Interchange Fee Reform

Floor Speech

Mr. DURBIN. Madam President, I rise to speak about the issue of swipe fees. Most people do not know what a swipe fee is, but it is almost part of your daily life. The next time you reach into your wallet or purse and pull out a piece of plastic to pay for something--such as my debit card--and present it at a retailer or a restaurant or a hotel or a gas station, understand what is happening in that transaction. There are several things that are not even visible.

What is happening in that transaction is, you are paying that merchant and your bank is going to honor that payment from your account on your debit card, but then the bank and credit card company are going to charge the merchant for the transaction.

In days gone by, if we paid in cash, obviously, there was no fee involved. If we paid with a check--which was done for a long time and is done less and less now--there were pennies charged to process the check. Whether the face amount of the check was $1 or $100--pennies to process the piece of paper through the system.

A much more efficient system is being used with debit cards, where we actually are withdrawing money from our own account to the credit of the restaurant or the retailer. Unfortunately, there is a fee involved charged to the merchant or retailer called the swipe fee--accurately called the swipe fee because what has happened is, these major companies--Visa and MasterCard and the banks that issue their cards--have established how much each transaction will pay in this swipe fee or interchange fee.

The Federal Reserve recently did an analysis and found something interesting: They found that the average swipe fee across America is 44 cents for each transaction. Then they said: Well, what does it actually cost to process this debit account movement of money from one place to another? The answer was: 10 cents or less.

So there is a substantial charge involved in the hundreds, thousands, tens of thousands, millions of transactions that go on every single day, and it has a direct impact on the places where we do business. It means there is an added cost to the retailer or merchant that we are doing business with for the use of the debit card that goes beyond the actual cost to the bank involved.

You say to yourself: Well, that is business, isn't it? If you are going to take these cards, and you want the convenience of using these cards, you have obviously negotiated 44 cents and that is the way it goes. Wrong. There is no negotiation involved. The retailers and merchants literally have no bargaining power in what that fee will be, and over the years, that swipe fee, or interchange fee, has been creeping higher and higher. For many businesses across America, it is the second or third most expensive item in doing business. That is right. Beyond the cost of personnel and workers and beyond the rental and utilities paid or health insurance comes the swipe fee--the fees charged by credit card companies for the use of debit cards and credit cards.

What we said last year, while we were debating financial reform, was, this price fixing by the credit card companies--and there are two giants, Visa and MasterCard, that control 80 percent of the card transactions in America--this swipe fee that is being charged by them should be reasonable and proportional to the actual cost of the transaction. They should not be able to force feed and price fix an excessive swipe fee, or interchange fee, on retailers and merchants across America.

We said to the Federal Reserve: Take a look at this and try to figure out a way to establish a reasonable, proportional fee since the credit card companies and the big banks are not going to negotiate. The Fed is in the process of doing it.

We also said any bank or credit union with less than $10 billion in assets will not be affected by this. Our object was to make sure the hometown banks, the local banks, the local credit unions, could continue to receive interchange fees without any type of oversight by the Federal Government. Some people said: Why didn't you include them? Well, we tried to give them an opportunity to continue to do business because, frankly, those who are closest in the communities are the ones we ought to be mindful of and protective of.

Perhaps I have a little prejudice involved too. The biggest banks in America--the top 1 percent of banks in America--are the ones that do almost 60 percent of this card business. I am talking about the same Wall Street banks that ended up getting a bailout from the Federal Government, to the tune of hundreds of billions of dollars. I do not have a lot of sympathy for them. They made some stupid mistakes and the taxpayers came to their rescue. From my point of view, we should not be subsidizing them or creating an opportunity for them to fix prices when it comes to merchants and retailers across America.

This passed last year with a strong bipartisan vote of 64 Senators, and the biggest banks in America and the biggest credit card companies in America have been working nonstop ever since to stop this from going into effect. They have poured more resources into this effort than I have ever seen, and I have been around this place for a while. They want to stop this because they hate swipe fee reform like the devil hates holy water. For them, it is a dramatic loss of money. How much? Each month--each month in America--these debit swipe fees generate $1.3 billion--$1.3 billion--for the banks at the expense of merchants and small businesses and large businesses, too, for that matter, across America. But not just at their expense. These swipe fees are being paid every time a person uses a debit card or a credit card to pay the government, to pay a university, to make a charitable contribution. That is a reality, and $1.3 billion a month--most of it going to the biggest banks in America--they believe is worth fighting for.

So the fight has been joined, and Senators have come to the floor and submitted an amendment to postpone this swipe fee reform for 2 years--2 years--to study it. Let me see, 24 months times $1.3 billion--over $30 billion they want in a handout to the biggest banks and credit card companies in America. I do not think that is fair. It is sure not fair to the small businesses that had asked me to introduce this and ask me to continue to fight for it. It is not fair to these businesses or their customers.

You see, our reform efforts are not just supported by the businesses. They are supported by the Consumer Federation of America, the largest consumer advocacy group in the United States. They understand that if you are dealing with a competitive business--let's assume you have gas stations across the street from one another and you make more profitability at one gas station, they can lower prices and be more competitive with the gas station across the street. The same is not true when it comes to big banks and credit cards. When it comes to credit cards, we have not a monopoly but a duopoly--two monopolistic companies, very little competition between them. There is a lot of competition in small town America and Main Street America.

Some people ask me why I tackle some of these issues that involve the big banks and credit card companies and others. They say: Don't you understand these operations you are fighting are pretty large in terms of their resources and their political might? There is truth in that. The banks are a $13 trillion industry in America, according to the American Bankers Association--$13 trillion--and last year the banking industry in America made over $87 billion in profits.

Visa and MasterCard were spun off from big banks a few years ago and now are multibillion-dollar companies that control nearly 80 percent of the payment card market.

People tell me these financial industry giants have unlimited resources, and they are going to fight when there is $1 billion a month on the table.

Well I do not think the people of Illinois sent me--or sent from their own States other Senators--to hand the keys of this country over to big banks and credit card companies. They sent me to make sure Wall Street banks follow the same rules of the road that Main Street businesses follow every single day.

There is nothing wrong with fees charged for services provided, as long as those fees are transparent and are set in a competitive market environment. Don't tell me you are for a free market and then say but Visa and MasterCard can fix prices. Don't tell me you are for a free market and then say those prices they fix have to be concealed and hidden from the public.

When markets are characterized by transparency, competition, and choice, consumers benefit. But consumers do not benefit when fees are hidden, changed without warning or set by agreement between competitors. Sadly, that describes many of the fees banks and card companies have charged in recent years.

We passed the Credit CARD Act of 2009 and then the Dodd-Frank Wall Street Reform Act last year and the Consumer Financial Protection Act was also included. We targeted many of the hidden fees consumers pay in America. If we do not do it, ladies and gentlemen, if the Senate does not do it, I would say to my colleagues: It will not be done.

These powerful economic business entities in America need to be watched closely. Do not take my word for it. Take the word of those who analyze the recession which we are dealing with. Left to their own devices, these entities will go to extremes when it comes to profit taking, and that is what is happening when it comes to these big banks and credit card companies today. If we do not stand for consumers and small businesses on the floor of the Senate, shame on us. Who else is going to do it?

By making fees transparent and helping to inform consumers, our laws will help the financial services market work better for all Americans.

This swipe fee, or interchange fee, reform amendment I added to the Dodd-Frank bill also addressed an anticompetitive market failure in the debit card system. For years, the banking industry has engaged in a collusive practice. The banks that issue the cards have let Visa and MasterCard fix the interchange fee rates banks receive from merchants every time a debit card is swiped. The banks get the fees, but they do not set the fees. Their friends at Visa and MasterCard set the fees that will be charged. This is price fixing, purely and simply, by Visa and MasterCard on behalf of thousands of banks, and this price fixing is currently unregulated.

Of course, every bank in the country is going to tell us the interchange system is working just fine, Senator. That is because with centrally fixed interchange rates, banks do not have to worry about competition. Each bank knows the bank down the street is getting the same fee they are. But there are two fundamental problems with Visa's and MasterCard's fixing of these interchange rates and swipe fees.

First, centralized rate fixing gives the card-issuing banks no incentive to manage their operational and fraud costs efficiently. All banks in the Visa network are guaranteed the same Visa price-fixed interchange rate whether they are efficient or not. There is no competition and the fees literally subsidize inefficiency.

Second, because Visa and MasterCard, the credit card giants, control nearly 80 percent of the debit card market and merchants can't realistically refuse to accept them, Visa and MasterCard have the incentive to constantly raise interchange rates to encourage banks to issue more of their cards. So fee rates keep going up and the merchants are helpless to do anything about it.

I have heard so many speeches on the floor of the Senate about how we love our small business, and we should. It is the backbone of the economy of America. This interchange fee goes to the basic survival of small businesses across America. If this Senate is going to decide that it is more important to protect the big banks and credit card companies than small businesses, shame on us. We should accept the reality that it means these small businesses will struggle, will not be as profitable, will not hire as many people. Can that make us a better country? Can that help us out of the recession?

Merchants can't say no to Visa and MasterCard because of the market power of these two credit card giants and because swipe fee rates are fixed by the networks. A merchant doesn't even have the option of negotiating a better deal, so merchants are stuck with whatever the increase is in swipe fees, which is then passed along to consumers in the form of higher prices for gasoline and groceries. Consumers, and particularly low-income and unbanked consumers, pay for the debit interchange system to the tune of $16 billion a year.

Incidentally, do my colleagues know what the interchange fee is in Canada charged by Visa and MasterCard--the same fee I have been talking about here--through the banks in Canada? Zero. There is no interchange fee. Do my colleagues know what it is in Europe? A fraction of what it is in the United States. Why is that the case? Why would these credit card giants say they can't survive oversight of their interchange fees in the United States and charge zero in Canada and pennies in Europe? Because the Canadian Government came to them and said, We are not going to let you rip off our small businesses. We will regulate you. They said, Never mind, we won't charge an interchange fee in Canada. In Europe, the same thing happened. If we are silent, exactly the opposite will occur. The credit card companies will continue to increase these fees at the expense of American consumers and small businesses and large businesses alike.

Some people out there apparently trust Visa and MasterCard to price fix in a fair and benevolent way. They don't see the need for reform. If you believe the giant credit card networks can be trusted to fix interchange prices in a way that is fair for banks, merchants, and consumers, then you should be fine with the status quo and have no problem prolonging it for years.

That is exactly what the amendment coming before us will do. It will postpone for 2 years and put in a study of this issue. Well, we should study things before we act on them, that is for sure. But let's look at the record. We have had nine different congressional hearings on this issue and three separate studies already. We have studied this one to death. What the banks and credit card companies want us to do is to keep on studying so they can collect $1.3 billion every single month. That is their strategy.

I don't place my trust in Visa and MasterCard, and I am not alone. Last year, a strong bipartisan majority in Congress said we better stand up for small business and retailers and consumers, and we passed this law. The banks and credit card companies are pulling out all the stops. I learned yesterday that Chase, which is one of the major issuers of these debit cards across America, sent a letter to their customers in a number of States and said, If you don't repeal the Durbin amendment, we are going to end up in a position where we won't be able to give you all of the rewards which we are offering you on your debit and credit card.

First, this relates to debit cards which don't carry the big reward programs. Secondly, this kind of veiled threat from these credit card companies should not be taken seriously by any consumer across America.

The last time we had credit card reform, we unfortunately waited months before it became law. The credit card companies saw it coming. So what did they do? They dramatically raised their interest rates on consumers across America during that period of time. Don't expect any favors from this industry. If we do not regulate the credit card industry and the banks that issue these cards, trust me, the consumers will continue to lose time and time again.

As for Chase, I don't think there are going to be any poppy flowers sold on their behalf on street corners. If I recall correctly, their last earnings report showed a 48-percent increase in profits over their previous year. They are doing quite well. Now it is time for them to give small businesses and consumers across America a break when it comes to the fees they are charging.

Congress said that if banks are going to let Visa and MasterCard fix the interchange rates that merchants pay banks, then the rates fixed on behalf of the biggest 1 percent of banks must be reasonable and proportional--reasonable and proportional. This is a narrowly targeted reform through the Federal Reserve. The new law will provide a constraint on ever-rising interchange fees that the current broken market does not provide.

We have given this job to the Federal Reserve. They have put out draft rulemaking and they are soliciting comments across the country. Chairman Bernanke called me a couple of days ago and said they needed an additional few weeks to come up with the rule that will still go into effect in July of this year. I understand that. I want him to do his best. I want him to follow what this law says--exempting credit unions and community banks with less than $10 billion in assets.

The Fed has taken this job seriously, and I am glad they have. The Fed knows that many small banks are concerned the reform might affect them even though the law clearly exempts them. Last week Chairman Bernanke told all those small banks at a meeting that he understands their concerns and will work with them to make sure the final rule addresses them.

I urge my colleagues to stand up for the reasonable reform Congress passed last year. We don't need another study. A study is an excuse for the credit card companies and the biggest banks in America to take $1.3 billion a month out of the economy and away from small businesses.

I want my colleagues to know there is broad support for debit interchange reform. I have received many letters in recent days from individuals, small businesses, and organizations that support reform. I will readily concede that the big box retailers are also benefitted by this. I am not trying to hide that. That is a fact. But the simple fact of the matter is this has been generated by a lot of local people and a lot of local businesses.

Let me tell my colleagues, this is hardball as far as the big banks and credit card companies are concerned. I happened to mention that I was brought to this issue 4 or 5 years ago by a good friend of mine, a very conservative gentleman who has been very successful in downstate Illinois, named Rich Niemann from Quincy, IL. He owns a bunch of grocery stores and has expanded all across the Midwest. He is a hard-working guy the like of which is hard to find. He and I disagree on a lot of things, but I always turn to him when I have a business issue because I know he will give me an honest analysis. When Rich told me that he started accepting plastic at his grocery stores, it went from just a small number of transactions to now almost half of the transactions at his grocery stores are with plastic and he says, They are killing me with this interchange fee. The credit card companies and debit card companies are charging him this fee and he has no voice or bargain in the process. They charge whatever they want to charge and he pays it. He is a man who is trying to create jobs in small-town America. I thought he had the right approach to this. They should be able to recover their reasonable, proportional costs for using a debit card, but why should they be able to penalize a business such as Rich Niemann's grocery stores? I said this publicly a couple of days ago and, not surprisingly, some folks on the other side decided to go after and attack Rich Niemann as a businessman. I will stand with him. From my point of view, he is a good man. I don't think he votes for a lot of Democrats. I hope once in a while he might vote for me, but notwithstanding that, I respect him so much and I am sorry he had to take this beating in the press from the other side. He can take it, though. He has been a tough guy who has stood up for his family and his business all his life.

Incidentally, on March 18 I received a letter from the American Council on Education and nine other national associations representing colleges and universities and here is what they said:

Debit card swipe fees have been a hidden expense for students and families paying for college for which they receive no benefit. As a result of the law enacted last year and the Federal Reserve's proposed rule, we believe colleges and universities will see reduced debit card costs which they will be able to pass on to students through lower costs as well as increased resources for institutional grant aid and student services.

We don't think about that. We think about gas stations. But the fact is students use plastic for everything, and the universities and colleges end up paying these swipe fees to the big banks and the credit card companies and debit card companies as a result.

On March 15 I got a letter from the Consumer Federation of America. Some of the folks on the other side said this will never help consumers. These businesses are going to take all the savings that would otherwise go to the big banks and credit card companies and they are going to take those and go home. Well, I disagree, and so does the Consumer Federation of America, the leading consumer advocate in this country. Here is what they said on March 15:

The current interchange system is uncompetitive, nontransparent, and harmful to consumers ..... CFA does not support delaying implementation of the new law.

That is what the amendment on the floor today suggests.

On March 15 I received a letter from the consumer groups Public Citizen and U.S. PIRG, and here is what they said:

The Durbin amendment was designed to curb anticompetitive practices in the payment card market ..... we do not support legislation calling for delay of the Durbin swipe fee amendment.

Yesterday I received a letter from Americans for Financial Reform, a coalition of over 250 national, State, and local groups, including consumer, civil rights, investor, retiree, labor, religious, and business groups. Here is what they said:

From a consumer point of view, the current interchange system is not defensible. Feeble competition in the payment card marketplace has led to unjustifiably high debit interchange fees that the poorest Americans, generally cash customers, are required to subsidize at the store and at the pump. ..... We oppose efforts to delay the implementation of the Durbin amendment through Congressional action.

Make no mistake, the big banks and card companies want to stop this rule before it is issued, because they are afraid that once it is issued and once people realize the savings to business and consumers across America, they will never go back. So they are pouring it on to try to move this amendment as quickly as possible to stop the Federal Reserve from issuing the rule which the law requires them to issue.

On March 17, the Hispanic Institute sent me a letter and here is what they said:

Sixteen countries and the European Union regulate swipe fees and their experience demonstrates that regulation benefits consumers in lower fees and lower cost of goods. There is no evidence that swipe fee regulation will lead to an increase in other consumer fees.

The National Small Business Association--as I said, we spend more time on the Senate floor venerating small businesses than almost anything other than our troops. Here is what the National Small Business Association said in a statement on March 23:

The Durbin amendment and the proposed Fed rule are beneficial to America's small businesses. Further delay, equivocation, and another big-bank handout are not.

I also received a letter from 185 national and State merchant trade associations representing 2.7 million stores and 50 million employees.

Let me say at the outset, the coalition I am representing is not nearly as powerful or as large politically as the big banks and the credit card companies. They can't match them in terms of their political power, the number of lobbyists they hire, the number of letters they send, and all the rest. For the most part, they represent a lot of small businesses that are trying their best to get fair treatment. Here is what they say:

We have repeatedly sought to negotiate with the card companies to reform this broken market and bring savings to our customers. Fifteen years later, we have concluded that normal market forces cannot and do not work in a broken market with price-fixing among banks controlled by a duopoly.

They mean Visa and MasterCard.

They urged Congress to oppose any efforts to delay swipe fee reform.

The United Food and Commercial Workers, a union which I used to belong to when I was growing up, said:

Delaying swipe fee reform will also delay the creation of thousands of jobs each year that will result in reduced interchange fees. This reform is long overdue for working Americans everywhere.

The National Community Pharmacists Association and the National Association of Chain Drug Stores sent me a letter and said:

We request any assistance you can provide in ensuring the timely completion of the final regulations and enforcement of the Durbin amendment.

The National Association of College Stores and 20 State associations wrote and said:

Credit and debit purchases account for more than $100 million annually in interchange fees paid by college bookstores and their student and parent customers.

Let me repeat: $100 million a year paid by college bookstores and their student and parent customers in interchange fees to the banks and credit card companies.

They go on to say:

Excessive swipe fees that would otherwise be returned to students through lower prices, grants, and student services are being misdirected toward credit card companies and large banks. ..... Every month of delay means higher costs for students and parents at a time when schools are being asked to do more with less funding.

BREAK IN TRANSCRIPT

Mr. DURBIN. In closing, I know what I am up against. Don't take on Chase and all the big banks of America--the ones that have the lion's share of these debit cards--and Visa and MasterCard and not get suited up for battle. This is a darn important battle. It will test beyond the wisdom or justice of this proposal; it is going to test who owns the United States Senate. Is this a Senate that is willing to stand up for small business across America? Is this a Senate that is willing to say we will fight for consumers even at the expense of the profits of the banks and credit card companies?

I think consumers across America know on which side we should be. I hope we will be. We were last year, with 64 Senators, Democrats and Republicans, joining to stand up for small businesses and large businesses alike, retailers and merchants. I know the big banks and credit card companies have enormous resources, and they have a reach in every direction. I know they are running commercials and sending an army of lobbyists to Capitol Hill. They also have allies in the Senate. They will pull out all the stops to roll back any effort to curb their abusive practices.

I want my colleagues to know I think Main Street is worth standing up for--certainly, when it comes to their fights with Wall Street. Small businesses, consumers, universities, labor unions, and merchants are sick and tired of the banking industry's tricks, traps, and hidden fees. They want fees they can see, and they want them set up in competition, not fixed by credit card companies. They want the Wall Street banks to play by the same rules of the road that the Main Street businesses play by every day, and I want that too. I hope the Senate does as well.

I urge my colleagues not to let the big banks and credit card companies avoid accountability for 2 more years. In the name of a study, do not give a $30 billion handout to the biggest banks and credit card companies in America. That is exactly what the amendment filed on the Senate floor will do. Do not delay interchange reform. Do not delay swipe fee reform. Don't give those banks another multibillion-dollar handout with no strings attached.

I urge my colleagues to let the Federal Reserve do the job that was sent their way. Let them move forward with the important process of swipe fee reform.

On behalf of businesses and merchants all across America, they are counting on the Senate to be on their side to help them in reaching profitability and making sure their savings are passed along to consumers and in being the No. 1 engine for the creation of new jobs in America. Our question is, Whose side are you on? I am on the side of small business and Main Street. I hope my colleagues will be as well.

I yield the floor.

BREAK IN TRANSCRIPT

Source