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+ - UNDERSTANDING THE FEDERAL RESERVE'S PROPOSED RULE ON INTERCHANGE FEES: IMPLICATIONS AND CONSEQUENCES OF THE DURBIN AMENDMENT
+
+[House Hearing, 112 Congress]
+[From the U.S. Government Publishing Office]
+
+
+
+
+ UNDERSTANDING THE FEDERAL RESERVE'S
+ PROPOSED RULE ON INTERCHANGE FEES:
+ IMPLICATIONS AND CONSEQUENCES OF
+ THE DURBIN AMENDMENT
+
+=======================================================================
+
+ HEARING
+
+ BEFORE THE
+
+ SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
+
+ AND CONSUMER CREDIT
+
+ OF THE
+
+ COMMITTEE ON FINANCIAL SERVICES
+
+ U.S. HOUSE OF REPRESENTATIVES
+
+ ONE HUNDRED TWELFTH CONGRESS
+
+ FIRST SESSION
+
+ ----------
+
+ FEBRUARY 17, 2011
+
+ ----------
+
+ Printed for the use of the Committee on Financial Services
+
+ Serial No. 112-8
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+ UNDERSTANDING THE FEDERAL RESERVE'S
+ PROPOSED RULE ON INTERCHANGE FEES:
+ IMPLICATIONS AND CONSEQUENCES OF
+ THE DURBIN AMENDMENT
+
+=======================================================================
+
+ HEARING
+
+ BEFORE THE
+
+ SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
+
+ AND CONSUMER CREDIT
+
+ OF THE
+
+ COMMITTEE ON FINANCIAL SERVICES
+
+ U.S. HOUSE OF REPRESENTATIVES
+
+ ONE HUNDRED TWELFTH CONGRESS
+
+ FIRST SESSION
+
+ __________
+
+ FEBRUARY 17, 2011
+
+ __________
+
+ Printed for the use of the Committee on Financial Services
+
+ Serial No. 112-8
+
+
+
+
+
+
+
+
+ U.S. GOVERNMENT PRINTING OFFICE
+64-557 PDF WASHINGTON : 2011
+-----------------------------------------------------------------------
+For sale by the Superintendent of Documents, U.S. Government Printing
+Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
+area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
+20402-0001
+
+
+
+ HOUSE COMMITTEE ON FINANCIAL SERVICES
+
+ SPENCER BACHUS, Alabama, Chairman
+
+JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
+ Chairman Ranking Member
+PETER T. KING, New York MAXINE WATERS, California
+EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
+FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
+RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
+DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
+WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
+JUDY BIGGERT, Illinois BRAD SHERMAN, California
+GARY G. MILLER, California GREGORY W. MEEKS, New York
+SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
+SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
+RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
+PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
+JOHN CAMPBELL, California JOE BACA, California
+MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
+KENNY MARCHANT, Texas BRAD MILLER, North Carolina
+THADDEUS G. McCOTTER, Michigan DAVID SCOTT, Georgia
+KEVIN McCARTHY, California AL GREEN, Texas
+STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
+BILL POSEY, Florida GWEN MOORE, Wisconsin
+MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
+ Pennsylvania ED PERLMUTTER, Colorado
+LYNN A. WESTMORELAND, Georgia JOE DONNELLY, Indiana
+BLAINE LUETKEMEYER, Missouri ANDRE CARSON, Indiana
+BILL HUIZENGA, Michigan JAMES A. HIMES, Connecticut
+SEAN P. DUFFY, Wisconsin GARY C. PETERS, Michigan
+NAN A. S. HAYWORTH, New York JOHN C. CARNEY, Jr., Delaware
+JAMES B. RENACCI, Ohio
+ROBERT HURT, Virginia
+ROBERT J. DOLD, Illinois
+DAVID SCHWEIKERT, Arizona
+MICHAEL G. GRIMM, New York
+FRANCISCO ``QUICO'' CANSECO, Texas
+STEVE STIVERS, Ohio
+
+ Larry C. Lavender, Chief of Staff
+ Subcommittee on Financial Institutions and Consumer Credit
+
+ SHELLEY MOORE CAPITO, West Virginia, Chairman
+
+EDWARD R. ROYCE, California, Vice CAROLYN B. MALONEY, New York,
+ Chairman Ranking Member
+DONALD A. MANZULLO, Illinois LUIS V. GUTIERREZ, Illinois
+WALTER B. JONES, North Carolina MELVIN L. WATT, North Carolina
+JEB HENSARLING, Texas GARY L. ACKERMAN, New York
+PATRICK T. McHENRY, North Carolina RUBEN HINOJOSA, Texas
+THADDEUS G. McCOTTER, Michigan CAROLYN McCARTHY, New York
+KEVIN McCARTHY, California JOE BACA, California
+STEVAN PEARCE, New Mexico BRAD MILLER, North Carolina
+LYNN A. WESTMORELAND, Georgia DAVID SCOTT, Georgia
+BLAINE LUETKEMEYER, Missouri NYDIA M. VELAZQUEZ, New York
+BILL HUIZENGA, Michigan GREGORY W. MEEKS, New York
+SEAN P. DUFFY, Wisconsin STEPHEN F. LYNCH, Massachusetts
+JAMES B. RENACCI, Ohio JOHN C. CARNEY, Jr., Delaware
+ROBERT J. DOLD, Illinois
+FRANCISCO ``QUICO'' CANSECO, Texas
+
+
+
+
+
+
+
+ C O N T E N T S
+
+ ----------
+ Page
+Hearing held on:
+ February 17, 2011............................................ 1
+Appendix:
+ February 17, 2011............................................ 77
+
+ WITNESSES
+ Thursday, February 17, 2011
+
+Floum, Joshua R., General Counsel, Visa Inc...................... 43
+Kantor, Doug, Partner, Steptoe & Johnson, on behalf of the
+ Merchant Payments Coalition.................................... 41
+Kemper, David W., Chairman, President and CEO, Commerce Bank, on
+ behalf of the American Bankers Association (ABA) and the
+ Consumer Bankers Association (CBA)............................. 40
+Michael, Frank, President and CEO, Allied Credit Union, on behalf
+ of the Credit Union National Association (CUNA)................ 37
+Prentzas, Constantino (Gus), Owner, Pavilion Florals, and Life &
+ Health Fitness................................................. 36
+Raskin, Hon. Sarah Bloom, Governor, Board of Governors of the
+ Federal Reserve System......................................... 2
+Seltzer, David, Vice President and Treasurer, 7-Eleven Inc., on
+ behalf of the Retail Industry Leaders Association (RILA)....... 45
+
+ APPENDIX
+
+Prepared statements:
+ Canseco, Hon. Francisco...................................... 78
+ Marchant, Hon. Kenny......................................... 80
+ Renacci, Hon. James.......................................... 82
+ Floum, Joshua R.............................................. 84
+ Kantor, Doug................................................. 101
+ Kemper, David W.............................................. 147
+ Michael, Frank............................................... 160
+ Prentzas, Constantino (Gus).................................. 174
+ Raskin, Hon. Sarah Bloom..................................... 179
+ Seltzer, David............................................... 192
+
+ Additional Material Submitted for the Record
+
+Capito, Hon. Shelley Moore:
+ Written statement of various higher education associations... 199
+ Written statement of the Electronic Payments Coalition....... 200
+ Written statement of U.S. PIRG, Public Citizen, and the
+ Hispanic Institute......................................... 204
+ Written statement of the 60 Plus Association................. 211
+ Written statement of the Association of Kentucky Fried
+ Chicken Franchisees, Inc................................... 212
+ Written statement of the Independent Community Bankers of
+ America (ICBA)............................................. 215
+ Written statement of Senator Richard J. Durbin............... 220
+ Written statement of Hy-Vee.................................. 225
+ Written statement of the National Association of Federal
+ Credit Unions (NAFCU)...................................... 227
+ Written statement of the Network Branded Prepaid Card
+ Association (NBPCA)........................................ 230
+Marchant, Hon. Kenny:
+ Written statement of the Texas Credit Union League........... 234
+Perlmutter, Hon. Ed:
+ Letter from William A. Cooper, Chairman and CEO, TCF
+ Financial Corporation...................................... 236
+Kantor, Doug:
+ Excerpt from a House Judiciary Committee hearing held on May
+ 15, 2008................................................... 331
+Kemper, David:
+ Written responses of the American Bankers Association to
+ questions submitted by Representative Capito............... 334
+ Written responses to questions submitted by Representative
+ McCarthy................................................... 337
+Michael, Frank:
+ Written responses to questions submitted by Representative
+ McCarthy................................................... 338
+Raskin, Hon. Sarah Bloom:
+ Written responses to questions submitted by Representative
+ Capito..................................................... 339
+ Written responses to questions submitted by Representative
+ Maloney.................................................... 340
+ Written responses to questions submitted by Representative
+ McCarthy................................................... 361
+ Written responses to questions submitted by Representative
+ Pearce..................................................... 363
+ Written responses to questions submitted by Representative
+ Westmoreland............................................... 364
+Seltzer, David:
+ Written responses to questions submitted by Representative
+ McCarthy................................................... 368
+
+
+ UNDERSTANDING THE FEDERAL RESERVE'S
+ PROPOSED RULE ON INTERCHANGE FEES:
+ IMPLICATIONS AND CONSEQUENCES OF
+ THE DURBIN AMENDMENT
+
+ ----------
+
+
+ Thursday, February 17, 2011
+
+ U.S. House of Representatives,
+ Subcommittee on Financial Institutions
+ and Consumer Credit,
+ Committee on Financial Services,
+ Washington, D.C.
+ The subcommittee met, pursuant to notice, at 11:30 a.m., in
+room 2128, Rayburn House Office Building, Hon. Shelley Capito
+[chairwoman of the subcommittee] presiding.
+ Members present: Representatives Capito, Marchant, Royce,
+Manzullo, Hensarling, McHenry, Pearce, Westmoreland,
+Luetkemeyer, Huizenga, Duffy, Renacci, Canseco; Maloney, Watt,
+Baca, Miller of North Carolina, Scott, Velazquez, Meeks, Lynch,
+and Carney.
+ Also present: Representatives Green, Welch, Peters,
+Perlmutter, Clay, and Cleaver
+ Chairwoman Capito. This hearing will come to order. I would
+like to welcome everyone to the Subcommittee on Financial
+Institutions and Consumer Credit's first hearing for the 112th
+Congress.
+ Before we start, I would like to remind everyone briefly of
+our rules. Ranking Member Maloney and I have agreed that both
+sides are going to waive our opening statements in light of
+this chaotic schedule that we have.
+ So normally, we would have 10 minutes for the purpose of
+opening statements on each side. Without objection, we can have
+all members' opening statements be made a part of the record. I
+would like to remind the witnesses as well that you have 5
+minutes to give your oral statements, and without objection,
+your written statements will be made a part of the record.
+ The last item of housekeeping is to first of all say how
+thrilled I am to have the gentlelady from New York as the
+ranking member of this subcommittee. She has a long history of
+dealing with issues, and I am very excited that we are going to
+be able to work together on this subcommittee. But I would like
+to recognize her for the purpose of making a unanimous consent
+request.
+ Mrs. Maloney. Thank you. I join the chairwoman in welcoming
+all of the witnesses who will be testifying today, as well as
+the members of the subcommittee. I congratulate the Chair on
+her appointment and express my deep desire to work
+constructively to move forward in a positive way for our
+country.
+ I am thrilled to be here. We have a very good panel;
+welcome to Governor Raskin. Due to time constraints, I am
+yielding back and will place my statement in the record. And I
+am delighted that this thoughtful hearing is among our first.
+Thank you.
+ Chairwoman Capito. Thank you.
+ I would also like to ask for unanimous consent for
+Representative Welch to participate in the hearing. If there
+are no objections, is is so ordered.
+ With that, I would like to say before I introduce our first
+witness, this is obviously a topic of great interest to a lot
+of people, so we are going to be listening very closely and I
+appreciate everybody's weighing in on the topic. And hopefully
+the point of this hearing is to hear all sides of the issue so
+we understand it better. So with that, I would like to welcome
+the Honorable Sarah Bloom Raskin who is a Governor on the
+Federal Reserve Board.
+
+STATEMENT OF THE HONORABLE SARAH BLOOM RASKIN, GOVERNOR, BOARD
+ OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
+
+ Ms. Raskin. Chairwoman Capito, Ranking Member Maloney, and
+members of the subcommittee, thank you for the opportunity to
+discuss the Board's proposed Regulation II which the Federal
+Reserve was directed to implement pursuant to Section 1075 of
+the Dodd-Frank Act. Generally unnoticed by the customer, each
+time a debit card is swiped to make a purchase here in the
+United States, interchange fees are paid by the merchant to the
+bank that issued the debit card.
+ Interchange fees are a controversial feature of the debit
+card system. And their substantial rise in recent years has
+precipitated a national and international debate about the
+appropriate level of those fees. Supporters of the current
+interchange system contend that interchange fees play an
+important role in balancing the two sides of the payment card
+market by encouraging merchants to accept cards and encouraging
+card issuers to issue cards and consumers to hold and use them.
+ Critics of interchange fees contend that due to
+characteristics of the debit card market, merchants generally
+do not have the leverage to control their cost of accepting
+debit cards. And network competition tends to result in higher
+interchange fees as networks strive to attract issuers and
+cardholders.
+ Critics of interchange fees note that non-card-based
+payments take place without any such compensation being
+provided by merchants' banks to consumers' banks. So for
+Section 1075 of the Dodd-Frank Act, Congress engaged in this
+debate and enacted a law that addresses the concerns of
+interchange fee critics in several ways.
+ First, I will discuss what is referred to as the
+prohibition on network exclusivity arrangement and routing
+restrictions. Second, I will discuss the part of the law that
+requires the Board to establish an interchange fee standard.
+The statute exempts small issuers, government benefit programs,
+and certain prepaid cards from this interchange fee standard
+but it does not exempt them from the exclusivity and routing
+restrictions.
+ Turning first to the prohibition on network exclusivity,
+the statute requires the Board to adopt rules that prohibit
+issuers and payment card networks from restricting the number
+of networks on which a debit card transaction may be processed
+to fewer than two unaffiliated networks.
+ We requested comments on two alternative interpretations of
+this prohibition. One interpretation would require issuers and
+networks to allow a debit card transaction to be routed over at
+least two unaffiliated debit card networks, for example, one
+signature-based network and one unaffiliated PIN-based network.
+ Another interpretation would require a debit card to have
+at least two unaffiliated networks for each method of
+authorization that can be used with that card, such as
+signature and PIN. This latter approach would provide more
+merchants with routing choice but would entail far more
+substantial operational changes by networks, issuers, merchant
+acquirers, merchants, and their processors.
+ Additionally, the statute requires the Board to adopt rules
+that prohibit issuers and networks from inhibiting the ability
+of merchants to route debit card transaction over any network
+that may process such transactions. The proposed rule includes
+examples of actions that would impede merchants' routing
+flexibility. These network exclusivity and routing provisions,
+along with the statutory provisions that give merchants more
+flexibility to set differential prices based on method of
+payment used, could promote competition among networks and
+place downward pressure on interchange fees.
+ But let's turn to interchange fee standards. In addition to
+these market approaches to constraining interchange fees, the
+statute limits any interchange fee that an issuer may receive
+for a debit card transaction to an amount that is reasonable
+and proportional to the issuer's cost with respect to the
+transaction.
+ To establish standards for assessing whether an interchange
+fee meets this statutory reasonable and proportional
+requirement, the law directs us to consider a number of things.
+First, the functional similarity between debit card
+transactions and checks which clear at par without interchange
+fees.
+ The statute also directs us to distinguish between the
+issuer's incremental cost to authorize, clear, and settle a
+particular transaction which by law, we must consider. And the
+other costs that are not specific to a particular transaction
+which by law we may not consider. Given the statute's mandate
+to consider the functional similarities between debit card and
+check transactions.
+ Our proposal includes as allowable costs only those
+incremental costs that the statute explicitly directs us to
+consider. There is no single generally accepted definition of
+the term ``incremental cost'' as it applies to a particular
+transaction. So the proposal uses average variable cost as a
+proxy. We have requested comments on whether other costs of a
+particular transaction should be included as allowable costs
+and how these costs should be measured.
+ The Board requested comment on two alternative approaches
+for implementing the interchange fee standard. The first
+approach is based on each issuer's allowable cost with a safe
+harbor and a cap. The second approach adopts a cap that is
+applicable to all covered issuers.
+ We also requested comment on different conceptual
+approaches for implementing a fraud prevention adjustment to
+the interchange fee standard. Comments on the proposed rule are
+due by next Tuesday, February 22nd. We have already received
+thousands of comments raising a variety of issues and expect to
+receive many more in the next several days. The other Board
+Members and I are reserving judgment on the terms of the final
+rule until we have the opportunity to consider these comments.
+ As you can see, the debit card interchange provisions of
+the Dodd-Frank Act raise a number of complex issues. The Board
+is devoting substantial resources to understanding and
+addressing these issues within the parameters established by
+the statute. We welcome input from the public and from members
+of the committee in this effort. And I would be happy to answer
+any questions you may have.
+ [The prepared statement of Governor Raskin can be found on
+page 179 of the appendix.]
+ Chairwoman Capito. Thank you, Madam Governor. And I would
+like to lead off the questions. I appreciate your testimony. On
+the issue of the exemption, on page five of your testimony, you
+talked about the--and you said this in your statement that the
+statute applies these provisions to all issuers, talking about
+the exclusivity portion of it, including the small issuers and
+the government-administered payment and other pre-paid
+programs.
+ As you are well aware and you stated in your statement,
+this is an issue that has brought many questions as to whether
+the exemption for community banks and credit unions can
+actually result in exempting them from the interchange fee. And
+you mentioned in your statement pretty--and actually Mr.
+Bernanke said today which I am sure you are probably not quite
+aware of because he just said it in another committee, that
+there are some risks that the exemption will not be effective.
+ Could you speak a bit about how this exemption can hold up
+through the different parameters that you are charged with?
+ Ms. Raskin. Certainly. And thank you. Thank you for that
+question. Yes, small banks are exempt. They are exempt from the
+interchange rules portion of this section of the law. And they
+are also made to be exempt in the proposed rule that the
+Federal Reserve has put out for comment.
+ The small issuer exemption is looked at from the
+perspective of asset size. So we have set a $10 billion level
+and that is looked at from the perspective of the size of the
+issuer as well as its affiliates and subsidiaries. But as you
+note, small banks and credit unions do in fact have concerns
+about this exemption. And they note in particular that the law
+does not put a similar exemption that it has in the interchange
+fee portion into the other portion of the law.
+ So the exemption does not apply in the provisions having to
+do with network exclusivity and the routing restrictions. Just
+to elaborate, Chairman Bernanke's earlier comments, there are,
+I think, legitimate questions regarding how in fact small
+issuers are going to in essence have this exemption work in
+their favor because there is indeed no statutory authority
+provided in the law that would permit the networks to in fact
+engage in two-tier pricing.
+ So it is a matter of whether the networks in fact will put
+two tiers of pricing in place and the extent to which that
+pricing becomes maintainable or whether in fact it gets
+rerouted by market forces.
+ Chairwoman Capito. Right. And the question being that if
+you are an issuer from a community bank or a credit union, that
+your interchange fee could remain higher, will there be, as you
+said, dollar pressure to move customers towards the lower cost
+interchange issuers?
+ The second question I have is on the fraud provision,
+because this is the one that I have heard a lot about. And in
+your statement, you mentioned that the--considering the
+comments they received, the Board plans to issue a specific
+proposal on the fraud prevention adjustment.
+ My understanding is that the Federal Reserve felt that the
+language was written so tightly that to calculate for fraud
+prevention was not included in the parameters of--when you were
+looking at the cost, the incremental cost.
+ What do you mean by the comment? Are you actually going to
+be calculating this? Or is this something that is going to come
+through in the comments? Do you have a comment on that?
+ Ms. Raskin. Sure. The whole issue of fraud prevention cost
+is dealt with explicitly in the statute. So, the statute has
+directed the Federal Reserve Board to allow for a fraud
+prevention adjustment that takes into account fraud prevention
+cost. And essentially, what we are directed to do by law is to
+develop standards for what those fraud prevention--
+ Chairwoman Capito. But not a pricing standard?
+ Ms. Raskin. It is actually silent on standards, but
+essentially, the law requires us to develop standards. And what
+we have done, because this is an area that I think is something
+we want to learn more about, is in our proposed rule, we have
+asked for comment on what fraud prevention costs might, in
+fact, be. These are costs that we should consider before we
+promulgate the final rule.
+ So we have, in fact, adhered to the notion that fraud
+prevention causes something that standards need to be developed
+for. And we really await, with some eagerness, the comments
+that we receive and we will review them so that we can
+determine what makes sense.
+ Chairwoman Capito. Right. Thank you.
+ I will turn to our ranking member for questioning.
+ Mrs. Maloney. Thank you very much, and congratulations on
+your appointment, Governor Raskin.
+ As you may know, I had the honor of serving on a conference
+committee with Chairman Frank and Mr. Meeks and Mr. Pearce and
+Mr. Watt. Many of my colleagues were on this panel.
+ We did work quite a bit on the compromise language that we
+put forward on interchange. And part of it was that everybody
+be treated fairly and that the financial institutions be able
+to recoup the price or cost of providing a service, but also
+limiting it to a reasonable amount.
+ When do you think you will finish your review of fraud
+prevention, which regrettably is becoming a huge issue, along
+with identity theft and the other items that are part of our
+financial system? When do you think that review process will be
+over?
+ Ms. Raskin. By law, we are required to have final rules in
+place by July 21st.
+ Mrs. Maloney. July 21st, okay.
+ Ms. Raskin. For effectiveness. And by April 21st, we need
+to have--after we back up from the date of effectiveness, by
+April 21st, we would need to have final rules in place.
+ So, backing that up further, the comment period is now
+coming to an end, but there are still some more days to it, and
+on Tuesday, the comment period ends. And as I noted before, one
+of the issues we put out explicitly for comment has to do with
+the fraud adjustment issue. So those comments are coming in and
+we will consider them carefully after they are all in and make
+a determination as to how to appropriately contemplate
+including them or not in the rule.
+ Mrs. Maloney. In relation to the comment period, some
+organizations, some constituents have suggested that the
+process was not as thorough as it should be, that the Federal
+Reserve should have had more time to study the issue and to
+survey a wider set of financial institutions and retail
+establishments.
+ Can you go through your review process and whether or not
+you believe it was extensive enough? And what studies have been
+done either by the Federal Reserve or by others? Can you
+comment on your review process?
+ I know from the credit card bill of rights, which I track
+daily, it was expensive and exhaustive. But this one, I have
+not--with the elections and everything else--tracked as
+carefully. So, if you could go through the details of the
+review process, please?
+ Ms. Raskin. Certainly. It was quite a massive set of
+efforts because, as you know, the Dodd-Frank Act passed July
+21, 2010. So, from July to October, the Federal Reserve Board
+staff engaged in a number of industry surveys; from July to
+September, those surveys were developed in-house.
+ We essentially arranged for multiple public drop-in calls
+for industry participants to comment on the draft surveys. I
+should note that some calls had well over 100 participants and
+there were more than 50 phone call lines that had to be opened
+up for this process.
+ We accepted many written comments on draft. And the input,
+I think, really did help us refine the survey instrument so
+that by the time September 13th came around, surveys were sent
+to all the covered issuers.
+ Surveys were also sent to payment card networks and to
+large merchant acquirers. And what we indicated in those drafts
+in those final surveys was that we would like the responses due
+October 12, 2010.
+ Let me say a little bit about what those surveys, who they
+went out to and what they covered. Essentially, there were
+three major surveys: a debit card issuer survey; a payment card
+network survey; and a merchant acquirer survey.
+ For the debit card issuer survey, it was sent to about 131
+financial organizations which had over $10 billion in assets.
+Of those 131 organizations, 89 responded with data, 13 did not
+have debit card programs, 3 declined to participate, and the
+Board didn't receive any communication regarding 26 of them.
+ The questions that survey included were very broad in terms
+of cost. So, they not only included authorization clearing and
+settlement costs, but included fixed and variable costs and
+other broad definitions of cost.
+ In terms of the payment card network survey, that was sent
+to all 14 networks which we believe to be active in debit
+card--
+ Chairwoman Capito. Just a second. I am going to let you go
+on, if you could kind of summarize it more quickly, because
+this is an area of very great importance. So, we will try to
+stick to the 5-minute--
+ Ms. Raskin. It was very thorough.
+ Chairwoman Capito. Do you think you need more time to study
+this issue?
+ Ms. Raskin. I would leave that to your discretion. I can
+complete the answer for the record and you can evaluate whether
+you think it was something that we possibly missed.
+ Mrs. Maloney. I think that would be appropriate if we can
+get in writing a review of your entire review system and other
+studies that you know that are out there. Thank you.
+ Chairwoman Capito. Thank you.
+ Mr. Marchant, from Texas.
+ Mr. Marchant. Thanks, Madam Chairwoman.
+ The issue I would like to stress this morning is the claim
+by the small banks and credit unions that the regulation of
+this fee, lowering it from, according to everything I have been
+able to read, 44 cents to about 12 cents, 12 to 15 cents,
+results in a loss of the income of about $12 billion. Is that a
+number that the Fed has recognized? Is that a recognized
+number, is that a claim or--
+ Ms. Raskin. I have heard that number used.
+ Mr. Marchant. Is it a reasonable argument that this
+regulation will limit the amount of fee income that the banks
+and credit unions can charge?
+ Ms. Raskin. The interchange fee portion of the rule
+essentially requires the Fed by law to look at the reasonable
+and proportional cost that the issuing bank faces.
+ One methodology that we follow in order to try to
+understand the broad nature of what those costs might be was
+essentially to engage in the set of surveys that I described.
+ Interestingly enough, what those surveys revealed was a
+broad range of average variable cost--and as I mentioned
+before, the average variable cost proxy was used for
+incremental cost. The language of the statute uses the term
+``incremental cost,'' that was a little bit hard to translate
+into something workable. And we thought the notion of average
+variable cost came closest to it.
+ So, in our survey, we looked at a range of issuing banks
+and tried to understand what their average variable costs were.
+And we saw interestingly enough quite a range, so that there
+are some issuing banks that can do this at very low cost and
+others that do it at very high cost.
+ When the amount that you cite, of 12 cents and 7 cents,
+when those amounts were arrived at, they were really derived
+from standards regarding those average variable costs. So, the
+7 cents, essentially, is the median point that we found in our
+survey, so the median issuing banks that would be covered by
+this proposed rule has average variable cost of 7 cents a
+transaction, the 12-cent number was arrived at in terms of
+looking at the 80th percentile of issuing banks that had
+responded. So, 80 percent of the banks in the sample survey
+were essentially at 12 cents or lower in terms of their average
+variable cost.
+ Mr. Marchant. My concern is that at a stage in the
+country's banking system where many banks are trying to rebuild
+their capital base, they are trying to maintain some degree of
+profitability, and they are desperately trying to stay open, in
+many cases, especially the small banks and the credit unions
+that we, at this time, decide that we are going to go in and
+review standards and cap the amount of fees that they can
+charge on this, in effect, lowering their profit, not allowing
+them to put profit into their capital base and something that
+is very, very counterproductive in this day and age that we are
+in.
+ Why has it become so critical to do this now? Is there a
+feeling--I understand that you have been instructed--the Fed
+has been instructed to do it. But I don't receive any
+complaints in my district from people who are complaining that
+their debit card fees are too high or that their--that in fact,
+they love their debit cards, they love the ability of the banks
+to offer them a debit card and not have to pass on exorbitant
+fees.
+ So, I think that--I would like for you to take more time, I
+would like for you to consider the impact that this is going to
+have on small to medium-sized banks and on their ability to add
+capital to their banks so they can have more money.
+ Chairwoman Capito. Thank you.
+ Mr. Watt?
+ Mr. Watt. Thank you, Madam Chairwoman.
+ Governor Raskin, I know you can't control the pace of this
+process, and you can't tell us whether we put you under too
+tight of a deadline, but I need to push you a little bit more
+on Mrs. Maloney's question. It seems to me that from what I
+gather, you had at least a two- or three-stage process: a
+survey; a proposed rule; and a comment period on one aspect of
+this and not on the fraud cost aspect of it--9 months to do
+something that we punted to you as a Congress, it wasn't the
+House bill, it was in the Senate bill, we had to reach
+reconciliation.
+ My question to you is not should we or ought we, the
+question is whether you would benefit from a further extension
+of time to evaluate these multiplicities of comments,
+particularly on the fraud calculation section of this, and go
+through a more thorough process.
+ Ms. Raskin. Thank you for that question, and I want to say
+that we are doing--
+ Mr. Watt. I understand that, Ms. Raskin. I am just trying
+to figure out whether you would benefit or wouldn't benefit.
+Don't be vague. Either you would or you wouldn't.
+ Ms. Raskin. It is hard to--it is actually hard to know and
+I am not trying to skirt that--
+ Mr. Watt. Okay, then, that is the answer. Okay.
+ Ms. Raskin. You know.
+ Mr. Watt. Let me go to the next question. If that is the
+answer, then you don't have an answer, that is really what you
+are saying--
+ Ms. Raskin. I am saying the comment period is still moving
+strong and we still--
+ Mr. Watt. You know you are going to get a substantial
+number of comments, you know you have gone through more stages
+on one aspect of this than you have on the other aspect of it,
+the fraud section, because you just said that. But I will draw
+my own conclusions from that.
+ The other real question I have is whether there is
+something in this rule that really addresses what we would be
+trying to get to, I think in this whole discussion, and that is
+whether--is there anything here that allows you to assess who
+benefits from this process, whether the issuer benefits,
+whether the merchant benefits, our ultimately beneficiary we
+were hoping was the consumer.
+ I guess my question is, is there anything in what we gave
+you as instructions to rule make about that would make some
+assessment of whether this is just a fight between merchants
+and issuers or whether ultimately the consumer really is going
+to benefit from this cost reduction or cost shift.
+ I have been troubled by that from the beginning of this
+discussion because I haven't been able to see how we ensure
+that the ultimate beneficiary that we were advocating for--that
+we all should be advocating for, consumers, really get the
+benefit of this. Is there anything in the legislation or your
+rule-making process that will allow you to address that?
+ Ms. Raskin. It is an excellent question and the consumer
+effects are always in the forefront of our deliberations. The
+statute itself didn't direct us to look at the consumer effects
+but that is beside the point. The consumer effects are
+something that we have tried carefully to articulate and to the
+extent we can try to measure.
+ I am going to describe a little bit what those--
+ Mr. Watt. No, no. I am trying to figure out what in this
+rule would do that? Is that what you are getting ready to say?
+ Ms. Raskin. What I am getting at is essentially, I think
+the theory behind--
+ Mr. Watt. Oh, I know the theory. I am trying to talk about
+the practice. Is there something in the rule that gets you to
+that determination?
+ Ms. Raskin. Yes. The idea--
+ Mr. Watt. Okay, tell me what that is. I know the theory.
+ Ms. Raskin. The idea is that lower interchange fees, it is
+argued, would lower cost to merchants who possibly in
+competitive environments, could lower their cost to consumers.
+That is one consumer effect. Not that that effect was directed
+by Congress to be looked at explicitly but that is what
+animates, I believe, the statute.
+ So, there is that one consumer effect. Another consumer
+effect which may work in a different way has to do with debit
+card holders who get rewards. Those rewards are often made
+possible through higher interchange fees.
+ If those rewards were somehow to be reduced or changed, I
+think that would be a factor that would be involved in
+evaluating the consumer well-being. Similarly, we would want to
+think about banks that charge fees for other services. If banks
+were to change that portfolio of services, query as to whether
+consumers would be helped or hurt.
+ So, I think that there are consumer effects, and my sense
+from the statute is that these consumer effects animated the
+statutes but they are not particularly noted explicitly.
+ Chairwoman Capito. Thank you.
+ We will go to Mr. Royce, from California.
+ Mr. Royce. Thank you, Madam Chairwoman.
+ I think some of the surprising things in life are the
+things we all take for granted. And when I think about the
+attacks on our payment system that occur every day, there are
+attempts to find new innovative ways to create fraud. And you
+look at the billions and billions of dollars that are invested
+by card issuers and invested in the system, in building a
+network that in such an extraordinary way today allows the
+system to stay ahead, for the most part, to the extent that the
+consumer himself or herself does not have to pay for that
+fraud. There is a guarantee that the system works well enough,
+and I guess what is surprising to me is how often, in most
+cases, the fraud is actually discovered by these complicated
+processes that have been developed to pick this up in the
+process of the fraud being committed before the consumer ever
+knows that she or he have been defrauded.
+ And so, you look at the billions that are invested into
+that and I was going to ask, why does the proposed rule lack a
+full accounting of several things? One would be the fixed cost
+in all of this and the next would be the network fees and other
+costs. But why did the Board omit adjustment for fraud
+prevention cost or actual fraud cost? I ask that because in
+watching the way in which fraud evolves so quickly, it is clear
+that whatever we invested yesterday, it is not going to be
+enough tomorrow to keep up with all the miscreants who are
+finding new ways to attack the system.
+ Could I have your thoughts on that?
+ Ms. Raskin. Certainly. The fraud prevention costs, as you
+can imagine, are probably something that are going to be
+substantial. And I imagine that through this comment period, we
+are going to be hearing about what those different programs
+look like, what the technologies look like, what in fact the
+parameters are for so-called legitimate fraud prevention
+efforts.
+ And part of the reason for this comment period was really
+to get a more robust understanding of what you are talking
+about in making sure that essentially we understand what
+efforts and costs go into fraud prevention. That said, I do
+want to suggest something that the statute was silent on, and
+that has to do with costs that are related to a particular
+transaction that are not related to authorization, clearance,
+and settlement. So if you read the law carefully, as we have
+now done many times, the law directs us to look at a couple of
+things.
+ We are supposed to consider, for example, functional
+similarity, that is, the similarity between debit card cost and
+debit card transactions as compared to check clearing. But, we
+are also supposed to consider the incremental cost that is
+incurred by an issuer when that issuer engages in authorization
+clearance or settlement. And we are supposed to make sure that
+those costs are specific--debit.
+ Mr. Royce. Okay.
+ Ms. Raskin. So, what you are suggesting in terms of fraud
+losses, could be something that falls in a so-called bucket
+that the statute is silent on, which doesn't mean that it would
+be either--
+ Mr. Royce. Right, right. No, I understand your point but
+there is going to be less bank incentive, clearly. There are
+going to be fewer resources for fraud prevention and less
+likelihood that the billions that need to be invested in the
+future will be there.
+ Another point I was going to make is one that Chairman
+Bernanke made today. He said we are not certain how effective
+the exemption might be when it--as merchants might reject small
+banks' cards, there are some risks that the exemption will not
+be effective going back to the argument made earlier. Chairman
+Bernanke said that there is a possibility that merchants won't
+accept more expensive cards or the cards won't offer two-tier
+pricing.
+ So as you look at all of these different issues that are
+coming up, there is at a minimum some confusion about the
+provision in this rule and if done incorrectly, this could be
+the final nail in the coffin for many of the smaller financial
+institutions, I think, that have been decimated by a weak
+economy and piles of new regulations from Washington. And
+larger financial institutions can maybe pass these costs on to
+consumers, but this isn't the case for smaller banks.
+ And for those--I will yield back, Madam Chairwoman. Thank
+you.
+ Chairwoman Capito. Mr. Baca, from California?
+ Mr. Baca. Thank you very much.
+ Ms. Raskin, one of the questions that was discussed earlier
+about profits for small banks and others--how much profit--will
+they still be able to make a profit?
+ Ms. Raskin. It is a very good question. The small banks and
+small credit unions, in fact any small issuer, remember by law
+are exempt from the interchange fee provisions. Whether or not
+they still are able to make a profit is going to depend on the
+market dynamics on how this all looks in the end. So, it will
+depend on obviously what the final rule looks like, but it is
+also going to depend on some of the things that Congressman
+Royce pointed out, some of the different dynamics regarding
+what kind of routing becomes, what the costs are of that
+routing.
+ Essentially, a bank by bank kind of perspective is needed
+because some banks have different portfolios of products so it
+is going to depend, I think, particularly on the portfolio of
+that issuing bank.
+ It is important to note that what I think the statute has
+directed us to do is to look at one payment stream that is
+related to debit cards. So, it is this interchange fee payment
+stream. Now, there are other payment streams that are
+associated with the issuance of debit cards, there are payment
+streams that are associated with other kinds of cards, there
+are other accounts and other kinds of products that banks offer
+and all of those products have different revenue streams
+associated with them. And it is complicated in terms--
+ Mr. Baca. But would it level the playing field in terms of
+the debit card, because I am concerned from a diversity
+perspective in terms of who is actually being charged ``X''
+amount about--without the regulation it is quite open right
+now, so diversity in certain areas would be charged ``X''
+amount of dollars based on the debit card versus someone else.
+ Under the new regulation on the cap, this sort of sets a
+standard that applies to everybody on a fair and equal basis
+versus the way it was it before, is that correct, the
+possibility?
+ Ms. Raskin. With the exception of what is carved out, so
+with the exception of small banks.
+ Mr. Baca. Okay, let me ask another question. Another
+critique about the proposed rule is the calculation of fraud.
+You allow for two options: one based on new technology being
+used; and the other being a small flag fee taxed on the
+interest change rate.
+ Can you describe how you came to this conclusion, and in
+your mind, should the calculation of fraud take into account
+the overall amount of the transaction?
+ Ms. Raskin. Certainly. When we put out the fraud adjustment
+rule, or a portion of the rule for comment, we really wanted to
+hear from commenters, so we really wanted to make sure we were
+hearing enough about the robustness of their fraud prevention
+effort. We wanted to make sure we understood the variety of
+them, essentially what they did and how they did them, what was
+necessary in terms of cutting edge technology.
+ At the time we put out the rule, we did not know enough
+really to set out definitive standards, and the idea--and the
+proposed rule really opened the debate--was to make sure we
+were hearing everything we needed to hear before we promulgated
+something final.
+ Mr. Baca. Thank you. Other countries have taken steps to
+curve the interchange fees much like the proposed rules that
+would be done here. Can you comment on your analysis of other
+countries' rules and the market's reaction? That is question
+number one.
+ Question number two, could you see the benefits passed on
+to the consumers or did you see the eliminated, or eliminating
+the financial products offered to the consumers?
+ Ms. Raskin. Sure. I will talk a little bit about one well-
+worn example which is Australia, actually. The Reserve Bank of
+Australia actually regulates credit card interchange on a cost
+basis. Aready we see, there is a difference here to what
+Australia has done, which applies to credit card interchange.
+We are obviously looking just at debit card interchange.
+ But essentially, the Reserve Bank of Australia was given
+authority under something called the Payment Systems Act of
+1998 to establish benchmark interchange fees for credit cards
+and this happened in 2002. And then for signature debit cards
+in 2006.
+ And so what the Reserve Bank of Australia did for credit
+card interchange fees was they established the cost-based
+benchmark with a cap and they capped it at a half of a percent
+on an annual value weighted basis. For signature debit card
+interchange fees, the Reserve Bank of Australia also
+established a cost base benchmark and they capped it at 12
+cents and that is in Australian 12 cents which I am told is
+approximately the same in U.S. dollars.
+ So 12 cents per transaction, again, on an annual value
+weighted basis. So although interchange fees for PIN debit
+transactions are paid from the issuer to the acquirer in
+Australia, in 2010, the Reserve Bank of Australia applied the
+same 12 cents per transaction benchmark in debit interchange
+fees.
+ Throughout all of this, what have been the--
+ Chairwoman Capito. Sorry. Can you just kind of wrap it up
+there because--did you have a one-line summarization of the
+question, which in my view was, what did this result in?
+ Ms. Raskin. Inconclusive in terms of prices to the
+consumer.
+ Chairwoman Capito. Thank you.
+ Mr. Hensarling, from Texas.
+ Mr. Hensarling. Thank you, Madam Chairwoman.
+ Governor Raskin, I want to follow up on a question that my
+colleague, Mr. Royce from California, was asking you. And I
+want to make sure I understand this. I believe that essentially
+your testimony is that in the interpretation of the Fed under
+the statute, you cannot recoup fraud prevention because that is
+a fixed cost, correct?
+ Is that a fair assessment of the Fed's interpretation? So
+apparently, it is not?
+ Ms. Raskin. Not exactly, no.
+ Mr. Hensarling. Okay. What is it exactly?
+ Ms. Raskin. Okay. Let me--
+ Mr. Hensarling. I still don't understand this. And I have
+been listening carefully.
+ Ms. Raskin. In terms of what can and can't be done, the
+statute sets out allowable cost, it sets out disallowable cost,
+but then there are costs like you mentioned which were not
+explicitly put into either allowable or not allowable.
+ Mr. Hensarling. I thought I heard you say that actual fraud
+losses may be a permissible cost to be recouped in response to
+his question. Did I hear you correctly?
+ Ms. Raskin. You did.
+ Mr. Hensarling. Okay. And you also allow for the
+possibility that fraud prevention cost may not be recouped, is
+that correct?
+ Ms. Raskin. That is also correct.
+ Mr. Hensarling. Okay. So does that mean that we could end
+up with the rather perverse conclusion that if a credit card
+company prevents fraud, they don't recoup their cost, but if
+they allow the fraud to take place in the system, you will
+allow them to recoup their cost?
+ Ms. Raskin. Obviously, this is why we want to collect
+comments. We want to make sure that when we hear of different
+combinations of things that we don't allow what is a very
+difficult statute--
+ Mr. Hensarling. The world works off of incentives. If I was
+the credit card company and you wouldn't allow me to recoup my
+fraud prevention cost, and you would allow me to recoup my
+fraud cost, I guess I would allow fraud in the system. My guess
+is that it would not be good for our economy.
+ Looking at the Federal Register of December 28th when you
+asked for--to open up the comment period, you said there is not
+a single, generally accepted definition of the term
+``incremental cost.'' Yet again, you seem to interpret it in
+such a way that fixed cost would not be allowable, but on page
+8, 1, 7.3, 6, I read the Board requests comment on whether it
+should include fixed cost in the cost measurement.
+ So it seems, and maybe I am misinterpreting something, it
+seemed like on December 28th, you interpreted the statute to
+permit fixed cost to be recouped but I think you are saying in
+your testimony today that your interpretation is different.
+ Is this correct?
+ Ms. Raskin. Let me try to clarify what our understanding is
+of the statute and it is a difficult statute to interpret so--
+ Mr. Hensarling. Could you help me here--is your
+interpretation different today than it was on December 28th,
+when you put out the--
+ Ms. Raskin. No.
+ Mr. Hensarling. It is not.
+ Ms. Raskin. No.
+ Mr. Hensarling. Okay. So on December 28th--I don't know; I
+don't believe I am taking this out of context--the Board
+requests comment on whether it should include fixed cost and
+the cost measurement which it seems like if you are haven't
+changed your legal interpretation on December 28th, you agreed
+that you had the flexibility to put fixed cost into the
+incremental cost measurement?
+ Ms. Raskin. And we requested comment to hear what those
+costs might look like to see essentially whether we could move
+them through another part of the statute regarding functional
+similarity with checks, which is also required by law.
+ So we needed to understand what the dimensions were of the
+different--
+ Mr. Hensarling. You think your hands are tied, but they are
+not tied by that particular language, is that what you are
+telling me?
+ Ms. Raskin. They are tied in various ways. But in terms of
+that particular language, you are describing a part of--a
+category of cost that the statute is silent on. And I think
+what we need to do is understand what that category of cost
+could--
+ Mr. Hensarling. I am trying to understand your legal
+interpretation of where Congress may need to act, and where
+Congress may need not to act, and it still appears to me you
+are saying that fixed cost could be part of the transaction fee
+that you set. I see my time is running out.
+ I know that under the statute, you were to consult with
+other Federal agencies. I have to tell you, my mailbox is full
+from community banks telling me that this is going to harm
+their bottom-line. Let's put the consumers aside for a second.
+We have discussed that, but a number of small community banks
+said, ``We are going to get left off this system. It is going
+to hurt our net revenue.''
+ I am concerned also, what is the impact on their bottom
+line and did you consult with the FDIC, I know you are a bank
+regulator--and the other bank regulators, ultimately what will
+be the impact when fees by estimates are going to be reduced 73
+percent?
+ Ms. Raskin. Yes. And the law requires us to consult and we
+would consult anyway with our colleagues in the other banking
+regulating agencies. And yes, so we have spoken to the FDIC,
+the NCUA, the OCC, the Small Business Administration, and
+others. We continue to have discussions with them, and as
+recently as yesterday, the NCUA has essentially looked at the
+issue of exempting small banks from not just the portion of the
+law regarding interchange but the other portions as well.
+ Chairwoman Capito. Thank you.
+ Mr. Scott?
+ Mr. Scott. Thank you very much, Madam Chairwoman.
+ And welcome, Governor Raskin.
+ If there is one thing that I hope you will take from this
+hearing this morning, it is that a delay in the implementation
+of this rule is definitely in order. Several of my colleagues
+have asked if that would be a benefit to you and the Fed.
+ I would like to rephrase that question. It is not the
+question of whether the delay would benefit you, the question
+is, would it benefit the American people and the institutions,
+the financial institutions, the merchants, the people who are
+on the ground who would have to make this work. And the answer
+is yes, there are just some profound questions here, starting
+off with what is reasonable and proportional.
+ It is questionable to me, a move from 45 cents down to 12
+cents, that is a glaring 73 percent reduction. Is that fair? Is
+that proportionate to the situation?
+ This debit card situation is beginning to be the fulcrum
+around which our entire commercial retail system operates. Just
+last year, I think the debit card transactions accounted for
+over 35 percent of all of the transactions that were non-cash,
+some 39 billion different payments there.
+ This is a profound impact. And I think we owe it to the
+American people, to these institutions to be able to delay and
+make sure that we get this rule right. So I hope and I admonish
+you very strongly to put a delay on the implementation of this
+rule without protections, for example, provided by debit
+interchange fees, the networks can restrict some high-risk
+retailers such as internet merchants from accepting debit cards
+at all.
+ Was this taken into consideration when the Federal Reserve
+developed its formula, that is a very serious question. My
+colleagues have gone over the fraud adjustment issue that has
+to be cleared up. It is the case of the larger cards issuing
+banks with significantly higher volumes and will be able to
+negotiate a smaller interchange fee than the smaller community
+bank.
+ So has the Federal Reserve considered the potential anti-
+competitive environment that this proposal would create against
+smaller banks and credit unions, for example, that currently
+issue these debit cards, these are very profound questions. And
+what will this cost be to the consumer and the bottom line?
+ It all ends up. The banks are not going to pay for this,
+the merchants are not going to pay for this, do you know who is
+going to pay for this? It is going to be the American consumers
+at the end of the line.
+ So we need to pause. We need to reflect on this and we need
+to give this rule implementation the kind of serious study that
+it needs to make sure we get it right and I am convinced and I
+hope you will be convinced at the end of this hearing that we
+need more time on this issue.
+ So let me just ask you this question. Do you feel that
+there is a possibility that consumers eventually could bear the
+majority of the burden of this regulation?
+ Ms. Raskin. First of all, let me tell you that I do take
+your statement very seriously, and we are committed to doing
+everything we can to get this right. We have engaged in a
+process that is thorough and continues to be very thorough. We
+are hearing all of the same kinds of comments that I imagine
+you are, this is indeed very controversial, and we are trying
+to take everything into account that has been presented our way
+while still making sure we reflect what is in the law.
+ So I want you to know it is something that is taken very
+seriously and I do hear you loud and clear.
+ Mr. Scott. With all due respect, Governor, would you
+consider a delay in this in view of the points that we have
+made this morning so far within this issue?
+ Ms. Raskin. I think that is Congress' prerogative. If, in
+fact, you determine that these deadlines are unrealistic, then
+of course we would adapt to those new deadlines. We would
+continue gathering information and analyzing information as I
+have heard today and we have been hearing through the comment
+period. We would, most definitively, defer to Congress' desire
+in that regard.
+ Mr. Scott. Thank you very much for your service.
+ Thank you, Madam Chairwoman.
+ Chairwoman Capito. Thank you.
+ Mr. Huizenga?
+ Mr. Huizenga. Thank you, Madam Chairwoman. I appreciate the
+opportunity.
+ Governor Raskin, it is good to see you again, and I
+appreciated our visit earlier. I think we are all hearing a
+very common theme and, yes, I am sure we will hear from our
+retailer and merchant friends a little later about that delay
+or discussion of that. And I am trying to take it back maybe a
+step more to the basic, since I am a freshman Member, I was not
+here during the time of the writing of both the underlying Act
+as well as this Durbin Amendment that was proposed in the
+machinations that went into adopting that and what was going
+on.
+ Ms. Raskin. That makes two of us.
+ Mr. Huizenga. Okay, we are on par then with this. So you
+were talking about downward pressure on the Act and what was
+happening. I am wondering if you didn't want any kind of
+perspective as to the Fed's view of what and why there was not
+any sort of this downward pressure on pricing pre the act.
+ And really, do we have any way of knowing the cost of
+implementing this regulation? Is it going to be proportionally
+beneficial to not only the large banks but the small banks as
+have been indicated, the retailers and the merchants that are
+going to be getting it and most importantly of consumers. Are
+they going to actually be seeing any kind of benefit?
+ Ms. Raskin. I know these are all excellent questions and
+different impacts that are all occurring in a dynamic
+environment at the same time, and it is very hard to measure
+exactly how one will affect another.
+ I will try on a couple of fronts to answer some of those
+questions. In terms of the market structure, in most markets,
+competition leads to prices going down. In payment card
+markets, we have seen something that seems a little bit more
+unusual where you have competition but interchange fees are
+going up.
+ And so, there were clearly issues regarding market
+structure, I think, that were animating the development of this
+statute. I don't think it came out of nowhere. They are clearly
+with the sense that merchants had prohibitions on how
+essentially they could route transactions, but those
+prohibitions had cost implications that they could not control.
+ Mr. Huizenga. And it could be that price pressure is
+swimming upstream because of some of the expectations that the
+consumers and/or regulations that have been put on those that
+are handling those transactions?
+ Ms. Raskin. That is interesting. I don't know if I have
+thought about it from that perspective exactly, but I think the
+increase in fees has actually come--it will be hard to evaluate
+the extent in which the regulatory environment has brought any
+of that about.
+ But essentially, it is what they call a two-sided market
+where you have the networks looking at fees both to the issuing
+bank and to the merchant side. And typically, the networks use
+those two sides to balance--to have credit cards and debit
+cards accepted in the marketplace.
+ And it is a balance that had some kind of possibly perverse
+pricing consequences. Essentially, we have issuing banks now
+who are taking these directives from the networks and
+increasing their interchange fees to merchants. So, there is
+that characteristic.
+ The other characteristic that you pointed out has to do
+really with the impact on consumers. And the consumer really
+doesn't even know, right? When you swipe your debit card or
+hand it to the cashier, you don't even know essentially that
+there is an interchange involved. But that interchange fee is
+somehow being paid for. And the impact of what changing the
+interchange fees would do is something that has been postulated
+would be of savings to the consumer. But we don't quite know.
+ Mr. Huizenga. It seems to me that we need to just blame
+intergenerational expectations. The staff section doesn't carry
+cash, the rest of us actually do. And we still want to go buy a
+$1.90 coffee somewhere. And we expect to be able to use
+whatever is convenient for us, not necessarily what is
+convenient for the retailer or convenient for those of us who
+are dealing with it.
+ So, thank you. I appreciate that and I look forward to
+continuing to pursue that. So, thank you, Madam Chairwoman. I
+yield back.
+ Chairwoman Capito. Before we go to the last--I would like
+to ask unanimous consent to submit for the record letters from
+the EPC, KFC Franchisees, the ICTA, NAFCU, U.S. PIRG, the
+Prepaid Card Coalition, TCF Financial Corporations, an ACS
+education letter, the Food Market Institute, Senator Durbin, IV
+Supermarkets; as I said, there is a lot of interest.
+ Ms. Velazquez?
+ Ms. Velazquez. Yes. Thank you, Madam Chairwoman.
+ Governor, thank you for being here today. This is a very
+important issue that has implications for both sectors--
+financial institutions, small businesses--and as the ranking
+member of the Small Business Committee, and a member of this
+Financial Services Committee, I am very concerned about this
+issue.
+ At a recent conference hosted by this European Central
+Bank, policymakers and banking experts suggested adopting a
+card fee system that took into account the cost that businesses
+will pay to operate their own credit systems. This seems to me
+only reasonable. Why weren't these costs taken into account in
+the Fed's proposed fee cap?
+ Ms. Raskin. Thank you. The European Commission, as you
+mentioned, did in fact initiate an investigation of cross-
+border debit and interchange fees. And essentially, they used
+different criteria that were not based on issuer cost. So they
+arrived at numbers and I should say they look to be about a 0.2
+percent interchange fee which is about 8 cents on an average
+$40 transaction.
+ But the European Commission used criteria that were not
+based on issuer cost. Our reading of the statute is that we
+need to stay focused on issuer cost. And so, that was primarily
+the focus of our effort in putting forth the proposed rule.
+ Ms. Velazquez. So, you are telling me that the cost
+criteria that they used are different from what is in the
+statute here?
+ Ms. Raskin. Yes, either that or else they look at criteria
+that were even cost based. They might have looked at other
+explicit customer consumer well-being kinds of matters.
+ Ms. Velazquez. Okay.
+ Ms. Raskin. They had a different set of criteria.
+ Ms. Velazquez. I would like to talk a bit about the
+Australia experience. Since Australia placed a cap on
+interchange fees in 2003, their Central Bank found a sharp
+decrease in the availability of rewards and no conclusive proof
+of lower prices for consumers, why do you believe that the
+Fed's proposal to cap rates on debit cards in this country will
+produce better results for consumers?
+ Ms. Raskin. Actually, I don't know. I don't know what the
+results exactly will be in terms of the ability of merchants to
+actually pass on costs to consumers. I don't know exactly. I
+would say that theory tells us that if it is a competitive
+market that the retailers would pass on those savings, but I
+don't know exactly.
+ Ms. Velazquez. Theory dictated that in Australia and
+apparently didn't produce the results.
+ Ms. Raskin. I am not exactly sure of that either, because I
+think the results in Australia actually are difficult to
+interpret. It is hard to know the extent to which the price
+change had to with the factors outside of the change in the
+interchange fee standard.
+ Ms. Velazquez. Okay. Thank you. Last April, the world's
+largest card company voluntarily reduced interchange fees on
+debit transactions in Europe to 0.2 percent of the total cost
+of a transaction. In that same period, the same company
+increased the same fees paid by U.S. businesses to almost 1
+percent of the transaction total.
+ Are there any practical reasons why it should cost 5 times
+as much to process a debit transaction in this country as it
+does in Europe?
+ Ms. Raskin. It is a very, very important kind of
+distinction and I would encourage you to ask that on the next
+panel and see what kind of answers you get.
+ Ms. Velazquez. Thank you.
+ Chairwoman Capito. Mr. Renacci?
+ Mr. Renacci. Thank you, Madam Chairwoman.
+ And thank you, Governor, for being here.
+ Yesterday, I appreciated the opportunity to have some time
+to spend with you and ask you some specific questions. A lot of
+them are being asked again today about cost. And as I told you,
+I come from a very unique perspective, because I have been
+involved with banks, I have been a retailer, and I have been a
+CPA who audited both.
+ So when it comes to my CPA background, I always look at
+cost and what are the true costs of any transactions. And
+yesterday, we had an--I asked you the same questions that many
+of my colleagues are asking you, do we have all the costs?
+ If we are going to impose, as I called it yesterday a price
+fix, and I know you corrected my by saying a standard. It
+doesn't matter what we call it. If we are going to impose a set
+fee, do we have all the costs to compare? I think your answer
+yesterday and I think your answer today has been the same
+thing. We do not have under statute the ability to look at all
+those costs.
+ And that concerns me, because if we are going to come up
+with a standard and you are being given this task to come up
+with a standard rate, you need to be able to look at all costs.
+ Over the last couple of weeks, I have talked to retailers,
+and I have talked to bankers, and I have had costs submitted to
+me which I told you yesterday showed that they are a lot more
+than 7 cents to 12 cents.
+ But truly the questions here is, how do we get to the right
+standards, as you called it yesterday? And my concern is that
+you have been tasked with only coming up with a standard and
+your hands are tied at looking at all these costs. But also
+available, that is not just fraud, there was--as a CPA there
+are costs, there is overhead there is the labor, the
+technology, all the things that are necessary to run a debit
+card.
+ So my question for you is in moving forward in establishing
+this final rule, would you be willing and able to identify, and
+willing to identify and consider those additional costs? And if
+you can't, because of statute, would you need a congressional
+fix so that you can look at these things?
+ My other question is, and I know a lot of people talked
+about delay, it is not about how fast we get it done; it is
+about getting it done right. So, I have asked you a couple of
+questions there. But would you consider looking at those costs
+without a fix, a congressional fix?
+ Ms. Raskin. Thank you for that. And I have benefited
+enormously from our conversation. The idea of cost is
+absolutely critical in terms of getting this right. We want to
+make sure that we are looking at all the costs possible. And
+then I think it is fair to say we should sift those costs
+through the parameters of the statutes to determine which would
+be permissible by law assuming that is the law that we are
+dealing with.
+ The surveys that we did turn out to have been quite
+comprehensive in terms of gathering costs. While in the
+proposal you are seeing a fairly narrow band of permissible
+costs, for purposes of our methodology, we in fact, collected
+quite a breadth of costs. So we went beyond the authorization
+clearing and settlement costs.
+ We looked at fixed cost. We looked at all variable costs.
+We essentially tried to get a broad understanding, now whether
+it is broad enough for your CPA mind, I am not sure, but my
+understanding is that it was a fairly broad based set of costs.
+ And what I am more than happy to do is make sure that we
+provide that aggregate data to you and your colleagues so that
+you could actually provide some kind of feedback regarding how
+essentially that looks.
+ Mr. Renacci. But are you agreeing that all costs are not
+being evaluated because the statute does not allow you to
+evaluate all costs?
+ Ms. Raskin. We should evaluate. We need to look at costs,
+okay. And we were trying to pull them out through the survey
+and through this comment period we are going to continue--
+ Mr. Renacci. I guess I want to ask you, yes or no. Do you
+agree that yes, there are costs that were not able to be
+evaluated because the statute has limited your ability to look
+at all costs?
+ Ms. Raskin. I don't know if I can answer it with a simple
+yes or no, because we need to look at a lot of costs and move
+them through the parameters of the statute and see whether they
+would be permissible.
+ Mr. Renacci. Again, it is an interpretation, I understand.
+But I think there are a lot of costs that were talked about but
+really are not being evaluated. And we need to get them all. If
+we are going to do this, we need to do it right. And I
+appreciate the comments from my colleague on the other side who
+said we need to delay this to the point to get it right.
+ A delay for just having a delay is not a good delay, but a
+delay for doing it right is important.
+ Ms. Raskin. And again, a delay is fully within the
+prerogative of the Congress.
+ Chairwoman Capito. Mr. Lynch?
+ Mr. Lynch. Thank you, Madam Chairwoman.
+ Madam Governor, I want to thank you for coming before the
+committee and helping with us with our work. I do want to just
+comment, the gentleman from Texas earlier mentioned that he
+didn't hear any complaints on anybody in this district
+regarding debit cards.
+ I just want to say that I heard a lot of complaints from
+the merchants in my district and across Massachusetts about the
+amount of money they were paying in these transaction costs.
+And I get the sense that there was some overreach on the part
+of the issue--on the part of the banks here and I am not sure
+where reasonable is in terms of the cost that are really
+related to the transaction. And I think that is what we are
+trying to get at. But there is probably a lot of credibility in
+the claim of the merchants and we are trying to get that price
+down.
+ Now, you are limited by the language in the statute and I
+understand that. And, with respect to the reasonable and
+proportionate language in there, it further limits you in terms
+of what you can consider in terms of incremental costs. One of
+the things that you cannot consider is something that my
+colleague from California, Mr. Royce raised earlier, and that
+is the integrity of the system, the fixed costs, the
+connectivity.
+ And in the Boston area where I represent, we have had a
+huge, huge scandal there and a huge hacking incident with TJX
+and Boston Chicken and--and 7-Eleven, 46 million credit cards
+were stolen. The numbers were stolen with the PINs. These
+hackers are getting much more sophisticated, and let's face it,
+the way we transact business in the United States has changed
+enormously. I think that these electronic transfers are 35
+percent of the non-cash transactions now in the country.
+ I am tremendously concerned about the integrity of the
+system and I am wondering if you think that you should have
+been allowed to consider the--I guess the systemic cost and
+maintaining a system that has integrity in light of all this
+hacking and it is going every single day. We just prosecuted a
+young fellow who got 20 years, but the damage that he caused
+there was tremendous.
+ I just think that we have to make sure that we are
+continuingly updating the systems that we transact business on
+going forward. And would it help if we allowed--if Congress
+allowed you to consider the underlying cost in maintaining a
+system with integrity because I guess forgot to mention that a
+lot of this happened because the merchants were storing the PIN
+number and were storing the ATM numbers within their systems
+and they were hacked out of that system.
+ It wasn't hacked against VISA or whoever the facilitator
+was; it was some of these merchants. So there is a shared cost
+in maintaining a system with integrity and I am just wondering
+if we gave you a broader mandate, whether you might be able to
+better protect consumers going forward.
+ Ms. Raskin. Thank you for that, and I, too, share your
+concern about the integrity of the system and the importance of
+fraud detection software and processes and systems that
+essentially can help limit the kinds of experiences that you
+have had first-hand experience of. In terms of your specific
+question, the notion of cost-effective fraud prevention
+technology is one that is currently in the statute.
+ So I fully anticipate that we are going to need to look at
+exactly the questions that you are raising in the context of
+the information that we are currently gathering. The comments
+that are coming in now and continue to come in on this point
+are going to have to be evaluated from the perspective that you
+described.
+ Mr. Lynch. And, again, I am probably repeating the
+questions that were previously asked, but in terms of the
+timing of this, do you think that some measure of delay might
+be in order here in order to get this right or do you think we
+pretty much have it? I don't think you will ever get it
+absolutely 100 percent perfect, but I would just be very
+nervous about going forward with something that might inhibit
+the system, given the widespread use of the system.
+ Ms. Raskin. I think you see how controversial this is and
+how difficult and challenging it has been for us to make sure
+we come very close to what Congress intended in passing this.
+And, from that perspective, it is your prerogative regarding in
+fact how much longer you want us to look at this regarding
+essentially questions of timing.
+ Mr. Lynch. Yes. It is controversial, I think, and let me
+just say this. I think we sometimes overlook the degree to
+which we have transformed the way we conduct business in this
+country with the respect to electronic transactions. I think we
+take it for granted now. I try to explain to my daughters how
+we used to go the bank on Saturday and try to take out enough
+money in order to cover the whole week, and they just think
+that is hilarious.
+ And, even my daughters have a debit card, which is
+obviously a glitch in the system. But it is one more reason
+that--two more reasons that we need to get this right. But
+thank you and again, I appreciate it. Madam Chairwoman, thanks.
+ Chairwoman Capito. Thanks. Mr. Canseco?
+ Mr. Canseco. Thank you, Madam Chairwoman, and thank you,
+Governor Raskin, for being here today and subjecting yourself
+to questions. Let me just start off by saying that the breadth
+of rule-making that has resulted from Dodd-Frank is just
+extraordinary and I feel that the current timetable for
+implementing this interchange rule is not sufficient for those
+who are affected whether you are the consumer or the retailer
+or the bank and it is going to be very difficult for them to
+adjust. Would you support a delay of this implementation? And
+with that, I am also echoing what the gentleman from Georgia,
+Mr. Scott, and the gentleman from Ohio, Mr. Renacci, have asked
+you before.
+ Ms. Raskin. Again, I would echo your concerns, essentially
+this has been very difficult. I think we are doing a thorough
+job. We are doing our best to meet the standard, it is
+obviously your prerogative to extend the timing if in fact you
+think that is warranted--
+ Mr. Canseco. I think it is highly necessary. But let me go
+on to a question--one that is one of my main concerns with the
+proposed rules by the Federal Reserve. It is--seemingly a lack
+of economic rationale behind the rule in Dodd-Frank that
+requires that interchange fees be reasonable and proportional.
+ And in the rule proposal that the Federal Reserve, it noted
+there and found only limited examples and I am referring to the
+Federal Register Volume 75 Number 248 Section 235.3 Subsection
+A1 where in the middle it says, ``EFTA Section 920 does not
+define `reasonable' or `proportional.' The Board has found only
+limited examples of other statutory uses of the terms
+`reasonable' or `proportional' with respect to fees.''
+ The Fed was tasked with creating a rule that not only
+lacked an economic argument behind it, but was basically
+unprecedented in this premise. This requires further
+examination, would you not agree?
+ Ms. Raskin. What we have done best with what we have been
+given and I agree that there are quite a number of provisions
+in this set of directives that have been difficult to
+interpret. And reasonable and proportional fall within that
+category as do the notions of incremental cost, as do the
+notions of what constitutes appropriate fraud prevention cost.
+ Mr. Canseco. But reasonable and proportional is so, so
+broad that it really bears some very heavy study and more logic
+behind it. Let me ask you this. What economic considerations
+were given to the proposed rule by the Fed in order to--with
+regards to reasonable and proportional?
+ Ms. Raskin. The terms ``reasonable'' and ``proportional''
+are baked right into the statute and what we have attempted to
+do through the construction of two possible alternatives which
+are now, as you know, out for comment is try to embed what
+those terms could possibly mean. So for example, in one
+alternative, we have looked at a very issuer-specific kind of
+way of evaluating the reasonable and proportional cost that is
+again baked into the statute.
+ And so, one alternative essentially tries to determine what
+the median average variable cost would be and give issuers the
+ability to stay within that amount without any kind of
+extensive compliance cost or proof, kind of matters--the idea
+of having some kind of cap I think is only reasonable for
+those--for those entities in fact that have very high cost. And
+I think the Congress directed us to somehow try to bring those
+costs into some reasonableness parameters.
+ Mr. Canseco. But it seems by reading the Federal Register
+and your report that it was made by pure discretion as to what
+reasonable and proportional was, that there was not actual
+factual process that went into it other than being esoteric in
+its nature. Is that true?
+ Ms. Raskin. No. I agree that ``reasonable'' and
+``proportional'' are quite esoteric, but essentially what we
+tried to do is anchor those terms with the results of the
+surveys that we conducted and as I have described the process,
+it has been quite thorough in trying to understand what those
+costs and the range of those costs might be so that we can
+somehow anchor those very vague terms.
+ Mr. Canseco. In the past, has the Fed been given such
+discretion before on rule writing and if so, what was the
+outcome?
+ Ms. Raskin. That is an interesting question. I can't speak
+to the whole realm of interpretation that the Fed has been
+asked to do over its long history. But I can state from the
+perspective of statutory interpretation always that it is a
+complicated task and that it is sometimes very difficult to get
+meaning around words.
+ Mr. Canseco. Thank you very much, Governor. My time has
+expired.
+ Chairwoman Capito. Thank you. Mr. Carney?
+ Mr. Carney. I am new at this. I have two lines of questions
+that are similar to others that you have answered today. I
+don't know that--I think I am a little bit more confused than I
+was when I walked in the room about cause and effects here. The
+gentleman from Ohio, my freshman colleague there, who is the
+CPA, had questions and I thought they were right on point and I
+will try to be direct. Do you feel like you understand all the
+costs involved in these transactions?
+ Ms. Raskin. I feel that we are in the process of collecting
+all the costs that could be involved yet.
+ Mr. Carney. You mentioned that in your testimony--I
+apologize. I haven't had a chance to get all the way through,
+but on page seven that you reached out and you have asked for
+comment on other costs, other costs that should be allowable.
+Have you gotten any preliminary feedback on that?
+ Ms. Raskin. We have gotten quite a lot of feedback, about
+7,000 comments worth of feedback in fact and it is probably
+premature to comment on it. Yes.
+ Mr. Carney. Fair enough. So we have thought a lot about
+fraud, do you have a sense that you are allowed to consider all
+the costs associated with fraud? We talked about fraud
+prevention. I thought I heard you say or somebody say that it
+does not include losses--does not include other, detection,
+maybe other things. I don't know exactly that. Can you comment
+on that, please?
+ Ms. Raskin. Sure. And it is interesting because the
+statutory language for fraud, fraud losses with that piece
+essentially says that the Board may allow for an adjustment to
+the fee amount if, and I am skipping over pieces to just to
+give you the relevant sections, if the issuer complies with the
+fraud-related standards established by the Board which standard
+shall and then it tells us what those standards need to do.
+ So it says those standards shall be designed to ensure that
+any fraud-related adjustments of the issuer are limited to the
+amount described in clause one above, which are the costs of
+preventing fraud and takes into account any fraud-related
+reimbursements. We have to figure out what that means and take
+into account any fraud-related reimbursement. And then we have
+in parentheses including amounts from charge-backs received for
+consumers, merchants or payment card networks in relation to
+electric debit transactions involving the issuer.
+ So the question of fraud losses, if you interpret--takes
+into account to mean you look at it, that is one interpretation
+in terms of what you do with those fraud-related losses or just
+takes into account means to track it. In other words, don't
+include it in your determination of standards for the fraud
+prevention cost. So, this is difficult stuff and I--
+ Mr. Carney. So it, so do you feel like you understand it
+clearly enough to make the kind of judgment that the Congress
+is asking you to make there?
+ Ms. Raskin. Again, I really want to underscore that I
+understand how important it is to get this right. But then
+again, it is Congress who will need to--with the same concerns
+that we have, and if it is something that you are concerned
+about essentially and you want us to take more time, we would
+do that.
+ Mr. Carney. And touch a little bit on fixed costs. I am not
+sure I understand what they are, I understand what they are in
+other contexts, the development of systems, capital
+investments, all that kind of thing not able to recover this
+cost in this context. Is that correct? Under what? What part of
+that includes--I read your comment there on page seven or
+eight. What part of that includes ongoing maintenance if you
+will of existing systems?
+ Ms. Raskin. The overall standard just refers to reasonable
+and proportional to the issuer's cost. Okay. So that is the
+general bracing which by any definition would look to be fairly
+broad. First, it would have to be reasonable and proportional,
+but the first look in terms of cost appears to be broad in the
+statute.
+ If you read through the statute, we are also directed to
+take those costs into certain kinds of consideration. So in
+other words, we need to consider the functionally of the debit
+transaction and compare that functionally with the
+functionality of checks. And so, we read that to mean that the
+costs that we collect as being relevant need to be essentially
+moved through that functional--
+ Mr. Carney. My time is up, I see, and I haven't gotten to
+my other question, but thank you very much.
+ Chairwoman Capito. Thank you. Mr. Luetkemeyer?
+ Mr. Luetkemeyer. Thank you, Madam Chairwoman. Ms. Raskin,
+do you realize that this morning here, you given very
+conflicting testimony a number of times with regards to your
+interpretation of fixed costs. You agree with Congressman
+Canseco and Congressman Hensarling in their comments with
+regards to previous statements made in December. With regards
+to Mr. Renacci, you allow that you are taking surveys that
+allow for fixed cost to be considered in your surveys and you
+are doing everything, I quote, ``doing everything to get this
+right.''
+ Yet in your written testimony, your written testimony says
+the proposed rule interprets the incremental cost to be an
+exclusion of fixed costs would be required. Which one is it?
+ Ms. Raskin. It is actually both.
+ Mr. Luetkemeyer. No, no, no. Yes or no? Which--we are not
+going there--take up my 5 minutes--very quickly. Which one is?
+Is it are we--are these guys right? Is your verbal testimony
+correct? Or your written correct?
+ Ms. Raskin. I am afraid I don't see a conflict and I
+could--
+ Mr. Luetkemeyer. I am sorry. I see a tremendous conflict
+when you say in your testimony, your written testimony says,
+``Proposed rule--incremental cost--dot, dot, dot--the inclusion
+of fixed cost is required.'' There is a huge incongruence
+there.
+ Ms. Raskin. Fixed cost may be considered for purposes of
+the fraud protection adjustment and maybe that helps.
+ Mr. Luetkemeyer. Okay. Moving on. Have you done any studies
+yet to show how the banks are going to make up the losses that
+they are going to incur as a result of not being able charge an
+appropriate fee for these interchange fees?
+ Ms. Raskin. No, we have not been--
+ Mr. Luetkemeyer. Okay. As a regulator, does it concern you
+at all that the industry is going to lose $12 billion? That
+your bank is going to lose $12 billion of income at a time when
+a lot of the big ones in fact are in very tenuous situations.
+Does that concern you at all as a Fed regulator?
+ Ms. Raskin. We always look at the loss of revenue streams
+as a potential safety and soundness matter. So, yes, our
+examiners would look at this very carefully depending on the
+particular profile of the bank.
+ Mr. Luetkemeyer. How are you going to mesh what you are
+doing with this rulemaking with what your regulators are going
+to do?
+ Ms. Raskin. We are going to mesh it very carefully so that
+we are going to make sure that once a rule is finalized, that
+rule is put into examination guidelines and spelled out very
+carefully for examiners that need to make--
+ Mr. Luetkemeyer. Are you going to make adjustments for your
+banks with regards to the amount of income they are going to
+lose when you go examine them?
+ Ms. Raskin. I am sorry. Did you say adjustment?
+ Mr. Luetkemeyer. Yes. And whenever you look at them and
+their inability to increase their capital accounts, increase
+their profit or loss for the year. Are you going to make any
+adjustments?
+ Ms. Raskin. We will take this particular set of
+regulations, should they be made final, into consideration in
+our examination process.
+ Mr. Luetkemeyer. Okay. I have--we are going down a very
+slippery slope here with this. And a minute ago, you made a
+comment something to the effect that you agreed that we need to
+be setting these prices so we keep those who are charging too
+much, from charging too much. But basically you agree that we
+are price--and as a government entity to set prices on the
+private sector is unconscionable.
+ We are taking a huge step down a road we don't want to go
+to, because suddenly we are starting to treat the banks and the
+people who do the interchange fees whether Visas, MasterCards
+or whatever as a utility company instead of a private sector
+entity.
+ Do you agree with that statement?
+ Ms. Raskin. No, I don't think that a public utility--I
+don't see a--
+ Mr. Luetkemeyer. You don't see setting the prices for a
+business by the government is the same as setting prices for a
+utility company?
+ Ms. Raskin. I don't see this as price fixing.
+ Mr. Luetkemeyer. Just a minute ago, you said that. You said
+it just a minute ago. You said that we need to set this price
+for those who are making more than this average, need to bring
+their prices down.
+ Ms. Raskin. I possibly misspoke, but I don't view what we
+are doing as setting prices. We have been told to set standards
+and those standards had been promulgated and put forward--
+ Mr. Luetkemeyer. I have a real concern with the direction
+of this entire bill, obviously. But what we are doing here is
+the same as the credit card company or interchange fee company
+here, we are not going to allow part of your cost of operation.
+Just like telling a pizza place that delivers pizzas, we are
+not going to allow you to put into your cost to your pizzas,
+the person who drives the car or the car itself, all we are
+going to let you do is charge for the gas. And that is what we
+are doing here. And that is wrong.
+ Where are we going with this? Have you looked at the
+possibility of what is going to happen if we don't allow debit
+cards for a lot of folks, especially community bank folks,
+instead of using debit card they use the credit card.
+ Ms. Raskin. That is--
+ Mr. Luetkemeyer. That is not even going to solve the
+problem of cheapening the ability of the merchants to lower the
+price to products. We are not accomplishing--are we?
+ We are shifting one way of payment to another. Would you
+agree with that?
+ Ms. Raskin. This--
+ Mr. Luetkemeyer. Yes or no?
+ Ms. Raskin. This is something that the Congress has in
+its--
+ Mr. Luetkemeyer. Are you taking that into consideration?
+ Ms. Raskin. No.
+ Mr. Luetkemeyer. Okay. Thank you, Madam Chairwoman.
+ Chairwoman Capito. Thank you. Mr. Perlmutter?
+ Mr. Perlmutter. Thanks, Madam Chairwoman. And Governor, let
+me just say I have a lot of sympathy for the position that you
+are in. The Durbin Amendment was added at the last minute. It
+has been a controversial subject--interchange fees, merchants
+with some legitimate points about their margins getting
+squeezed as the price of gas goes up but the interchange fee
+remains the same. They have some legitimate point.
+ On the other hand, I feel like you are in a box because you
+have been prescribed with language that really makes it, in my
+opinion, impossible for the network and the banks and the
+credit unions to recover their costs. But forget about profit,
+recover their costs.
+ So, you are in a pickle, and I appreciate my friends on the
+other side grilling the heck out of you, but it isn't your
+fault. Okay, you have to do what you have to do and we gave you
+9 months to do it.
+ The beginning of the rulemaking says, ``The Board shall
+prescribe regulations in final form not later than 9 months
+after the date of the enactment of the Consumer Financial
+Protection Act of 2010.''
+ So, I just want to say, I appreciate the effort that you
+are making but I don't think you have been given all the tools
+or the time necessary to come up with reasonable and
+proportionate, you guys may call it esoteric, those are terms
+of art that are used every day and every contract in statute
+across the country. But you have to have time and the ability
+within the statute to figure out what reasonable and
+proportionate really means. We didn't give that to you.
+ So, I am one who is on the side of some delay here.
+Probably, Congress has to go back and take a look at this, that
+is my opinion, because of the language in here was done in
+Conference Committee. I think it should have been opened to
+much more discussion and I would like to introduce into the
+record, if I could, a letter from TCF Bank. Thank you very
+much.
+ And I would like to yield the balance of my time. I have
+lots of questions, but you are just, in my opinion, in a
+pickle. We have to--the statute doesn't deal with what was
+always brought to my attention which was the margin the
+merchants were able to deal with in escalating price scenarios.
+It goes much further than that and I would like to yield my
+time to Mr. Carney. So, you can ask your second question.
+ Mr. Carney. Thank you, gentleman from Colorado for that.
+And really quickly, at least there was some discussion earlier
+about looking into bank fees, revenue, and the effect on
+consumers. Could you comment on that at all again?
+ And in particular, whether if you curtail fee income in one
+area, an institution is going to look for it somewhere else. A
+lot of that happened as a result of the Card Act and now we
+have this provision here which could result in negative effects
+on the consumer.
+ There was some discussion about that earlier, and I would
+just like your thoughts on this, if you would?
+ Ms. Raskin. The market dynamics of these are really pretty
+complicated and unclear. So, it is not exactly perfectly
+quantifiable regarding what is going to happen and then what
+magnitude anything would happen.
+ All I can really do is identify some of the potential
+consumer effects and I think these are consumer effects that
+you probably are aware of. But I really caution it by saying
+that I don't know the magnitude of what--
+ Mr. Carney. Right, is this something that you are looking
+at--there was some discussion about it earlier and you
+mentioned that it was something that you are looking at and--
+ Ms. Raskin. We always look at it. It is very important to
+understand the effect of any regulatory change on consumers and
+especially in this area. So, yes, we do look at it, which isn't
+to say that you will find the word ``consumer'' necessarily
+displayed in the terms of the statute.
+ Mr. Carney. Thank you.
+ Chairwoman Capito. Mr. Pearce?
+ Mr. Pearce. Thank you, Madam Chairwoman. And thank you,
+Governor. I think our friend from Colorado got it just right.
+You are in kind of a pickle here.
+ In your discussion of cost, are the overdraft risks
+associated, are they considered at all, the overdraft of the
+debit cards, are they considered at all in the costs?
+ Ms. Raskin. I am not exactly certain what we did on that.
+My recollection is that might have been something that we put
+out for comment but I think I need to get back to you on that.
+ Mr. Pearce. No, because I suspected it is not included,
+which is going to be, I am seeing headshakes through the group
+behind you, which then leads me to the same discussion my
+friends have been having.
+ How do we get it right if we aren't considering one of the
+most basic risks that are associated with the debit card? And
+as I--two amazing things happened last year along the campaign
+trail. The first and most amazing thing is that a publisher of
+a newspaper gave me a book, a big thick book titled, ``Atlas
+Shrugged.''
+ The second amazing thing was I actually read some of it and
+I was amazed that sitting here listening to your reading of the
+law of what constitutes fraud and doesn't sounded just like
+page 864 out of this book from the 1950s talking about the
+government getting into the manipulation of the market.
+ And so as I sit here and think, the market should be
+deciding who can run their affairs very well. They don't have
+to read that big, thick book. And they don't have to target it
+and get it right.
+ They need to get it right or go broke if they don't figure
+out the costs. And so, we are asking you as the government to--
+and I will use your words, set standards, which in effect sets
+the price. You seem to want to not allow the word to be used.
+So, I will--so you are going to set standards, which then sets
+the price that should be set by markets.
+ And in that setting of standards, you, one of the deciders
+is not even certain that one of the huge risks and because
+people do, they overdraft and they can't get the banks right
+now. Tell me if they don't have any protection against it. No
+ability to reclaim that.
+ If you have a comment, I would welcome it, but I suspect
+you are just in a pickle, I think like our gentleman said. I
+will be quoting you the rest of the day, sir.
+ Do you have any comment? Is that a fair concern on the part
+of the banks that they're stuck with the overdrafts without
+being able to go back and get it? And by the time they take six
+overdrafts in a year, now they have to set up a counseling
+service in order to talk to the people who are overdrafting so
+that they might see the wickedness of their ways and setting
+out the banks in business of religion and correcting people
+from their sins. And so, this is what we get ourselves into
+when we allow the government to run the markets.
+ Ms. Raskin. Essentially. I will go to page 864 and do a
+close reading of it, but I do want to make sure I answer the
+question on overdrafts correctly, and we will go back to the
+office and get a good reading of that and let you know.
+ Mr. Pearce. You see, my concern is that the Federal Reserve
+with all of its expertise in reading a law and threading a
+needle, my concern is that it is going to come up something
+like your index on inflation, you declare that inflation went
+up 1.6 percent last year and you have this tortured explanation
+of why it only went up 1.6 percent.
+ But when I read the paper 2 days ago, I saw that gas went
+up 69 percent, oil 127 percent, gold 60 percent, corn 78
+percent, soy beans 43 percent. And I suspect when we get a
+standard, it is going to not include many of the risk factors;
+it is not going to allow businesses to thrive.
+ So, they are going to start shutting off customers from
+access. We are going to unbank more people than we bank, all in
+the name of protection of consumers, which has been arrived at
+by this reading of the rules that I heard just a couple of
+times ago when we are talking about the fraud protections and
+the difficult stuff of getting this right.
+ And with all due respect, I suspect that we are
+manipulating things to an extent here in Washington that
+American people know is not correct. They know that they are
+paying more for food. They know that inflation is happening.
+But they can't get anyone to confirm it. And whether they are
+going to see their cost, their ability--increase without
+understanding why.
+ And the frustration that we are seeing across the America
+that is causing people to walk around in the streets and
+complain loudly is going to continue. And we are going to be up
+here setting standards and making sure we follow exactly the
+definitions that will make everybody feel really good.
+ So, you are welcome to respond and to disagree or whatever.
+Thank you.
+ Chairwoman Capito. Do you have a comment or--
+ Ms. Raskin. No, I obviously take what you are saying very
+seriously and you want to underscore that Congress has quite a
+bit of prerogative in terms of rulemaking and lawmaking and
+this is the law. And if there are changes that you would like
+to see in it, we will of course faithfully execute them.
+ Chairwoman Capito. Thank you. Mr. Welch?
+ Mr. Welch. Thank you very much, Madam Chairwoman and
+Ranking Member Maloney. I appreciate your willingness to let me
+participate briefly. I was the sponsor of this legislation in
+the House. It eventually passed in the Senate and was part of
+the Conference Committee report. But there are two basic
+questions as I understand it.
+ Number one, is it necessary to provide some regulation? And
+then, number two, is the regulation that is being proposed
+doing the job that needs to be done?
+ We had that debate last year about whether there was a need
+for regulation, and my view was that there definitely was a
+need for it. I was hearing from one merchant after another who
+had no control whatsoever over the prices they were being
+charged.
+ It was becoming an increasingly large cost of doing
+business. They acknowledge, as I do, that credit cards and
+debit cards are very good and very important. They are good for
+consumers because they are convenient. They are very good for
+merchants because they are secure transactions.
+ But what happened, as I understand it, is that without any
+regulation whatsoever, the charges that have been assessed to
+our merchants are the highest in the world. And that is I think
+what drove--was the impetus of Congress passing this. I think
+there had been some very good questions asked by members on
+both sides about how you came to the rule that you came to.
+ I heard you say that your examination was thorough and
+comprehensive and you are going to submit at the request of the
+ranking member the chronology of what you did and how you did
+it, so that the members are going to be able to come to their
+own conclusions about that. But the one thing I want to ask
+about is in--on the debit card, that is essentially a direct
+transfer from a person's bank account, correct?
+ So, is there much of a fraud risk there?
+ Ms. Raskin. That is what we need to look at carefully,
+because we have been receiving comments on precisely that point
+and quite a number of comments.
+ So, I probably want to reserve judgment from the
+perspective of making sure that we give all those commenters
+the chance to be heard. But, essentially, we are looking
+carefully at that question.
+ Mr. Welch. The debit card it comes right out of my checking
+account, correct?
+ Ms. Raskin. Correct.
+ Mr. Welch. And if I have overdraft protection, which I now
+have to sign up for that--is that debit will be paid and then
+the bank will assess a fee to me on my account for the
+overdraft, correct?
+ Ms. Raskin. As I understand it.
+ Mr. Welch. Mr. Pearce, I think, made some good points about
+the market. But my understanding is the point of contention
+of--is whether the market in fact was free and open on the
+pricing side and historically, is it the case that when debit
+cards were originally introduced, the transaction fee was very,
+very small. The Maestro network was only charging $0.10 when
+the Visa network was charging like a $1.30 on a $100
+transaction.
+ Is that more or less correct?
+ Ms. Raskin. That is what I understand, yes.
+ Mr. Welch. And what Visa did quite effectively from a self-
+interest standpoint is they raised the fees in order to
+encourage banks to offer more and more of their cards and
+penetrate the market. Is that more or less right?
+ Ms. Raskin. I believe so. But, now, you clearly know more
+history on this than I do.
+ Mr. Welch. So, you have the credit cards--the debit card
+was not so much competing with the checking account where there
+is no charge to the merchant. They get 100 cents on the dollar.
+They were competing with credit cards where the fees were
+higher. And this was allowed to go on without any push back.
+Merchants have literally no power individually to be able to
+negotiate a price.
+ So, we got to this point where the charges to our
+merchants, these are mom-and-pop stores as well as the Wal-
+Marts and Home Depots, became the highest in the world. Do you
+understand our charges are the highest in the world?
+ Ms. Raskin. I understand that to be the assertion, yes.
+ Mr. Welch. And I know that the Australian study came to no
+specific conclusion about whether the consumer benefited when
+the prices went down and you explained, as I understood it,
+that there were other variables that you couldn't possibly take
+into account.
+ But normal economics, if you are--you have one gas station
+on a corner and there are three competitors, most of us when we
+are filling up with gas, go to the one that is a penny or two
+cheaper. And is there any reason to think that wouldn't happen,
+that competition wouldn't force--I see my time is up.
+ Yes, thank you, I yield back.
+ Chairwoman Capito. Thank you. Mr. Duffy?
+ Mr. Duffy. Thank you, Madam Chairwoman. Governor Raskin,
+first of all, I appreciate you being here today.
+ And I appreciate the number of people who kept coming to my
+office on both sides of this issue to explain their position.
+It seems like it hasn't stopped the last 2 weeks.
+ I guess I have a concern about what we are doing here, that
+we are going to do here, that we are going to set a price in a
+marketplace by way of Congress between $0.07 and $0.12.
+ I believe that the free market should be allowed to work.
+And I don't think we are doing that here, and as I have talked
+to a lot of different merchants out there, when we talk about
+Congress potentially stepping in and mandating prices or
+profits or salaries for their companies or CEOs, they take
+great offense to that. But they seem to advocate for Congress
+stepping in and advocating for price fixing in regard to Visa,
+banks, and their fees.
+ My concern is, in Wisconsin we have, especially in my
+district, quite a few small community banks and they have
+expressed great concern over what we are doing here. And when I
+look at the reports or the analysis that have been done, it is
+my understanding that you have provided a survey to 63 large
+banks, is that correct?
+ Ms. Raskin. I want to get you the exact numbers--
+ Mr. Duffy. Or is it fair to say that you didn't really do
+any of these surveys with small community banks?
+ Ms. Raskin. The surveys that were done of issuing banks
+were done of the institutions that would be covered by the
+statute, and remember, the statute exempts institutions of $10
+billion or less.
+ Mr. Duffy. But I think it is going to--
+ Ms. Raskin. --$10 billion or less were not included in the
+survey.
+ Mr. Duffy. Right. But I think it is clear from your
+testimony and from the comments of Mr. Bernanke that we are not
+so certain that they are going to be excluded or this law is
+not going to impact them. It seems quite possible that our
+small community banks are going to be impacted by this rule,
+but then you haven't included them in your survey. Is that
+right?
+ Ms. Raskin. They have not been included in the survey.
+ Mr. Duffy. Right.
+ Ms. Raskin. And if you recommend, or suggest, it is
+certainly possible for the exemption that exists in the
+interchange fee portion of the law to also be carried over
+pursuant to congressional direction to the network routing and
+those restrictions.
+ Mr. Duffy. But this could affect our small community banks.
+And having that potential impact, the only thing that is
+beneficial is that we reach out to them and try to get their
+input by way of a survey?
+ Ms. Raskin. Clearly, the impact on small banks, I think,
+needs to be understood.
+ Mr. Duffy. So, it is fair to say then it might be
+beneficial to have more time to talk to our community banks and
+say, ``Let's take a look at what kind of impact this is going
+to have on you.''
+ Ms. Raskin. I am happy to share the methodology that we
+have followed. And you can look carefully at the surveys and
+make it--
+ Mr. Duffy. Let me ask you something, in the time that is
+remaining, can you get sufficient information from our
+community banks by way of a survey?
+ Ms. Raskin. In the time that is remaining, I would argue--
+ Mr. Duffy. No?
+ Ms. Raskin. It depends on what comments we have received
+today. And we have a couple more days.
+ Mr. Duffy. Now, there are a lot of folks who have suggested
+that if the structure of the fee is changed, we are not going
+to have free checking, and there are going to be more charges
+to consumers in the banking side.
+ And then we will also argue that on the consumer side,
+prices are potentially going to go down, because our merchants
+are going to save maybe 0.5 percent, or 1 percent, or 2 percent
+per transaction. Is that a fair assessment of how the argument
+is going?
+ Ms. Raskin. There are arguments all different ways in terms
+of what the ultimate impact is on the consumer.
+ Mr. Duffy. Do you think that Congress should step in and
+mandate that merchants--that Home Depot and Wal-Mart and
+Target--should be forced to reduce their prices by 1 percent or
+1.5 percent if this law passes? Is that a proper role for
+Congress?
+ Ms. Raskin. That is Congress' decision. It is certainly not
+the Federal Reserve's.
+ Mr. Duffy. Okay. But it is the Federal Reserve's obviously
+by way of Congress to look at how this interchange fee affects
+merchants and banks and come up with a pricing structure that
+you guys think is appropriate.
+ Ms. Raskin. That reflects the law that we have been given.
+ Mr. Duffy. And is it fair to say that you capped the top
+fee at 12 cents?
+ Ms. Raskin. We have put out alternative approaches, and
+that 12 cents fee represents the 80th percentile in the survey
+that we have conducted of average variable cost. And so, 80
+percent is the--of the people, of the institution--
+ Mr. Duffy. Have you capped that at 12 cents?
+ Ms. Raskin. Nothing has been done yet. This is a proposal.
+ Mr. Duffy. Do you anticipate it being capped at 12 cents?
+ Ms. Raskin. This is a proposal. And we are taking comments.
+ Mr. Duffy. So, it could be capped at 30 cents or 44 cents?
+ Ms. Raskin. We are looking at comments as they come in.
+ Mr. Duffy. Okay. I yield back, Madam Chairwoman.
+ Chairwoman Capito. Thank you. Do you have any questions,
+Mr. Manzullo?
+ Mr. Manzullo. My only question is a follow up on what
+Congressman Duffy spoke about. You acknowledge in answer to his
+question that the smaller and community banks are impacted. And
+yet, you neglected to get their input in the first place.
+ Wouldn't that lead you to the conclusion that the results
+are flawed based upon your own testimony, Governor?
+ Ms. Raskin. It is certainly an honest observation. And in
+fact, it is the case that when the survey went out because of
+interests of complying with the statutory deadline that
+Congress provided--
+ Mr. Manzullo. So, you were under the gun and you rushed to
+judgment on this issue?
+ Ms. Raskin. I don't want to say we rushed to judgment
+because we are trying to proceed carefully and we have had 9
+months to do it. But it is very complicated--
+ Mr. Manzullo. I understand. But why couldn't you have
+simultaneously brought in the community bankers and other
+stakeholders with all the resources that you have as a Fed and
+at least get their input on this?
+ Ms. Raskin. We are getting their input. We talk to them
+frequently. They have--
+ Mr. Manzullo. But not upfront.
+ Ms. Raskin. They have submitted comments. And yes, there
+have been--
+ Mr. Manzullo. But you didn't survey them.
+ Ms. Raskin. We didn't survey them because Congress exempted
+them from the--
+ Mr. Manzullo. That doesn't make any difference. Your job
+was to figure the impact on the consumer, and on the retail
+industry, and on the banking industry. And just because they
+were exempted, it does not mean that they were impacted. I
+think that your survey and your studies are flawed and you
+should miss that.
+ Ms. Raskin. Yes, I am not ready to admit that. I think we
+have faithfully executed upon a very complicated--
+ Mr. Manzullo. I would disagree because you would have
+stated in a direct answer to Congressman Duffy that those
+smaller banks are impacted by this legislation. And yet with
+all the hundreds and thousands of people that you have on hand
+there in 9 months that you don't have the time, or the desire,
+or the scholarship, or the interest to examine other people,
+that would be the community banks that would be impacted by
+this.
+ People make mistakes all the time. If you don't have all
+the information before you and if they were not interviewed and
+questioned in the first place, why would you then take a look
+at their comments on the study as to which they have no input
+in the first place? Why not disregard their comments as they
+come in, then you would be consistent?
+ Ms. Raskin. Based on the comments we have today, we have
+received plenty of information from small banks and small
+credit unions, and their particular perspective is being taken
+into account.
+ Mr. Manzullo. The problem is this, you came to a conclusion
+without them being involved in the process in the first place.
+And now, they are playing defense. They have to come back and
+they have to show through their studies and--through their
+studies without being given the opportunity that the larger
+banks were given.
+ That is no way to come up with a regulation, Governor. It
+is flawed. And it is disingenuous.
+ Ms. Raskin. I don't mean to be disingenuous. I am a
+former--
+ Mr. Manzullo. You are not disingenuous. The study was just
+disingenuous. I think the numbers here we are looking at and I
+think what America is looking at is a study that is fair and
+balanced, takes into consideration all the stakeholders, and
+then comes to a conclusion as to what that charge would be.
+ I have the same people coming into my offices as
+Congressman Duffy. Some are saying it is too high. Some are
+saying it is too low.
+ What the incredible effect of business people being pitted
+against each other in a way I have never seen before in my 19
+years of Congress. I have never seen this before with a
+criticism that has been leveled at it. And a lot of it has to
+do with the fact that the people, that a large group of people,
+the banks under $10 billion were excluded from this.
+ Their bigger concern also is that because they were
+exempted, they could go on there and charge whatever they want.
+That doesn't help them. They come under the force and pressure
+of the price that you have set.
+ And if they truly have expenses that are greater than what
+you have set, then they are going to be in the position of the
+larger banks trying to woo away the customers of the smaller
+banks saying, ``Oh, by the way, our swipe fees are cheaper. And
+the way to get cheaper swipe fees would be for you to move your
+accounts to the larger bank.''
+ I am just saying that those are some of the arguments that
+we are hearing. And if they have been--you guys are shaking
+your heads ``no'' back there. But maybe you are a part of the
+people who had been questioned.
+ But we are talking about the people who were not questioned
+and who wanted just a simple opportunity to be able to state
+their case even if, in fact, they were wrong doing so wrong on
+the facts they would have given you. Thank you.
+ Chairwoman Capito. I want to thank the Governor for her
+patience for pushing back when we began and for her diligence
+in answering the questions. Without summarizing, and I think we
+still have a whole lot of questions left. And so, we are going
+to have another panel. So, I will dismiss you from the panel.
+And thank you very much.
+ Ms. Raskin. Thank you.
+ Chairwoman Capito. The Chair notes that some members may
+have additional questions for this witness which they may wish
+to submit in writing. Without objection, the hearing record
+will remain open for 30 days for members to submit written
+questions to this witness and to place her responses in the
+record.
+ We will do a transfer quickly.
+ Okay. Sorry about that.
+ I would like to thank the panel for their patience. And we
+are going to begin the second panel.
+ I think the first witness is the guest of the ranking
+member. And I recognize her to make an introduction.
+ Mrs. Maloney. Thank you so much.
+ I am honored to represent Mr. Prentzas. And I thank you for
+giving me the opportunity to introduce my constituent from the
+great borough of Queens, Gus Prentzas.
+ Gus owns two businesses in my district: Pavilion Florals;
+and Life & Health Fitness, a health club in Astoria. He is also
+president of the Long Island City Business group and an active
+member of the Queens community. And he has been a small-
+business owner for over 20 years and is actively providing jobs
+and services in the district I am honored to represent.
+ So, I welcome you Gus, and all of the panelists today. And
+I very much look forward to all of your testimony. Thank you.
+ Chairwoman Capito. We also have another guest. The next
+witness is a guest of Mr. Luetkemeyer. Would you care to
+introduce your guest?
+ Mr. Luetkemeyer. Thank you.
+ Thank you, Mr. Chairman. My guest today is Mr. Kemper. I am
+pleased to introduce him. He is the chairman, president, and
+CEO of Commerce Bancshares Incorporated, an $18 billion
+regional bank holding company based in Missouri.
+ He began his career with Commerce in 1978 as vice president
+of commercial lending at the Commerce Bank of Tennessee. He was
+president of Commerce Bancshares in 1982 and held a wide
+variety of senior positions, being named chairman, president,
+and CEO of Commerce Bancshares in 1991.
+ David is a graduate of Harvard University. He received a
+masters degree in English from Oxford University and an MBA
+from the Stanford School of Business. Dave also served in an
+advisory capacity to Enterprise Holdings and Bungee North
+America.
+ In his spare time, he is the vice chairman of the board of
+trustees at Washington University and a member of the board of
+trustees at the Missouri Botanical Garden and the Donald
+Danforth Plant Science Center.
+ Mr. Kemper is also the past president of the Federal
+Advisory Council of the Federal Reserve. As you can see, David
+is involved in the financial services industry in a number of
+different capacities. I appreciate him taking the time today to
+be with us, and I look forward for his testimony.
+ Thank you, Madam Chairwoman.
+ Chairwoman Capito. Thank you.
+ With that, I think we will begin with Mr. Prentzas. And we
+will proceed, as I said earlier, we would like to keep the
+initial comments to 5 minutes so we can have time for
+questioning. So, when you hear this, it means try to wrap it
+up. You can see the light on your table there.
+ So, Mr. Prentzas.
+
+ STATEMENT OF CONSTANTINO (GUS) PRENTZAS, OWNER, PAVILION
+ FLORALS, AND LIFE & HEALTH FITNESS
+
+ Mr. Prentzas. Madam Chairwoman, thank you.
+ Madam Chairwoman, Ranking Member Maloney, and members of
+the subcommittee, thank you for inviting me to share my views
+regarding payment card swipe fees. My observations are based on
+my experience as a small business owner in Astoria, New York.
+ From my perspective, these fees, for both credit and debit
+cards, have long been out of control. In fact, they have grown
+so large, so quickly, that I was forced to lay off an employee.
+ While I understand that the Durbin Amendment only addresses
+debit card and not credit card fees, I believe this is at least
+one step in the right direction.
+ Therefore, I fully support the debit card rules proposed by
+the Federal Reserve and any other efforts to help curve swipe
+fees.
+ I own some small businesses in Astoria, New York: Pavilion
+Florals is a flower ship I have owned since 1998; and I have
+owned Life & Health Fitness for the last 4 years. Both
+businesses accept credit and debit card payments.
+ The health club is particularly dependent on credit and
+debit cards as a form of payment because we charge monthly
+membership fees and allow our members to set up automatic
+payment plans via credit and debit cards for their convenience.
+For the health club, approximately 78 percent of our payments
+were received by credit and debit cards.
+ I pay a monthly interchange fee of approximately $380. And
+I pay roughly the same amount for the flower shop even though
+the health club revenues are double the amount. And I note that
+the interchange I pay is not only based on the revenues I get,
+but also a percentage of the sales tax I collect, money that I
+don't even keep.
+ These fees have grown at an incredible rate. Indeed, they
+have doubled in the last 2 to 3 years alone. Our prices
+certainly have not doubled over the same period. So, there is
+no question that these fees themselves are out of control.
+ In fact, these fees have increased so much, so quickly,
+that I was recently faced with an unfortunate choice at my
+flower shop. I could pay these fees or lay off an employee. I
+was forced to lay off an employee because there were no
+realistic alternatives to accepting credit and debit cards.
+ Visa and MasterCard are another form of currency and we
+must accept them like we take cash. This is one reason why I
+believe that the debit card fee limit is a step in the right
+direction. Policymakers need to begin to see cards for what
+they really are--a new form of currency.
+ Approximately 60 percent of the flower shop's sales are
+paid by credit and debit cards, and 78 percent at the health
+club. We expect the percentage to increase as more young people
+patronize our stores.
+ Overall, for my small business, interchange fees have grown
+more rapidly and significantly than all other expenses. And the
+fact that I cannot control interchange fees the way I can
+control other expenses is a huge problem for me.
+ But our interchange fees are what they are. And we have
+absolutely no ability to change them or take our business
+elsewhere.
+ Finally, I want to share my experience dealing with credit
+card charge-backs to make clear that merchants like me are on
+the hook when problems like fraud come up.
+ A charge-back is when the card company doesn't give me the
+money for a sale even though it was properly authorized. My
+flower shop deals with high-value charge-backs.
+ In fact, charge-backs I get at the shop are about one-third
+of the amount of interchange fees I pay. That is a big loss of
+funds on top of what I am already paying, and it offends me
+when the card companies claim they guarantee payment. Nothing
+is guaranteed.
+ I can do everything right and still lose a sale along with
+a customer who has left my store with the flowers that I will
+never see again. There have been times when I checked an I.D.,
+obtained a security code, and checked a zip code to make sure
+everything was authorized and in order. But when the card turns
+out to be stolen, I have still been charged back for a sale and
+lost the money on the goods. This is blatantly unfair. And
+losing an entire sale takes a big bite out of my business.
+ Not only that, I have to pay the interchange fees on the
+charge-back amount. Once again, I am paying for fees I don't
+get.
+ In conclusion, I feel fortunate to be able to serve my
+community as an owner of two small businesses in Astoria. The
+increases that I am seeing in credit and debit card fees are
+unreasonable.
+ If interchange fees, even debit card fees alone, were
+reduced to a more reasonable level, I would have the revenue
+that I could use to hire more people, offer discounts, and cut
+prices.
+ I ask you to please support the Federal Reserve's proposal
+and turn your attention to ways to bring some needed changes to
+credit cards as well.
+ I thank you again for inviting me to testify. And I am
+pleased to answer any questions you have. Thank you.
+ [The prepared statement of Mr. Prentzas can be found on
+page 174 of the appendix.]
+ Chairwoman Capito. Thank you.
+ Our next witness is Mr. Frank Michael, president and CEO,
+Allied Credit Union, Stockton, California, on behalf of the
+Credit Union National Association.
+ Welcome.
+
+ STATEMENT OF FRANK MICHAEL, PRESIDENT AND CEO, ALLIED CREDIT
+ UNION, ON BEHALF OF THE CREDIT UNION NATIONAL ASSOCIATION
+ (CUNA)
+
+ Mr. Michael. Thank you, Chairwoman Capito, Ranking Member
+Maloney, and members of the subcommittee.
+ Chairwoman Capito. You need to keep your microphone on a--
+ Mr. Michael. Thank you very much for the opportunity to
+testify at today's hearing.
+ My name is Frank Michael and I run an $18 million--that is
+``million'' with an ``M''--Credit Union in Stockton,
+California, called Allied Credit Union.
+ We are not Bank of America. We are not Visa. We are not 7-
+Eleven. We are small. And we strive to fulfill our mission to
+serve our members every day. Our members want access to their
+checking accounts which means the ability to use a debit card.
+In fact, 1,100 of my 2,300 members use our debit cards.
+ Section 1075 of the Dodd-Frank Act will make it more
+expensive for my members to access their checking accounts. And
+I know that this is not what Congress intended because Congress
+included an exemption for institutions like Allied.
+ When the law was passed, the chief proponent said credit
+unions like mine would not lose any interchange revenues that
+they currently receive. We were skeptical about this statement
+in July.
+ And unfortunately, the proposed Federal rule makes it clear
+that will not be the case. And here is why. There is no
+guarantee that all the payment networks will operate a two-tier
+system. Even though Visa has said it would, it is not clear
+when it would start, for how long, or under what conditions it
+would do so. Visa is just one of several payment card networks.
+Who is to say the others will operate that way?
+ Even if they do, with the passage of time, market forces
+will cause at least some convergence of prices for the two-
+tiers and the absence of full implementation of the exemption
+that Congress intended.
+ In our view, the Fed's proposal errs by failing to include
+a provision enforcing the small issuer exemption. The Fed has
+the authority to write rules for innovation of interchange
+standards. And we would hope that the committee would encourage
+the Fed to use its authority to enforce the exemption and
+protect small issuers. In the absence of meaningful protection,
+credit unions are rightfully concerned about the potential
+impact that the regulation's other flaws will have on their
+member institutions.
+ At its most basic level, the Fed's proposal says that if
+you want to issue debit cards, you must do so under a set of
+government-imposed restrictions that require the program to
+operate at a loss because many of the costs of operating debit
+cards have not been considered by the Fed under the statute.
+Even for not-for-profit credit unions, the idea of government
+requiring the operation of the program at a loss is abhorrent.
+It flies in the face of safety and soundness.
+ Under the current proposal, we are going to lose money on
+every transaction. The only real question is, how much? If the
+carve out is entirely ineffective and credit union interchange
+fees converge on the rate set for very large institutions,
+credit unions will find their net income reduced by $1.6
+billion. That represents about a third of credit unions' recent
+net income. Such a reduction in income will lower capital of
+debit card issuing credit unions by 10 percent after 6 years
+absent any reaction by credit unions.
+ However, that is not where the story ends, certainly not
+for credit unions. The real problem with this proposal will be
+its impact on its consumers, including consumers on the margin
+who may no longer have access to free checking. Credit unions
+cannot absorb this lot. Let's face it, our regulator will not
+allow it.
+ We are not-for-profit institutions but we are subject to
+safety and soundness standards. Regulators will expect credit
+unions to maintain current net income levels and replace the
+lost revenue because credit unions must maintain at least a 7
+percent net worth to be well-capitalized. The choices facing
+credit unions are relatively straightforward and carry a
+consistent theme: charge more to members for services or reduce
+the services that members are offered. Either way, it is a bad
+deal for members.
+ CUNA surveyed its members: 91 percent of credit unions
+offering debit cards anticipate they will make changes to their
+rates fees and/or services as a result of the negative impact
+of this regulation. The four changes most often cited are:
+number one, increase debit card fees; number two, increase NSF
+fees; number three, eliminate free checking accounts; and
+finally, number four, lower the deposit rates.
+ If the exemption for small issuers prove completely
+ineffective, the $0.12 rate would require credit unions to
+impose an annual fee in the range of $35 to $55 a card, a
+transaction fee within the range between $0.25 to $0.35, or
+some combination of the two. In order to maintain the pre-
+reform revenue, there would be new fees for our members.
+ The timeline for formalization and implementation is very
+short and the consequences are potentially devastating for
+small financial institutions and consumers. There are problems
+with the rule that the Fed can and should address but there are
+significant statutory problems that Congress also needs to fix.
+ We urge Congress to stop, study, and start over. Enacting
+the moratorium against implementation of the Fed's interchange
+rules will provide time for the Treasury to study the
+operational impact of the regulation on all issuers including
+small issuers, the impact on the safety and soundness of
+depository institutions, and the impact on consumers.
+ Then the Fed should start its rule-making process again,
+taking into consideration the results of the study and set
+standards for a rate which is proportional of full cost and
+risk of the transaction.
+ Madam Chairwoman, it is important for Congress and the Fed
+to get this right, otherwise consumers face high costs for
+financial services and they aren't likely to recover those
+costs from the merchant. We ask Congress and the Fed to stop,
+study, and start over. Thank you very much for this opportunity
+to testify in today's hearing. I am pleased to answer any
+questions you may have.
+ [The prepared statement of Mr. Michael can be found on page
+160 of the appendix.]
+ Chairwoman Capito. Thank you, Mr. Michael.
+ Our next witness is Mr. David Kemper, who has already been
+introduced. He is the chairman, president, and CEO of Commerce
+Bank, on behalf of the American Bankers Association and the
+Consumer Bankers Association. Welcome.
+
+ STATEMENT OF DAVID W. KEMPER, CHAIRMAN, PRESIDENT AND CEO,
+ COMMERCE BANK, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION
+ (ABA) AND THE CONSUMER BANKERS ASSOCIATION (CBA)
+
+ Mr. Kemper. Good afternoon, Chairwoman Capito, Ranking
+Member Maloney, and members of the subcommittee. My name is
+David Kemper, and I am the chairman and CEO of Commerce
+Bancshares. I am pleased to be here today on behalf of Commerce
+Bank, the American Bankers Association, and the Consumer
+Bankers association.
+ Commerce is a mid-sized Main Street bank founded in Kansas
+City in 1865. Our 5,000 employees serve customers across 5
+Midwestern States. Commerce is one of only three banks in the
+country to hold Moody's highest rating for financial strength.
+Last year, our business and financial strength was recognized
+on the Floor of the House by Congressman Emanuel Cleaver and
+former Financial Services Committee Chairman Barney Frank. We
+did not contribute to the economic crisis by originating any
+subprime products.
+ The Durbin Amendment and the Fed's proposed rule
+implementing it will cost great harm to consumers. It will
+affect banks of all sizes and their ability to revitalize local
+economies.
+ On behalf of Commerce Bank and the thousands of banks
+represented by the ABA and CBA, I urge Congress to take
+immediate action to stop the proposed rule from being
+implemented. This needs to be done to avoid the profound
+negative consequences that the rule has for the payment system
+and for consumers.
+ I would like to make four points to the committee today.
+First, the Durbin Amendment and the Fed's proposed rule will
+severely affect consumers everywhere, causing new fees and
+pushing low-income customers out of the banking system. The
+fact is that both consumers and merchants value debit cards.
+They are faster at checkout, accepted worldwide, provide a
+payment guarantee, and protect from fraud.
+ Debit cards reduce the need for cash and checks and the
+cost of handling bad paper. The Durbin Amendment moves the
+payment system backwards, taking a highly efficient system
+where costs are shared by all who benefit, the one where
+merchants are almost entirely excused from contributing.
+ Some have argued that lower interchange rates will bring
+lower prices to consumers at checkout but this far from
+certain. What is certain is that banks will have to find other
+ways to recover revenue and this will ultimately lead to new
+fees for the consumer.
+ Second, the Fed's proposal implementing the amendment
+dictates that my bank and indeed every bank throughout the
+country must lose money on every debit card transaction unless
+we charge customers more. Let me put this in context, the
+reality is that today's checking accounts have become debit
+accounts.
+ Each month, our average active customer uses his debit card
+26 times while writing only 5 checks. It costs Commerce Bank
+about $230 per year to maintain a checking account, including
+salaries, branch expenses, and issuing statements, among other
+costs. Our overall profit margin for that checking account is
+about $35 or 13 percent.
+ The Federal Reserve's proposal would cut our debit card
+revenue by about 85 percent or $60 per account. This means our
+profit on a typical checking account goes from $35 to a
+negative $27. We will lose money on average for each account.
+Mandating that banks cannot recover the cost of our most
+popular consumer product is unfair, unprecedented, and just bad
+public policy.
+ Third, the exemption for small banks will ultimately be
+ineffective. Every community banker--and I have spoken to a lot
+of them in the last 9 months--with whom I speak strongly
+believes his or her bank will be severely affected by the
+interchange price controls imposed on larger banks.
+ The economics are simple. Market share will flow to the
+lower-priced product of big banks, forcing small banks to lose
+customers if they don't follow suit. And finally, the process
+Congress used was deeply flawed. The amendment was added to the
+Dodd-Frank legislation on the Senate Floor at the last minute.
+ It was never the subject of any hearing in either the House
+or the Senate and never voted on by this or any other standing
+committee. A policy decision of such importance deserves much
+more thorough consideration. Commerce Bank, and indeed the
+banking industry, supported many of the key principles in Dodd-
+Frank.
+ We are all for sound banks, strong capital, and consumer
+transparency; however, the Durbin Amendment has nothing to do
+with these principles. It will stifle innovation, lower
+productivity in our economy, and force a number of our
+customers out of the protection of the banking system. On
+behalf of the ABA and the CBA, I urge you to take immediate
+action to stop the Federal Reserve from implementing the
+proposed interchange rule.
+ I would like to thank the committee for its time today and
+I look forward to your questions. Thank you.
+ [The prepared statement of Mr. Kemper can be found on page
+147 of the appendix.]
+ Chairwoman Capito. Thank you, Mr. Kemper.
+ Our next witness is Mr. Doug Kantor, a partner at Steptoe &
+Johnson, on behalf of the Merchants Payment coalition. Welcome.
+
+STATEMENT OF DOUG KANTOR, PARTNER, STEPTOE & JOHNSON, ON BEHALF
+ OF THE MERCHANT PAYMENTS COALITION
+
+ Mr. Kantor. Thank you, Madam Chairwoman, Ranking Member
+Maloney, and members of the subcommittee. I appreciate the
+opportunity to be here and share with you my views about the
+Durbin Amendment and the debit card rule before the Fed.
+ If there is one thing that I would like you to take away
+from my testimony today, it is this: that the banks right now
+that issue debit cards all charge the same schedule of fees
+when they are under the Visa umbrella. And those under the
+MasterCard umbrella agree to the same schedule of fees as well.
+ This is the only area of their operations that we are aware
+of where they all agree with their competitors to charge
+precisely the same fees. On other things, they stand on their
+own two feet, decide on their own charges, the same lending
+rates, the same interest rates, they do that for themselves
+each bank individually. Here, they charge the same thing and
+lock arms in a centralized price-fixed way.
+ That is tremendously unfair to merchants across the country
+and it has led to an explosion in these fees where, as you
+heard in part from Gus Prentzas, from any merchants, this is
+the second highest operating cost that they have only behind
+labor but higher than rent. It is the fastest growing expense
+they face, growing faster even than health care costs, and for
+many parts of the merchant and retail industries, these fees
+are far, far higher even than their profits every year.
+ That is a problem that cannot continue and the billions of
+dollars that they are being paid cannot continue. And the thing
+that is key here is the Durbin Amendment and the Fed's rule
+presents these banks with a simple choice. It says, if you
+would like to charge any amount of money that you would like,
+governed only by the marketplace, go ahead, unregulated, just
+don't do it through a centralized price-fixing mechanism.
+ The Fed's rule and the Durbin Amendment only apply to
+centrally set fees. And so, if banks want to charge merchants
+whatever they want to charge, they can go ahead and that is
+fine. We believe in competition. Our members compete every
+single day. If they are going to fix the fee centrally though,
+there has to be some reasonable limits and that works where the
+Fed comes into play.
+ And I think it is helpful to understand how we got here.
+How we got here was that banks used to have a different
+business model. The business model was, they tried to attract
+consumers to give them their money. That was kept in the
+checking account or in the savings account.
+ And the bank would lend out those funds that was their
+capital, they would lend it out at a higher rate than the
+interest they paid to consumers. It is a good business model.
+It benefited everyone and still does. The consumers, however,
+had to have a way to get at their own money.
+ One of those ways was checks. And almost 100 years ago, the
+Congress and then the Federal Reserve by rule, prohibited the
+analogy of interchange fees on checks, the exchange fees that
+used to be there, now they are not there. Now merchants get 100
+percent of the amount of the check when they accept the check.
+Those are prohibited, and have been for a long time. We haven't
+heard any lobbying against that; that was price fixing.
+ It has made the checking system much more efficient and
+made it work quite well. Then banks came out with ATM cards.
+That was a convenience to consumers. And in fact, some people
+put ATMs out there and invested money to do that. Interchange
+on ATM fees flows from the card holder's bank to the person
+putting the investment to put out the ATMs. They are providing
+a convenience.
+ But then they saw, hey, if merchants would take these cards
+in their store, that is a great convenience as well. That not
+only saves consumers in terms of convenience, it saves the
+bank. Every time a debit card is used, the bank saves money
+because someone didn't write a check. They used the debit card
+instead. That has nothing to do with the interchange.
+ It also saves money because they didn't go to a teller and
+take the teller's time to make a withdrawal. It saves the banks
+money; there are tremendous benefits for banks in debit which
+they don't tend to talk about when we discuss these types of
+issues. Merchants have invested billions of dollars putting--
+stores, accepting debit cards and protecting from fraud. I have
+some of those numbers in my testimony, billions of dollars.
+ That investment isn't recognized through interchange to the
+merchant although at first, it was. When these cards were first
+introduced, that is precisely what happened for many merchants;
+there was zero interchange for some. The merchants we repaid on
+other instances to recognize that. However, over time that
+system has changed, and because the price is fixed, those fees
+have exploded to a point where merchants are suffering from
+that and consumers ultimately, unfortunately, are footing the
+bill.
+ Thank you very much. I realize my time is up. I am eager to
+answer any questions you may have.
+ [The prepared statement of Mr. Kantor can be found on page
+101 of the appendix. ]
+ Chairwoman Capito. Thank you.
+ Our next witness is Mr. Floum, who is the general counsel
+for Visa.
+
+ STATEMENT OF JOSHUA R. FLOUM, GENERAL COUNSEL, VISA INC.
+
+ Mr. Floum. Thank you, Chairwoman Capito, Ranking Member
+Maloney, and members of the subcommittee. My name is Josh
+Floum, and I am Visa's general counsel and a member of our
+executive team. We appreciate the opportunity to discuss the
+Dodd-Frank Act and the Federal Reserve Board proposal relating
+to the debit interchange and the routing of debit transactions
+and the great harm to consumers and to small businesses that
+may be caused by these government-mandated price and business
+controls.
+ The Durbin Amendment was enacted through a really
+extraordinary process with no consideration in any
+congressional committee and no opportunity for the House to
+consider debate or vote at all. The amendment will have
+significant long-term consequences for consumers, for financial
+institutions, for small businesses, and for the entire U.S
+economy, consequences so fundamental and extensive that their
+full impact may not be known for many years.
+ Because of this, Congress should consider extending the
+implementation date and requesting an impact study on
+unintended consequences. I would like to highlight the issues
+that may lead to those unintended consequences. Turning first
+to the price controls, there are three fundamental issues.
+First, the proposed regulations would result in a $12 billion
+annual value transfer to merchants, primarily to the big box
+retailers.
+ This makes it virtually impossible for issuers to recover
+the cost of the infrastructure and operations required to build
+and manage a world-class debit system and discourages future
+investment in fraud protection, in e-commerce, in mobile
+payments, and other important innovations.
+ This country should continue to drive innovation,
+technology, data security, and commerce. After all, digital
+currency was invented here and this country shouldn't get in a
+situation where it lags behind.
+ But, while the direct impact is on debit card issuers, big
+and small, it is the consumer who ultimately will pay the cost
+to advance the industry. The Federal Reserve Board itself
+admits that its interchange proposal will permit issuers to
+recover only a small fraction of their costs but explains that
+``issuers have other sources of revenue such as cardholder fees
+to help cover their costs.'' In other words, the Fed suggests
+raising fees to cardholders.
+ Already, we are seeing that the Fed had it right. Many
+banks have indicated that they will have to take the step.
+Earlier this week, for example, the ICBA released a study of
+its community bank members. More than 90 percent of them
+reported that they will be forced to increase other fees to
+consumers to compensate for the interchange regulation.
+Importantly, and many members have mentioned this today, there
+is no requirement or evidence that merchants will pass on this
+windfall to consumers. In fact, the opposite appears to be
+true.
+ When asked in 2008 whether consumers would benefit from
+lower interchange fees, the retailer representative truthfully
+testified, ``There is not a businessman who doesn't attempt to
+keep the margin.''
+ Ranking Member Maloney, you asked me to discuss the routing
+and exclusivity sections of this amendment, which were added
+with even less discussion and analysis, and also have
+significant unintended consequences. The retailers specific
+intent in adding these provisions was to establish a system
+that would further drive down their cost without regard to the
+need for networks and issuers to get a fair cost for the
+significant value delivered.
+ By requiring more than one network on a single card and
+taking the routing decision away from consumers, the retailers
+have set up a race to the bottom to drive rates down. The
+retailers will seek the least expensive options regardless of
+quality or value delivered to the consumer. This part of the
+rule will only do more to stifle innovation and shortchange
+consumers on new and improve payment services.
+ And unfortunately, the rule will have a particularly
+significant impact on community banks and credit unions and on
+the government and prepaid programs that rely in part on debit
+card revenue to fund their operations. Many people have
+concluded that these institutions and programs are exempt from
+all the Durbin Amendment provisions, but as we have heard
+today, the law does not exempt them from the exclusivity and
+routing control provisions. Of note, the routing requirement
+allows merchants, not consumers or card issuers, to decide how
+debit card transactions are handled now and in the future.
+ The new rules deprive the consumer of the ability to choose
+over which network transactions will be processed. Now, the
+merchant will decide without notice to or consent from the
+consumer how money from her DDA account is accessed. There is
+simply no disguising if this is an anti-consumer provision.
+ The exclusivity and routing provisions also compromise the
+security of debit transactions and compromise fraud prevention.
+Investment in data security and fraud prevention can only be
+made if there are sufficient economic incentives to do so and
+the opportunity to--I will--if I can have more 30 seconds,
+Madam Chairwoman--and the opportunity to recover the cost of
+these investments. Finally, the exclusivity in routing
+provisions add unnecessary cost and complexity.
+ In conclusion, given all of this uncertainty and the many
+concerns being raised, we beseech Congress to extend
+implementation of the Durbin Amendment and request an impact
+study on unintended consequences. Thank you very much. I am
+happy to answer any questions.
+ [The prepared statement of Mr. Floum can be found on page
+84 of the appendix.]
+ Chairwoman Capito. Thank you very much.
+ And our final witness is Mr. David Seltzer, vice president
+and treasurer, 7-Eleven, on behalf of the Retail Industry
+Leaders Association.
+ Welcome.
+
+ STATEMENT OF DAVID SELTZER, VICE PRESIDENT AND TREASURER, 7-
+ ELEVEN INC., ON BEHALF OF THE RETAIL INDUSTRY LEADERS
+ ASSOCIATION (RILA)
+
+ Mr. Seltzer. Good afternoon.
+ I would like to thank Chairwoman Capito, Ranking Member
+Maloney, and the members of the subcommittee for inviting me to
+testify today on an issue that is important to the thousands of
+franchisees who own and operate 7-Eleven stores.
+ My name is David Seltzer, and I am the vice president and
+treasurer of 7-Eleven. There are more than 6,700 7-Eleven
+convenience stores operating in 32 States nationwide. More than
+5,000 of these stores are operated by small business
+franchisees.
+ In fact, sitting behind me today is Dennis Lane, who has
+been the operator of the 7-Eleven in Quincy, Massachusetts, for
+more than 36 years. I welcome this opportunity to share the
+views of 7-Eleven, companies of the Retail Industry Leaders
+Association, and small business owners like Dennis, on the
+topic of interchange reform. Putting this into perspective, a
+typical 7-Eleven franchisee owns a single store, employs 8 to
+10 people, and works 60 to 70 hours a week.
+ After payroll, interchange is the largest cost our
+franchisees face and it is the only cost over which they have
+no control. The proposed rule is critical to our franchisees
+because it will provide meaningful relief. I acknowledge that
+debit and credit cards are important to 7-Eleven, and as a
+direct beneficiary of the credit and debit clearing system, we
+expect to pay competitive fees for the use of the system.
+ At 7-Eleven, 49 percent of our sales are paid using
+plastic, and 73 percent of these card transactions are on
+either a Visa or MasterCard. Unlike all other business
+expenses, the pricing mechanism for this clearing system is not
+determined in a competitive manner. Over the past 8 years, 7-
+Eleven credit and debit fees have quadrupled from less than $40
+million in 2002 to $177 million in 2010. That is a 21 percent
+average annual increase. Debit cards are now used for over 80
+percent of our card transactions. According to the Kansas City
+Fed, average PIN debit card interchange rates have risen by
+more than 500 percent over the past 10 years.
+ In October 2009, MasterCard increased its Maestro debit
+interchange rate by 98 percent. On small ticket transactions,
+the fee can be more than 20 percent of the sale. When we spoke
+to MasterCard executives regarding this rate increase, we were
+told that interchange rates were non-negotiable.
+ Further, we were advised that MasterCard views banks rather
+than merchants as their customer and the rates are set at
+levels needed to entice banks to issue cards on MasterCard
+rather than Visa. In other words, competition among the card
+networks translates into higher interchange fees for merchants.
+And as we have heard today, banks don't compete on or negotiate
+interchange fees; the rates are the same.
+ As the Federal Reserve noted, the financial incentives in
+the debit clearing services market work to encourage higher
+costs and more risky debit transactions. In short, this market
+is fundamentally broken. In 2009, we and our franchisees and
+customers petitioned Congress to address this issue and nearly
+1.7 million people in 285 congressional districts signed
+petitions.
+ Since our petition drive, over 3 million more Americans
+added their names to similar petitions sponsored by members of
+the National Association of Convenience Stores. So now, more
+than 5 million Americans have signed petitions calling on
+Congress to reform interchange fees. We are delighted that
+Congress responded last year and the resulting Federal Reserve
+rule will lead to tremendous savings for hundreds of thousands
+of small businesses.
+ These savings will translate into lower prices for
+consumers, and more development and more economic activity in
+communities throughout America. In fact, Dennis has already
+hired a new employee in anticipation of the savings from the
+debit interchange reform. Given the intense price competition
+that exists within retail, there can be no doubt that debit
+savings will benefit consumers.
+ As to the impact on the banks, I want to make it clear that
+debit interchange legislation only affects about 100 financial
+institutions, leaving more than 99 percent of all institutions
+exempt. According to a recent article in the American Banker,
+some analysts believe that community banks and credit unions
+will benefit from this change as it will provide them with a
+competitive advantage against the larger financial
+institutions.
+ Madam Chairwoman, the facts are clear. The system is
+broken. Anyone who accepts debit or credit cards, whether or
+small or large businesses, and the more than 5 million
+consumers who signed petitions agree that interchange reform is
+necessary.
+ The Federal Reserve has proposed a rate structure, having
+received substantial input from card networks, banks, credit
+unions, and merchants. Though we believe the data submitted by
+the banks to the Federal Reserve supports a lower rate
+structure, we respect the process undertaken by the Federal
+Reserve and recognize that the proposed rates developed through
+this process will provide meaningful relief.
+ We encourage the Federal Reserve to complete its work to
+provide some common sense to debit fees for businesses large
+and small, and most importantly, their customers. Delaying this
+process would only harm American businesses and consumers to
+the tune of $33 million a day, or a billion dollars for every
+month that passes. Thank you for the opportunity to appear
+before the subcommittee this afternoon.
+ I would be happy to respond to any questions.
+ [The prepared statement of Mr. Seltzer can be found on page
+192 of the appendix.]
+ Chairwoman Capito. Thank you.
+ I would like to thank all the witnesses, and I have so many
+questions because honestly, conflicting information is what I
+have been seeing streaming through my office. So, I am going to
+ask some short questions and hopefully get some short answers.
+ Mr. Prentzas, you mentioned the cost of the debit
+interchange has gone up. Has your business--has your gross
+revenue gone up at the same time or is it a shift in the way
+people are paying for your services?
+ Mr. Prentzas. It is a shift in the way people are paying
+for their services, so the more they are using their debit
+cards, the more interchange fees I am paying.
+ Chairwoman Capito. Right.
+ Mr. Prentzas. But, what creates a problem for a small
+business person like myself and there are thousands out there
+in the United States, is that we don't know until the end of
+the month when we get that statement what our interchange fees
+are going to be. That creates a very big problem when you are
+trying to operate a business, not knowing what you are going to
+end up paying.
+ Chairwoman Capito. Okay. Let me ask you this, do you decide
+which routing your card goes on in all this?
+ Mr. Prentzas. No.
+ Chairwoman Capito. Okay. Who negotiates your fee for you?
+ Mr. Prentzas. The merchant company.
+ Chairwoman Capito. So, you go through like a merchant
+payment--
+ Mr. Prentzas. Correct.
+ Mr. Kantor. If I could, Congresswoman, folks like us have
+their own service providers who sign them up and provide
+processing and we don't do that.
+ Chairwoman Capito. Okay. Mr. Kemper, on your debit cards
+right now, do you have any charges at all associated with debt
+for the consumer?
+ Mr. Kemper. No, we don't.
+ Chairwoman Capito. No.
+ Mr. Kemper. And as I said, it is extremely popular for
+being used and it has basically displaced the check.
+ Chairwoman Capito. Right, I know. I am in that generation
+where I am--he is writing checks, I am using my credit card,
+but my kids are using their debit cards so--has the cost--Mr.
+Kantor mentioned the cost going up, this is another conflicting
+piece of information. Has your interchange cost on debit cards
+gone up to the 98 percent that Mr. Seltzer mentioned?
+ Mr. Kemper. My view is that is primarily because the debit
+card is the most successful product we have ever had.
+ Chairwoman Capito. Has the cost of the debit card--
+ Mr. Kemper. No, the cost as a percentage of sales to us,
+and I think it is true pretty much across-the-board, has stayed
+fairly constant. Maybe it has gone up a little bit, but I think
+the dollars are driven by the volume because everybody is using
+debit cards.
+ Chairwoman Capito. But if you had to average the average
+cost of interchange fees over 10 years or let's say 5 years ago
+because 7-Eleven made an assertion in their statement that it
+has gone up 500 percent over the last 5 or 10 years. Is that--
+ Mr. Kemper. That would be nothing comp--I think that is
+driven by volume. Our debit fees have gone up because they have
+replaced checks and so the fees have gone up, as a percentage
+of the retail sales, they have stayed very steady.
+ Chairwoman Capito. Okay.
+ Mr. Kantor. If I could, Congresswoman, just for a moment on
+this question. Actually, the rates have gone up very
+significantly over time. In fact, PIN rates were next to
+nothing about a decade ago and so--
+ Chairwoman Capito. This is what I mean.
+ Mr. Kantor. Yes.
+ Chairwoman Capito. We are getting two conflicting--
+ Mr. Kantor. We are happy to give you those numbers and I
+would know--there are a lot of things that are conflicting
+here. Commerce Bank's Web site says they do charge some of
+their customers for debit cards so there are a number of
+things--the facts of the--
+ Chairwoman Capito. We will let Mr. Kemper--
+ Mr. Floum. May I respond, Madam Chairwoman?
+ Chairwoman Capito. I want to ask Mr. Michael something
+because I really have only a minute 43 left. You fall into the
+category of the under $10 billion, obviously, with your credit
+union.
+ Mr. Michael. Well under, yes.
+ Chairwoman Capito. Yes. Did you submit any comments to the
+Fed?
+ Mr. Michael. I have not had the time. And in fact, until I
+was asked to speak in this hearing, I didn't have the time to
+really investigate the effects of this. That is one of the
+problems I think most have--
+ Chairwoman Capito. I would agree with that. Would it be a
+safe assumption probably that your association--the Credit
+Union National Association, I am sure has submitted something
+representative of--because only two credit unions fall into
+this category.
+ Mr. Michael. They are in the process of submitting two
+separate comment letters to the Fed.
+ Chairwoman Capito. Thank you. Do you charge for your debit
+card right now?
+ Mr. Michael. I have to, because I lose money on my
+transaction accounts.
+ Chairwoman Capito. So you do it like a fee?
+ Mr. Michael. I have a fee on the transactions to try and
+allocate the cost and--most use it. I have too much in fixed
+cost and those fixed cost, I don't think they are being even
+considered as part of the Fed study. And for a small
+institution, that is a major portion of what we do.
+ Chairwoman Capito. Yes, I mean proportionately too, that
+has to be a problem.
+ Mr. Michael. It is.
+ Chairwoman Capito. Because you don't have access to the
+larger networks, then you don't have the--obviously the lawyers
+and the accountants and everything else that has to go along
+with finding a--with doing the correct fraud and protections
+and all those kinds of things.
+ Let's see, the question that I really want to find out here
+and I assume--I don't know if the Fed actually knows this or
+not but is the cost--whether they have gone--I understand the
+volume of business has gone up so your interchange is going to
+go up because it is a greater part of your bottom line.
+ More people are paying with debit cards and so your
+interchange fee is going to go up with that because you have
+more people using the card.
+ Mr. Prentzas. Madam Chairwoman, if I may? As a small
+business owner, what I am really confused about and try to
+understand throughout this whole process and maybe some of the
+banks can explain this to me is, how is an interchange fee
+actually determined? There are so many different types of debit
+cards out there with rewards where I as a small business don't
+know what these fees are, what the percentages are, and I am at
+the mercy of a bank, at the end of the month, they give me a
+statement and tell me this is what you have to pay. And I have
+no understanding of what I am paying or why I am paying.
+ Chairwoman Capito. Thank you.
+ Mrs. Maloney?
+ Mrs. Maloney. I want to thank all of the panelists for
+their thoughtful testimony and I would like to ask this
+apprentice, we talked a great deal about small businesses and
+trying to help them here in Congress and wanting them to
+prosper. They are the backbone of the economy. After Valentines
+Day and being a florist, is the economy improving?
+ Mr. Prentzas. There is a lot of love in the air this year.
+ Mrs. Maloney. That is great to hear. Can you elaborate and
+others on the panel on what you think this rule will mean for
+you as a small businessman or as a bank or as a small community
+bank? And if there is any savings, Mr. Prentzas, how would you
+use those savings? What would you do with them?
+ Mr. Prentzas. Congresswoman Maloney, thank you for that
+question. Actually, that is a very important question. As a
+small business owner, we are in the business of competing
+everyday. And every dollar that we could save will be in our
+best interest to put it back into the market, into the
+consumer.
+ That also includes lowering prices. That is what is going
+to draw another customer to my shop and that is what is going
+to help me create more revenue where I could hire people and
+give the benefits that all Americans deserve. So, naturally, in
+my situation and as a small businessperson, I think it is going
+to trickle down to the consumer.
+ Mrs. Maloney. Okay. I would like to ask all the panel
+members to comment on what they see as the benefit or perhaps
+detriment to consumers with the implementation of this
+interchange rule.
+ I have heard from financial institutions that this will
+mean that fees on their customers in others areas may be
+raised. And I have heard from merchants that high interchange
+fees mean that the price of goods and services are higher.
+ I would just like Mr. Kemper, Mr. Seltzer, all of you, to
+comment on what this means to you.
+ Mr. Kemper. Yes.
+ Mrs. Maloney. And to your customers and to the consumers.
+ Mr. Kemper. Great question. Josh used the number $12
+billion to $14 billion that is going to come out of the banking
+industry primarily to retailers and primarily to the top 1.5
+percent of retailers who are doing most of the business.
+ That $14 billion is 16 percent of banking profits for last
+year. Banks last year made about 6 percent on equity compared
+to 19 percent for the 3 biggest retailers. So, banks have gone
+through a tough time of rebuilding capital and are not
+particularly profitable.
+ This payment system is the most stable income and
+especially for small banks. We do a lot about the businesses,
+we are in money management, we are in commercial. But for small
+credit unions, for small banks, it is going to be devastating.
+ As I said, it is going to mean that our basic--system
+product is going to be unprofitable. We are going to have to
+raise fees. I think people have generally said we will be lucky
+to recoup a third to a half of these kind of fees, it was going
+to suppress profitability immediately, and we have a wonderful
+system. We have to step back and look at what the value of this
+system is, not what the cost.
+ I like to talk about the costs because they are very
+competitive. They are cheaper than checks, they are cheaper
+than cash, and a lot of studies have shown that. We have a
+wonderful system that we could ruin. And Josh, Visa, a lot of
+people are not going to be investing in the future in fraud, on
+innovation, and we are going to go the wrong way.
+ Mr. Kantor. If I could address this question, because it is
+an important one. What we have shown--and I cited in my
+testimony, a study from Robert Shapiro, the former
+Undersecretary of Commerce. And he took a look at this and said
+if interchange fees, he looked at both credit and debit, were
+just cost plus a reasonable rate of return, that would return
+almost $27 billion to the pockets of consumers and create
+242,000 new jobs in the United States.
+ If you look at just debit, those numbers are more than $10
+billion to consumers and it is more than 95,000 new jobs
+created. As prices go down, people buy more, and that is good
+for everyone.
+ I would like to comment just again at the chairwoman's
+helpful observation about talking about facts here. Mr. Floum,
+in his written testimony, and again in his testimony early
+today before the committee, quoted a small businessperson, Tom
+Robinson, who testified a few years ago before the Judiciary
+Committee on this issue. But that quote was cut off at the
+critical point of that quote.
+ And Mr. Floum quoted Mr. Robinson in talking about passing
+on savings to consumers as saying there is not a businessman
+who doesn't attempt to keep the margin.
+ Mr. Robinson continued that statement. He said there is not
+a businessman who doesn't attempt to keep the margin, but the
+competition always drives it back out. And when you have a
+competitive market, and we definitely have a competitive market
+unlike some others, those benefits will go back to the
+consumer.
+ I expect this was an honest mistake on Mr. Floum's part.
+Unfortunately, this artificially truncated quote has been
+floating around for a while. When there was a markup in the
+Judiciary Committee, one of the Members who talked to him had
+to read it in and correct it, and I would just ask that this
+exchange in the transcript be made part of the record of this
+hearing so that we get it right and make it clear that
+merchants believe in free market and believe consumers will
+save.
+ Mrs. Maloney. Thank you, and my time has expired. Thank
+you.
+ Chairwoman Capito. Thank you.
+ Mr. Marchant?
+ Mr. Marchant. Thank you, Madam Chairwoman.
+ What I would like to focus on is the expense that merchants
+no longer have to incur because of the debit card. In my life,
+I have worked in stores where a great amount of the time that
+the cashier and the management spent was in compiling the
+deposit, taking the check, checking the ID, taking the hot
+checks to the door as you walk out, and all the expense that
+went into just making this simple transaction take place.
+ It seems to me that the debit cards have made a lot of the
+positions that existed in your store, Mr. Prentzas, maybe you
+don't have to have a fulltime version that does that now. Now,
+you can--this debit card enables you to have safer
+transactions, quicker transactions.
+ Would you admit that there is some value to that versus the
+way it probably was when you started in business?
+ Mr. Prentzas. Thank you for that question.
+ What I could say to that is that I don't need that person,
+but I also had to lay off one other person because of these
+fees. And let me explain myself, Congressman. As a businessman,
+you need to be able to understand what you are paying for.
+ When it comes to interchange fees, I don't know what I am
+paying for and what these fees are. What is the rate of taking
+card ``A'', or what rewards are on that? I don't know. I am at
+the mercy, like I said earlier, of the statement that comes in
+at the end of the day. So, yes, it might be convenient, but I
+am not willing to give anybody a blank check to fill out a
+portion for that convenience. I want to know what I am paying
+for that convenience and how it is being derived at the end of
+the day.
+ Mr. Marchant. Okay. So, your point is you don't know what
+you are paying for. You don't know how--
+ Mr. Prentzas. Why it has been increasing so rapidly without
+having any additional services?
+ Mr. Marchant. The other thing that I am noticing as I am
+going down to the store is that with almost every transaction
+that I try to make, the retailer is trying to push me towards
+the transaction that the retailer would prefer that I make.
+ And the retailer absolutely does not want a check. Cash, I
+am pretty sure is okay, but retailers no longer want a check.
+The retailer really no longer wants a credit card because I am
+assuming the credit card is still 2 to 3 percent. Is that a
+standard bank charge for credit cards, Mr. Seltzer?
+ Mr. Seltzer. Mr. Marchant, for us, credit and debit are
+right on top of one another and I think on average--our credit
+rates are about 2.2 percent.
+ Mr. Marchant. 2.2 percent.
+ Mr. Seltzer. Our debit rates are about 2.1 percent of the
+transaction, so they are right on top of one another. And, I
+will speak to your other question. We absolutely believe there
+is value in cards, we are willing to pay competitive prices.
+And if there were competitive markets for this product, we
+wouldn't be here. There is no competition within the card space
+for debit cards.
+ Mr. Marchant. I think I might get to that if I have enough
+time to get to my question. The retailer, though, now is--even
+though there is no difference, I guess you are saying, between
+credit and debit, they are pushing me towards a debit
+transaction because I will now have to say that I don't--debit
+or credit. That is a standard question now so there must be
+some advantage to one transaction over the other.
+ Mr. Floum. Yes. Can I say a little bit about the facts?
+Because the one thing I agree with Mr. Kantor about is that
+facts are important. And there have been a lot of assertions
+about facts.
+ Chairwoman Capito, I am happy to provide you with
+excruciating detail about Visa's interchange rates. They are
+transparent, they are on the Web site, they are public.
+ So, let's talk a little bit about the facts. You asked
+whether the rates are going up because usage is going up or
+because the percentage rates are going up, and this is very
+important; it is because people are using debit cards more, and
+merchants are accepting them more. That is a good thing because
+they are less expensive than cash and they are less expensive
+than checks so merchants are achieving savings.
+ The debit card rates on average 10 years ago were about 1.4
+percent. Today, they are about 1.4 percent. Some rates have
+gone up, some rates have gone down. The average effective debit
+card rate has remained stable over a 10-year period. Any
+assertion to the contrary, we need to look at the facts.
+ Credit card rates on average are higher, but the rates that
+merchants pay for use of debit cards and credit cards in the
+United States are far lower than what they pay in most other
+countries. So, it is important to get the facts correct and we
+would be happy to provide you with all of these facts for the
+record.
+ Chairwoman Capito. Mr. Watt?
+ Mr. Watt. Madam Chairwoman, I think I will allow Mr. Scott
+to go next. I missed the testimony, I do want to apologize for
+that, but I am trying to get into the flow here.
+ Mr. Scott. Thank you very much, Madam Chairwoman.
+ This is very, very interesting and, as I said, it is very
+profound. The issue, if I could frame it right is that
+everybody here agrees we need to change the fee. The issue
+becomes, what is reasonable and what is proportional?
+ Three of you have one set of feelings, and three of you
+have the other. So--if you could briefly just share with this
+committee what do you feel. What rate fee do you feel would be
+proportional and reasonable?
+ Let me start with you, Mr. Kemper.
+ Mr. Kemper. Yes, thank you.
+ I think you have to go back. And I put this in my written
+testimony about the different costs of payments. The merchant
+can take checks, the merchant can take cash, the merchant can
+take debit, the merchant can take credit cards. And debit cards
+are the cheapest form of payment from a social cost. That is
+not my view, that is a Brookings study, and we can show you
+other studies.
+ So, it is a very competitive way of payment. It has huge
+benefits for everybody, for the bank.
+ Mr. Scott. I want to get to quite a few little points.
+ Mr. Kemper. Okay.
+ Mr. Scott. So if you could just tell me, we are looking at
+a range here from 43 or 44 to 12?
+ Mr. Kemper. As I mentioned, it costs us $230 for a checking
+account. And lots of those costs are revolving around debit.
+So, we have millions of dollars in cost of running our call
+center, issuing statements in fraud, all kinds of things that
+are not being included.
+ The Fed has too narrow a rule, and it is a train coming
+down a track.
+ Mr. Scott. Do you have a figure? Do you have a figure,
+let's say, from 12--
+ Mr. Kemper. My figure is that we have a huge amount of cost
+that they are not even looking at.
+ Mr. Scott. Right.
+ Mr. Kemper. And that is why we say you have to delay this,
+you have to step back and really understand the cost involved
+in this.
+ Mr. Scott. The one thing you would say is 12 is certainly
+insufficient?
+ Mr. Kemper. Twelve is certainly--that is one thing I will
+say.
+ Mr. Scott. You don't want to say--
+ Mr. Kemper. It is insufficient.
+ Mr. Kantor. Congressman, thank you. It is a very helpful
+question because actually I do not agree that the centrally
+fixed interchange fee should exist at all. In fact, in seven of
+the eight nations around the world that have the highest per
+capita debit card usage, this fee does not exist at all.
+ It is important to recognize that, as I talked about in my
+testimony, banks get tremendous benefits every time there are
+customers.
+ Mr. Scott. I know, but I don't--I am just going to get--do
+you have--
+ Mr. Kantor. There should not be a fee.
+ Mr. Scott. Period?
+ Mr. Kantor. It should be zero. They should have to set
+their own fees at banks and not--
+ Mr. Scott. Twelve is even high to you?
+ Mr. Kantor. That is absolutely right.
+ Mr. Scott. Okay.
+ Mr. Kantor. It is far too high.
+ Mr. Scott. Let me go to the next point if I may, because we
+have some merchants here, and I would like to get their
+concerns about this.
+ Mr. Seltzer, let me ask you, you agree that if someone
+provides a service and someone else profits off that service,
+that the person profiting off that service should pay for that
+service?
+ Mr. Seltzer. Absolutely.
+ Mr. Scott. How much business would you lose if you stopped
+accepting the debit card transaction?
+ Mr. Seltzer. We sell groceries, we sell gasoline, so we
+don't believe that debit transactions or debit cards have
+increased purchasing volume for our consumers.
+ If we stop accepting cards because Visa and MasterCard have
+been successful in transforming American purchasing habits from
+checks to electronic checks as debit cards were originally
+marketed--
+ Mr. Scott. Would you say you--yes, and you would lose
+business 35 percent, 40 percent? Would it be in that range?
+ Mr. Seltzer. I don't know an answer to that. No retailer
+can--
+ Mr. Scott. But it makes a certain portion of your business
+possible. And you do feel that you should pay for that service.
+Is that correct?
+ Mr. Seltzer. Again, if there were competitive rates or
+competitive interchange--
+ Mr. Scott. Does 7-Eleven accept checks as a form of
+payment?
+ Mr. Seltzer. We do in our company-operated stores and our
+franchisees can--
+ Mr. Scott. Okay. Do you pay for a guarantee service, a
+check guarantee service to make sure that check--that you are
+covered?
+ Mr. Seltzer. We do on a guaranteed basis; checks are less
+than half the cost of debit.
+ Mr. Scott. Yes, so it is less than half the cost of debits?
+You would say that debit cards--how do they compare to the fees
+that you pay out to the check guarantee service?
+ Mr. Seltzer. Debit fees are substantially more expensive.
+ Mr. Scott. Pardon me?
+ Mr. Seltzer. Debit fees are substantially more expensive.
+And debit is not guaranteed at the end of the day. We take
+chargebacks on debit.
+ Mr. Scott. Thank you, sir.
+ Thank you, Madam Chairwoman.
+ Chairwoman Capito. Thank you.
+ Mr. Royce, from California?
+ Mr. Royce. Thank you, Madam Chairwoman.
+ I was going to ask Mr. Kemper--you are with Commerce Bank,
+right, Mr. Kemper?
+ Mr. Kemper. Yes, that is right.
+ Mr. Royce. Which, as I remember, never got into the toxic
+mortgage mess that a lot of financial institutions did get
+into.
+ Mr. Kemper. I am proud of that.
+ Mr. Royce. I read your testimony here. And I was going to
+ask you, do you expect the ability of the system as it exists
+now to combat fraud to be weakened if the proposed rule goes
+through? And walk us through the logic as to why, if so.
+ Mr. Kemper. In the previous testimony with Governor
+Raskin--and I think we were talking about the incentives on
+fraud prevention and fraud, if you can't recover the cost of
+fraud, you are going to have to put different restrictions.
+ First of all, I think you are not going to guarantee
+payments on larger items, so that is really going to cripple
+the debit system for everybody, for the consumer and for
+merchants. And if you don't continue to invest, as we talked
+about before, it is part of a rapidly evolving battle, and so
+the card operators, the banks, we have to continually put a lot
+of money into doing what we must to outwit the crooks.
+ So if you can't recover your cost and if you cut your fees
+by 85 percent, there is no question that you are not going to
+invest to cover fraud. And if you are not allowed to recover
+fraud cost, you are going to have to put a lot of restrictions
+on that so you don't take the losses on fraud. And that would
+be devastating.
+ Mr. Royce. Let me ask Mr. Floum, too, on that front. I
+spoke earlier when we had the representative of the Fed here
+just about their concerns with the way in which fraud in our
+society continues to evolve, the innovative ways in which
+people keep trying to hack into the system and, also, the
+evolution of this system where we are informed as consumers,
+where it is found in advance of us finding it, in most cases by
+the current system. But that system has cost billions and
+billions of dollars to develop.
+ And I was going to ask you how often is your network
+hacked?
+ Mr. Floum. Congressman, there are efforts to hack our
+network multiples times every day. And, fortunately, up till
+now there has never been a successful breach of our network,
+not one, and we are proud of that. But that takes a lot of
+investment. We invest at Visa alone $800 million a year in
+preventing fraud and cyber attacks. The banks, our issuers
+invest billions each year.
+ And if there is not an incentive and an economic return to
+continue to invest and to safeguard the data security of our
+payment network and our digital currency, that is a very
+serious policy concern. I would respectfully submit we need to
+keep ahead of the cyber criminals. It is not enough to be on
+par with them. That takes a very sophisticated technology,
+thinking ahead and significant investment.
+ Mr. Royce. Let me ask you then, do you think the system
+will be less safe as a result of this rule if it is implemented
+as is, without change or without study?
+ Mr. Floum. Whatever the regulatory environment, we will
+always strive to make the system as secure as possible. And I
+am sure the issuers will do the same. But without a return, and
+if issuers have to operate at a loss, it makes it very
+problematic and much harder to do so. And I fear that
+competitors overseas, other networks will have an edge because
+they are not constrained by artificial price controls.
+ Mr. Kantor. Congressman, could I have a word about this
+fraud question--
+ Chairwoman Capito. Yes.
+ Mr. Kantor. --because it is an important one, and I think
+it is helpful to recognize first that Visa's fees as a network
+are not regulated by the Fed under the law or the Fed's
+proposal, so if their investments are not affected, they can
+continue to charge merchants, which they do, whatever they
+desire to charge them.
+ But Mr. Hensarling made a very important observation during
+the first panel that you don't want to create that incentive by
+paying banks for their fraud losses--then they don't have the
+incentive to get rid of those fraud losses. And so that
+shouldn't be part of the analysis and in our view isn't what
+is, is fraud prevention. And if in fact there are systems that
+demonstrably prevent fraud, our view is--and we believe the law
+says this and the Fed's rule accounts for them in the options
+they put forward--those fraud prevention cost can be recovered
+if they demonstrably reduce fraud.
+ Mr. Royce. Thank you, Madam Chairwoman.
+ Chairwoman Capito. Mr. Meeks?
+ Mr. Meeks. Thank you, Madam Chairwoman.
+ It is a very good hearing. And, I can recall when we
+started this, I wish we would have had the time before we
+passed the bill to have this kind of an intensive kind of
+debate and conversation and it might have cleared it up and--
+because, ultimately, what we are concerned about is the
+consumers and all of you, whether it is merchant or whether it
+is bank group or the person who is going to a bank or credit
+union and our constituents. We want to make sure that they get
+the benefit.
+ There is one question, that before I get into the main
+question, I want to ask. And I don't know--backing off to Mr.
+Scott. I didn't get quite the understanding because I know
+usually, there is a lot of tax. How much does it cost or who
+pays the cost if a check was bounced? If you gave the check,
+what is the cost of the, you know--maybe, I don't know if
+someone could answer that for me, Mr. Floum or someone from the
+credit union or anybody. How much or what is the cost for a
+bounced check?
+ Mr. Floum. The cost annually to merchants from bounced
+checks far exceeds the total amount that they pay in debit
+interchange. And as volume increases on debit cards, those
+bounced check losses come down. So, again, this idea that debit
+fees have gone up, I have said that is not true. The rate
+hasn't gone up. The overall expense has gone up because more
+debit cards are being used. That means merchants are saving
+money because it costs them more to bounce checks, to pay for
+bounced checks.
+ If you want to guarantee a check, you can go to a check
+guarantee type of service. And the rate they are going to
+charge you is 1.3, 1.4, 1.5 percent. So with that guarantee and
+with the additional expense, and as Mr. Kemper said, it is not
+just us who are saying this. Everyone would acknowledge who
+studied it that the cost of checks far exceeds the cost of
+debit cards per merchant.
+ Mr. Meeks. Quickly, please because--
+ Mr. Kemper. Sure. We are happy to bring in the numbers from
+merchants. It is the case because, often, with the bounced
+checks the merchant does get the money. There is--or otherwise,
+and there are fees put on there just like the bank's $38
+billion in overdraft fees. Merchants do put a fee, so it is not
+the fact that merchants lose more money than they pay on--
+ Mr. Meeks. Let me just--this is another reason why, in my
+viewpoint, we need to dig into this more because, too, I was
+watching. That is what it meant. The first panel is watching
+the Senate Banking hearing today. And there were two statements
+that were made--one by Chairman Bair--that said that the Durbin
+Amendment might not be helpful to consumers and has unintended
+consequences and really needs to be fixed. He further stated
+that the full policy ramifications might not have been dealt
+with as thoroughly as they should have been. So we kind of
+rushed it through.
+ And then there was also a statement--because I was
+particularly concerned at that time with the effect that for a
+small--for credit unions and for the smaller institutions, the
+community banks--and so we put in an exemption what we felt
+would protect them. So my question then is--and I think
+Chairman Bernanke said that the exemption may not work.
+ So my question--and Mr. Floum, I will ask you, especially
+with this network, because I heard you testified about network
+exclusivity provision. How does that affect, if it does, small
+issuers?
+ Mr. Floum. Thank you for the question, Congressman Meeks.
+It affects small issuers greatly because although they were
+exempted from the direct price regulation on the debit rate,
+they are square in the crosshairs and exclusivity and routing
+provisions. Those were put in during conference by RILA, the
+large retail association, for one reason and one reason only--
+and that was to suppress interchange rates and issuer revenue.
+ So what they do is they say that it is not enough that the
+networks can't compete to have cards, but that there had to be
+two networks on one card. Whether the cardholder wants two
+networks or the issuer wants two networks or not, the choice is
+taken away. And the choice is taken away from the consumer to
+route the transaction. So someone is asking about thin pads and
+merchants trying to steer-- at least consumers had a choice
+before, but with the Durbin Amendment the choice is taken from
+the consumers and merchants' route and with two networks they
+want to set up a situation where they drive the interchange
+rate down.
+ That was the reason. That was the intent. That will be the
+effect. And, unfortunately, the credit unions and community
+banks are not exempt from that provision.
+ Mr. Meeks. Do you have any comments?
+ Mr. Kantor. If I could, it is important to recognize a
+couple of things here. One is that there is robust competition
+in one place here--that is to drive interchange fees up. The
+networks drive interchange fees up to get issuers to put them
+on the card. That won't change even with the network non-
+exclusivity and that will protect the small banks so that they
+won't have to worry about their fees.
+ Visa has already said they will have a two-tiered system.
+And there have been commentators like Christopher Leonard of
+the American Banker, who said, ``This will allow the small
+banks to win and have their cake and it eat, too.''
+ Chairwoman Capito. Mr. Renacci?
+ Mr. Renacci. Thank you, Madam Chairwoman.
+ And thank you all for being here.
+ Mr. Prentzas, Mr. Kantor, and Mr. Seltzer, there was a day
+just very recently that I was a retailer. And Mr. Michael, Mr.
+Kemper, and Mr. Floum, there was a day very recently that I was
+on a bank board. So I see both sides of your story. The only
+concern I have is in the long run, who is going to win and who
+is going to lose?
+ If I was sitting on the retailer side, and even if prices
+were able to come down, I know that the bankers have to make
+these dollars up somewhere and those fees will wind up going to
+the consumer. And, today, I am sitting on the side of the
+consumer and wondering who really wins in all of this.
+ The other thing that I think we need to be very, very
+careful of is that any time the government gets involved and
+sets a price or a standard or a fix, whatever you want to call
+it, it is a very dangerous precedent especially for the
+retailers. So I am concerned about that and not comfortable at
+all. But I do know that, from a retailer's standpoint, these
+cards do allow you the opportunity to sell more. And I do know,
+from a banking perspective, these cards do allow you to make
+money.
+ The issue again is going to be, how does it affect the
+consumer? My biggest concern today, though, goes back to all of
+the testimony.
+ And, Mr. Kantor, I want to--two things you did say in your
+testimony. You said that interchange rates should be based in
+many cases with the foreign markets charge. I think you need to
+be extremely careful there, too, because I am sure your
+retailers would not want to have to charge with the foreign--
+with some of the foreign market for selling things for. I will
+give you a chance to speak.
+ And you also mentioned--the word early on in your
+testimony--fixing fees and you said that the banks are fixing
+fees. I am not too sure you want the government to fix fees.
+So, again, let's be careful while we are talking about all of
+these numbers.
+ But here is the question I have. After all of this
+testimony, we are still getting down to we now have an
+interchange fee that the Federal Reserve is saying should be at
+a certain amount. And they put that amount inside of a specific
+box. We didn't give through a statute the Federal Reserve any
+opportunity to pick up all of the costs that are available.
+ You heard the testimony earlier that it could be an issue.
+And for the retailers sitting on the panel, I am sure that if
+you were stuck with a certain retail cost that was set by
+somebody else and all you were told was you would want your
+cost, you would want to make sure it is a fair fee and a fair
+cost. So I am going to ask this primarily to the retailers.
+ Hearing the testimony earlier and hearing that you know
+that this interchange fee is really--it is flawed in my
+opinion. It doesn't take into consideration all of the cost.
+And as I asked the previous person who testified, what do you
+need to get this cost, I really didn't get an answer, so what
+do you need?
+ But for your purposes, do you really want the Federal
+Reserve to set a cost, a standard, as you called it, or do you
+want it to be fair and reasonable? And are you willing to allow
+there to be more time given to the Federal Reserve to have all
+the details available so that they can come up with a fair
+standard, as they call it?
+ Mr. Kantor. Congressman, I appreciate that. And thank you
+for looking at this question so closely. What is helpful to
+recognize here, as I said in my testimony again, is if banks
+would compete rather than fixing the fees and set their own
+costs, charge whatever you want and have a market system, that
+is great with us, do it.
+ If they are going to fix the fees, we think frankly they
+should not be allowed to charge anything by fixing the fees.
+The Fed has been more generous than that in spite of the fact
+that we advocated that they not do that and, instead, here you
+can recover this cost plus a rather large rate of return on
+those costs.
+ And so, here, I have gone through in my testimony the banks
+have argued for a great many other costs to be included here.
+Now, some of those are costs of the network, which, as I said,
+aren't regulated. Some of those are the costs of the credit
+program--
+ Mr. Renacci. I am going to run out of time, so I just want
+to make sure are you willing to let more time to be allowed
+from a retailer's standpoint so that actual reasonable cost can
+be determined, or you are going to stand here or sit here today
+and say, no, I don't want to waste any more time to have a
+reasonable cost?
+ Mr. Kantor. The Fed has done a good job here so far.
+Merchants have been--
+ Mr. Renacci. The Fed has said today that they did not take
+into consideration all of the costs. So my question is pretty
+specific--are you willing to allow that there will be more time
+for the Fed to get all the costs outside of the box so that
+they can come up with a fair interchange fee?
+ Mr. Kantor. We have waited more than 10 years too long
+already.
+ Mr. Renacci. You are not answering my question.
+ Mr. Kantor. The Fed is getting it right. It should go
+forward. If anything, the fees should be lower.
+ Chairwoman Capito. Mr. Carney?
+ Mr. Carney. Thanks, Madam Chairwoman.
+ First, let me apologize for not being here in the last--
+when you made your opening statements. You may have heard the
+questions that I asked the Governor earlier about the cost--and
+we have been having some discussion about that.
+ I am just glancing through the testimony that was provided
+in writing. I am interested in the banker's view of those costs
+and if there are things that you don't take into consideration
+or allowed allowable cost because presumably that will be in
+the--part of the comment record and maybe you have already
+submitted that, but could you summarize that for me, I guess,
+Mr. Kemper?
+ Mr. Kemper. Yes. I would be glad to comment on that. First
+of all, when you step back--and I said that in my testimony,
+when you look at all of the social costs, debit is lower than
+any other form of payment. And so, we talked about facts. There
+are facts on that.
+ I mentioned in my opening statement that--and we talked
+about with Governor Raskin that the Feds have really been
+putting a box on this because of the language in Dodd-Frank on
+how narrowly they can interpret what the costs are. It is
+basically just the marginal electronic and clearing costs.
+ The other cost, we talked about fraud, and we paid millions
+of dollars in fraud cost. That is a real cost. Our call center,
+our 24/7 call center where we have 120 people, we have people
+call up all the time about entries on their checking accounts.
+They are doing far more debit transactions. And they are checks
+or other forms of payments. So how do you allocate that? We
+have to have systems for their payment system. Periodic
+statements were required and we spend millions of dollars
+sending our customers statements every month.
+ It is very difficult. And I think the whole--and there are
+a lot of frauds. First of all, price fixing on an unprecedented
+scale is very scary to me. But, secondly, telling businesses
+that they can only price a product, our most popular consumer
+product, at marginal cost just doesn't make any sense. And it
+was very narrowly defined by the Fed.
+ So they are hamstrung on this. And so if we talk about it,
+then it gets very important that we step back from this and
+have a full debate like we are having today and really get the
+cost right because I think--I have a lot of merchants who are
+very good customers of mine. We want a fair deal just like the
+merchants want a fair deal.
+ Mr. Carney. The second question I had this morning was the
+effect on consumers. I didn't really have enough time to pursue
+it. Could you outline what you think the effects will be on
+your customers, I guess, and other fees that you might
+otherwise have to--and you might now have to charge?
+ Mr. Kantor. In aggregate, it is $14 billion. As I
+mentioned, it is 16 percent of bank--
+ Mr. Carney. $14 billion is--
+ Mr. Kantor. $14 billion is just taking that $0.44. And
+cutting it--I think Josh mentioned 12, but it is somewhere in
+between that. I am going from $0.44 to $0.07 and $0.12 cents.
+And, basically, that is the transfer from the banks to the
+retailers. Now, whether or not they lower cost, who knows?
+ Mr. Carney. But that is in a nutshell what we are talking
+about in terms of--
+ Mr. Kantor. Yes. And as I mentioned in my opening
+testimony, that would move our basic checking account where we
+have a full cost of profit of maybe 13 percent to a loss of
+probably 10 or 12 percent on every checking account and so we
+are going to have to recapture. And, also, we really haven't
+talked about it today.
+ But, certainly, people are going to fall out of the banking
+system on this. And I have talked to Congressman Clay, who is
+my Congressman from St. Louis. There are big issues on this
+about the banking system has worked very well and you don't--
+you want to keep people in the banking system because the
+alternative is not good.
+ Mr. Carney. One of the things we have tried to look hard to
+do in Delaware, and I am sure others have as well, is to try to
+get people who aren't banks, if you will, to go to the banks
+and checking the account fees and all that kind of stuff is a
+barrier there. And I would not want to see that obviously
+happen.
+ I mentioned this morning that some of the regulations with
+the court act have had taken away some other revenue sources
+for--on the credit card side. And so it is just really a
+question of what the ultimate impact is going to be on the
+consumer with this.
+ Again, I apologize for not being here earlier to hear your
+testimony. I had to go out. And I will read it carefully.
+Thanks very much for--
+ Mr. Michael. Representative, may I say something?
+ Mr. Carney. Yes, you may, please.
+ Mr. Michael. On the credit union side, just to let you
+know, our consumers are our members. And as interchange rates
+are dropped, this is going to be a direct transfer from our
+members to the merchants. So that will--they will have to make
+that up some way through some other sources--
+ Mr. Carney. What is the estimated loss for the credit
+unions?
+ Mr. Michael. Again, what we are figuring right now that it
+is going to be fairly substantial, about $1.1 billion a year.
+They will be transferred to merchants. And I don't have a
+guarantee that the merchants are going to take and give that
+money back to my members.
+ Mr. Carney. Thank you.
+ Mr. Kantor. Yes, if I could?
+ Mr. Carney. No, you can't.
+ [laughter]
+ Sorry, I am just a freshman. I don't mess with the Chair.
+ Chairwoman Capito. You are a good man.
+ Mr. Canseco?
+ Mr. Canseco. Thank you, Madam Chairwoman.
+ The Federal Reserve Board has proposed these regulations in
+an effort to implement the interchange fee provisions of the
+Dodd-Frank Act.
+ Let me ask a simple question, starting with Mr. Kemper. How
+did the Federal Reserve do in writing this rule, in your
+opinion?
+ Mr. Kemper. I think the Federal Reserve, as I mentioned,
+was hamstrung with some very specific language on what they can
+do on incremental costs, and I think they narrowed. And I have
+talked to--Missouri is the only State with two Federal Reserve
+districts. And I know both persons very well and I have talked
+with them.
+ I think there are a lot of questions on how they came up
+with what they did and why they didn't include fraud and why it
+was so narrow. But I think it took a very bad law and made it
+worse and narrowed it down. And that is--and I think--I
+listened to Governor Raskin, and I think you asked a lot of
+good questions about what are the costs that should be in
+there. And they are not in there.
+ Mr. Canseco. So you don't think that the Federal Reserve
+did a good job in writing?
+ Mr. Kemper. I think they did a very thorough job, but I
+think the outcome was not good. And I don't think it is right,
+either.
+ Mr. Canseco. Thank you, Mr. Kemper.
+ Mr. Kantor?
+ Mr. Kantor. Thank you for that. I think that the Federal
+Reserve has done a good job and a credible job of writing this
+rule. It is not everything that we would like it to be, as you
+heard. I think they have the room and should not have centrally
+fixed interchange fees, whatsoever, allowed anymore by the
+banks.
+ But they did a good, credible job going through it. And it
+is substantial progress that will benefit everyone, in
+particular, the consumer. And I would know, just with respect
+to Mr. Carney's comment before, too, it is helpful to look
+the--in Europe, they took a look at this question when they
+moved to a 0.2 percent debit interchange, which is a little bit
+lower than what the Fed proposed, and they found that there is
+no relationship between the fees that banks charge their
+customers checking and otherwise in the interchange fee.
+ In fact, if there were, had interchange fees tripled in
+this country over the last decade, we would have seen bank fees
+on the consumers fall dramatically. In fact, they didn't--those
+increased dramatically to the $38 billion in overdraft just to
+take one example.
+ Mr. Canseco. So they did well, Mr. Kantor?
+ Mr. Kantor. But I think they did well.
+ Mr. Canseco. And, Mr. Michael?
+ Mr. Michael. I think that, again, they have been hamstrung.
+And they had some options where they could have--have made some
+decisions, for example, enforcing--or requiring an enforcement
+of the two-tier system could be something they could have done,
+but they have decided not to do that.
+ I think there are issues in the definition of the cost. It
+is not an incremental cost. It is really an operational cost
+and it all has to be allocated out. But my operational costs
+are not being surged for the process.
+ The final thing I am going to say is they have acknowledged
+that the small--the exempt institutions will be dragged in.
+They said that is a reality of what is going to happen. But
+they haven't surveyed it. They haven't determined what our
+costs are and included those as part of their determination.
+ Mr. Canseco. Thank you.
+ And, Mr. Floum?
+ Mr. Floum. Congressman, I think the Fed did not have enough
+time and so it could not and did not do a thorough enough job.
+They didn't consider all of the costs. They didn't survey the
+small financial institutions. And they didn't include all of
+the costs that even the narrow statute should have allowed them
+to include such as fraud cost, such as network fees, such as
+fixed costs, the investment cost to keep the infrastructure
+safe, sound, and secure.
+ Mr. Canseco. Thank you, sir.
+ Mr. Prentzas?
+ Mr. Prentzas. I believe that the Federal Reserve is now
+doing a proper job. Like I said, there might be more that has
+to be done, but we are heading in the right direction.
+ The only comment I just want to make so maybe we could get
+a down-curve grasp on this problem coming from a small
+business. If you have 2 flower shops within a 50-mile radius,
+those 2 flower shops could basically set their own prices. But,
+now, if you allow four other flower shops to come into that
+area, there is going to be competition. Who benefits at the end
+of the day? The consumer.
+ This is what could happen here. If they allow the
+competition to exist, where not two banks decide what these
+interchange fees are, that, at the end of the day, it is the
+consumer and the retailer who will benefit, including the
+banks.
+ Mr. Canseco. Thank you, Mr. Prentzas.
+ Mr. Seltzer--because we are running out of time.
+ Mr. Seltzer. Sure. I think the Fed has, from our
+perspective, gone through a very thorough process. I know that
+we have spent considerable time answering their questions in
+the fall as did banks and other institutions. So from our
+perspective, they have done a very thorough job.
+ And there were things that--we think the actual cost of the
+transaction is a bit lower than where the Fed came out. So we
+think the rates could be lower, but at the end of the day, we
+will trust the process and, in any event, we think that the
+merchants and consumers in particular will benefit from their
+actions.
+ Mr. Canseco. And just a very short follow-up question, if I
+may, Madam Chairwoman?
+ If the Dodd-Frank bill was presumably inactive or cobbled
+together in order to try to and pull back our economy from the
+brink, were interchange fees a root cause of the financial
+crisis?
+ Mr. Floum. No. No, they weren't, Congressman. They had
+nothing to do with the financial crisis. And, in fact, they are
+an engine for growth.
+ Mr. Canseco. Yes. Dodd-Frank was supposed to be about
+protecting consumers. And the Durbin Amendment, unfortunately,
+will have the opposite effect by harming consumers. So it
+really was rushed and has no place as a part of a consumer
+protection bill.
+ Mr. Kantor. And we would not surprisingly perhaps disagree.
+The interchange fees in fact said some--lacks the underwriting
+standards on credit cards system that will in fact be a
+terrible problem.
+ Mr. Canseco. Thank you, gentlemen, very much.
+ Chairwoman Capito. Thank you.
+ Mr. Watt?
+ Mr. Watt. Thank you, Madam Chairwoman.
+ And I am going to confess to being old school. I don't use
+debit cards. Just a fact of life--I am behind the times.
+ I want to ask a couple of questions here about--Mr.
+Michael, let me start with you because I met with local credit
+union people last week. I think only two, Credit Unions
+National--exempt. Is that correct?
+ Mr. Michael. Yes, that is correct.
+ Mr. Watt. Okay, but the argument was that, ultimately, even
+being non-exempt was not necessarily a good thing because the
+fees get set so low for the exempt institutions, for the ones
+who are covered, then the folks will flock to them because of
+those lower fees. And so they seem to be now rethinking the
+proposition and thinking that they may be ought to have been
+covered.
+ What is your--this is not a trick question. I am just
+trying to find out.
+ Mr. Michael. Yes. Basically, the intent of Congress--and we
+thank you for trying to keep us out of this battle to begin
+with--was to keep small institutions out of this interchange.
+ Mr. Watt. I understand that.
+ Mr. Michael. But the reality is because of the routing
+provisions that are in there and market forces, it will drive
+costs down to the lowest common denominator--
+ Mr. Watt. Okay.
+ Mr. Michael. --and yank them up on the other side. So I am
+going to see what I received on interchange income drop to what
+the largest institutions have.
+ Mr. Watt. Okay. I want to go to Mr. Floum because I
+couldn't figure out why Visa is here. Visa doesn't issue debit
+cards. And so I have to stay--you have the network, I
+understand, or one of the networks. Is that your Visa's
+involvement in this debate?
+ Mr. Floum. Yes, Congressman. We are the technology
+platforms, so we operate the network that makes the banks able
+to talk to one another.
+ Mr. Watt. Okay. And how many competitors are there in that
+space?
+ Mr. Floum. There are many competitors in that space.
+ Mr. Watt. Okay. And how do you get paid for providing that
+service to banks and whomever uses it?
+ Mr. Floum. We charge fees to the issuing banks and to the
+merchant banks. We do not charge fees to merchants or
+cardholders.
+ Mr. Watt. So your network is a convenience to them also, is
+it not? It is a convenience to the banks, but it is not a
+convenience to the cardholders--
+ Mr. Floum. Yes, it is.
+ Mr. Watt. --and to the merchants?
+ Mr. Floum. It is, sir. The merchants and the cardholders
+are end users of the platform that we provide. And this is an
+important point. I have heard a lot about the uniform
+interchange fee being--
+ Mr. Watt. I don't mean to disturb you. I am just trying
+to--in short, I am trying to understand how this works. As you
+provide a network, what part of this fee are you getting for
+providing the network as opposed to the financial institution
+that ultimately has the account and the debit is being debited
+against? What part of it goes to them?
+ Mr. Floum. Of the interchange fee, which is the subject of
+the Durbin Amendment, the networks get nothing, no part of it.
+Separately, we do charge a fraction of a percent fee to the
+issuing bank and the acquiring bank. That is how we make our
+revenue.
+ But, obviously, we are very interested in the health of the
+debit card program because we are in the business of
+facilitating that program.
+ Mr. Watt. And if somebody defrauds the system, is it the
+network that is defrauded or is it the financial institution
+that is defrauded? If somebody hacks into the system--
+ Mr. Floum. Let me give you some examples.
+ Mr. Watt. No. No, I am just trying to find out, who loses?
+ Mr. Floum. The issuers lose. They would bear the financial
+responsibility, unfortunately. The breaches have occurred at
+merchants--T.J. Maxx, Hannaford, and others who have stored
+data in ways that could have been more secure. So there is
+fraud directed at Visa, but it has never penetrated our
+network.
+ The problem has been with third parties, but the issuers
+bear the responsibility. And that is part of--
+ Mr. Floum. They are compensated by interchange.
+ Mr. Watt. Okay. So that is the fraud costs that the Fed
+should be taking into account, is that what you are saying?
+ Mr. Floum. Correct. Fraud losses and fraud prevention
+costs.
+ Mr. Watt. Even though it didn't go to your network? It goes
+to them?
+ Mr. Floum. Yes. And the interchange fee we are talking
+about is a revenue to issuers, correct?
+ Mr. Watt. Thank you.
+ Mr. Floum. Thank you.
+ Chairwoman Capito. Thank you.
+ Mr. Luetkemeyer?
+ Mr. Luetkemeyer. Thank you, Madam Chairwoman.
+ Mr. Kemper, I know a while ago Mr. Kantor made statements
+to the effect that there is no correlation between bank fees
+and interchange fees. Would you like to jump in on that
+discussion to represent the banks, on how you structure your
+fees and how you charge interchange fees?
+ Mr. Kemper. We look at our payment system and our payment
+account as one account that we priced. And there are a lot of
+different components in that. People write checks. People use
+credit cards. People use their debit cards. And so we take all
+of those into account and we look at what--just like any
+business would look at--we would look at what our revenue is
+and what our cost is and we will price that accordingly.
+ The system has worked brilliantly. And I think that is
+what--everybody has benefited from this. When you go to a fast
+food place now, they take debit cards, they take credit cards.
+That wasn't true 5 years ago. When you were on an airplane,
+they wouldn't accept credit and debit cards. The merchants want
+to take it, the airlines want to take it because they don't
+want to handle checks and they don't want to handle cash. We
+see that.
+ So we like--the idea that you can strip out this marginal
+cost on one component of payment systems to me just doesn't
+make any sense because it is all wrapped together. We have to
+support all of the--we have to support our call center. We have
+to work with Visa. We have to support security. All of those
+things flow together for our payment accounts. So we factor all
+of that together in trying to carve out one area and price it
+at marginal cost. It is just not the way business is done in
+this country.
+ Mr. Luetkemeyer. If this price structure goes forward, what
+are you going to do? What are you going to reprice? How are you
+going to reprice your products or all of your products or just
+the debit cards to make up for lost income, to continue to
+provide the service? Are you going to continue to provide the
+service?
+ Mr. Kemper. It is a very competitive world out there. And
+there is PayPal, there are all kinds of non-bank kinds of
+accounts. So the market will dictate how we can price up. But
+there are 7500 banks in this country and they compete very
+vigorously. So, sure, if we are going to lose tens of millions
+of dollars of revenue and we are going to start losing as I
+mentioned on every checking as a whole, we will price that up.
+So costs go up to consumers.
+ But the debit card now is paid for by users. And, in fact,
+as you use it, it is a user fee as opposed to spreading it out.
+I think it is a very fair way to do it. But I guess the bottom
+line answer is fees will go up significantly to consumers to--
+the market will allow us. That is the way a free market system
+works.
+ Mr. Luetkemeyer. Mr. Michael, you indicated that all of
+your members are consumers?
+ Mr. Michael. That is correct.
+ Mr. Luetkemeyer. And, therefore, this is going to be a
+direct charge back to them. Have you looked at your model yet
+to see what is--how much it is going to cost? Or how you are
+going to approach this? Are you going to continue to provide
+debit card service? Are you going to pull it out of the system
+of services you provider? How are you going to approach this?
+ Mr. Michael. First off, I need to, again, let you know that
+we don't cover our cost with interchange. I have to charge--
+currently $0.25 in these transactions to help cover the cost of
+processes and transactions, and I still lose money.
+ Going forward, the issue is going to be I will have to
+either adjust that price or find other locations and my
+financial institution to do that. But I have a narrow range of
+products, and larger financial institutions could take that
+cost and past it off to another area. I can only basically add
+it back into my deposit products such as my checking accounts
+either through fees or through incremental fees on the debit
+card transactions or checking account fees. Other institutions
+will be able to go other directions with it.
+ Ultimately, in the end, if my fees get to be too high, I
+will not be competitive in the marketplace and I will lose
+members who will go to other financial institutions because
+they will be able to get those products cheaper.
+ Mr. Luetkemeyer. Okay. A while ago, Mr. Floum, you
+indicated that you had some data with regards to the cost per
+transaction of cash, credit cards, and debit cards. Off the top
+of your head, do you have the information just roughly which
+one of those cost would be what your research shows?
+ Mr. Floum. I would be happy to provide that. I believe that
+one bank executive has said that cost of cash ranges 79, 80
+basis points. The cost of verified checks is 1.35 basis points.
+But we can get you that information. And that doesn't include
+fully-loaded cost, as Mr. Kemper said. If you look at the--cost
+to all participants, cash and checks have even higher cost.
+ Mr. Seltzer. And I could tell you for 7-Eleven, the cash
+costs are about 20 or 25 basis points. So the debit is on the
+order of 8 times more expensive for us than accepting cash,
+including the bank service charge that we incur on depositing
+cash--
+ Mr. Luetkemeyer. What is your--on checks, etc.? What is
+your cost on checks?
+ Mr. Seltzer. I don't know that one--
+ Mr. Luetkemeyer. And, now, and when--those checks, I am not
+talking about the cost just to handle checks. I am talking
+about the losses you incur on taking bad checks as well.
+ Mr. Seltzer. Less than 1 percent.
+ Mr. Luetkemeyer. One percent of the cost of the
+transaction?
+ Mr. Seltzer. Of the transaction as compared to 2 percent
+plus on a debit transaction.
+ Mr. Luetkemeyer. Okay, very good.
+ Thank you, Madam Chairwoman.
+ Chairwoman Capito. Thank you.
+ Mr. Clay?
+ Mr. Clay. Thank you, Madam Chairwoman. Let me thank you and
+the ranking member for allowing me to sit in on this hearing
+today. I find it quite interesting.
+ And I also want to take this opportunity to welcome my
+constituent, Mr. David Kemper, here who is a pillar of our
+community. He has been in business for a long time. And in the
+interest of full disclosure, I am a customer of the bank.
+ Let me also say that there are other benefits to debit
+cards. In my case, I have a 16-year-old daughter, and I utilize
+the card to teach her the principles of banking. It is very
+important for young people, especially those who think money
+grows on trees. So it helps me with that.
+ And all of you appear to be a reasonable business group. I
+know that this is driven by profit margins. But starting on
+this end of the table, have you all--have the opposing sides
+attempted to sit down outside of the Federal Reserve to try to
+resolve this issue, and then be able to come forward with a
+reasonable solution to offer up to the Federal Reserve? Has
+anyone? I will start with you, Mr. Prentzas. Go ahead.
+ Mr. Prentzas. Okay. Thank you for the question. On my
+level, at the small business level, no, the only thing I could
+tell you is when I did call my local bank that handles my
+accounts, they basically told me that they don't control the
+interchange fees. They really can't do anything about that.
+ Mr. Clay. Mr. Michael?
+ Mr. Michael. I am certain that there are conversations that
+have occurred. But I have to be honest with you; I wouldn't
+have been privy to those. I am just too small to be included.
+ Mr. Clay. Mr. Kemper?
+ Mr. Kemper. I think you want to have the market determine
+the price. I think we would all agree on that. I think we would
+debate about whether or not there is enough competition, but I
+just go back to--I have a lot of merchants who are very good
+customers. Everybody has benefited from the program and we have
+a real danger here if we don't do something, that the train is
+going to go off the track here.
+ So I would just urge Congress to step back and really
+examine a lot of the issues that have been brought up today.
+ Mr. Clay. Mr. Kantor, would you be willing to go outside of
+the Federal Reserve and be able to offer up a solution that
+both sides could agree to?
+ Mr. Kantor. We have many merchants in our coalition who
+have tried to do that and then rejected both on fees on
+different legislative and policy proposals in the past and
+unfortunately, we have been rebuffed in any case. We are always
+open to talking about good policy proposals here because we see
+this as a broken market demonstrably so, that needs fixing and
+the debit card piece is just the first step. Credit card fees
+are even higher and much needs to be done there as well. We are
+quite open to those conversations at any time.
+ Mr. Clay. Mr. Floum, any position on--
+ Mr. Floum. Actually, we are very happy to negotiate. In
+fact, we have negotiated customized agreements with thousands
+of merchants. We tried with 7-Eleven. We were unable to get to
+an agreement, but that is the way it ought to work, though
+negotiation, through free market rather than through government
+intervention and price controls.
+ Mr. Clay. Thank you for your response.
+ Mr. Seltzer?
+ Mr. Seltzer. Sure. We have great relationships with a lot
+of banks that we do business with in many other areas of our
+business. We have gone to all the major banks before that we do
+business with and we have asked them, can we have the
+discussion with them regarding interchange.
+ The banks that are the beneficiaries, the direct
+beneficiaries of interchange, say they can't talk to us about
+it, that all of that goes through Visa and MasterCard. So the
+banks won't have the dialogue about it. With Visa and
+MasterCard, our experience has been that we have not been able
+to have a meaningful, constructive dialogue with them regarding
+these fees.
+ Mr. Clay. We know that fee increases will be passed on to
+consumers ultimately. Mr. Michael and Mr. Kemper, what do you
+estimate will happen to your customers as far those who still
+want to use debit cards?
+ Mr. Kemper. Estimates and a number of people have said this
+is that perhaps 5 percent of banking customers will fall out of
+the system as banks raise prices. I don't know. It probably
+won't be that magnitude to us--it would be tens of thousands
+because we have 700,000 checking accounts.
+ And the cost of going outside the banking system, there is
+an article I will send you that was done by Candice Troy who is
+an A.P. personal financial writer and she said, ``What would it
+cost me if I couldn't work with the banks?'' So she wrote this
+article last October and she did it for a month and it cost her
+$93, primarily cashing checks, getting prepaid debit cards
+which they charge per item $1. And $93, that is $1,100 a year--
+$1,100 and we figure that our cost, we are making about $260,
+so it is a real danger when people go outside the banking
+systems.
+ Mr. Clay. Thank you all so much. I yield back.
+ Chairwoman Capito. Thank you.
+ Mr. Hensarling?
+ Mr. Hensarling. Thank you, Madam Chairwoman.
+ To the panel, I heard your testimony. I had to step out for
+much of the Q&A, so I may be plowing some old ground here. I
+apologize about that.
+ Like many other members, I have heard from a number of
+financial institutions in my State and in my district,
+particularly dealing with the small financial institution
+exclusion. I have heard from the First Financial Bank in
+Hartford, Texas, and they tell me economic forces are going to
+force their institution to adapt the same price level as the
+large institutions.
+ And since the proposal doesn't permit their bank to cover
+the cost of providing debit card transactions, they will be
+forced to implement new service charges and other fees on
+checking accounts.
+ I hear from First State Bank of Athens, Texas, who say that
+if the formula applied to their bank caused the result in
+revenues, it would not even cover switch and transaction cost,
+much less cost to issue the cards, administer them, and cover
+fraud losses.
+ I heard from Austin Bank, also in my district, ``We expect
+a 70 percent reduction in our interchange fees which will
+reduce our income by 14.74 percent. If net income is reduced,
+so is our capital growth. That leads to less lending by
+banks.''
+ So, Mr. Kemper, you are representing a number of the banks
+here today. Why aren't these small financial institutions
+convinced that they are going to be protected? And they
+certainly don't seem to believe the consumer is going to be
+protected.
+ Mr. Kemper. As I mentioned in my opening remarks, and I
+think Mr. Michael has mentioned it too, that whenever you have
+a low-cost alternative, they are going to take market share. I
+think that is why the small banks don't think exemption will
+work their way.
+ Chairman Bernanke commented on that this morning. I think
+that this will hasten the consolidation in the industry and of
+the community banks that are most at risk. And we see this all
+the time. I said, we are a Main Street bank. We have banks in
+Poplar Buff, Missouri; Hannibal, Missouri--Illinois. And our
+profitability relates directly to how big the community is. The
+smaller the community, the less profitable it is. It is a
+simpler kind of model, the community bank model. They are much
+more dependent on this kind of payment stream. So they are
+going to suffer proportionally more because they are not in
+other businesses.
+ Mr. Hensarling. Mr. Seltzer, in your testimony, you said
+there was a ``lack of a properly functioning market
+mechanism'', speaking of the payment card network. Do you view
+there to be a legal barrier to entry in the payment card
+network market?
+ Mr. Seltzer. By that, I meant that--we have never seen
+another product like this.
+ Mr. Hensarling. But, no, I am just asking the question.
+Does your firm believe there is a legal barrier to entry into
+this market? Yes, no, maybe?
+ Mr. Seltzer. No. There is a practical barrier.
+ Mr. Hensarling. Okay, a practical barrier. Do you view it
+as a natural monopoly? Do you have an opinion on the matter?
+ Mr. Seltzer. No.
+ Mr. Hensarling. We now have a rule, okay, so if we don't
+necessarily have a natural monopoly, if we don't have legal
+barriers to entry, I am not totally unsympathetic here. I take
+you at your word as your testimony. This is very high cost for
+you. I understand that, but I happen to patronize one of your
+establishments in Lakewood, Texas. I have two small children.
+They are thirsty. They drink a lot of milk.
+ So my first question is, we hear to some extent about the
+benefits that can be derived here. If Congress does not act to
+delay this for further study, when the Federal Reserve rule is
+implemented, if I go to the 7-Eleven in Lakewood, Texas, in the
+Lakewood neighborhood of Dallas, Texas, can I expect a gallon
+of milk to drop in price? Can I expect a gallon of gas to drop
+in price? Is the DVD from the Redbox machine you have in front
+of your store going to drop in price?
+ Mr. Seltzer. I think when this goes forward, you are going
+to see competition in every retail merchant. We compete every
+day on gas prices. You mentioned gas prices. So my competitor
+across the street--
+ Mr. Hensarling. So maybe, maybe not.
+ Mr. Seltzer. I either have to drop the price--
+ Mr. Hensarling. I expect you don't know the answer to the
+question, but I want to make a point here. The question is, do
+you know what the incremental cost is of producing a Slurpee?
+ Mr. Seltzer. Yes.
+ Mr. Hensarling. What is it?
+ Mr. Seltzer. I don't know specifically--
+ Mr. Hensarling. I just wonder how 7-Eleven would feel if
+the Federal Reserve came in with a rule that said you can only
+recover the incremental cost of selling a Slurpee. My guess is,
+the ice and the fruit flavor don't cost a whole lot, but you
+have a lot of fixed cost. My time has expired, but I think you
+get the point.
+ Thank you, Madam Chairwoman.
+ Chairwoman Capito. Mr. Welch?
+ Mr. Welch. Thank you very much.
+ It has been informative for me to listen to everybody
+because I go back to the basic proposition that the debit cards
+and the credit cards are really essential for commerce. They
+are incredibly important to the merchants. They are incredibly
+important for the customers. I have a Rewards Card and I am
+very happy that the cost of my trip to Disneyworld is paid for
+by the merchants of America because that does get passed on to
+them.
+ But here is the question, there are impacts of this
+legislation. Cost will be shifted. But what might be good, it
+is good if we have banks making solid returns so that they can
+do the work that they do that is so important in our
+communities. But it is not great if you have this
+uncontrollable expense and you are a merchant. You have a
+floral shop. You have a 7-Eleven.
+ And the question really is about what is fair and how do we
+get fair pricing in this? Let me ask you, Mr. Kemper. Your bank
+does have a tremendous reputation. You have done a lot of great
+work in the community and you have a Congressman for a customer
+who is not complaining. But if the Fed did take the time you
+think they need to take, and they included what you fairly
+thought was a fair consideration of the cost, would you accept
+their authority to then make this recommendation as to what was
+reasonable and proportionate?
+ Mr. Kemper. I wish I had Ayn Rand up here. But I would say
+that the idea of government fixing prices is not the way the
+system works.
+ Mr. Welch. Right. So, no, I can understand it. Mr.
+Hensarling made that point, in fact, I think, quite
+effectively. But so, what I am trying to find out is whether
+this call for delay is really just another polite way of saying
+you just don't want it done.
+ Mr. Kemper. No. I don't think it is good public policy.
+ Mr. Welch. Right.
+ Mr. Kemper. But having said that, I think the box that the
+last Congress put the Fed in is a very tight, little box and I
+think the Fed made it even smaller.
+ Mr. Welch. Right.
+ Mr. Kemper. And I think that the idea--if you are really
+going to price based on marginal cost which you shouldn't, you
+have to look at all the costs.
+ Mr. Welch. No. I am sorry. I hear you on that.
+ Mr. Kemper. Okay.
+ Mr. Welch. And whether it is a Slurpee or a debit charge,
+you are going to be concerned about it. But the dispute that we
+have here is whether there really is the market setting the
+price on the debit and on the credit card transactions. That is
+really the question.
+ If Mr. Prentzas wanted to get a better deal on his Visa
+charges, Mr. Floum, could he call you up and do it? He is right
+here.
+ Mr. Floum. Yes. In fact, the last hearing when that Rotten
+Robbie was here from the gas stations, I told him that we would
+be happy to negotiate with any merchant.
+ Mr. Welch. Okay. I have talked to literally hundreds of
+merchants in Vermont and they tell me that is not the case. Mr.
+Prentzas, tell me. He is offering a good deal here.
+ Mr. Floum. I am happy to give you my card and I would
+invite you to call me after the hearing.
+ Mr. Welch. Let's get real here. That sounds good, to
+maybe--with Wal-Mart, but Mr. Prentzas, have you had any
+success trying to get--
+ Mr. Prentzas. I shop around to get the best rates out
+there. And basically, every time I turn to a bank, they just--
+the bank tells me that interchange fees are set. They have no
+control over them. It is something that Visa and MasterCard
+control.
+ Mr. Kantor. If I could--
+ Mr. Welch. Mr. Kantor?
+ Mr. Kantor. Congressman, thank you, and thank you for your
+tireless work on this issue over time. That has been tremendous
+in terms of advocacy for small businesses. What we have heard
+from businesses all across the country is in fact that the
+answer is ``no.'' They can't negotiate with the banks because
+the banks all charge the same thing and won't depart from that.
+And, no, they can't negotiate with the card networks either.
+ And, in fact, Mr. Floum made his offer to Tom Robinson when
+he was here a few years ago. Tom Robinson followed up on that
+and he was presented with a gag order that he had to sign which
+would have prevented him from talking to Members of Congress
+about this issue in the future if--as a first step before he
+could ever negotiate.
+ A similar thing happened before when Senator Arlen
+Specter's office had this conversation and folks from
+MasterCard made a similar offer to folks from Giant Eagle. And
+Giant Eagle--
+ Mr. Welch. I get the point.
+ Mr. Kantor. I answered them with ``no.''
+ Mr. Welch. If you could sit down and work something out,
+that would be great. There is a lot at stake for American
+businesses despite of--I have had great relations with my
+credit unions, but we don't see to eye-to-eye on this one.
+ And I would say this to the community bankers, if you guys
+were in charge, we never would have had the Wall Street
+meltdown.
+ Mr. Michael. Can I make a quick comment here on this?
+ Mr. Welch. Sure.
+ Mr. Michael. I think that this law is bad public policy,
+and I think the rules are bad public policy. And, the rules are
+going to go in effect unless you as Congress go stand up and
+say, ``We need to intervene and stop this for the time being.
+We need to delay. We need to go back and take a look at this
+rule.''
+ Mr. Welch. But I will ask the same question I asked Mr.
+Kemper.
+ Thank you.
+ Chairwoman Capito. Mr. Duffy?
+ Mr. Duffy. Thank you, Madam Chairwoman.
+ I appreciate you all coming in and testifying and sitting
+so nicely together.
+ I understand the concerns. I have heard from--as every
+district--we have a lot of merchants in my district and my
+community and I understand the problem that they convey to me
+that they face with the interchange fees. But I do have this
+overwhelming concern about the government stepping in and
+fixing prices.
+ And, I guess, Mr. Floum, to you, with regard to Visa, was
+this debit card philosophy developed by Visa?
+ Mr. Floum. We had a great hand in pioneering the debit
+category and growing that category including the technology
+platforms needed to deliver instantaneous guaranteed
+transactions.
+ Mr. Duffy. And what did it cost Visa, $100,000, $200,00?
+ Mr. Floum. Congressman, over the years, billions and
+billions and if you include the--tens of billions.
+ Mr. Duffy. Okay, fair enough.
+ Are you familiar with Mr. Kantor's organization?
+ Mr. Floum. Yes, very well.
+ Mr. Duffy. Okay, part of a lawsuit, challenging--
+ Mr. Floum. Sure.
+ Mr. Duffy. Okay. And were his clients investors in those
+billions of dollars that Visa spent to develop this technology?
+ Mr. Floum. No, they were not.
+ Mr. Duffy. So you took the risk. You innovated the product.
+And now, Mr. Kantor's clients enjoy that product. Is that
+right?
+ Mr. Floum. Yes, sir.
+ Mr. Duffy. And is it fair to say by way of Visa that sales
+have gone up for merchants who use this Visa product?
+ Mr. Floum. Without a doubt.
+ Mr. Duffy. So they sell more, is that right?
+ Mr. Floum. Yes, sir.
+ Mr. Duffy. Which would mean they would probably make more
+money.
+ Mr. Floum. They make more money out of it.
+ Mr. Duffy. Okay. Mr. Kantor, you and your folks say there
+is not enough competition in this market. Is that right?
+ Mr. Kantor. That is correct. There is price fixing now.
+ Mr. Duffy. But is it fair to say that your clients can use
+cash?
+ Mr. Kantor. Can they use cash? Sure.
+ Mr. Duffy. Yes. And they can use checks as well, right?
+ Mr. Kantor. Sure.
+ Mr. Duffy. So there are three methods of payment that your
+clients can choose to use if they so wish, right?
+ Mr. Kantor. There are many methods of payment, yes. The
+problem is--
+ Mr. Duffy. --these are the Visa products, yes?
+ Mr. Kantor. Visa is one product, they have credit and
+debit, but there is no competition among different cards and--
+ Mr. Duffy. But there is competition with the payment
+method, right? You can accept checks, you can accept cash, or
+you can accept Visa.
+ Mr. Kantor. Right. Thankfully, that was part of the Durbin
+Amendment that we could discount based on those differential
+prices.
+ Mr. Duffy. And so, we are talking about, what is the
+appropriate charge here, right? Why don't your clients just
+pass that cost onto the consumers? We will give you a 1.5--we
+will give you a 2 percent discount if you use cash or check.
+ Mr. Kantor. There are two things. One, consumers are paying
+these fees right now in the form of higher prices.
+ Mr. Duffy. But they don't see them, right?
+ Mr. Kantor. They don't see them, which is--
+ Mr. Duffy. So why don't you let them see the fees, pass it
+on to them?
+ Mr. Kantor. We have started doing that. Since the Durbin
+Amendment passed, there has been actually a large uptick in
+cash discount, particularly, at gasoline stations and some
+restaurants.
+ Mr. Duffy. And then--
+ Mr. Kantor. Visa has been quite aggressive about pushing
+them not to do that--
+ Mr. Duffy. But what exactly is the answer to say, ``Listen.
+Let's expose these fees and let the consumer decide whether
+they want to use a credit card, check or cash.''
+ Mr. Kantor. It would not though engender competition among
+different kinds of cards--Visa versus MasterCard versus--
+ Mr. Duffy. But why is that your concern? You have
+competition of payment.
+ Mr. Kantor. Because if they don't compete with each other,
+their only incentive is to keep driving fees up as it has been.
+ Mr. Duffy. But at what point do we say, this is the
+appropriate role of government. I traveled in a campaign for a
+very long time, and I like the example of Slurpees, but--and I
+am a big fan of McDonald's. I ate a lot of it. But, I get a
+super-sized Coke and what is the cost of a Coke? The water and
+the sugar and the ice in the cup, $0.20? And they charge $1.50
+or $1.80.
+ We should get involved and regulate the price of McDonald's
+Coke. Is that how far we are going to go?
+ Mr. Kantor. If McDonald has fixed their prices with their
+competitors, the government not only should, but would get in
+trouble.
+ Mr. Duffy. I go to Burger King and I go to Taco Bell and
+they are all the same price.
+ Mr. Kantor. They are competing. They are competing that
+price down.
+ Mr. Duffy. I don't know.
+ Mr. Kantor. We fixed this. Trust me. Their profit margins
+wouldn't be 1 percent to 3 percent. They are very well.
+ Mr. Duffy. But it is fair to say, if we look behind the
+curtain, there are other expenses and costs that feed into the
+$1.50 or $1.80 supersized Coke that I get.
+ With that, Mr. Kantor, do you think that the Fed has
+analyzed all the costs that go into the fees that the banks
+charge or interchange fees that are charged?
+ Mr. Kantor. I think they actually have not because there
+are a lot of other costs ranging all the way from marginal to
+semi-fixed that are part of that product.
+ Mr. Duffy. And thank you--one other question. Quickly, Mr.
+Seltzer. You indicated that with the check guarantee service--
+okay, that--what do you guys pay on average for a transaction
+to your Visa, $0.44, $0.50?
+ Mr. Seltzer. The average debit transaction is about $0.29--
+ Mr. Duffy. $0.29. And you testified earlier that if you
+have a check guarantee, you pay about half of that. Is that
+right?
+ Mr. Seltzer. Sure.
+ Mr. Duffy. So you pay about 14.50 cents if you are going to
+get a guarantee for a check.
+ Mr. Seltzer. Something on that order.
+ Mr. Duffy. And right now, the maximum you are going to pay
+with Visa with this new rule is $0.12. Is that right?
+ I yield back.
+ Chairwoman Capito. Thank you for making all of us hungry--
+ Mr. Duffy. Congressman?
+ Chairwoman Capito. And I would like to go to Mr. Prentzas
+because he is one of the weigh in on this and he is our bona
+fide merchant on the panel. So if you could, in 30 seconds,
+respond to Mr. Duffy.
+ Mr. Prentzas. Yes. Mr. Congressman, you made a comment that
+let's leave it to the consumer to decide their form of payment.
+I understand that my type of business, for example, is
+basically by phone orders and also by the Internet. There is no
+way I could accept the check or cash. My business depends on
+somebody using that credit card and debit card.
+ On the other hand, you tell me it is not the place of the
+government, the Federal Reserve--the government to oversee that
+this is a billion dollar industry. It affects every single one
+in this country. And when it doesn't affect everybody and thus
+cause a billion dollar industry, I believe that the government
+should be able to oversee what is going on. It has been done in
+the past and it should be done today.
+ Chairwoman Capito. Thank you.
+ Mr. McHenry?
+ Mr. McHenry. Thank you, Madam Chairwoman, and thank you for
+your leadership on this subcommittee and congratulations on
+your subcommittee chairmanship.
+ Most of the great questions have been already asked. And it
+is tough for me to follow Sean Duffy on anything.
+ Do you want my time, Sean?
+ But in all seriousness, this is a major issue, and Congress
+was legislating when a lawsuit was ongoing and some of us had
+some questions about that. But price fixing, this was--Mr.
+Kantor, to your question here--to your comment, rather.
+ What Sean was saying in terms of $0.99 Cokes at all the
+fast food restaurants, you could call that price fixing, that
+is to be litigated by the courts. So in terms of representing
+your coalition, do you conceptually think that the government
+setting prices is the right path?
+ Mr. Kantor. What the government should do is get rid of
+price fixing here and get rid of these fees and that is what
+this amendment says exactly, if I may--
+ Mr. McHenry. Reclaiming my time, so in order to eliminate
+price fixing, we need to have a regulator set the price. Yes or
+no?
+ Mr. Kantor. Here, we need to have the regulator do
+something. And we thought they should say no more price fixing
+zero fees. Set them on your own. They have instead been more
+generous to the banks and said, ``Oh, charge more than that.''
+Okay.
+ Mr. McHenry. We just had testimony from Mr. Seltzer that it
+costs, in essence, $0.14 for a check and $0.12 for the Fed's
+regulation for debit. Is that a fair assessment, Mr. Kantor?
+ Mr. Kantor. It is. Unfortunately, that price difference
+doesn't make up for the fact that Dave Seltzer, Gus Prentzas
+and merchants like them get charged back for fraud transactions
+and don't get a payment guarantee. He has bought one on the
+checks and paid extra for that, debit cards don't give--
+ Mr. McHenry. Okay.
+ Mr. Kantor. The Fed found that in our numbers--
+ Mr. McHenry. Let's continue on this question here. And I
+have had merchants tell me prior to this debate going back a
+number of years that the cost of cash is a burden on small
+businesses. If you are--especially 7-Eleven or during a lot of
+transactions and so sticky fingers, taking money out of the
+till is--and loss prevention is a cost and so there is a cash
+cost.
+ And so I just want to better understand that cash cost.
+This is a complicated issue, but it is hard to get an accurate
+comparison. Mr. Seltzer, can you discuss that cash cost?
+ Mr. Seltzer. Sure. We calculated this, within the last year
+or so. And as we calculate the cost of cash, we include all of
+the bank service charges we incur for depositing that cash and
+currency.
+ Mr. McHenry. What about losses?
+ Mr. Seltzer. We include losses.
+ Mr. McHenry. --okay. Yes.
+ Mr. Seltzer. And labor and everything else that goes into
+it. And so at the end of the day, we see our cost of cash being
+somewhere in the 0.2 percent to 0.25 percent range as we looked
+at it.
+ Mr. McHenry. Okay--everything. Okay.
+ Mr. Seltzer. That is probably an eighth of what we see for
+debit cards.
+ Mr. McHenry. So as a merchant, you don't like the deal you
+are getting with debit, with credit. Okay. Why not simply say
+no to credit and debit?
+ Mr. Seltzer. We are happy to pay a competitive fee for
+debit or credit. The challenge we see is that every time we had
+discussions with any of the networks, the answer we get back--
+ Mr. McHenry. No. No.
+ Mr. Seltzer. --change rate because we have to compete with
+the other network.
+ Mr. McHenry. I know. I understand. But, why not simply say
+no?
+ Mr. Seltzer. We would be out of business.
+ Mr. McHenry. You would be out of business. So there is--the
+current value that they are producing for your business, debit
+and credit is providing some value for you and your business.
+ Mr. Seltzer. That is right and if there were a competitive
+market for this--
+ Mr. McHenry. Okay.
+ Mr. Seltzer. --and prices were set accordingly with--
+ Mr. McHenry. True. Okay. Mr. Kantor, are you going to
+answer?
+ Mr. Kantor. I am very eager. There is a benefit. There are
+also benefits to the banks because they save on the check
+processing. What the courts have found is that Visa and
+MasterCard have market power. And they found that there is not
+an ability for merchants to say no, because of that market
+power.
+ Mr. McHenry. Okay. Then, why not come to Congress and look
+for a legislative fix in order to reduce that market power? It
+is an untoward market power. Why not get a remedy in courts? It
+appears that you just didn't like the remedy the courts were
+offering. And the simple way to do this is to simply have a
+regulator fix the price.
+ Mr. Floum--yes, my time is wrapping up, so I mean--
+ Mr. Floum. Yes. They have gone to the courts time and again
+with this argument that a uniform interchange is price fixing
+and every time the court has said no, you need to have
+interchange, a uniform rate. That is what keeps the small
+merchants, the small banks and low-income individuals in the
+system.
+ If the banks set the rates themselves, then, sure, some
+banks and some merchants would do fine, but the little guy
+would drop out of the system. So let's not confuse the benefits
+of a uniform interchange rate which the courts have found every
+single time to be lawful with the kind of price fixing that the
+government would impose under the Durbin Amendment.
+ Chairwoman Capito. I want to thank everybody on the panel
+and the visitors for their attention. I think you raised some
+interesting points. And I will go back to my original
+statement, a lot of questions at the same time.
+ So I will dismiss this panel and again, thank you, and I
+apologize for the late start. The Chair notes that some members
+may have additional questions for this panel which they may
+wish to submit in writing. Without objection, the hearing
+record will remain open for 30 days for members to submit
+written questions to these witnesses and to place their
+responses in the record. This hearing is adjourned.
+ [Whereupon, at 3:40 p.m., the hearing was adjourned.]
+
+
+
+
+ A P P E N D I X
+
+
+
+ February 17, 2011
+
+
+
+
+
+