Durbin Chairs Hearing on the Payment of Interchange Fees by the Federal Government

Interchange Fee Reform Could Save Taxpayers Nearly $40 Million/Year

[WASHINGTON, D.C.] – Assistant Senate Majority Leader and Chairman of the Senate Appropriations Subcommittee on Financial Services and General Government Dick Durbin (D-IL) chaired an oversight hearing today on the federal government’s payment of interchange fees.

The hearing follows the release of a Treasury Department report which concluded that the federal government could save nearly $40 million a year of taxpayer dollars if Treasury were allowed to negotiate interchange rates with Visa and MasterCard – something they are currently unable to do.

“Credit and debit cards are rapidly replacing cash and checks in today’s economy – they account for more than half of all retail sales in America and are used to buy nearly $30 billion a year in goods and services from the federal government,” Durbin said. “Visa and MasterCard, which control 80% of the credit and debit card markets, have established a system where they and their big bank allies take an automatic cut out of every credit and debit transaction.  The card giants also block competition, prohibit discounts, and refuse to negotiate fee rates. If we do not take steps to reasonably regulate this system, a dollar won’t be worth a dollar anymore – it will be worth whatever Visa and MasterCard want it to be.”

Interchange fees are supposedly charged by Visa and MasterCard in order to cover the cost of processing a credit or debit card transaction. These fees continue to rise even though processing costs have decreased.  Nearly $50 billion in interchange fees were charged by credit and debit card networks in 2008 – coming out of the bottom lines of small businesses, charities and government balance sheets. Of these fees, 80 percent of these fees went to just ten large banks.

At the hearing, Gary Grippo, testifying for the Department of the Treasury, said that reform of the current interchange system could save taxpayers nearly $36-39 million a year simply by allowing the federal government to negotiate their interchange rates with Visa and MasterCard and to place reasonable limits on the card networks’ unilateral right to raise fees. A copy of their report on the effect of interchange on the federal government – which Durbin requested last year – is attached.

Two panels of witnesses testified at today’s hearing. Testifying in the first panel were Gary Grippo, Deputy Assistant Secretary for Fiscal Operations and Policy, Department of the Treasury; Alicia Puente Cackley, Director, Financial Markets and Community Investment, Government Accountability Office; and Janet Langenderfer, Senior Director, Credit Cards, National Railroad Passenger Corporation (Amtrak).

Bruce Sullivan, Vice President of Government Solutions, Visa Inc.; Ed Mierzwinski, Consumer Program Director, U.S. Public Interest Research Group; and Wendy Chronister, President and CEO, Qik'n EZ Stores, Springfield, Illinois, will make up the second panel.

Last month, Durbin successfully added a bipartisan amendment to the Senate’s Wall Street reform legislation that would require the Federal Reserve to determine if the current interchange fees structure is both “reasonable and proportional” to the real cost of processing a debit card transaction. The amendment would also allow small businesses to offer discounts to consumers when they use cash, checks or debit cards.

A copy of Durbin’s prepared remarks and a document correcting the myths surrounding Durbin’s interchange amendment appear below.
 Senate Appropriations Subcommittee on
Financial Services and General Government
Oversight of Federal Payment of Interchange Fees:
How to Save Taxpayer Dollars
Room 192 Dirksen Senate Office Building
Wednesday June 16, 2010
2:30 p.m.


Good afternoon.  I am pleased to convene this hearing before the Senate Appropriations Subcommittee on Financial Services and General Government.  Today’s hearing is titled “Oversight of Federal Payment of Interchange Fees: How to Save Taxpayer Dollars.” 

I welcome my distinguished ranking member, Senator Susan Collins, other colleagues who have joined me on the dais today, and others who may arrive.  We are also pleased to have a distinguished lineup of witnesses to discuss this subject with us.

Credit and debit cards are rapidly replacing cash and checks in today’s economy – accounting for more than half of all retail sales in America. And that percentage is growing.

Credit and debit cards are also used to buy nearly $30 billion a year in goods and services from the Federal Government.

People use cards to pay for things like admission passes into National Parks, groceries at military commissaries, tickets on Amtrak, and co-pays for VA medical services.

There are benefits to being able to use plastic for transactions.  But there are also consequences.  The more Americans use credit and debit cards, the more the American economy falls under the control of the two giant card networks, Visa and MasterCard.

Visa and MasterCard control 80% of the credit and debit card markets, and they have established a system of fees and rules that apply to every transaction conducted across their networks.  Every time a credit or debit card sale is made, Visa and MasterCard take a cut out of the transaction amount.

Some of this cut they keep, but most of it is routed along to the bank that issued the card used in the transaction.  This fee that they give to the card-issuing bank is called the interchange fee.

Interchange fees, also known as swipe fees, average around 1% - 3% of the transaction.  Because these fees are deducted from the transaction, the seller who accepts the card ends up with less than 100% of the sale amount.

An estimated $48 billion dollars in credit and debit card interchange fees was collected in 2008 from those who accept cards, including small businesses, charities, and government agencies.

While the interchange fee is not the only fee charged on debit and credit transactions, it is by far the largest fee.  It is also unique in the way that it is established.  Interchange fees are received by card-issuing banks, but banks do not set the rates for the fees they receive.

Instead, interchange fee rates are set by Visa and MasterCard, who apply the same schedule of rates to all card-issuing banks within their networks.  All banks in the network are guaranteed the same interchange rates, regardless of how efficiently or inefficiently a bank manages its card-issuance costs.

There is no agency with regulatory authority over the nearly $50 billion collected per year in interchange fees.  Nor is there any real competition or negotiation in the market to keep fees in check.  Visa and MasterCard set the fee rates as they see fit, and tell merchants to take it or leave it.

Given the card companies’ enormous market power and the rigid operating rules that they unilaterally mandate, it is extremely difficult for those who accept their cards, including the federal government, to influence how much Visa and MasterCard will make them pay.

We need to step back and recognize the reality of the situation: Visa, MasterCard and their big bank allies want credit and debit cards to completely replace cash and checks, and we’re already halfway there.

Already when a sale is made by credit or debit card, the person who makes the sale only receives 98 or 97 cents on the dollar, because the card companies automatically take a cut.  And the cut they take keeps growing.

If we do not take steps to reasonably regulate this system, a dollar won’t be worth a dollar anymore – it will be worth whatever Visa and MasterCard want it to be.

We will literally cede control of America’s currency to the Visa and MasterCard duopoly.  The economic consequences to American businesses, consumers and taxpayers will be staggering.

I successfully sponsored an amendment in the Senate that would require debit interchange fees to be set at a reasonable level, and that would prevent Visa and MasterCard from prohibiting those who accept cards from offering discounts to consumers.  This amendment is critical to addressing the abuses of the card companies’ fees and rules. 

As chair of this subcommittee, I have also devoted particular attention to the amount of interchange fees that the federal government pays when entities like Amtrak, the Defense Department, the National Park Service, and the VA accept cards as a form of payment.

Of course, interchange fees paid by the federal government are paid with taxpayer dollars, and we have an obligation to make sure the taxpayer is getting the best value possible.

At my request, last year the Appropriations Committee directed the Financial Management Service within the Treasury Department to provide a report on potential cost savings that the federal government could achieve if FMS were able to effectively negotiate changes to the interchange fees and operating rules established by the card networks.

The report concludes that Treasury could save an estimated $36 to $39 million per year in taxpayer dollars if Treasury were able to negotiate certain terms with the card networks.  We have invited the Treasury Department here to discuss this report and to explain what terms they seek to negotiate with the card networks.

We are also pleased to be joined today by representatives from Amtrak, which also incurs significant interchange fees, as well from the Government Accountability Office, which issued a report on federal payment of interchange fees back in 2008. 

On our second panel, we will have representatives from Visa and the U.S. Public Interest Research Group share their perspectives.  We will also hear from one of my constituents who operates several stores in Illinois and who faces the same fees and rules with regard to card acceptance as does the federal government. 

Today’s hearing is not to debate whether credit and debit cards can bring benefits to the federal government and other accepters of cards.  We all agree that cards do provide benefits like convenience, electronic recordkeeping, and a lighter wallet.

Instead, this hearing is about whether the current system of fees and rules that Visa and MasterCard have established are necessary to achieve those benefits.   We will discuss how increased competition and an end to unrestrained fee increases will help improve the system and save taxpayer dollars.

Senator Collins…


Each year an estimated $50 billion is collected in interchange fees on debit and credit card transactions.  The interchange system is entirely unregulated, and 80% of interchange revenue goes to just ten big banks.  Interchange fees are paid by every business, charity and government agency that accepts cards, and the fees are passed on to consumers in the form of higher prices.  Big Banks and their well-heeled are allies fighting to keep the current interchange system untouched, but many of their arguments against Senator Durbin’s amendment are myths.

Summary of the Durbin Amendment:

The amendment would:

1) require that for transactions involving debit cards issued by banks with assets over $10 billion, any interchange fee charged must be reasonable and proportional to the cost incurred in processing the transaction; and

2) prevent card networks like Visa and MasterCard from punishing merchants who provide discounts to customers for use of a particular card network (e.g., Visa vs. MasterCard) or a particular form of payment (e.g., cash vs. debit card vs. credit card), or who set minimum or maximum dollar thresholds for use of a credit card. 

Myth #1:  The Durbin Amendment is bad for consumers.

Reality: The Durbin amendment is supported by consumer advocates including Elizabeth Warren, Nobel Laureate Joseph Stiglitz, and President of the American Antitrust Institute Albert Foer as well as Americans for Financial Reform, a broad coalition of more than 250 national and state organizations.

As a November 2009 GAO study points out, it is under the current interchange system that “merchants pass on their increasing card acceptance costs to their customers.” (p. 25)   The National Retail Federation estimates that each American family pays an extra $427 per year as a result of inflated prices due to interchange fees. 

The Durbin amendment would restrict interchange inflation, reducing costs for small businesses, merchants and consumers alike.

Opponents argue that under the amendment merchants would not necessarily pass any savings on to consumers. However, these same opponents also object parts of the amendment that would specifically allow discounts for consumers.

Further, the big banks claim that if the Durbin amendment is passed, consumers will pay increased fees and lose access to free checking accounts.  But this is already happening. According to a May 18 article in USA Today, banks are already charging monthly checking account fees and annual credit card fees in response to last year’s Credit CARD Act.

The fact is that banks and card companies have continually tried to increase the fees consumers and merchants pay. The Durbin amendment protects consumers from unreasonably high fees and ensures that interchange rates are reasonable and proportional to the real cost of doing business.

Myth #2: Under the amendment merchants might discriminate against cards issued by small banks.

Reality:  False. When a merchant agrees to accept Visa or MasterCard, they are required by Visa and MasterCard to accept all debit cards in their networks regardless of the issuer.

Visa and MasterCard enforce that rule vigorously and fine or cut off merchants who fail to abide by the network agreement.

 The Durbin amendment makes no changes to this practice. Nothing in the amendment would allow merchants to discriminate between card issuer.

This argument also ignores the current reality of the interchange system.  Merchants know which cards have higher interchange rates today and theoretically could try to violate the honor-all-cards rule by refusing to accept rewards cards or corporate cards which carry higher fees and which are easily identifiable.  But they don’t.

The current network agreements - and the fines and penalties associated with non-compliance - are more than adequate to protect from discrimination against large or small issuers.

Myth #3:  The amendment would allow merchants to set maximums and minimums for debit card payments.

Reality:   The Durbin amendment would allow merchants to set a minimum or maximum threshold amounts for credit cards only
Currently, Visa and MasterCard require merchants to honor their credit cards for all transactions, including those where interchange fees exceed profit margins.

Permitting merchants to set minimums for credit card purchases will pressure card networks to lower interchange rates on small-dollar transactions to affordable levels. 

Permitting merchants to set maximums for payment by credit card will help large institutions like the federal government and universities save millions in fees and allow for lower prices to be passed on to consumers.

Myth #4:  While the amendment exempts all banks under $10 billion in assets from debit fee regulation, the carve-out will not work.

Reality: The Durbin amendment exempts all but the largest 1% of financial institutions in the country from the proposed regulations. While only 86 banks and 3 credit unions will be affected by the changes, they control nearly 70% of the interchange market.

The Durbin amendment will have no effect on the interchange rates for small banks and financial institutions.

The only way that small banks or credit unions would experience interchange rate reductions is if Visa and MasterCard unilaterally decide to cut their rates – something they already have the power to do today.  But there is simply no economic reason for Visa or MasterCard take this step.

Small financial institutions contend that every dime of current debit interchange revenue is needed in order to issue debit cards. Visa and MasterCard in turn earn their revenue by receiving a per-swipe fee each time one of their cards is swiped.

If Visa and MasterCard lower small bank debit interchange rate, small financial institutions will stop issuing debit cards and Visa and MasterCard will stop deriving billions of dollars in income from those lost swipe fees.  It is a lose, lose proposition for both the card giants and small banks and credit unions.

Myth #5:  It is not possible for Visa and MasterCard to operate a two-tier system whereby small banks would receive different interchange rates than large banks.

Reality: Visa and MasterCard have established more than 400 separate interchange rate categories (Visa has 122, MasterCard has 289)

Each category has different fees based on various criteria such as whether or not a card is a rewards card, the volume of business done by the merchant who accepts the card, whether or not the card is a corporate card, and whether the transaction involves the entry of a PIN number or not. 

To argue that it is impossible to have two-tiered system is absurd and ignores Visa’s and MasterCard’s ability to operate a 400+-tiered system with great success today. 

Myth #6: The Durbin amendment amounts to government sponsored “price-fixing.”

Reality: It is the current interchange fee system that represents price fixing.  
Visa and MasterCard, which control 100% of the signature debit market and nearly 80% of the credit card market, unilaterally set the interchange fee rates for every single bank that issues Visa and MasterCard cards. There is no competition in the system and no way for banks or merchants to negotiate a different rate than the one set by the card companies.

The Durbin amendment does not set interchange rates. It simply directs the Federal Reserve Board to ensure that debit interchange rates are “reasonable and proportional” to the processing cost.

This is the same “reasonable and proportional” standard that Congress directed the Fed to use in last year’s Credit CARD Act, which empowered the Fed to regulate the fees that banks charge to credit cardholders.

Visa and MasterCard also currently prohibit the merchants who accept their cards from offering discounts to consumers who use competing card networks.  This is another form of price-fixing, akin to Coca-Cola and Pepsi each telling stores that they must agree not to sell the other at a lower price.

The Durbin amendment would correct this anticompetitive practice by allowing merchants to offer discounts for the use of one card network (e.g., MasterCard) over another (e.g., Visa), creating competition between networks.

Myth #7:  Interchange reform has not been the subject of hearings, and should be replaced by a study. 

Reality:  Interchange fees have been the focus of two GAO reports and at least six hearings in the past five years, including hearings before the following committees:

(1) House Committee on Energy and Commerce, Subcommittee on Commerce, Trade and Consumer Protection, February 15, 2006;

(2) Senate Judiciary Committee, July 19, 2006;

(3) House Judiciary Committee Antitrust Task Force, July 19, 2007;

(4) House Judiciary Committee Antitrust Task Force, May 15, 2008;

(5) House Financial Services Committee, October 8, 2009; and

(6) House Judiciary Committee, April 28, 2010

(7) Senate Appropriations Committee, Subcommittee on Financial Services and General Government, June 16, 2010.

Just like they did in 2009 by insisting on an interchange study in the Credit CARD Act, the card networks and big banks will always seek to replace real interchange reform with calls for more study.  It is time to stop studying the problem and start fixing the problem.

Visa’s and MasterCard’s market power continues to grow by the day, as more and more transactions are conducted over their networks and as they charge higher and higher fees.  If left unregulated, the interchange system will drive entire sectors of American retailing out of business, stunt job growth, and raise prices for every consumer.