Swipe Fee Reform

This week, we are considering legislation on the Senate floor that affects small businesses. I want to talk about another issue very important to small businesses; that is, the topic of interchange fees, also known as swipe fees.


Last week, nearly 200 small businesses came to Washington, DC, from Illinois and from all across America. They came to stand up in support of the reform of interchange fees, swipe fees, that Congress passed last year. They came to stand up to the major credit card companies, Visa and MasterCard, and the $13 trillion banking industry that is doing everything in its power to reverse this reform.


We all know small businesses are the key to our economy and its future. We need for them to be able to grow, to hire more workers, and serve their customers well. But debit card swipe fees set by Visa and MasterCard on behalf of their big bank allies are crushing many small businesses.


Back in 2009, the banks made over $16 billion per year in debit swipe fees, about $1.3 billion per month. Now, $16 billion may not sound like a lot of money when you compare it to the $20.8 billion that the New York State comptroller said was paid out in Wall Street bonuses to major financial institutions just last year, but it is a huge amount when it affects small business.


For most Americans on Main Street, $16 billion in swipe fees is quite a lot. This money comes out of the pockets of small business owners across America and out of the pockets of their customers, who pay higher prices for gas and groceries as a result.


According to data from the Federal Reserve and the Nilson Report, over half of all debit interchange fees--more than $8 billion per year--goes to just 10 giant banks.


What it boils down to is this: Some who are pushing for a delay in this reform are literally offering a handout of $16 billion mainly to the biggest banks in America.


The swipe fee system does not have transparency and has no competition. The bottom line is that the current debit card system in this country is a broken market. Ask any retailer, large or small, hotel owner, restaurant owner, convenience store owner, gas station, ask them what bargaining power they have when it comes to the amount they are charged for the use of a debit card, and the answer is, none. Ask them how much is being paid in each transaction. And the answer is, it is secret. Now, is that how you would build an economy, with no competition and no transparency? That is exactly what is going on with the duopoly of Visa and MasterCard imposing these fees on small businesses.


The banks and card companies are sending an army of lobbyists to Congress to undo the reform Congress passed last year. There are hundreds of bankers swarming over Capitol Hill this week. Several Members who have never supported an interchange reform in the first place have introduced legislation to delay that reform that we passed. I am sorry to say that this plays right into the banking industry's effort to avoid accountability.


I want my colleagues to know that small businesses are going to tell their side of the story too.


Todd McCracken is the president of the National Small Business Association. He came to Capitol Hill last week, and this is what he said:


Small businesses aren't trying to do away with credit and debit cards, we just want them to play by the rules. Small businesses have been at the mercy of these large banks for years, and the swipe fee reforms merely inject fairness and transparency into a market that has been dictated by a handful of companies for years.


Hundreds of small businesses also submitted formal comments to the Federal Reserve in support of reform. Those comments are posted on the Federal Reserve's Web site. I would like to read a few of those from my home State of Illinois.


Nolan Williamson runs a flower shop. It is called Jerry's Flower Shoppe in Carbondale, IL. Carbondale, IL, in southern Illinois, is the home of Southern Illinois University. Here is what Nolan wrote to the Federal Reserve:


In 1964, Jerry's Flower Shoppe opened, and for 35 years I have been a partner in the business. We are located in a university town, and our business depends greatly on the university. Since the university budget is down and they are not spending, our business is suffering.


We have streamlined our business as much as possible. We were forced to lay off one employee for a while, then brought her back at reduced pay and reduced hours. As a retail business, we have no choice but to accept credit and debit cards. We had to increase prices to cover the high interchange card fees. Even with a price increase, these high card fees are eating away our profits.


Nolan concluded by saying:


Help our struggling business and other small businesses around the country. Reduce our swipe fees to 12 cents as proposed.


He alludes to the fact that when the Federal Reserve took a look at the actual interchange fee being charged for the use of a debit card, they estimated the average to be over 40 cents per transaction, which is more than 1.1 percent of the value of each transaction. The actual cost? Less than 10 cents. So what the credit and debit card companies are doing is imposing a fee that there is no bargaining over, no competition, no disclosure, and forcing retailers to pay it. Jerry's Flower Shoppe does not have a fighting chance against Visa and MasterCard. They have to pay it or else. That is, of course, transferred to a cost to customers and reduced profit to the owners.

Here is another comment from Bob Stork. He owns Stork's Catering in Springfield. I know Bob. Here is what he says:


My business has been in operation for about 35 years. We are just a small enterprise with five employees. The economic situation has taken a toll not only on my business, but also on companies all across the country. Personally, I believe that swipe fees are hindering these struggling businesses even further. If these fees keep rising, they will eventually place such a strain on us that we may be forced to close our doors. Please continue your efforts to regulate the debit swipe fees.


Here is a comment from Norman Flynn. He has a business, Culligan Water Conditioning, in Macomb, had it for over 70 years in his family. He said:


We really cannot afford to keep getting hit with unnecessary fees. Please seek to get the proposed rule implemented quickly so that debit swipe fees will be lowered and small businesses will get some breathing room.


I hope my colleagues understand that these small businesses need relief right now. They need to understand that delaying swipe fee reform, which a bill just introduced this week would do, would give Visa and MasterCard and the banks a multibillion-dollar handout and would leave small businesses and consumers footing the bill.


We have heard a lot about the bailout of Wall Street. This is the handout to Wall Street. To think that they would turn around and give to these companies $32 billion in handouts, most of it going to the largest banks in America, by delaying this rule at the expense of small businesses and consumers all across America.


As the big banks and card companies make their pitch, I hope my colleagues will make their choice to stand with Main Street instead of Wall Street. I hope they choose to stand on the side of hard-working small business owners. Most Americans understand--and I sure do--that good jobs are created by small businesses all over this country. We have to be on their side in this struggle and not on the side of the biggest banks and Wall Street.


I wish to respond to another argument that was raised recently against interchange reform. Banks such as JPMorgan Chase have started threatening that interchange reform will force them to limit debit card transactions to $100 per transaction. This threat is so hollow, I am amazed they are saying it publicly. It is a threat that defies basic logic. Remember, it does not cost a bank any more to conduct a $100 debit transaction than it does a $1 transaction. In both cases, the cardholder must already have the money in his account. The costs to transfer that money through the network's wires are the same no matter the dollar amount. The only logical reason why banks such as Chase would make this threat is to scare opposition to interchange reform.


Once reform takes effect, big banks such as Chase would be crazy to follow through on this threat of imposing dollar limits on debit transactions. If they did, consumers will start moving in droves to small banks which are not regulated by this bill and will not impose unnecessary restrictions.


Chase also has no business to argue that they have to limit large-dollar debit transactions because they are afraid about fraud. Remember, this is the same Chase bank that last April told all of its debit card holders not to use PIN numbers even though PIN has one-sixth as much fraud loss as signature debit cards. Chase did this because Visa and MasterCard give higher interchange fees for signature debit than for PIN debit. Chase is the poster child for banks that have brought increased fraud risks upon themselves by not using PIN numbers.


I also want to respond to my colleagues who tell me they are hearing from banks and card companies that consumers might be hurt by interchange reform. First of all, these banks and card companies have no credibility when it comes to speaking on behalf of consumers. They say interchange reform will force them to raise fees on consumers, but they will not even admit that they were already raising consumer fees to record levels before interchange change reform passed.


Glance back at headlines like these: November 12, 2008, Wall Street Journal, ``Banks Boost Customer Fees to Record Highs.'' May 28, 2009, USA TODAY, ``Banks Find Ways to Boost Fees; Checking Accounts Latest Target.''


Banks and card companies also refuse to concede that consumers already bear the cost of interchange fees in the form of higher retail prices. That is particularly hard on the unbanked and low-income Americans.


Instead of listening to banks and card companies about consumer interests, I suggest my colleagues listen to those consumer groups in Washington.


Just this week, the Consumer Federation of America sent a letter to all Senators. Here is what it said:


The current interchange system is uncompetitive, non-transparent, and harmful to consumers. It is simply unjust to require less affluent Americans who do not participate in or benefit from the payment card or banking system to pay for excessive debit interchange fees that are passed through to the cost of goods and services. As a result, the Consumer Federation of America does not support delaying implementation of the new law.


Other groups, such as U.S. Public Interest Research Group, Public Citizen, and the Hispanic Institute, have argued strongly that interchange reform will help consumers across America, just as it has helped consumers in many other countries that have undertaken reform.


Do you know what the interchange fee is in Canada? It is zero. The same companies that are offering debit cards here in the United States do not charge an interchange fee in Canada. And they have just recently reduced the interchange fees dramatically in Europe, much lower than the United States. Same companies.


How can they do that? They did it because the governments of Europe stepped up and said: This is a ripoff. You can no longer impose, unilaterally, interchange fees, and we are going to regulate it.


They said: Please do not. We will just drop the fees dramatically.


And they did.


Look what is happening here. We have a group of Senators and Congressmen who are now saying: We are not only refusing to assert the rights of consumers, we are going to back off and let the banks and card companies charge whatever they want for at least 2 more years. Whatever happened to our sensitivity to the people we are supposed to represent--the consumers and the small businesses? That, to me, is a troubling outcome, if, in fact, those who push this legislation continue to do so.


We all know the game plan that Visa, MasterCard, and the $13 trillion banking industry is using.


We have seen it before. They will try to kill interchange reform outright using threats and scare tactics. If they can't kill it, they will try to delay it, praying that the next President and the next Congress will be even friendlier to the banking industry.


Exactly the same thing happened when Congress passed the Credit Card Act in 2009. The banks and card companies fell all over themselves trying to raise fees before the rules went into effect. When I would go home to Springfield, my wife would say to me: Guess what, here is another notice from the credit card company raising the interest rate you have to pay on late charges. I thought you passed credit card reform.


I said: It doesn't take effect for a few more months. They are running as fast as they can to run up the fees in the meantime.


That is what is happening to businesses with the interchange fees. A lot of people don't know it because they don't get a notice in the mail about the interchange fee. That has been their game plan in the past, and it is their game plan again.


I am sick of the big banks and card companies squeezing American consumers and small businesses with tricks and traps and unfair fees. I will stand with the small businesses and consumers of America on this issue. I will fight the big banks and the big credit cards and their efforts to kill or delay swipe fee reform.


I urge my colleagues to join me in standing up for Main Street and against the abusive fees and practices of Wall Street.