Interchange Fees

Floor Speech

Mr. DURBIN. Mr. President, there are many issues which come before the Senate, and some are simple and some are complex. The issue I am going to speak to today is one which you are personally aware of, Mr. President, as the Senator from West Virginia, and one that more and more Members are becoming aware of. It is the question of interchange fees or swipe fees.

For those who do not follow this closely, every time we use a credit card or a debit card in the United States of America, the retailer or merchant we do business with pays a fee to the bank that issues the card. The fee is established by the major credit card networks, Visa and MasterCard. They tell the banks how much they will receive each time a customer uses these cards.

What it comes down to is the fee that is being charged, the debit card fee, has become a subject of controversy. Let's go back in history a little bit. I can still remember when people used checks, and some still do but not as frequently. Now we use the plastic form of a checking account. Instead of writing out a check and pushing it through the banking system, and for a few cents watching it be processed, we use a debit card. A debit card draws money directly out of our checking accounts to the merchant we are doing business with.

So the debit card has, in fact, by a large measure, replaced checks--and in many instances replaced cash--as more and more people are using plastic for transactions. So I started hearing from merchants and retailers all around the United States about the fee that was being charged for debit card transactions.

Now, debit card transactions are different from credit card transactions in this respect. When I use my credit card, I am going to be billed each month for what I put on my credit card. There is a collection issue: Will Durbin actually make his monthly payment? Will he make it on time? Is he able to make the payment? And there is a question about whether this is going to be processed.

So there is, I guess, an uncertainty involved in credit card transactions and much less so when it comes to debit card transactions because that money is coming directly out of our checking accounts to the merchant. So in terms of risk, there is greater risk with a credit card than for a debit card. Nevertheless, over the years what we have seen is the swipe fee, or fee charged to a merchant for the use of a debit card, keeps going up, up, and up.

People would say: Well, why don't the merchants and retailers bargain with Visa, MasterCard, and the banks to make sure they do not have to pay an increasingly large fee every time a person uses a debit card?

The answer is they have no power to bargain at all. Not at all. So the retailer, the merchant, ends up accepting the debit card, swiping the debit card, paying for the transaction, and then paying a fee, to the point where one would ask: Well, how much of a fee is it?

The average debit card fee, found by the recent study of the Federal Reserve, is about 40 cents a transaction. Now, 40 cents may not sound like much if someone is buying a television--of course, though, it is going to be a percentage fee--but think about 40 cents if a person standing in front of you in line at the airport is buying a package of bubble gum. That 40 cents is all the profit that retailer could ever expect, and it is going right out the window. In fact, they are losing money on the transaction because of the debit card.

So for years retailers and merchants, restaurants, convenience stores, hotels, charities, universities, went to Visa and MasterCard and said: You cannot keep just raising this fee. It is not fair to us. You are not justifying it in terms of the costs of doing business, and we are paying more and more out of each transaction, even though the cost has not gone up.

Basically, Visa and MasterCard told them: Go take a hike. We are going to charge what we want to charge. Take it or leave it, buddy. If you do not want to take plastic, that is your business. Try to do business without it. You cannot.

So retailers and merchants were on the losing end of this conversation. So they came to me and said: Is there a way to do a study on this issue and determine what is fair? So a few years ago I joined with Senator Bond of Missouri, and the two of us, on the credit card reform bill, asked for a public Fed study on fee and cost information. Well, it turned out the banking industry did not want any study at all. They killed our amendment for a Fed study and told people--all the people in the Senate, Democrats and Republicans--vote against even a study of the swipe fee, the debit card interchange fee.

So we ended up empty handed. The day came last year when we revisited the issue. This time I came to the floor with an amendment and said: Here is what I would like to do. I would like to give to the Federal Reserve the power to promulgate a rule which says the fee charged for the use of a debit card is going to be reasonable and proportional to the costs incurred by the bank in processing this transaction. We are going to put in a factor for fraud. If there is something they need to add to take care of fraud, add it in. We went a step further. We said this is not going to apply to every bank and credit union that issues a debit card. We are going to exempt the overwhelming majority of community banks and credit unions across America.

There are about 15,000 community banks and credit unions across the United States---15,000. So we said: If your bank or credit union has a valuation of less than $10 billion, you are not covered by this reasonable and proportional law. You are exempt. At the end of the day, it meant that about 100 banks across America were subject to this new law and three credit unions. All the rest are exempt.

So you say: Well, Durbin, if you exempted all of these banks and credit unions, almost 15,000 of them, and you only affected about 100 of them, how can this have any impact? Well, it turns out, of the largest banks in America, three of the big ones--that would be Chase, Wells Fargo, and Bank of America--really comprise nearly half of all the debit card transactions in the country. Some say even more, 60 percent or even more. So by just making this a law that applies to the largest banks, we are affecting the majority of debit card transactions, and we are establishing a reasonable and proportional fee for what the transaction is.

So the retailer and merchant, the person running the mom-and-pop store or the person running a big box store is going to get fair treatment in terms of how much is charged.

So you say to yourself: Well, how much are they charging now? The Federal Reserve estimates they are charging about 40 cents a transaction, and the actual cost to the bank and the credit card company is about 10 cents. They are charging four times as much as they should on each transaction.

How much money is it worth to the banks? The estimates range from $1.3 to $1.7 billion a month--a month. Now, these banks, the big banks that I am addressing with this law, they are not having little collections outside the bank to keep themselves in business. They are bringing in quite a bit of money. They are very profitable, and to say that they should have a reasonable charge for retailers and merchants across America, small businesses and large businesses alike, I do not think is unreasonable. Remember, we exempted the community banks. We exempted the credit unions. It is only the big ones that are going to be affected by this.

Well, one would think I had done the worst thing in the world to these banks and credit card companies. They have unleashed, with the greatest fury they can possibly put together on Wall Street, this attack against the Durbin amendment. They are sending out letters--Chase is--to all of the people who have debit card accounts and credit card accounts saying if this Durbin amendment goes through, we are going to charge extra fees here and extra fees there.

Well, at the end of the day, that is the threat that we always hear from them. The fact is, since they are virtual monopolies in their business, they are increasing their fee charges regularly. People across America know it. Every time we put in a reform, they race to raise their interest rates and race to raise their penalties. They give these ``free'' checking accounts loaded with penalties if you stumble and do not pay on the exact day or whatever it happens to be.

So it has become quite a battle. It is a battle between Visa, MasterCard, and the biggest banks in America versus the retailers and merchants of America. They are both engaged. Now, the retailers and merchants cannot hold a candle to the big banks and credit card companies when it comes to their investment in this fight. But they are trying valiantly, and we are organizing small businesses across the United States--in Illinois, West Virginia, all over the place--to step up and say: Come on. This is an important part of business.

Now, I ran into one of my colleagues on the Senate floor, and she said: What I am worried about is even if you reduce the fee charged to the retailer for using the debit card, how is that going to help the customer? How is that going to translate into anything more than profits for the business?

Well, Mr. President, in your family background, you have been involved in business. If you have a competitor across the street, whether it is a gas station, a drug store, a grocery store, a restaurant, you know your price competition is an important part of whether a person chooses your store over the other store. So when you give the owner of the store a break on the fee that is being charged by the credit card companies and banks, then you give them an opportunity to engage in more price competition.

But what about Walmart? This is the monster of retailers in terms of size, about 10 percent of all of the sales in America. I can tell you, even with Walmart, Target is looking over its shoulder. It is watching the prices of goods and deciding whether it can be competitive. So there is competition at this level.

If we give retailers a break when it comes to the amount they have to pay to the banks and credit card companies, I think it is going to end up in consumer benefits.

The consumer organizations, the major ones in this town, support what I have done. They aren't supporting the position of the big banks and credit card companies.

One of the arguments that comes down is interesting. The lion's share of the argument against my amendment is not coming from the people directly affected by it. We are not hearing as much in Washington from those big banks on Wall Street or the credit card companies, and they are the ones most affected by it. Why? They don't have much credibility around here. These are the folks who came filing in for a bailout when they made some pretty bad decisions and got billions of dollars from the Federal Government to bail them out, and then, of course, they turned around and gave bonuses and all sorts of high-level compensation to their officers. So they are not the most popular crowd on Capitol Hill. So they have brought in surrogates to argue their position, and the surrogates, as my colleagues know, are the small banks and small credit unions saying the Durbin amendment is terrible.

The first thing we have to say to them is: You are exempt. You are not covered by the Durbin amendment. If you have $10 billion in assets or less, you are not covered. Still, they argue, at the end of the day, we think this might hurt us.

I have taken an extra step, beyond the law, to try to deal with some of their concerns because I value these community banks and credit unions. I worry they have now become part of the banking industry--in capital letters--instead of what they were traditionally: our neighborhood banks, our small town banks, our local credit unions. They have now become part of this big banking industry thing. I don't think it is healthy for them, and I don't think it is healthy for the economy or for consumers. So what I did was go to the merchants coalition on my side of this issue, the retailers, and ask them to put out a statement of policy when it comes to whether they are going to discriminate on the card that is presented.

Let me be more specific. If you are running a restaurant in Wheeling, WV, and somebody walks through the door and puts a debit card--these are all debit cards--puts a debit card down to pay for the meal, will your restaurant take a close look and say: Oh, that is a community bank with a higher interchange fee than it might be with a card from Chase Bank, for example? That is one of the concerns expressed by the community banks and credit unions. Even though you exempted us, all these retailers could discriminate against us because our swipe fee is higher than it might be coming out of Chase.

We ended up with a letter--an important letter--which I have shared with every one of my colleagues, and it is a letter from the Merchants Payment Coalition, which I ask unanimous consent to have printed in the Record.

There being no objection, the material was ordered to be printed in the RECORD.

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Mr. DURBIN. Thank you, Mr. President. Let me quote a few words from it. This is a letter to me, dated May 2:

Dear Senator Durbin:

We understand that some in the financial services industry are claiming that the Durbin Amendment exemption from interchange ``swipe fee'' regulation for financial institutions with assets under $10 billion will not be effective in practice because merchants will discriminate against debit cards with higher swipe fees. On behalf of the undersigned trade associations, and the tens of thousands of merchants and retail locations we represent, we are writing to make clear that we have no contractual or practical ability to treat debit cards issued by small financial institutions or credit unions differently than those issued by large institutions. Furthermore, our member companies are committed to customer service and it is not in their interest to discriminate against debit cards that so many customers carry.

Currently, merchants are subject to Visa and MasterCard network rules that require us to accept all Visa and/or MasterCard debit, regardless of which bank or credit union issues the card. This is called the Honor All Cards rule and we risk the threat of $5,000 per day fines--or higher--if we break this rule, so we assure you that merchants have no intention of violating this term of brand acceptance. These rules also prevent merchants from pricing goods differently based on the financial institution that issued the card.

The No. 1 complaint of community banks and credit unions about discrimination against their cards is addressed directly by this letter. I have made this a part of the Record. It is being sent to every Member of the Senate.

There is a second part of this argument. The question is whether Visa and MasterCard, the networks, will continue to allow the community banks and credit unions to charge a higher interchange fee than the big banks. Under our law, there is no reason to change it. So I am challenging Visa and MasterCard and these card networks to state clearly and unequivocally, as this letter has stated, that they will not discriminate against these smaller banks, community banks, and credit unions. The merchants have come forward as a matter of record, and it has been put in the Congressional Record this day, to say there will be no discrimination. At the end of the day, if Visa and MasterCard will make the same promise of no discrimination, then ultimately there is no disadvantage to the community banks and credit unions. None. Now the burden is on the big credit card networks to step up to the plate.

I am sending a letter today to the president and CEO of the Illinois Bankers Association, the Illinois Credit Union League and the Community Bankers Association of Illinois and we are going to send it to their national affiliates as well, sending them a copy of this merchants letter so they can no longer make the claim that they are going to be victims of discrimination by merchants and retailers and asking them to now step up and join us in challenging Visa and MasterCard and the major card networks. That, to me, resolves the most fundamental issue that has been brought to the Members of the Senate. They can no longer claim that these retailers are going to discriminate against them. As a matter of record, they will not.

I think it is important for us to change this system, and I think it is important for these virtual monopolies of Visa and MasterCard to be held accountable. I think what we have done in passing this law and giving the Federal Reserve the authority to establish this rule is the right thing to do.

Now there is a big effort afoot to stop us. The Presiding Officer knows that. They are lobbying such as I have never seen before on Capitol Hill. You would think there was $1 billion a month at stake, and there is. They are determined to stop the Federal Reserve from issuing a rule which says that retailers and merchants across America will be treated fairly. They are going to stop them, if they can, and I am going to fight them all the way. I am hoping my colleagues who joined me in this vote and those who share my feelings about small business across America will stand with me.

I know the alternative. The largest banks in America and the credit card companies have a lot of friends, and they are very powerful, but I think we ought to give the Federal Reserve the chance to issue reasonable final rules.

In fact, talk to any bank across the country, and they are going to tell you that the current system is working just fine. They don't want reform. They don't want any change. They want to keep it as is. It is worth billions of dollars to the major banks to keep this charge as is, at the expense of businesses across America.

I favor transparency and I favor competition and I wish we didn't have to bring the Federal Reserve into this conversation. But we looked for a neutral regulatory agency that would establish a reasonable and impartial fee, promulgate a rule, issue it after a public comment period and implement it, and that is what we are striving to do.

The CEO of JPMorgan Chase, who is a friend of mine--or at least he used to be--Jamie Dimon, has called interchange reform downright idiotic. He spent a good portion of his recent annual shareholder letter criticizing this reform. Chase has also sent a letter to its customers warning about my amendment, and Chase is constantly threatening to raise fees on its customers unless they stop the Durbin amendment. A few weeks ago, I sent Jamie Dimon a letter and responded to some of his criticisms. I ask unanimous consent that the letter be printed in the Record.

There being no objection, the material was ordered to be printed in the RECORD.

BREAK IN TRANSCRIPT

Mr. DURBIN. Thank you, Mr. President. I haven't had a reply yet from Mr. Dimon. He called me. I called him back. That seems to be the end of our exchange. But I would like to hear his response. I encourage him to share my letter with the same shareholders and customers to whom he has written. After all, in his shareholder letter, Mr. Dimon said he wanted ``analysis in the full light of day'' of the Durbin amendment, so I figured he would want his audience to be informed on my position. I don't think Chase has done that yet. I hope they will.

I know the banking industry prefers for the giant Wall Street banks to stay in the background when it comes to this fight because they are not that popular. Estimates indicate that about half of all debit swipe fees go to just 10 big banks and the Big Three, Bank of America, Chase, and Wells Fargo, make the most of all, well over $1 billion a year each. But the banking industry knows the public isn't happy with big banks, so the industry is using small banks and credit unions as their public face in this battle. Industry argues that even though my amendment exempts all but the largest 1 percent of banks from fee regulation, the exemption will not work and small banks are going to get hurt. Well, this letter makes it clear that when it comes to retailers and merchants, there will not be any pain inflicted. They are, in fact, exempt under the law and they will be exempt in practice.

As I said, I received a letter from 20 of the Nation's largest retail associations that reaffirms what I just said. I think the letter is compelling. In this letter, these merchant groups make it clear they don't have the contractual authority, the practical ability or the economic incentive to discriminate against small bank or credit union debit cards. They point out that Visa and MasterCard contracts impose strong penalties on them even if they try. Second, they point out that in many, if not most, retail environments, the merchant doesn't have the practical ability to distinguish between a small bank or a large bank card at the point of sale.

I had Wendy Chronister, whose family owns a chain of gas stations in downstate Illinois, come to my office and talk about this. I have known her mom and dad a long time, and Wendy is running the business and running it well. She said: Senator, for goodness' sake, when they put the plastic on the counter we take it. We need the sales. We are not going to argue with them about who issued the credit card or debit card. That just stands to reason. They are not going to ask them to put their debit cards away when they come to a cash register. They will lose sales and customers if they do it.

Finally, the merchants make the observation that most customers only have one debit card, so if you want to make a sale, they are going to take that debit card.

What I have tried to do with this letter is to show that those on my side of this debate--the small businesses, the retail merchants, convenience stores, hotels, and restaurants across America--are trying to be reasonable. Had the credit card companies and major banks been reasonable on this issue, I never would have introduced this amendment. They refuse--refuse--to bargain with the retailers and merchants. They said it was a ``take it or leave it,'' and they did it in the obscurity of retail contracts and regulations which are almost impossible to work through.

I think those who are asking for a delay and study of this issue should be called out for what they are asking. Every month they delay means customers and consumers across America will pay over $1 billion more in these fees on debit cards--money taken away from retailers, taken away from small business, and taken away from our economy. When these small businesses have the advantage they can get under the Durbin amendment, they are going to be able to be more profitable, expand their businesses, and hire more people. How many times have we heard a speech on the floor that the key to economic recovery in America is small business. If you truly believe, then you cannot vote for this 2 1/2 -year delay and study of this issue, if you truly believe in small business. I think the issue is very clear.

I urge my colleagues not to fall for this game the banks and card companies are playing. Don't let them delay and derail the swipe fee reform consumers need so badly. The Senate has already voted to establish a process for interchange reform. We should let that process continue and we should let the Federal Reserve issue their rules, which they are planning to do in just a matter of weeks, and I think at that time we will see that there is a reasonable way to deal with this that doesn't create a disadvantage for community banks and credit unions.

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