.
Mr. Cannon of Utah. So what do they do in relationship to
what Visa does as its processing?
Mr. Floum. Well, we are the central switch, so the
transaction between the acquiring bank and the issuing bank,
that is what we do, we switch the transaction and we settle
between those two banks.
Mr. Cannon of Utah. Okay. So the acquiring banks or the
merchant banks have processors that prepare information for
you, and then they take it to your central process.
Mr. Floum. Well, for example, First Data is a large
merchant processor, yes.
Mr. Cannon of Utah. And there are also some small merchant
processors.
Mr. Floum. Yes, sir.
Mr. Cannon of Utah. Have the costs that those people have
been reimbursed, First Data or smaller operators, have they
declined?
Mr. Floum. I need to answer your question directly. It
really depends on the type of transaction. For a standard
transaction, perhaps. But they are much more complicated today,
with automatic authentication, clearing settlement, fraud
control, verification of the risk and so forth. So I can't say
that, in all instances, it has gone down.
Mr. Cannon of Utah. But has it had a tendency to decline?
Mr. Floum. If you are looking at it as just a scale
business, you could make that argument. But, again, because it
is a different product and service, I don't think that is an
apt analogy, with all respect.
Mr. Cannon of Utah. Well, in other words, you have more
service involved. You have a better product, a higher-quality
product that is happening, and so there is some tendency to
raise the value because of that quality.
But you are not suggesting--I mean, you are having a hard
time saying this, but, in this regard, almost all prices have
been falling where you have had automated transactions.
Mr. Floum. What we have done in recent years, Congressman,
is we have paired together our products and our processing
services. They are one. And so, to that extent, I can't say
that the cost has declined, just because of all the added value
that comes with the product and the processing sevrices.
Mr. Cannon of Utah. Of course, price declines tend to occur
more readily where there is competition and transparency. I
don't think there is any question about that.
The record ought to note that Mr. Floum has nodded in
agreement.
Mr. Floum. I agree with you, Congressman.
Mr. Cannon of Utah. Thank you.
Mr. Chairman, I am not sure where we are on the light. Has
it gone red and off?
Mr. Cohen. Your light never goes off, sir. [Laughter.]
Mr. Cannon of Utah. The problem is it doesn't go on either,
right? [Laughter.]
Let me just ask one other question to Mr. Floum and
probably also to Mr. Peirez.
One of the principal complaints about H.R. 5546 is that it
is a price-control bill. If we amended the bill to remove the
three-judge panel but still kept the antitrust exemptions in
it, maybe adjusted those a bit, for the merchants and banks to
negotiate the interchange terms, would that be acceptable to
you?
Mr. Floum. We would have a problem with imposing an
antitrust exemption, because the merchants----
Mr. Cannon of Utah. It would not be imposing; it would be
allowing an exemption to people if they wanted to get together
and negotiate.
Mr. Floum. And today they can get together and negotiate,
Congressman. And there are many examples of that, and I have
cited several of them, the----
Mr. Cannon of Utah. But my question was not what they are
doing now, but if we change the law and allowed them to
negotiate as a group, is that something that would remove your
opposition to this bill?
Mr. Floum. We would certainly--it would certainly improve
the bill. We would need to study the antitrust exemption.
Again, the negotiation is basically between the merchant
community and the acquiring community, and I have seen----
Mr. Cannon of Utah. But that is because the interchange fee
is outside the scope of the acquiring community. Isn't that
right?
Mr. Floum. Acquirers can negotiate interchange with
issuers, and often do.
So what we do is we set default interchange rates. We allow
negotiation of those rates. Those rates are frequently
negotiated between issuers and acquirers. The default rate
protects people like Mr. Blum, the small credit unions, who
aren't able to effectively negotiate in the same way that the
larger financial institutions can.
Mr. Cannon of Utah. How many institutions actually
negotiate? I suspect that Wal-Mart does. How many others
actually effectively negotiate that?
Mr. Floum. Well, the acquirers that have business
relationships with large merchants or large groups of small
merchants negotiate with issuers over the interchange rates in
return for driving volume toward that particular card program.
It happens all the time, Congressman.
Mr. Cannon of Utah. Are there any of your thousands of Visa
banks, or any of your thousands, Mr. Peirez, of your MasterCard
banks, that offers a published interchange rate that is lower
than the rate that is set by Visa and MasterCard?
Mr. Floum. A published merchant discount rate? I am not
aware of any that are lower than interchange. I am aware of
many that are very, very close to the interchange rate, such as
the NACS, which is interchange plus 6 cents.
Mr. Cannon of Utah. Thank you.
Mr. Peirez, could you answer that question also, the prior
question that I had asked Mr. Floum?
Mr. Peirez. Sure. We would definitely see an improvement in
the bill were it to remove the price control setting by the
three administrative law lawyers.
But as far as antitrust exemption goes, I will simply quote
from the Modernization Commission as to why we would still have
a problem with that, which is that, ``They should be
disfavored, and they should be granted rarely and only where it
is necessary to satisfy a specific societal goal that trumps
the benefit of a free market to consumers and the U.S. economy
in general.''
So it is not that you offer an antitrust exemption,
according to the Modernization Commission, to deal with an
antitrust problem. It is that, in fact, you offer an antitrust
exemption in lieu of, and in fact to the detriment of, what the
antitrust laws would otherwise enforce. So it is our belief
that----
Mr. Cannon of Utah. That balancing act would sort of be
implemented by a vote of the House and the Senate.
Mr. Peirez. Sure, absolutely. And we think that, from our
perspective, what that would do is harm competition and harm
consumers. Because, whether the prices went up or down as a
result of that, when we set our default interchange rates, we
do so to maximize the output of our system. We do it to
increase the number of merchants that accept our cards. We do
it to increase the number of cards that are issued. And we do
it to increase consumer usage of our cards. And we think we are
doing it incredibly effectively and legally today.
Mr. Cannon of Utah. Isn't all of that done within--I am not
anti-profit. I love profit. I think you guys should be
profitable. But isn't all that done within--the three things
you just stated are done in the context of how you optimize
your profit. So you say, how do we continue to grow, et cetera,
while still making the most profit.
Mr. Peirez. Absolutely. And legally.
Mr. Cannon of Utah. That is a unilateral decision in a
marketplace that has no way to affect that portion of that
decision.
Mr. Peirez. We make a decision as to a default rate. It is
not unilateral, in the sense that there are many, many actors
who choose to participate or not participate or to go to Visa
or to American Express or to PayPal or to many other payment
systems that are available, many new ones that are coming out.
So it does not exist in the abstract and standing alone. There
are many competitive forces that play into how we set those
rates.
Mr. Cannon of Utah. Do you have any banks that actually
publish an interchange rate that is different from the default
rate?
Mr. Peirez. I am not aware of any banks that publish any
interchange rates. But I am aware of banks that have negotiated
interchange rates in connection with cobranded cards, in
connection with ``on-us'' traffic, in connection with many
other instances.
I would be happy to sit down with your office and go
through many examples that are confidential and I would not
want to speak about in depth here.
Mr. Cannon of Utah. Let me just ask--before I yield back
the vast amount of time remaining, I think that--Mr. Keller,
did you want me to yield a couple of minutes to you?
Okay, then I yield back.
Mr. Cohen. Thank you.
Does the lady from Texas seek recognition?
Ms. Jackson Lee. I do.
Mr. Cohen. You are recognized.
Ms. Jackson Lee. I thank the gentleman.
And I thank the witnesses.
Let me just focus on two lines of questioning, if I might.
Mr. Floum--and I won't--if Mr. Peirez and Mr. Blum want to
answer--if you would answer this question: If interchange
tithes do not generate profit to the credit card companies,
what purpose do they serve?
Consumers are paying for the convenience of many credit
cards, with the security protections, et cetera. We understand
that. I think I have said that on the record before. Should
consumers have to pay extra to pay for a good, functioning
credit card or a good usury that a credit card may have? I
would just put that on the table.
Mr. Cannon, can you give us a sense of how final-offer
arbitration works in the private sector today and how you
expect it to work under the context of the new legislation? In
light of that system, do you view the legislation as Government
price controls?
Let me yield to the three gentlemen who might want to
answer about the interchange fees. I think in your testimony
you have been representing that they are not profit. Then what
are they?
And maybe I have missed it; maybe you have already conceded
that you are willing to engage in the kind of marketplace
negotiation that would give relief to these retailers.
Mr. Floum. Congresswoman, thank you for the question.
We are absolutely willing and eager to negotiate, as I have
said before, at any time. My phone line is always open, as are
our merchant representatives.
Interchange, again, is not----
Ms. Jackson Lee. And would that mean that you would bring
the interchange fee down if Mr. Robinson asked you, along with
a number of others?
Mr. Floum. We would certainly negotiate with anyone about
driving volume to Visa in return for lower rates, absolutely.
Now, with respect to the interchange question, again,
interchange is not revenue to Visa. And we don't set it with
the purpose of making profits to Visa. It doesn't come to Visa
or Mastercard. It goes to the issuing bank----
Ms. Jackson Lee. Well, and I think one of the elements is--
and I appreciate what you have said, and that is on the record,
and we will be posing these serious questions to banks. But
allow me to just ask you the question, from your perspective,
it is profit, is it not, to the banks? I mean, you can continue
to answer, but someone is gaining a profit.
Mr. Blum. Congresswoman, perhaps as a credit union, I can
give you an example in Chartway.
I placed in my testimony that I did 14 million transactions
last year, that it is not a windfall; it is not, in fact, a
profit. You will see in my written testimony that I named it at
24 cents per transaction.
And that is net of some of my costs that, you know, we
didn't include. We didn't include in that net, if you will,
return to our shareholders or our members the cost of
marketing. We didn't include in that the cost of brand repair
when there is a compromise, when our members go out and attempt
to use their credit card at a restaurant and it has been closed
because there has been a tragic, you know, large data breach,
and in order to protect a relatively small financial
institution I have had to block a card. My members didn't
recall that to be T.J. Maxx or to be B.J.'s. It was,
``Chartway's card was closed,'' or, ``Chartway did that,'' or,
``Chartway did this.'' They expect a card to work when they
want to use it, 24/7. Some of those costs associated with that
pull into that 24 cents.
More importantly, years ago, those 14 million transactions
equate to a little over $500 million that was transacted
electronically in 2007 for Chartway. If we take it bank 10
years to when it was a check system, and prior to this larger
surge 20 years, Chartway would have enjoyed 2 more days, on
average, of those funds to be in our institution, where I could
invest them at an overnight rate. The immediacy of that payment
system, that interchange recovered for me, if you will, a
small, a relatively small portion of what I lost by immediately
debiting those funds and moving them out of my----
Ms. Jackson Lee. And, you know, we have worked with credit
unions. Are you suggesting to me that there is no profit that
you gain through the interchange fee?
Mr. Blum. There is an advantage. I mean, as a credit union,
I don't use the word ``profit.'' You know, I am able to----
Ms. Jackson Lee. But it goes back into your shareholders.
You must be getting something from----
Mr. Blum. It certainly goes back in higher dividends and a
lower loan rate----
Ms. Jackson Lee. Right.
Mr. Blum [continuing]. So there are extended services. So
there are advantages.
Ms. Jackson Lee. Well, would you be willing to sit down and
negotiate in the marketplace a response to the interchange fee
and lowering it?
Mr. Blum. In negotiating in the marketplace, as a credit
union, again, we are not staffed to be in that position to go
out and work what I would perceive to be a rather extensive and
ongoing ``who are we going to meet with today.''
Again, our service focuses on our membership. We need these
credit and debit cards in order to compete with larger
financial institutions. And I would poll the Committee: How
many Committee Members would do business with a financial
institution as their primary institution if that institution
could not provide them credit or debit card services?
Ms. Jackson Lee. I appreciate that.
Let me move quickly to Mr. Cannon. And, Mr. Peirez, I am
not going to leave you out, and I will let you finish last.
Mr. Cannon, I asked you a question. Do I need to repeat it
for you, or are you----
Mr. Cannon. Sure, I guess the question is, as I recall, the
benefits of the arbitration, how it would work or how this----
Ms. Jackson Lee. How it works today and how it will work
in----
Mr. Cannon. Sure.
Ms. Jackson Lee. It has been described as being onerous and
burdensome.
Mr. Cannon. Well, I can't fathom that. Mr. Floum talked
about negotiation with subpoenas. I don't think we are reading
the same bill, because that has nothing to do with it. If, in
fact, negotiation is successful, that is the end of it and
there is no proceeding. And they understand that.
This whole process is known, as you know, Congresswoman, as
baseball arbitration, which just says, the parties, all having
negotiated, if they can't come to an agreement, then they just
simply each decide a final offer. And then you give this panel,
in this particular legislation, the authority to make a
decision using a standard as to, essentially, which offer comes
closest to a competitive market rate.
That is not very hard to understand. I think it is going to
be simple to administer. And I will tell you, the great thing
about it, I think it will get the parties together, because
they will all understand what will end up being a competitive
rate.
Ms. Jackson Lee. Mr. Peirez?
Mr. Peirez. Thank you, Congresswoman. I guess I am going to
answer the first question that you had asked about the profit?
Ms. Jackson Lee. Yes, sir.
Mr. Peirez. What I can say is the interchange fees are
absolutely revenue to the banks that receive them and the
credit unions that receive them. As to whether they are profit,
of course, you would have to look at all of their revenues and
all of their costs.
If you took just interchange revenue, took all other
revenue out, and looked at that relative to the costs of
running the card businesses that the banks run, they would not
have a profit, they would have a loss, because their costs of
running it far exceed the interchange revenue.
And the perfect example of that is the fact that, for
American Express to run this system themselves, they charge a
higher fee to merchants than our system does, because they use
that money to subsidize the running of their card business.
And when merchants run their own card systems, it costs
them much more than it costs them to take our cards, which are
much more cost-effective for them and consumers than the cards
that they issue directly to consumers, which is why they have
ended up using our systems or co-branding their existing cards
with our systems or outsourcing the management of their card
programs to the banks that run our card systems.
Because, between lending, credit-risk-worthiness
determinations, monthly compliance requirements, and
statementing and the like, acquiring new accounts, looking at
losses, costs of funds and all the other costs that are
associated with running a card program, they are far in excess
of what is received on interchange revenue.
So, yes, card businesses are profitable, and, yes,
interchange fees are a component of the revenues that are added
up to make them so, but that profitability is also competed
away every day when American consumers receive the vast away of
product offerings that they can choose from from a credit union
like Mr. Blum's up through the largest banks in the country.
Ms. Jackson Lee. Well, I would just ask that you submit for
the record a total of those fees that you have just represented
orally, that I think you indicated that the cost of the card
itself, what the card company has to expend, or the bank.
Mr. Peirez. We can provide you some averages, and
particular banks would have to give you their specific numbers.
Ms. Jackson Lee. But if you could bring it on the----
Mr. Peirez. We can give you what we have.
Ms. Jackson Lee [continuing]. Card, I would greatly
appreciate it.
I do believe, again, to close, that the 671 million cards
and $1.7 trillion revenues, whether it is merchants, cards,
and/or issuers, which are the banks or credit unions, that we
can find some way to resolve what I think has come about
because of the status of our economy. We have to find relief.
And, frankly, I welcome your discussion on this point.
And I yield back.
Mr. Cohen. Thank you.
The gentleman from the State of Florida and Vanderbilt
University?
Mr. Keller. Thank you very much.
Mr. Floum, I did go to Vanderbilt Law School. I was this
close to going to your alma mater, Harvard Law. That is how
thick my rejection letter was, if I can recall. [Laughter.]
But I was very happy to stay in Tennessee.
Mr. Floum. Isn't Harvard the Vanderbilt of the East?
Mr. Keller. Something like that.
Let me ask you, Mr. Floum, about market share, because we
have heard that. I went and pulled the Forbes magazine and the
Nielsen Reports, and it says that the market share,
collectively, of Visa and MasterCard is 75 percent, with Visa
at 44 percent and MasterCard about 31 percent.
Does that seem right to you?
Mr. Floum. If you are just talking about cards, that sounds
accurate.
Mr. Keller. Okay. So we have a market share of 75 percent
with you two; also, AmEx, 20 percent, according to them; and
Discover, 5 percent.
Visa does set the default interchange rates, is that
correct?
Mr. Floum. Yes, sir.
Mr. Keller. What is the single lowest default interchange
rate available right now from Visa?
Mr. Floum. I believe it is around 1.2 or so. I might be off
a little bit, Congressman, but that order of magnitude, in the
supermarket sector, would be one of our lowest rate.
Mr. Keller. Mr. Peirez, what is the single lowest default
interchange rate currently set by MasterCard in the supermarket
sector?
Mr. Peirez. Solely in the supermarket sector?
Mr. Keller. Yes, sir.
Mr. Peirez. It is around that 1.2----
Mr. Keller. 1.2. Is that a coincidence, that MasterCard and
Visa both have 1.2 percent as their single lowest default
interchange rates in the supermarket sector?
Mr. Peirez. I think it is competition, just like if you go
to the corner and there are four gas stations, they are all
going to charge the same price for a gallon of regular.
Mr. Keller. And what if, tomorrow, Visa decides to go to
1.3 percent as their single lowest default interchange rate for
supermarkets, what would be the response of MasterCard?
Mr. Peirez. We would have to carefully consider whether we
had an opportunity to drive more volume by not changing our
rates or by lowering them. We would look at it similar to the
way we did in the gas cap situation, where we said, you know,
there may be an opportunity for us here. We would have to take
a look at other competitive factors like what American Express
is charging in that segment, whether ACH is gaining traction.
There are multiple other factors.
Mr. Keller. Okay. If that is the case, you look at the
competition and you know that Visa is charging a 1.2-percent
default interchange rate for the supermarket sector, why don't
you lower yours to 1.1 percent to take competitive advantage of
the lower rates?
Mr. Peirez. Again, where we think we can do that, as we did
with the gas cap, we do. We have also recently--when you say
the lowest rate, it is going to depend on the transaction size.
But for gas, for example, if someone does fill up an SUV, for a
$90 tank, that may well be our lowest rate. We have a 75-cent
flat-fee rate published, I believe, for----
Mr. Keller. All right. Let me get to some more things here.
I appreciate that. And I will stick with you, Mr. Peirez,
because I want to give you a chance to talk about some other
stuff. I have been asking Mr. Floum a lot of questions here.
If, over at Rotten Robbie, Mr. Robinson decided to place a
sign next to his cash register and says, ``If you use cash, we
will give you a discount on some of the items here,'' would he
be allowed to do that?
Mr. Peirez. Yes.
Mr. Keller. Would he be able to provide a discount if his
customers used a debit card discount over the credit card?
Mr. Peirez. Under our current rules, I believe not.
Mr. Keller. And why is that?
Mr. Peirez. Because we do not allow our form of payment to
be discriminated versus others in the electronic space. On the
cash side, we have always allowed and continue to allow the
discount for cash. But when it comes to between different
electronic forms, we do not allow that.
Mr. Keller. Would he be allowed to put a sign there in
front of his cash register that said, ``Please use your debit
card instead of your credit card''?
Mr. Peirez. Yes.
Mr. Keller. He would.
Mr. Floum, do you concur in that? Would he be able to first
have a sign that says he can offer a cash discount?
Mr. Floum. Absolutely, Congressman.
Mr. Keller. Would he be able to have a sign that says he
can offer a discount over the credit cards if you use your
debit card?
Mr. Floum. Yes. Under our rules for pin debit, he could
also offer a discounted price.
Mr. Keller. Okay.
You have said that you don't think that the retailers would
pass along their savings if they did get a lower interchange
fee. Is that correct?
Mr. Floum. That is what the evidence would suggest, yes,
sir.
Mr. Keller. The evidence in Australia, correct?
Mr. Floum. Yes, and also in a litigation settlement,
interchange rates were lowered, the Wal-Mart settlement, and
there was no passing along of those increased retailer profits
to consumers.
Mr. Keller. All right. I would think Wal-Mart would think
they offer a pretty good deal. I mean, they are doing pretty
well. But we will let them speak for themselves; they are big
boys.
Mr. Robinson, you heard that you are not going to pass
along any of the savings to your consumers. Let me just ask you
point-blank, if you have a favorable result, either through
legislation or litigation, where you pay lower interchange
fees, are you going to pass along the savings to consumers, or
are you going to take all the money and put it in your pocket
as additional profits?
Mr. Robinson. Petroleum retailing is a fiercely competitive
business. Generally when costs go up, generally when costs go
up, we increase our prices. And generally when costs go down or
benefits increase, we pass those along to the consumer also.
Mr. Keller. Let me just be crystal-clear. Let's say you are
paying 2-percent interchange fees now, and the Conyers bill
passes, and you go to the arbitrator, and the arbitrator says,
``I agree with 100 percent with Rotten Robbie, and it is going
to be 1 percent,'' will Rotten Robbie customers get a discount
when they go to buy donuts or gasoline or Coca-Cola as a result
of that taking interchange fees from 2 percent to 1 percent?
Mr. Robinson. Well, I don't think the marketplace works
exactly like that.
Mr. Keller. But your whole argument----
Mr. Robinson. But, ultimately, ultimately, the answer to
your question, the consumer will benefit.
Mr. Keller. Okay. That is the $64,000 question, because
your whole argument is you want lower interchange fees because
it is better for consumers. And so that is why I want to give
you the chance. He is saying it is not going to benefit
consumers. Is it going to benefit consumers or not?
Mr. Robinson. There is not a businessman that doesn't
attempt to keep the margin. But the competition always drives
it back out. And when you have a competitive market--and we
definitely have a competitive market, unlike some others--those
benefits will go back to the consumer.
Mr. Keller. All right. My time has expired. Let me just
give you one last question. You said over and over you are a
businessman and not a lawyer, and I really respect that. But I
am going to ask you sort of a legal question here anyway.
And that is, when you look at this lawsuit, one of the big
things in bold that you see is ``jury trial demanded.'' And
there is a reason for that, as someone who spent many years as
a litigator, often on the side of the big companies, in the
interest of full disclosure. But the little guy wants to have a
jury. Often, the big guys would rather not have a jury; they
would rather have a judge or an arbitrator and other folks, so
you don't have the possibility of massive, inflated verdicts
from emotion and that sort of thing. And there are always
exceptions, but that is the general rule.
You are seeking legislation that is going to put you in
front an arbitrator that is binding, not a jury. And, in fact,
if you say you want a 1-percent fee and Mr. Floum's Visa client
says, no, we want 5 percent, you are taking a real risk that
this binding arbitrator may go with his side.
Are you comfortable taking that gamble and putting yourself
in that forum, as opposed to the jury trial situation?
Mr. Robinson. The short answer is yes.
As we looked at the problem in trying to do something about
the anti-competitive behavior of Visa and MasterCard, we looked
at the various options. We looked at the option of breaking it
up like AT&T. We looked at it dealing with it like a utility.
And we felt that this was a competitive marketplace solution
that, quite frankly, we might not do better with.
I have a hard time believing that we will not.
Mr. Keller. But the gist of it is you are willing to take
that gamble?
Mr. Robinson. Yes.
Mr. Keller. Okay.
Issues have been raised about whether or not you have
bargaining power. Have you ever worked with a merchant bank
that was willing to negotiate a lower interchange fee rate?
Mr. Robinson. No.
Mr. Keller. Have you ever attempted to negotiate a lower
interchange fee rate with a merchant bank?
Mr. Robinson. We don't even know who to talk to. So, no, to
answer your question, no.
Mr. Keller. Well, your own bank you can talk to, right? I
mean, the acquiring bank you can talk to?
Mr. Robinson. Yes. And we negotiate--the acquiring bank, we
negotiate processing. And it is interesting, on the processing
side, that is fiercely competitive. I mean, it is amazing how
aggressive the processing banks. So you have a processing
rate--and they have negotiated a processing fee, and that has
come down because of competition.
Mr. Keller. So you are able to negotiate with the banks, in
terms of the acquiring bank, lower processing fees. But you are
not sure who to talk to in terms of the issuing bank,
negotiating lower interchange fees. Is that a fair summary?
Mr. Robinson. Yes. We do not negotiate interchange fees.
Mr. Keller. Have you ever tried to negotiate with Visa or
MasterCard, in terms of getting them to set lower interchange
fees?
Mr. Robinson. It is not--I mean, it is not an option.
Mr. Keller. You are sitting right next to two pretty big
players, and they said they are going to talk to you. Do you
feel any optimism? Are you going to try?
Mr. Robinson. I can't wait for this hearing to be over, to
do that.
Mr. Keller. Okay. You have heard the criticism from
MasterCard and Visa saying that this is price control, because
you are having the three-judge panel set the rate. Some folks
think it is only price control if you are having the
Government, itself, or bureaucrats set the rate or Congress.
But they would dispute that. But others may think that you are
living under a price-control system now, since you have these
two companies with a 75-percent market share, and they are
telling you, here is the default interchange rate that they are
giving to the banks, and take it or leave it.
Do you feel that you have a price-control situation now?
And if you feel that it is not price controls under the new
scheme, tell me why.
Mr. Robinson. I would basically call the existing system a
price-fixing system, not necessarily a price control. But the
result is effectively the same. So that is the existing
situation.
And I think that when you set up an opportunity to provide
for the parties to negotiate and yet you have something that
holds their feet to the fire, that at some point in time they
can't just stonewall the negotiation process, I consider that a
competitive system.
Mr. Keller. Mr. Floum, let me go back with the bargaining
power and negotiation issue. You have heard, essentially, that
the little guys can negotiate with the acquiring banks to get
lower processing fees, at least in the mind of Mr. Robinson. Do
you think that is a true statement, they do have the power to
at least negotiate with the acquiring banks?
Mr. Floum. Absolutely. And I believe they are charged a
single fee for acceptance. The processing fee is a component of
that. But, yes, absolutely, they can bargain with their
acquirer.
Mr. Keller. My next question is, I come into Rotten Robbie
and I use my credit card, which I think is the local credit
union here in the building. Does he have the ability to
negotiate a lower fee with my credit union, the so-called
issuing bank?
Mr. Floum. He does. And his group, the National Association
of Convenience Stores, I would think, would have quite a lot to
say about driving volume to either Visa or one of our
competitors. That is competition in return for favorable terms.
So I am very happy right after this to sit down with Mr.
Robinson and we can talk about.
Mr. Keller. So you are saying, not only can he negotiate
with the acquiring bank, he can also, through some sort of
organization like the convenience stores trade group, negotiate
with a variety of issuing banks as well as MasterCard or at
least Visa?
Mr. Floum. Yes, sir. And, again, it is a very competitive
environment, and we would be looking for something that would
drive volume in return for lower rates.
Mr. Keller. Let me just--my time has expired, and I think I
am the last person now, so let me just do a short question to
you, Mr. Robinson.
What percentage of your customers at Rotten Robbie use
credit cards, would you estimate?
Mr. Robinson. Right now, cash represents, total company,
just a little over 25 percent. We have some locations where we
are almost 90 percent plastic.
Mr. Keller. Okay. Well, in those locations where you are 90
percent plastic, I understand you are upset about the
interchange fees that you are paying to the credit cards. Why
don't you just put a sign up and say, hey, if you use your
debit card, I would appreciate it or may even give you a
discount, since that apparently is at least allowed with Visa?
Mr. Robinson. Basically doing some sort of a cash discount
type of a----
Mr. Keller. Or debit card. Why don't you just tell them,
hey, you know--when they hand you a card that can be used debit
or credit, why don't you just tell them, can you use this as
your debit instead?
Mr. Robinson. There is a number of considerations.
Number one, the rules that Visa and MasterCard have make it
more challenging to be able to do that. You do run into some
issues relative to the State weights and measures. A challenge
that you run into--I mean, we would prefer to say yes to our
customer, not no. And trying to do something where you have
different pricing is confusing to the customer.
It is very interesting, if you are a credit card user,
oftentimes you will not perceive that as a discount for cash;
you will consider it a charge for credit.
Mr. Keller. Right, but you are listening to what these
smart guys are saying, and they are saying, hey, if you don't
like the credit card fees, just tell them to use the debit
card, because that is still a pretty good deal. And it seems
common-sense to me.
If I were you, I would probably be saying, well, I can't do
that with everybody because, for a debit card, you have to have
money in the bank and, credit card, you don't need the money in
the bank. So it is not a perfect solution.
But I just wanted to give you the chance to respond to
that, because that is what you are hearing.
Let me go on and ask you this: If you decided today that,
``I am mad as heck, and I am not going to take it anymore, and
I am not accepting MasterCard and Visa at Rotten Robbies,''
what would happen to your business model?
Mr. Robinson. Oh, I don't think that is an option. I mean,
when you are dealing with whichever number that I said, whether
it be 60 percent, 80 percent, 90 percent, and you have that
much business in plastic, you not accepting it just really
doesn't work.
Can I just answer or make a----
Mr. Keller. Yes, but you are saying you would go out of
business if you stopped taking MasterCard and Visa?
Mr. Robinson. Well, probably.
Mr. Keller. Okay. Yes, go ahead.
Mr. Robinson. One of my options is to push the debit side.
What is very interesting is, if you look at all the
advertisement, you know, for pin debit versus signature debit,
if you come in with your debit card and you don't use the pin,
you don't use the thing that makes the card more secure, that
product doesn't go through the debit card network; that goes
through the credit card network. I am charged credit card rates
if you use your debit card.
Mr. Keller. All right.
Mr. Robinson. So one of the things that gets a little bit
challenging is, if you want to have a discount for debit, it
really depends on how it is used.
Mr. Keller. Thank you.
I have been told to wrap up. Just, in fairness, Mr. Floum,
on this whole debit card issue, do you have anything that you
want to respond to about encouraging folks to use debit if you
are worried about the high interchange fees for credit card?
And that will be my final question. I will let you respond.
Mr. Floum. Thank you, Congressman.
Just to clear up any confusion, discounting is permissible.
It doesn't require to label separately every item in the store,
as we have heard from merchants. So that would certainly be a
solution for retailers that want to try to drive their costs
down by steering--it is permissible, under our rules--to
different forms of payment.
Mr. Keller. Thank you.
And I thank you, Mr. Chairman, for your indulgence. I will
yield back.
And I just want to thank the witnesses so much for being
here and being patient. We appreciate you doing that.
Mr. Cohen. Thank you, Mr. Keller.
I just had one question. Is there a Visa Triple Crown this
year?
Mr. Floum. I don't think that we still sponsor the Triple
Crown.
Mr. Cohen. The interchange fees weren't high enough to be
able to afford it? [Laughter.]
Mr. Floum. I am not going to respond to that. [Laughter.]
Mr. Cohen. I didn't know if Big Brown was going to have to
pay part of his winnings out of that or not.
Thank you. I would like to thank our witnesses for their
testimony.
Without objection, Members will have 5 legislative days to
submit any additional questions. And we would ask that you
answer those questions as promptly as you can, which we will
forward on to you, and they will be made part of the record.
Without objection, the record will remain open for 5
legislative days for the submission of any other additional
materials.
The hearing is adjourned.
[Whereupon, at 2:34 p.m., the Task Force was adjourned.]