Swipe Fee Reform

Last year, Congress enacted landmark reform of the swipe fees that Visa and MasterCard impose on the debit card system. An amendment I offered to Wall Street reform passed the Senate with 64 votes--47 Democrats, 17 Republicans--and was later signed into law. It was the first amendment out of the first 26 on that bill that was held to a 60-vote standard. Every other amendment before was held to a simple majority. But I was lucky enough, when I offered the amendment, that there was an insistence that we had to reach 60 votes. We did it, 47 Democrats and 17 Republicans. It was a great victory, and one that came as a surprise to Wall Street, because Main Street--the retail merchants, the restaurants, the convenience stores, and many others--had worked hard for this amendment.


Never before had Visa and MasterCard, the duopoly of credit cards, and their big bank allies lost a vote such as this in Congress. Normally, the credit card companies and the big banks are used to getting their way in this town. Visa and MasterCard have such power that they control over 75 percent of all credit and debit card transactions in America. Last year, $1.39 trillion was transacted on Visa and MasterCard debit cards. According to the American Bankers Association, the U.S. banking industry is a $13 trillion industry. That is trillion with a ``t.''


Many Members in this body are being lobbied right now by banks and card companies to repeal this law, to undo the interchange reform Congress passed last year. It is one of the most active lobbying efforts I have ever seen.


I want to explain why interchange reform is so important, not just for the concepts of competition and transparency but also for the people and businesses affected, for small businesses and consumers and the American economy.


A little background on the debit card industry: Debit cards are simply a way for accountholders to access funds stored in an account. They are the electronic version of a check.


Debit cards are issued by banks, such as Bank of America, where the account is held. The cards are also part of a card network such as Visa or MasterCard, which set certain fees and rules about using their cards.


The banks that issue the debit cards can make money in several ways. They make loans based on deposits and earn interest. They charge fees to consumers for maintaining and accessing accounts such as ATM, monthly, overdraft, and transfer fees. They also receive interchange fees from merchants every time one of their debit cards is used.


If you look at any bank's Web site, you can find the loan interest rates and the account fees the bank charges customers. Banks compete with one another for this consumer business. That competition keeps their fees in check. It is called the free market. But ask any bank to show you on their Web site where you can find the interchange fees that the bank charges merchants, restaurants, universities, charities, convenience stores, ask them what they charge as an interchange fee for the use of their debit cards, the bank will say: Well, you will have to call Visa or MasterCard.


Card companies such as Visa fix the interchange fee rates received by issuing banks, the banks that have their name on the card next to the Visa symbol. In other words, thousands of banks that compete with one another in all other aspects of business do not compete with one another when it comes to how much in so-called swipe fees or interchange fees they get from merchants. The banks let Visa set the prices for all of them.


Visa has decided that every bank that issues Visa cards will get the same rate as every other bank, no matter how efficient a bank is, no matter how much fraud a bank allows. Rather than a competitive system, this is a system which subsidizes inefficiency. In fact, the only competition in the interchange system right now is the competition between card networks to raise interchange fees. They raise the rates in order to get banks to join the network and issue more of their cards.


It is easy to see why banks and card networks set up this system. It makes the banks happy because they get billions of dollars a year in high fees, and they don't have to worry about competition. It makes the networks happy because they get their own network fee each time a card is swiped, and high interchange means banks will issue more cards.


But it is unfair to those who are receiving the cards--for example, the restaurants, the merchants, the shops, the book stores, universities, charities, convenience stores--because they have no power to negotiate this fee. They can't hold off and say: Wait a minute, if you want us to take Visa at our store, we want to know how much you are going to charge us every time a customer uses a Visa card. There is no way to have any conversation on that. Visa establishes what the swipe fee will be.


It is also unfair to consumers, particularly low-income consumers and those without banking accounts, who pay billions per year in hidden interchange fees that are passed on to them in higher prices for gas and groceries. How about that. I had some people in my office today talking about the price of gasoline. They said: Understand, every time a customer uses a Visa or a MasterCard, they are taking a percentage of that cost on the gallon of gasoline. Their percentage keeps going up, and in order to have a profit, to keep the lights on, we have to keep raising the price of gasoline to keep up with the credit card companies, let alone the national oil companies.


The Federal Reserve estimated that in 2009, about $16.2 billion was charged in debit interchange fees, a massive amount of money that is being paid to the banks by merchants and their customers, about $1.3 billion a month. I will get back to that number in a moment. It didn't used to be that way in America. It isn't that way in many other countries that use Visa and MasterCard.


Back when the debit card system was started several decades ago, debit fees were minimal. It wasn't until Visa entered the market in the 1990s that we started seeing debit card interchange fees that looked like credit card interchange fees.


They are two different worlds. When I use a credit card, ultimately, the bank and credit card company have to collect from me. If I dodge them or don't pay, there is a loss. A debit card comes directly out of my account. There is no question whether the money is there. It is already there.


There is an excellent New York Times article by Andrew Martin from last year titled ``How Visa, Using Card Fees, Dominates a Market.''


How Visa, Using Card Fees, Dominates a Market - Andrew Martin - New York Times


I urge my colleagues to read it. It shows how Visa leveraged its dominance in the credit card industry to enter into and dominate the debit card industry. Visa then changed the debit interchange fee system so it looked like the credit card fee system. The result: the United States has the highest interchange fees in the world.


We also have some of the worst fraud prevention technology in the world. This is because Visa gives banks higher interchange rates for so-called signature debit transactions instead of PIN debit transactions. So the banks tell their customers to pay with signature debit, even though far less fraud occurs with the use of PIN numbers.


It doesn't have to be this way. Many countries such as Canada have thriving debit card systems with zero interchange fees. Canada has low fraud and wide consumer debit usage. Other places such as the European Union carefully regulate interchange rates to keep them to a reasonable level. But in this country, we have let dominant card networks--and they are a powerful bunch--take over our debit card system. They are driving that system on an unsustainable course.


I have worked for years to reform interchange fees and to bring transparency, competition, and choice to the credit card and debit card industry. I first introduced a bill on this in 2008. In 2009, I joined with Senator Kit Bond of Missouri to file a modest floor amendment to the Credit CARD Act. The amendment simply said interchange fees should be reported to the Federal Reserve and that Visa and MasterCard should not be allowed to stop merchants from offering discounts for debit cards against credit cards. The card companies and bank industry hated that idea like the devil hates


holy water. They did everything they could to kill the amendment. They used their standard talking points, saying this amendment would hurt consumers, small banks, credit unions, the economy, everything one could think of. The amendment never reached a vote. Instead, in 2009, the banks and card companies said they would support a study. We love to study things in Washington. So Congress delayed real reform and said: Let's get on with the study.

Last year, I said: Enough is enough. We can't continue to let Visa, MasterCard, and the big banks use price-setting schemes to turn our debit card system into their own large piggy bank at the expense of merchants and consumers. The amendment I offered last year said: If banks are going to let a card network set interchange rates for them, those rates must be reasonable and proportional to the cost of processing a debit transaction over that network's wires.


Why would we bring the Federal Reserve in to establish a reasonable and proportional interest change fee? Because there is no competition in this market. Visa and MasterCard, recently under investigation by the Department of Justice for their practices, establish what these interchange fees are going to be. They impose them on merchants who many times are told late in the game how much the fee is. They don't bargain. Merchants can't shop around. There is no competition when it comes to the establishment of interchange fees.


The amendment will end this inefficient subsidy that Visa and MasterCard have created for banks, and it will incentivize banks to operate their card systems efficiently. The amendment directs the Fed to issue regulations to implement this reasonable and proportional standard. The Fed issued draft regulations in December and is now working on final regulations to be completed in April and take effect in July.


Do my colleagues know what they found in their initial cut at this? The average interchange fee is in the range of 40 cents, and the average cost to use a debit card is about 10 cents. Think of the overcharge that is going on with every single transaction. The next time you are standing in the airport and somebody hands a debit card to the cashier to pay for a pack of gum, think about that retailer just having lost money. The only ones who made money in the transaction were Visa, MasterCard and the issuing bank.


Last year, when I was drafting this amendment, I knew we had to be careful about the way the reform would affect small banks and credit unions that currently benefit from the rates Visa and MasterCard set. I didn't want to drive small issuers out of the debit card market. So my amendment specifically exempted them from regulation. That means that now, just like before, networks will compete by raising interchange rates to win the business of those small, unregulated issuers.


I know the small banks and credit unions are also lobbying on the Hill, saying that interchange reform will hurt them. For years, they have been making this argument against any type of reform. I have been on the Hill for a while, in the House and in the Senate.


I used to really believe there was a qualitative--not just quantitative but a qualitative--difference between community banks and credit unions and the big boys, the Wall Street banks. Over the years, I am sorry to say when it comes to these issues, they are the same. It is just a quantitative difference. Credit unions and community banks are smaller, but in terms of the way they look at issues, there is not a dime's worth of difference.


When it comes to this issue, there is an interesting phenomenon at work. Visa and MasterCard do not dare raise their head on Capitol Hill. If there are two more unpopular companies with American consumers, it is hard to think of what they might be. Maybe today it is oil companies. But it is a close second with credit card companies and the way they treat people. So they do not come in and lobby.


Well, how about the Wall Street banks? Do you think they are going to show up here and say: You cannot regulate these interchange fees? Two-thirds of the debit cards come from the biggest banks out of Wall Street, not the community banks and credit unions. So the big money in this whole transaction is on Wall Street. But you do not hear from the Wall Street banks. Why? Because they are not going to win any popularity contests either.


It was not that long ago we were shoveling billions of taxpayer dollars at these banks to keep the lights on after they made some pretty stupid investment decisions that drove our economy into the ditch. So they cannot lobby, the big banks, with the big money involved in this issue. The credit card companies cannot lobby because they have no popularity with the American consumer. So what do they do? They have some beards, and the beards in these circumstances are the credit unions and the community banks. Those specifically exempted are now coming to Congress, coming to Capitol Hill, saying this could hurt us in the future.


We drew a line and said if the asset value of the financial institution is below $10 billion--$10 billion--they are not affected by this law. There are, if I recall, only three credit unions in America with assets over $10 billion. The vast majority, the overwhelming majority, of credit unions in this country do not have anywhere near that kind of asset value. The same thing is true with community banks.


So Wall Street banks and credit card companies have found their great agents. Their agents are the credit unions, community banks, presenting their case to the Members of Congress as if they are directly regulated when they are specifically exempted from this.


I know the small banks and the credit unions are working the Hill. For years, they have been using these arguments against any type of reform. When we tried to get bankruptcy reform to deal with foreclosures a few years back--and I honestly think it could have had a dramatically positive impact to slow down foreclosures in this Nation--we specifically exempted credit unions and community banks, and they still lobbied against it. They are in concert when it comes to issues with the biggest banks in America. I do not understand it. It is a dramatic departure from where they have been historically.


Independent analysts agree that the reform Congress passed last year will give small banks actual competitive advantages over big banks. I ask unanimous consent to have printed in the Record a recent op-ed by Andrew Kahr in the American Banker newspaper entitled ``Never Mind the Lobbyists, Durbin Amendment Helps Small Banks.''


Never Mind the Lobbyists, Durbin Amendment Helps Small Banks - Andrew Kahr - American Banker


Now, Kahr is no mouthpiece for merchants. He is a financial consultant who is recognized as the creator of many aspects of the modern card industry. But he says what I have been saying for months--that the arguments small banks have been making against my amendment defy economic logic and common sense.


I also believe interchange reform is essential for consumers. Banks will tell you consumers will be hurt by reform because banks will have to raise consumer fees to make up for lost revenue.


First, when did we start listening to banks and credit card companies to tell us what is good for consumers? Second, read the headlines for the past few years and you will see that banks were already raising consumer fees to record highs in 2008, 2009, and 2010--before my amendment became law. They are always looking for ways to raise fees on consumers as high as the market will allow.


Third, consumers are already paying for the current interchange system. Soaring interchange fees are passed on to consumers in the form of higher prices for gasoline and groceries. And the current system particularly hurts unbanked consumers who pay with cash.


I believe consumers benefit from transparency, competition, and choice. The current interchange system has been designed specifically to avoid these features. That is why consumer groups agree with me and support the interchange reform which we have on the books.


I know the financial industry lobbyists are out there now storming the Halls of Congress. They are saying: Let's delay the Fed's interchange rulemaking for a year or two. Let's study this issue some more. Study, study, study; this is one great study hall, this U.S. Senate. But there comes a point when we need to act, and we are prepared to act now with the Federal Reserve in April and in July.


There is no need to delay these rules. Read the comments I submitted to the Fed about their draft rulemaking. You will see how the new law provides reasonable timeframes for implementing every part of the Fed's rules.


I saw this call for delay and study before, on the Credit CARD Act back in 2009, and it does not surprise me we are hearing it again.


If my colleagues remember nothing else, they should remember this: Delaying interchange reform will have significant consequences to employers, small businesses, and consumers all across America. Not only will businesses, universities, government agencies, and charities keep paying the current $1.3 billion per month in debit interchange fees, the fees will keep going up further. There will be nothing to constrain Visa and MasterCard from setting higher and higher fees. There is no competition in this industry.


Some of my colleagues say they are concerned about small banks and consumers. So am I. That is why I drafted the amendment to exempt them. Independent analysts and consumer groups agree that the reform we passed protects small banks and consumers.


I say to my colleagues, do not tell me you are worried about small banks and consumers and then push for a delay that will serve to provide $1 billion a month in more fees primarily to the largest banks in America.


A delay in this implementation would give Visa and MasterCard and the big banks a multibillion-dollar handout--have we heard this song before?--while leaving merchants and consumers worse off than they already are. I am not going to sit by and let the big banks and card companies get away with trying to kill this reform. They have been bailed out enough already.


I urge my colleagues in Congress: Do not bail out the big banks on Wall Street another time. Once in a political lifetime is enough for most of us.


I am standing with the consumers and merchants on this issue. I hope my colleagues will join me and find it is a good place to stand.