[Congressional Record (Bound Edition), Volume 156 (2010), Part 15] [Senate] [Pages 23486-23488] [From the U.S. Government Publishing Office, www.gpo.gov]INTERCHANGE FEES Mr. DURBIN. Mr. President, I wish to speak briefly about interchange fee reform, an issue I have worked on for many years and an issue which was taken up just recently last Thursday when the Federal Reserve considered legislation we passed in the Senate and House of Representatives and sent to them to establish regulations. It was an effort to bring reasonable regulation to a $20 billion annual debit card interchange fee system industry. The Federal Reserve released draft regulations that will implement the new law Congress enacted. Back in May, when the Senate was debating the Wall Street reform bill, I offered an amendment. I am honored that 64 Senators voted for it, including 17 Republicans. It was a bipartisan success. It is now the law of the land. The Federal Reserve is moving forward to make sure our law is implemented in a fair way. The Fed announced, according to their investigation, it costs the banks between 7 and 12 cents to process a debit card transaction. But the Fed reported that big banks and card networks charge merchants, retailers, charities, universities, and others an average debit interchange fee--not 7 to 12 cents--of 44 cents. The Fed has confirmed what consumers and retailers long suspected. They are being overcharged and gouged for each purchase made with a debit card. Merchants and their customers are being charged more than three times what the transactions cost. In the old days, if you paid by check before debit cards, the fee for processing the check was pennies, regardless of the face amount of the check. Now the debit card fee is 44 cents--three, four, five, six times more than the cost actually incurred by the banks because of the transaction. The draft regulations released propose to cap the interchange fees at the largest banks at 12 cents per transaction, give or take some conditions such as the prevention of fraud, which we built into the law. With the 12-cent cap, we could save businesses and consumers across the United States about $10 billion in the first year. Imagine what $10 billion will mean to a restaurant, a shop. Think of what it means to universities and other charities that collect through the use of debit cards--more money for them to use, more profitability, and that could lead to more employment and better business outlooks. At this point, I am hunkered down and ready for the fight that is coming. The biggest banks and credit card companies are going to do their best to influence the Federal Reserve to raise this interchange fee as high as possible, but we know what the reasonable costs are. We know these credit card companies and the big banks have been overcharging for years. Every time a credit or debit card sale is made, Visa and MasterCard take a cut of the transaction. Some of this cut they keep, but most of it is routed along to the bank that issued the card. This fee that goes to the card-issuing bank is the interchange fee, also known as a swipe fee. It skims an average of 1 to 3 percent off the top of every transaction. An estimated $48 billion in credit and debit card interchange fees were collected in 2008, around $20 billion from debit cards. These fees come out of the pockets of everyone who accepts cards-- merchants, small businesses, charities, and government agencies--and the costs are passed on to consumers. Every bank says they need to charge fees to help pay for the cost of processing card transactions and fighting fraud. That is fair enough. But the banks do not set their own interchange fees. There is no competition here. Some of my Republican colleagues, who supported my efforts said we did not want to go this far to give the Federal Reserve this authority. But there is literally no competition when it comes to credit and debit cards. That is why the government has to step in. [[Page 23487]] That is why we think the Federal Reserve is moving in the right direction. Go look at any bank's Web site and look to see how much that bank charges in interchange fees. You won't find anything. Why? Because for years, the banks have enjoyed a cozy scheme where they let Visa and MasterCard fix the interchange fee rates that each bank receives. This means banks do not have to compete with one another. They all receive the same fees no matter how much a particular bank actually spends to process transactions or to prevent fraud. The current interchange system is a price-fixing scheme. Visa and MasterCard set the fee rates that thousands of banks receive. Efficient banks and inefficient banks receive exactly the same fees. And Visa and MasterCard have so much market power over 75 percent of the market--that they can raise rates whenever they want to and tell merchants to take it or leave it. Merchants have no choice but to take it, because now over half of all retail transactions take place with cards. They can't say no. It is easy to see that the banks and card companies set up this interchange scheme. It benefits the banks that receive high fees and don't need to compete with each other or negotiate with merchants. And it benefits Visa and MasterCard, because they get their own network fee each time a card is swiped, and high interchange fees mean more banks will issue more cards. But the system is unfair to merchants and to consumers in the United States. They have to pay billions per year in these fees with no negotiation and no competition. The interchange amendment that I offered--and that is now law reins in these abusive fees. My amendment did several things. First, it said that if the big banks are going to let Visa and MasterCard fix fees on their behalf, the Federal Reserve should regulate those fees. The amendment said that any debit interchange fee that is set by a card network and passed along to a big bank must be regulated by the Fed to ensure that the fee is reasonable and proportional to the actual cost of processing the transaction. If a bank wants to charge its own fees to reflect the costs it bears, so be it. My amendment does not regulate that, and as long as those fees are transparent and competitive, I am fine with it. But if the banks all get together and decide to let Visa and MasterCard fix fees for them, that is where my amendment steps in. We know that banks today receive far more in interchange than it costs them to do debit transactions. They use their excess interchange subsidy to pay for things like ads, rewards programs, and CEO bonuses. The result of my amendment is that we will squeeze the fat out of the interchange system. Banks will still be able to use interchange to pay for necessary processing costs, but they won't be able to use this interchange scheme to take excessive fees out of the pockets of merchants and their customers. Second, my amendment said that if a bank takes steps to effectively reduce fraud in debit transactions, that bank can get an increase in their interchange rate. So instead of the current system, where Visa and MasterCard give banks the same interchange rate no matter how much fraud the bank allows, my amendment will actually incentivize banks to reduce the amount of fraud that takes place. The rules that the Fed institutes on this will mark a major step forward. Third, my amendment said that card networks cannot require that their debit cards all use exclusively one debit network. The story here is that there are a number of debit networks that merchants can use to conduct transactions. Until recently, most cards could be used on multiple networks. You used to see a number of debit network logos on each debit card. In recent years, however, the biggest networks like Visa have begun requiring banks to sign exclusive agreements under which they become the sole network on the banks' cards. This diminishes competition between networks and leads to higher prices. My amendment will restore this competition. Finally, my amendment said that card networks can no longer penalize merchants who try to offer certain discounts to consumers, like discounts for using debit instead of credit. This was a clear pro- consumer provision. I know that my amendment has been criticized by the banks and by some of their allies in Congress. Those criticisms have generally fallen along several lines. Some have argued that my amendment is a problem because it involves price fixing. I agree that price fixing is a problem, but it is the current interchange fee system that represents price fixing. Don't take it from me even Visa admits that they fix prices for all their member banks under the current system. They sent a letter to the Fed on November 8 saying, quote, ``issuers do not in practice set interchange transaction fees; rather, these fees are set by networks,'' My amendment tries to correct price fixing, not create it. Second, my amendment has been criticized because some think that it will not benefit consumers. I absolutely agree that interchange reform should protect consumer interests. And I would note that my amendment was supported by a broad range of consumer groups and by millions of consumers who signed petitions in support of swipe fee reform. Also, I note that the Fed met on October 13 with a number of consumer groups to discuss how to implement interchange reform. The Fed has posted online summaries of all its interchange meetings, and according to that summary, the consumer groups said they preferred that debit interchange fees be either de minimis or zero. Consumers support interchange reform because, 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.'' 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. Reining in soaring interchange fees reduces costs for merchants and consumers alike. Now make no mistake--I expect the banks and card companies will try to get around debit interchange regulations by creating new hidden consumer fees and by steering consumers toward less-regulated products like prepaid cards. We saw the banks do this after the credit card reform bill was enacted last year. But I want the banks and card companies to know that I will be watching, and I will make sure both the Congress and regulators step in as needed to prevent consumers from being fleeced. Finally, my amendment has been criticized because some say it will hurt small banks and credit unions. I have pointed out repeatedly that my amendment bends over backward to protect these small institutions. I don't want to drive them out of the debit card market, and my amendment won't do that. Nothing in the amendment enables merchants to discriminate against cards issued by small banks and credit unions. Merchants are still required by Visa and MasterCard contracts to accept all cards regardless of the issuer. And the amendment exempts banks with less than $10 billion in assets from interchange fee regulation. All but around 90 banks and 3 credit unions are exempt. These small banks can continue to receive the same high interchange fees that they do today and they will actually receive higher fee rates than their big bank competitors. If Visa and MasterCard are so protective of their big bank members that they decide to voluntarily cut the interchange rates that small banks receive, they will be doing so against their own profit motive-- and they may be doing so in violation of the antitrust laws. [[Page 23488]] My amendment does not harm small banks and credit unions, and I will be watching to make sure Visa, MasterCard and the big banks do not harm them either. Finally, I will point out that the United States is actually late to the party when it comes to interchange regulation. According to an April 2008 report by the Federal Reserve Bank of Kansas City, banks have reached agreement with foreign governments to reduce interchange fees in countries such as Israel, Mexico, and Switzerland. Just this week, the European Union reached an agreement with Visa Europe to limit debit interchange fees to 0.2 percent in nine countries and for cross-border EU transactions. These countries are doing fine without excessive interchange fees. And the United States will do fine as well. In conclusion, the Fed's release of proposed interchange rules is an important step toward bringing relief to our nation's merchants and consumers. Now the Fed will commence a formal comment period on the draft rules, and I and many others will likely submit comments suggesting how the draft can be further improved. I look forward to this process. I again want to thank my 63 colleagues who stood up back in May and voted for my amendment to rein in the unfair debit interchange system. I look forward to continuing to work with them on this issue in the future. I know this fight will be engaged again next year. I am looking forward to defending what we have done and to move with Senator Menendez of New Jersey and others to deal with other abuses in the credit card industry, such as the prepaid debit card where there are vast overcharges of fees. We have to stand in this body for the consumers of America. They cannot afford the well-paid lobbyists in the hallways. We have to stand for them because those people are the backbone of our economy, and without our support, have limited voice in the decisionmaking that takes place in this Chamber. I yield the floor. The PRESIDING OFFICER. The Senator from Rhode Island. Mr. WHITEHOUSE. Mr. President, I ask unanimous consent to speak for up to 20 minutes in morning business. The PRESIDING OFFICER. Without objection, it is so ordered. ____________________