Interchange Fee Reform

Mr. DURBIN. Mr. President, I rise to speak about the effect of interchange fee reform on small banks and credit unions.

Interchange fees are not well known by most Americans. They are known as swipe fees or interchange fees, and they reflect the amount of money that is paid to a bank each time you use that bank's credit or debit card. You do not know it as a consumer that you are being charged extra when you buy something in a store, but prices are higher because that fee is being paid to the bank every time you swipe the card.

Who establishes that fee? You would assume the bank does, but it is not so. The fee that is charged every time you swipe a card is established by the credit card companies. The big giants Visa and MasterCard decide exactly how much that fee will be. And you ask yourself: Well then, what voice does a merchant or a retailer have in how much that fee is going to be on each transaction?

And the answer is virtually no voice. It is a price-fixing mechanism where Visa and MasterCard, the major credit card companies, establish the interchange or swipe fee to be paid to each bank, credit union, or financial institution that issues the credit or debit card.

It is a lot of money. Each month in America--just on debit cards now--each month in America, they collect about $1.3 billion in transactions where people use debit cards. Now, remember, a debit card is like your checking account. You are drawing money directly out of your checking account to pay the merchant where you are doing business. It is not like a credit card where, in fact, they have to collect the money from you later. This is a situation where the money is taken directly out of your bank account. You would think, as with the use of checks in the old economy, this would be a low-cost transaction. And it should be.

It used to be banks would process checks written to pay a restaurant or department store, charging pennies on the transaction--not a percentage of the transaction.

Well, the Federal Reserve took a look at what is being charged for debit cards, where the money comes right out of your account. It turns out the average is about 40 cents a transaction. We asked them: Well, what is the reasonable amount that should be charged if you are going to take into account exactly how much it costs a bank to process a debit card transaction? They said it was closer to 10 or 12 cents.

So merchants and retailers across America, on every single transaction involving a debit card, are paying an inflated amount of swipe fee or interchange fee, and most of those fees go to the largest banks in America. You see, almost 60 percent of all the debit card transactions really focus on three major banks. That would be Bank of America, Wells Fargo, and Chase. So there is a lot of money to be made in this business as long as they are using the debit cards and getting the swipe fees.

We put in a new law last year which said the Federal Reserve should establish what is a reasonable and proportional amount to be charged for the interchange fee for debit cards. As I told you, the initial investigation suggested it is around 10 cents; and the actual charge is 40 cents.

Now, these banks that are about to lose these major interchange fee receipts are very upset about it because as of July 21, the new law will go into effect which will bring the fee down to a reasonable and proportional level. So they are fighting this with tooth and nail. Today, I was at a breakfast here on Capitol Hill, and a group of lobbyists were there, and one came up to me and said: DURBIN, your fight on the interchange fee has more lobbyists working in Washington than any other issue, on both sides of the issue. I said: I understand that. That was not my goal.

My goal is really to help the merchants, retailers, and consumers. You see, when retailers are in a competitive atmosphere--if it is one gas station across the street from another--then saving 30 cents on a transaction can really be part of a decision by a retailer to lower prices to become more price competitive in a competitive free market atmosphere. That is what I am looking for. I want the consumers to be the ultimate winners. I want retailers and merchants to be treated fairly.

Incidentally, for the record, what is the debit card interchange fee charged by Visa- and MasterCard-issuing banks in Canada? It is zero--zero. There is no interchange fee in Canada because the government there said: We are not going to stand for this. You are really ripping off merchants, retailers, and consumers. We will not let you do it.

The same thing happened in Europe. They brought down the interchange fees to dramatically lower levels.

Well, in the United States the battle is on. If you had to pick a group with the lowest level of credibility when it comes to this institution or Congress--maybe even the American people--I guess next to politicians, you would have to say big banks, particularly the big banks that were bailed out by our Federal Government when they made a mess of things a few years back. So the big banks that issued the debit cards cannot come in here and lobby for themselves. The credit card companies themselves do not enjoy a very good reputation here either. Consumers know what a tough time it is to pay off those bills and the fine print they have to deal with in their contracts.

So what these groups have done--the credit card companies and big banks--is to enlist small banks and credit unions to come and appeal to us, saying: We are in your city and community and the Durbin amendment can hurt us. What they do not say is the law we passed specifically exempts--specifically exempts--all banks and credit unions with a valuation lower than $10 billion.

So of the 7,000 or 8,000 credit unions in America, how many have a valuation over $10 billion? Three. How many banks out of the 7,000 or 8,000 have a valuation over $10 billion? Less than 100. So we are talking about 100 institutions that will be affected by this law; and the others are exempt.

I rise today to speak about the effect of this interchange fee reform on these small banks and credit unions. Recently, the banking industry and some bank regulators have claimed that the small issuer exemption--the $10 billion exemption--in last year's reform law may not work. The banking industry people said there are market forces that could undermine it. They are wrong. I respect their right to speculate on what might happen when reform takes place. But in response, I point out they simply have not provided any evidence to back up their claims.

In fact, all the hard evidence about the interchange system leads to the opposite conclusion: that interchange reform will give small banks and credit unions competitive advantages against the bigger banks.

This is not just my conclusion. It is the conclusion of prominent economists and industry analysts such as Andrew Kahr, who the ``Frontline'' program profiled as one of the creators of the modern card industry, the plastic card industry, and former IMF Chief Economist Simon Johnson. In a recent online survey, even 60 percent of the American Banker's subscription-paying readers agreed that interchange reform will help small banks.

So the Members who come to the floor and say: Oh, this terrible rule change that exempts banks with less than $10 billion in assets is going to hurt them, they are not only wrong on the facts, they are wrong in public opinion.

The key point to remember is that the debit interchange system is not a properly functioning market. The interchange system has been designed in a way so normal market forces do not apply. No transparency. No competition.

Last year, a bipartisan majority of my colleagues recognized reform needed to take place, and after years of studies and hearings, it became clear the interchange system was not going to cure itself. It was broken and unfair. The system was structured to avoid normal competitive market forces.

Andrew Martin of the New York Times summarized the debit interchange system in his January 2010 expose. This is what he said:

Competition, of course, usually forces prices lower. But for payment networks like Visa and MasterCard, competition in the card business is more about winning over banks that actually issue the cards than consumers who use them.

Visa and MasterCard set the fees merchants must pay the cardholder's bank, and higher fees mean higher profits for banks, even if it means that merchants and retailers have to shift the cost to consumers.

Martin went on to quote Ronald Congemi. He is the former CEO of the Star debit network, who talked about his network's struggle to compete with Visa.

Mr. Congemi said:

What we witnessed was truly a perverse form of competition. They competed on the basis of raising prices. What other industry do you know that gets away with that?

James Miller, former Director of OMB and Chairman of the Federal Trade Commission under President Ronald Reagan, elaborated on this in a recent op-ed article titled ``The Debit Card Market Is Broken and Needs Fixing Now.''

Here is what he wrote:

Under this dysfunctional system, the networks' competitive incentives are to raise fees rather than to reduce them. One network raises its fees higher than the other to encourage banks to issue their cards. Then, soon after, the other network raises its fees for the same reason. The result is rapidly escalating fees. ..... This broken system would not survive were it not for the fact that Visa and MasterCard represent a combined 90 percent of the debit market. ..... Merchants are powerless to negotiate and can't take their business elsewhere, so they are left with no choice but to pay.

In short, interchange is an abnormal market which has no naturally occurring market force to hold fees in check. Visa and MasterCard want as many of their debit cards to be swiped as possible. That is how they make their money. By raising interchange rates that merchants must pay to banks, the card companies entice banks to issue more cards. Merchants cannot refuse Visa and MasterCard and they cannot negotiate with them, so they are stuck with what they have to pay.

Last year, Congress decided we can no longer simply trust Visa and MasterCard to fix interchange fees however they wanted. We agreed there should be reasonable constraints placed on the card networks to prevent them from using their market dominance to set unreasonably high fees on behalf of the Nation's biggest banks. We passed a law that said, when Visa and MasterCard fix fee rates on behalf of banks with over $10 billion in assets, the rates, according to the Federal Reserve, must be reasonable and proportional to the amount it actually costs the banks to process the transaction.

Congress did not have the information about how much it actually cost big banks to process transactions. The banks always kept that secret, even from the Government Accountability Office. So we directed the Federal Reserve to gather the information on the cost and put out a rule implementing the reasonable proportional standard. That is under way right now. The Federal Reserve believes they will report this rule toward the first part of June, and it will go in effect July 21.

When it comes to small issuers, we said they are exempt. This means Visa and MasterCard can continue to fix interchange rates on behalf of small banks and credit unions in an unregulated environment such as they do today. It is status quo for them.

Some people might say: Why would you let the credit unions and small community banks charge a higher rate to swipe the debit card then the big banks? You can make the argument that if you are going to protect consumers at every level, it should affect every institution. But we specifically exempted community banks and credit unions with valuations below $10 billion, believing that those community banks deserve a break and a helping hand. They have not shown much gratitude for that exemption.

Under the reform law, the only way small issuer interchange rates would change is if Visa and MasterCard decide to change them. And Visa and MasterCard have no incentive to voluntarily lower fee rates for small issuers. Remember, in the interchange market, Visa and MasterCard compete to raise fees to win bank business. They want to have high fees so banks issue more cards.

If MasterCard decides to voluntarily lower its small bank rates, those banks are going to jump over and start issuing Visa cards. Does that make sense for either of those two credit card giants? Of course not.

So why would the small-issuer exemption not work? This is where some creative arguments have come into play. I wish to respond to those arguments I have heard.

First, claims have been made card networks will not maintain separate tiers of interchange rates for big, regulated issuers and smaller issuers. The facts do not support this. Visa, the dominant network, announced in January it would, in fact, operate a two-tiered system, exactly the opposite of what all the lobbyists for community banks and credit unions are saying on Capitol Hill. Visa has said they will respect the interchange fee exemption for the smaller issuers.

Other smaller debit networks have made the same announcement. The only company that has not is MasterCard, and they are expected to. Sure, the law does not require them to operate two-tiered systems, but the card networks will lose money if they do not. If networks want small banks to issue their debit cards, they have to offer interchange rate levels the small banks will be attracted to.

Second argument. The American Bankers Association claimed last week that ``having two different prices for exactly the same product--transaction processing--is not sustainable in a competitive marketplace.''

But there is clear evidence to the contrary. Look at the current credit card market. According to GAO, in 2009, Visa had 60 different credit card interchange prices; MasterCard had 243. A merchant that accepts Visa or MasterCard credit cards might be charged any number of different interchange fees, depending on whether it is a consumer or corporate card and the type of rewards program.

If you have one of these frequent flyer cards, there may be a higher interchange fee that is going to be charged to the company--to the retailer--where they accept your card. From the merchant's standpoint, they treat it as exactly the same product. It is a credit card. But there are many different interchange prices that the merchant might get charged.

Visa and MasterCard have sustained this multi-tiered pricing structure for years. The American Bankers Association has to know that. Why would they state exactly the opposite? Because their biggest banks are the ones that are going to lose out if the consumers prosper under this new change.

How have they been able to sustain this multi-tiered system, these card companies? Remember, the interchange system is not a normal competitive market. In this case, card networks impose rules on every merchant that requires merchants to accept every card with a network logo on it. It means, if you are running a store in Springfield, IL, or Denver, CO, and someone shows up with a Visa card, you have signed a contact that says: I honor every card with Visa emblazoned on it put on the counter. Even though I pay a higher interchange fee as a retailer if it is a big rewards card with frequent flyer miles, all the rest of it, you have got to take it. That is the contract law that binds these merchants.

Third, the American Bankers Association has claimed that if big bank debit fees are reduced, merchants will discriminate and find some way to get customers to use big bank debit cards instead of small issuer cards. If this claim were true, we would surely see some evidence of it today because of multi-tier pricing in credit card interchange.

Let me give you an example. For supermarkets, a Visa credit card with no rewards program currently carries an interchange fee of 1.15 percent, more than 1 percent of what you purchase. That is the interchange fee if it is a simple Visa credit card, no rewards. But a Visa Signature Preferred rewards credit card has an interchange fee of almost twice that, 2.1 percent.

By the ABA's logic, supermarkets right now would be discriminating against rewards cards and steering customers to nonrewards cards--but there is no evidence of that discrimination anywhere. I challenge the American Bankers Association to put up or shut up. If you have some evidence to the contrary, let's see it. If you do not, retract the specious claim.

Why don't merchants discriminate? The merchant community sent me a letter a few weeks ago explaining in
detail how they lack the contractual authority, the practical ability, and the economic incentive to discriminate. I also wish to add a commonsense point. Most Americans only have one debit card. If a merchant tells a customer not to use his debit card because it was issued by a small bank, the customer would likely do one of two things, not purchase at all or pay with a credit card. Credit cards carry much higher interchange fees than debit cards. How then would discriminating against debit cards be in a merchant's interest?

When I talked to the merchants--like Wendy Chronister, who runs a whole slew of gas stations in central Illinois--took the business over from her dad, she is a great young woman executive--and she said: Senator, they put the plastic on the counter, we take it. If it clears, we move the transaction and move on to the next customer. We are not going to debate how many other cards you carry and where is the one with the lower interchange fees. We do not have time for it, and we are not going to put that kind of hassle on our customers.

Fourth, some make the argument that the nonexclusivity provision of the reform law will clause small issuer exchange rates to go down. This nonexclusivity provision is often misunderstood.

Until recent years, normally all debit cards were set up by banks so transactions could be run over one of multiple debit networks. But in recent years, the dominant networks, particularly Visa, have formed exclusive deals with big banks so transactions on the debit cards could only be run by one network. What they are trying to do--credit card companies are trying to do--is to monopolize the transactions as well as the cards.

These exclusivity agreements are threatening to drive smaller debit networks out of business. This trend hurts competition and creates real barriers to entry for new networks.

All the nonexclusivity provision in the new law says is that banks have to pick at least two unaffiliated card networks to enable on each debit card, and merchants get to choose which of those networks they want.

You know what? I wish to say to my friends at the Wall Street Journal who write editorials saying what a bad idea interchange reform is: What we are talking about is something called competition. For the biggest business newspaper in the United States, you would think they would support something such as this.

Nonexclusivity is not new. Last month, the Pulse Network released its annual survey of debit card issuers. Pulse said that when it comes to this nonexclusivity requirement, many issuers are already compliant, and we have not seen any small bank interchange rates decline as a result. It is another smoke screen, a red herring.

The nonexclusivity provision gives the Fed broad discretion to lay out guidelines to make it more effective. The Fed also gets to choose the effective date. In short, this provision is not the bogeyman that some have made it out to be and is simply a safeguard that will ensure that Visa does not become the only debit network left in the market.

What I have learned, after years of working on this complicated issue, is the following: Banks and credit unions will consistently oppose any type of reform. The American Bankers Association is legendary--it represents the banking industry--and the Credit Union National Association, which represents the credit unions, both have statements on their Web sites making it clear that there is no regulation of the interchange system they will support.

Senator Kit Bond of Missouri, now retired, and I tried to negotiate with the banks and credit unions in 2009. We were thinking about doing an amendment to allow for greater interchange transparency and debit discounts. The banks and credit unions blasted a letter of opposition out before we even drafted the amendment.

Now, the opponents of my amendment say what we need are 30 months to study this. Study it for what? I know where it is going to end up. We have been through this before. I have seen this movie. The American Bankers Association and the Credit Union National Association, now marching in lockstep on issues, are going to oppose any reform.

The entire financial industry is making a killing on the current interchange system, to the tune of $1.3 billion a month. Do the math and figure out why this has every lobbyist in town working to defeat the Durbin amendment--30 times 1.3. That is pretty close to $40 billion that is at stake if the amendment to stop this Durbin change in the interchange fee system goes through.

The change needs to go through. There is widespread consensus that we need to reform the interchange system to rein in Visa, MasterCard, and the biggest banks on Wall Street. I do not think anyone disagrees with that. In fact, I have seen polling across the country in every State, from virtually every political group--left, right, and center--where they overwhelmingly support interchange reform.

The credit unions and community banks are selling a story which the public is not buying. In carrying out this reform, I have bent over backward to try to address small issuer concerns. I do not want small banks or credit unions forced out of the debit card market. That is why we exempted them. I want consumers to be able to bank at these institutions and use debit cards.

I have tried to protect small banks and credit unions, even though they have made it clear they do not support any regulation of the system and even though they have fought me every step of the way.

By exempting small issuers from fee regulation, we have left intact an interchange system that has worked quite well for small issuers, and that will almost certainly continue to work well. But let's be clear. There is only one way we can provide these small issuers with an absolute, 100-percent guarantee that Visa and MasterCard will give them interchange rates they like. There is only one way to do it. That would be to regulate the rates Visa and MasterCard fix for small issuers and make sure they are appropriate.

I am happy to explore that. I can already tell you the small issuers are going to push back on that immediately.

They want their cake and they want to eat it, too. They want no regulation. They want to be able to charge interchange fees that reach the heavens, and they don't care what happens to merchants, retailers, or consumers.

I think we have already taken care of small issuers with last year's law, but if they have some suggestions on how to give even more assurance that Visa and MasterCard won't set their rates at unsustainable levels, I will listen.

But make no mistake, I will not support any delay or repeal of the overall interchange rulemaking because this will let the big banks and card networks off the hook. We are very close to finally reining in the abusive interchange system and providing help to consumers and merchants. We cannot let the big banks and credit card companies avoid accountability yet again. They get away with too much.

In closing, I strongly believe we need interchange reform. We need to bring fairness, competition, and transparency to the broken debit system. I will work hard to make sure this reform happens soon.

I would think the fact that the opponents of this are trying to stop it before the Fed issues a rule is an indication that they don't even want to see what the rule looks like. Why? It is $1.3 billion a month, that is why. Change will cost the big banks big money. That is why the credit card companies and banks on Wall Street are fighting this.

I have always tried to approach this issue in a reasonable way, focusing on facts. I am always happy to engage with others who share this approach, even if they disagree with me.

I yield the floor.

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