Interchange Fee Reform

Floor Speech

Mr. DURBIN. Madam President, I rise to speak about the issue of Wall Street reform, which I know is near and dear to the Senator from New York, who represents Wall Street.

I do believe what Congress achieved last year on Wall Street reform was wise not only for our Nation but also to avoid the possibility of another recession. There are many financial institutions across the United States, including New York, but the fact is, many of their practices led us into the recession we are now experiencing.

It was quite a battle last year. Senator Chris Dodd of Connecticut, now retired, led the battle on the floor of the Senate to try to make sure we had the necessary oversight and balance when it came to our financial institutions to avoid the likelihood of another recession. The banks fought back, but in the end we prevailed and Senator Dodd passed the measure here in the Senate, and it was passed in the House of Representatives under the leadership of Congressman Barney Frank of Massachusetts and signed by the President. It really gave us a chance to move forward with oversight, regulation and reform on Wall Street.

It was signed last July by the President, but many of the most important elements of the Dodd-Frank bill will not go into effect until July 21 of this year. Several of them are very important to America and important to me as an individual because as a Senator I offered an amendment to this bill. It was a controversial amendment and, for the banks, an expensive amendment. For the Wall Street banks and credit card companies, the interchange fee amendment, which I introduced and passed with 64 votes--17 Republicans and 47 Democrats--was an amendment which will cost the biggest banks and credit card companies in this country a portion of the up to $1.3 billion a month they collect in debit interchange fees. Imagine that. In any given year, $15 billion or $16 billion is being collected by these banks through credit cards from merchants, retailers, and consumers all across America.

From the moment that bill was signed into law, these Wall Street banks and credit card companies have been involved in an all-out, nonstop campaign to repeal the law. Now, they can't just flat-out repeal it because they know that looks a little too obvious. So instead, what they are calling for is postponement--just postpone it for 2 years while they study it. That is their argument. They believe we need to look into this a little more closely. Well, the record suggests they are not after a study. They are after $1.3 billion a month in profit. It turns out it is actually 30 months that the delay would take place, so that is about a $40 billion postponement that the Wall Street banks and credit card companies are asking for. And who pays the $40 billion? Merchants and retailers and customers all across America. That is why leading consumer advocacy groups support my amendment and oppose this $40 billion delay which has been suggested in the amendment that is being offered.

Last year, when we passed landmark legislation to reform the debit card swipe fees that are enriching Wall Street banks and crushing businesses and consumers on Main Street, they started organizing to repeal.

For years, the banking industry has been engaged in a collusive practice. Banks have let the Visa and MasterCard monopoly credit card companies fix the interchange fee rates that banks receive from merchants each time a debit card is swiped.

The so-called swipe fee is the fee the banks get, but they don't set the fees, the credit card companies set them. This is unregulated price fixing by the VISA and MasterCard duopoly on behalf of thousands of banks, primarily the biggest banks in America. The same banks we bailed out are now coming back here and saying don't cut into our profits, don't in any way reform or change the interchange fee that affects merchants, retailers, or consumers.

Incidentally, when the Federal Reserve took a look at the interchange fee that we pay every time we use a debit card, for example, it averages about 40 cents. The actual cost of using the debit card: less than 12 cents. So what they are doing is imposing this fee on every transaction in every place across America. This is unregulated price fixing by VISA and MasterCard. It is a sweetheart deal for the banks, too. According to the Federal Reserve, banks make about $1.3 billion each month, as I mentioned, in debit interchange fees and the fee rates keep going up even though the cost of processing continues to drop.

Last year, Congress decided we should place some reasonable limits on VISA and MasterCard. We did this to ensure that they cannot use their market power and price-fixing ability to funnel excessive fees to the Nation's biggest banks. Congress said if VISA and MasterCard are going to continue fixing interchange rates that merchants pay banks, the rates ought to be reasonable and proportional to the actual cost of processing the transaction. It is a narrowly targeted reform and we made a major exemption of small banks and credit unions. If they had assets of less than $10 billion, they were exempt. You wouldn't know that. They are acting as if this is going to apply to them. I recommend they read the law, which specifically exempts them.

There are two arguments which have been raised recently in opposition to interchange reform. The first is we need more studies. I know banks and credit card companies believe that interchange reform needs to be studied to death but many studies have already been done. There were at least seven congressional hearings specifically on interchange fees before we passed the amendment. I chaired one of them. Another two hearings on interchange fees have been held since the amendment became law. There were also at least three different GAO studies on interchange fees prior to the amendment's passage. It is not as if this matter has not been studied; it has been.

That is not all. Economists and payment systems experts at the Federal Reserve have been studying interchange fees for years. They have put out at least 10 significant reports. Do we need another study?

One of them was the January of 2010 study by Fumiko Hayashi, a senior economist at the Federal Reserve Bank in Kansas City. She did an international comparison of interchange fees in the United States and 12 other countries. Listen to what she found: ``In general, the United States has the highest debit card interchange fees'' and that ``the United States has the highest interchange fees for both credit and debit cards among the 13 countries where adoption and usage of payment cards are well advanced.''

I can see why the banks and credit card companies want to ignore that study. Americans are paying more every time they use plastic than any other of 13 of the largest nations in the world that use credit and debit cards. Do you know what the debit fee is in Canada, from VISA and MasterCard? Zero--40 cents a transaction for the United States of America, God bless them for treating us so kindly; zero for Canada. Why? Because the Canadian Government spoke up for retailers, merchants, and consumers, and said stop this. It is price fixing. Now we have done the same and the Wall Street lobby and the credit card lobby are coming down here hitting hard to repeal this interchange fee reform.

There was another comprehensive study, a 2009 paper put forward by the Federal Reserve's Divisions of Research and Statistics entitled ``Interchange Fees and Payment Card Networks: Economics, Industry Developments, and Policy Issues.'' This study analyzed the structure and economic theory behind the interchange system and discussed various ways of reforming the system.

Then there was a 2008 paper by James McAndrews and Zhu Wang of the Kansas City Fed on the economics of the payment card markets. Their study found, incidentally, that ``privately determined card pricing, adoption and usage tend to deviate from the social optimum, and imposing a ceiling on interchange fees may improve consumer welfare.'' The Kansas City Federal Reserve came up with this finding but the credit card companies ignore it. They want another study. They don't like a study that says interchange fee reform is good for consumers.

The Boston Federal Reserve did a study in 2010 and found on average every year, each cash-using household pays $149 to card-using households.

The studies go on and on. I will put them in the Record. I see several of my colleagues on the floor, but I want to make one other point as well. Whenever I talk about Wall Street banks and the credit card companies and the costs associated with debit card fees charged to American consumers and retailers, the first thing I hear is: There he goes again, defending Walmart.

There is no question about it, Walmart is the largest retailer in America. When it comes to the use of credit and debit cards, I am certain they have a larger volume of sales from that than any other. But let's do some comparison here for a moment. According to Forbes.com, in 2010, Walmart, the largest retailer in America, had $17 billion in profits.

I ask unanimous consent for 2 additional minutes.

BREAK IN TRANSCRIPT

Mr. DURBIN. They had $17 billion in profits and a 4-percent profit margin. That sounds like a lot and it is, but not compared to the big banks. JPMorgan Chase, one of the largest issuers of debit cards, had $17.4 billion in profits last year. That is more than Walmart, incidentally. And their profit margin wasn't 4 percent like Walmart, it was 15 percent.

This is the same Chase that has said any regulation of interchange fees will force them to raise fees on consumers. One of the most profitable banks in America threatens consumers that if they cannot charge the interchange fees they want to charge, they are going to raise fees on consumers. Isn't that great? ``Your money or your life,'' when it comes to Chase. Chase has more profits than Walmart and a 15-percent profit margin.

For the record, let me go back and discuss a few more of the studies that have already been done on interchange fees. For example, Terri Bradford of the Kansas City Fed published a report entitled ``Developments in Interchange Fees in the United States and Abroad.''

This report, which was published in 2008, said the following:

While regulation of interchange fees is still just a point of discussion in the United States, regulation abroad is a reality. In about 20 countries, public authorities have taken actions that limit the level of interchange fees or merchant discount fees. Many of these actions require interchange fees to be set according to cost-based benchmarks, although the cost categories that are eligible for the benchmarks vary by country. In several countries, interchange fees are set at zero.

Federal Reserve researchers are not the only ones who have studied interchange fees.

In 2006 the Antitrust Law Journal published an article by Alan Frankel and Allan Shampine called ``The Economic Effects of Interchange Fees.''

This article found that the interchange fee ``acts much like a sales tax, but it is privately imposed and collected by banks, not the government. It significantly and arbitrarily raises prices based not on technologically and competitively determined costs, but through a collective process.''

And in March 2010, Albert Foer, president of the American Antitrust Institute, published a study that found the following:

Governments around the world have been taking actions to eliminate or severely reduce interchange fees based on studies and investigations that clearly establish that these fees are abuses of market power. Moreover, the results demonstrate that interchange fee regulation works. Despite the protests of MasterCard and Visa and their giant card-issuing banks, mandated interchange fee reductions have increased competition in foreign payment card markets and have benefitted consumers through lower prices.

In short, there have been a large number of studies done about interchange fees. And this does not count the enormous amount of research, information collection, and analysis that the Fed has done since my amendment was enacted last July.

The problem from the perspective of Visa, MasterCard and the big banks is that they simply don't like what these studies have found. So they pretend these studies never happened and call for new ones where they are guaranteed a more industry-friendly outcome. It is obvious that their calls for more study are an effort to delay reform indefinitely. The big banks will do anything to prolong the status quo and to keep collecting $1.3 billion per month in excessive debit swipe fees.

I want to further address another argument that has been raised recently.

Some have argued that we should not follow through with interchange reform because it will only benefit big box retailers. Of course, this is not true. Swipe fees impact retailers of all sizes, from the smallest mom-and-pop stores to the largest retail chains. They also affect universities, charities, government agencies--everyone who accepts plastic as a form of payment. And they affect all consumers, who pay higher prices at retail because of the cost that swipe fees add to every transaction.

But many still like to portray this debate as a struggle between the banks and card companies versus the big box retailers. Well, let's look at those big box retailers and compare them to the big banks and credit card companies. Some of my colleagues may be surprised to learn that the big banks and card companies are significantly more profitable than the big retailers.

According to Forbes.com, in 2010, Wal-Mart, the largest retailer in the country, had $17 billion in profits and a 4 percent profit margin.

Sounds like a lot, right? Well, not compared to the big banks. Last year, according to Forbes.com, JP Morgan Chase, one of the largest issuers of debit cards, had $17.4 billion in profits--more than Wal-Mart. And Chase's profit margin was a robust 15 percent.

This is the same Chase that has said that any regulation of interchange fees will force them to jack up fees on consumers. Chase has more profits than Wal-Mart and a 15 percent profit margin. Why are they pleading poverty and threatening their customers with higher fees?

Well, what about other giant retailers? How are they doing? Target, the well-known retail chain, had profits of $2.9 billion and a 4.3 percent profit margin last year. Let's compare that to Wells Fargo, another giant debit card-issuing bank. Wells Fargo last year had $12.4 billion in profits and a 13.3 percent profit margin.

Large retailers would love to have the profit margins of the big banks. But they don't. Last year the largest drug store chain, CVS Caremark, had profits of $3.4 billion and a 3.6 percent profit margin. The largest grocery store company, Kroger, had profits of $1.1 billion and only a 1.4 percent profit margin.

Historically we have seen low profit margins and intense competition in the retail sector. According to a June 8, 2009, article in Fortune Magazine, Wal-Mart has only an 11 percent market share of the retail market, and Target has only a 2.3 percent market share. This shows that retail is an intensely competitive sector.

Let's compare that level of competition to the debit card industry. This past Monday, an article on CNBC.com reported that the Visa and MasterCard duopoly now control around 90 percent of the debit card market.

It is pretty profitable to be a duopoly. According to Forbes.com, in 2010: Visa had $3.1 billion in profits and a 37 percent profit margin, and MasterCard had $1.8 billion in profits and a 33 percent profit margin.

It must be nice to be a big bank or a credit card company these days. Big banks and their card network allies are making money hand-over-fist these days while retailers of all sizes are struggling to turn a profit. Rising interchange fees are a key part of this equation.

It doesn't have to be this way. If we can constrain Visa's and MasterCard's price-fixing on behalf of the 1 percent of biggest card-issuing banks, we will reduce the cost of interchange for every merchant and other entity that accepts debit cards. Competition in the retail sector will mean consumers will benefit through discounts and lower prices. Given the large profit margins at the nation's biggest banks, they will be able to stay in business once swipe reform is completed.

In fact, we know that banks and card companies can continue to offer debit cards profitably with lower interchange rates.

They did it before--up until the mid-1990s, banks used to offer debit cards with minimal or no interchange in the United States.

And they are doing it right now in other countries around the world, where there are thriving debit card industries with very low or nonexistent interchange rates.

I am going to reserve the remainder of my time and let my colleagues take the floor. I will return on the subject but I remind my colleagues, this amendment, this effort by the Wall Street banks and credit card companies to repeal interchange fee reform, is a $40 billion amendment--$40 billion that will be transferred to the biggest banks in America and credit card companies from consumers across America. We did the right thing with interchange fee reform. Let's stand by it and say to Wall Street, major card issuers, VISA and MasterCard, they have had enough. They can get a reasonable fee, but not an unreasonable amount out of our economy.

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