[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
H.R. 2382, THE CREDIT CARD INTERCHANGE
FEES ACT OF 2009; AND H.R. 3639, THE
EXPEDITED CARD REFORM FOR
CONSUMERS ACT OF 2009
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
OCTOBER 8, 2009
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-86
U.S. GOVERNMENT PRINTING OFFICE
55-812 WASHINGTON : 2010
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
October 8, 2009.............................................. 1
Appendix:
October 8, 2009.............................................. 53
WITNESSES
Thursday, October 8, 2009
Bourke, Nick, Manager, Safe Credit Cards Project, The Pew
Charitable Trusts.............................................. 46
Caverly, Mark, Executive Vice President, Local Government Federal
Credit Union, on behalf of the Credit Union National
Association (CUNA) and the Electronic Payments Coalition (EPC). 13
Clayton, Kenneth J., Senior Vice President and General Counsel,
ABA Card Policy Council, American Bankers Association (ABA).... 41
Demangone, Anthony, Director of Regulatory Compliance/Senior
Compliance Counsel, the National Association of Federal Credit
Unions (NAFCU)................................................. 44
Duncan, Mallory, Senior Vice President and General Counsel,
National Retail Federation, on behalf of the Merchants Payments
Coalition...................................................... 18
Duplessis, Hon. Ann D., Senior Vice President, Liberty Bank and
Trust, New Orleans, Louisiana; State Senator, District 2,
Louisiana State Senate, on behalf of the Independent Community
Bankers of America (ICBA)...................................... 16
Evans, David S., Lecturer, University of Chicago Law School...... 11
McCracken, Todd, President, National Small Business Association
(NSBA)......................................................... 42
Mierzwinski, Edmund, Consumer Program Director, U.S. PIRG........ 15
Miller, Kathy, Owner/Operator, The Elmore Store, Elmore, Vermont;
Board Member, Vermont Grocers' Association..................... 9
Shuster, Hon. Bill, a Representative in Congress from the State
of Pennsylvania................................................ 1
Susswein, Ruth, Deputy Director, National Priorities, Consumer
Action......................................................... 39
Welch, Hon. Peter, a Representative in Congress from the State of
Vermont........................................................ 3
APPENDIX
Prepared statements:
Waters, Hon. Maxine.......................................... 54
Schuster, Hon. Bill.......................................... 57
Welch, Hon. Peter............................................ 58
Bourke, Nick................................................. 59
Caverly, Mark................................................ 110
Clayton, Kenneth J........................................... 120
Demangone, Anthony........................................... 129
Duncan, Mallory.............................................. 144
Duplessis, Hon. Ann D........................................ 180
Evans, David S............................................... 191
McCracken, Todd.............................................. 194
Mierzwinski, Edmund.......................................... 200
Miller, Kathy................................................ 215
Susswein, Ruth............................................... 221
Additional Material Submitted for the Record
Gutierrez, Hon. Luis:
Written statement of the American Bankers Association (ABA).. 228
Written statement of Blackhawk Network....................... 240
Written statement of the Credit Union National Association
(CUNA)..................................................... 243
Written statement of the Electronic Transactions Association
(ETA)...................................................... 245
Written statement of the Independent Community Bankers of
America (ICBA)............................................. 251
Written statement of Congresswoman Betsy Markey.............. 254
Written statement of the National Association of Convenience
Stores and the Society of Independent Gasoline Marketers of
America.................................................... 255
Written statement of the National Black Chamber of Commerce.. 279
Hensarling, Hon. Jeb:
Written statement of the Financial Services Roundtable....... 280
H.R. 2382, THE CREDIT CARD INTERCHANGE
FEES ACT OF 2009; AND
H.R. 3639, THE EXPEDITED CARD REFORM
FOR CONSUMERS ACT OF 2009
----------
Thursday, October 8, 2009
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:03 a.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Waters, Gutierrez,
Velazquez, Watt, Sherman, Meeks, Moore of Kansas, Baca, Miller
of North Carolina, Scott, Green, Cleaver, Klein, Wilson,
Perlmutter, Carson, Speier, Minnick, Adler, Kosmas; Bachus,
Castle, Royce, Capito, Hensarling, Barrett, Marchant, Posey,
Jenkins, Lee, Paulsen, and Lance.
The Chairman. The hearing will come to order. Before we
make our opening statements, if there is no objection, we have
two colleagues here. We all know what the schedule is like, so
if there is no objection, I will go right to our two
colleagues. And after they made their statements, we will get
to our opening statements.
We have before us two pieces of legislation. One is a bill
to move up the effective date of the credit card bill that the
House passed. The other is a new subject for us dealing with
the question of interchange fees. The first of these is
somewhat familiar; the second is not.
We have before us two of our colleagues who are sponsors of
the interchange bill. We will later today hear from one of the
sponsors of the credit card bill.
But let me now go to the gentleman from Pennsylvania, Mr.
Shuster, I will go by seniority, and recognize him to talk
about his legislation.
STATEMENT OF THE HONORABLE BILL SHUSTER, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF PENNSYLVANIA
Mr. Shuster. Thank you, Mr. Chairman.
I appreciate the opportunity to be here today, and thank--
well, it is Ranking Member Bachus--but Ranking Member
Hensarling for having us here today, and the members of the
committee for allowing us to share some information on what I
believe is an important topic, an important issue, and that is
interchange fees in H.R. 2382.
I would also like to thank Congressman Welch for his
leadership on this issue and for working together with me on
H.R. 2382. I believe action is needed to help level the playing
field between consumers, small business, and credit card
companies by requiring greater transparency and prohibiting
unfair and abusive practices when it comes to interchange fees.
Last summer's dramatic rise in gas prices was a prime example
of the inflexibility of credit card companies towards merchants
and consumers over the interchange fee.
As most of us know, fuel prices doubled, and the
interchange fee basically doubled with the fuel prices while
the credit cards did nothing to add value but were able to
collect windfall profits because of that. Also, as fuel prices
rose above authorized transaction limits, major credit card
companies reserved the right to repay gasoline merchants a
lower price than was actually purchased, particularly on
smaller transactions. I joined with Congressman Welch to
introduce H.R. 2382 to curb this type of practice. This
legislation focuses heavily on transparency in the hopes of
determining whether credit card companies are pursuing
anticompetitive practices.
And again, it doesn't prohibit interchange fees. We just
want to have some transparency and fairness injected into the
process. It makes interchange fees subject to full disclosure
in terms and conditions set by credit card companies,
especially accessible by consumers. And we have here today,
this is the interchange fee agreement, 1,000 pages. I am
confident that few in this room could figure out what is going
on in the agreement here. And many small businesses have that
same problem in trying to understand what is happening in here.
This H.R. 2382 would also prohibit profits from interchange
fees being used to subsidize credit card rewards programs.
Small businesses and ultimately consumers should not be
financing the perks of luxury card holders.
To put the impact of interchange fees into perspective of a
business, I want you to consider a convenience store chain in
my district, Sheetz; it is a real-life example. The Sheetz
Corporation, which has 363 stores in six States, as I said, is
headquartered in my district. Last year, Sheetz paid twice as
much in interchange fees as they took in, in net income after
taxes. Their second largest expense after payroll is the
interchange fee, which is incredible to me. This means that,
for Sheetz, the interchange fee eclipses the company's cost of
rent for 363 stores. The interchange fee is also 1\1/2\ times
the cost of providing health care to their nearly 13,000
employees. And Sheetz is not alone.
Sadly, it is joined by thousands of businesses across the
country who are being unfairly penalized through interchange
fees. Something must be done, and I believe H.R. 2382 is the
right vehicle for that change.
Mr. Chairman and members of the committee, I hope you will
consider the merits of this bill as well as the serious
struggles of small businesses across this country that need
transparency, simplicity, and fairness when it comes to the
issue of interchange fees.
Again, thank you very much for giving me the opportunity.
[The prepared statement of Representative Shuster can be
found on page 57 of the appendix.]
The Chairman. And another Member who has been very active
in urging us to take this up, the gentleman from Vermont, Mr.
Welch.
STATEMENT OF THE HONORABLE PETER WELCH, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF VERMONT
Mr. Welch. Thank you, Mr. Chairman.
Thank you, members of the committee, for allowing me and
Mr. Shuster to testify today.
Credit cards are necessary in today's economy. They do
provide a service to merchants in the form of secure payment.
They provide a great service to consumers in terms of
convenience. And it is reasonable to expect that merchants pay
a fair fee for this service, just as consumers should pay a
reasonable interest rate on credit.
But just as with credit cards issued to consumers, the near
monopoly of big banks and credit card companies has led to
abuse. The amount of interchange fees collected by big banks
tripled from 2001 to 2008, from $16 billion to $48 billion; 80
percent of that money goes to 10 banks; not to 10 percent of
our banks, but to 10 banks. Now, part of that is due to the
increase in volume. But part is also due to the market power of
credit card companies and big banks and to the fact that the
interchange fees continue to rise so that now in the United
States, they are the highest in the world.
Credit card companies and big banks are also finding more
ways to squeeze merchants, for whom the profit on an individual
sale, as Mr. Shuster pointed out, can be completely canceled
out by the cost of the interchange fee.
The Welch-Shuster bill addresses these anticompetitive and
abusive interchange practices. It raises four fundamental
policy questions for this committee to consider:
First, should credit card companies and banks have to
disclose information about interchange rates? Our view is yes.
And our bill would require that disclosure.
Should merchants be able to freely advertise cash discounts
without credit card company intervention? Our view is yes. This
bill would ensure that merchants have that freedom.
Third, should merchants have to subsidize rewards or
premium credit cards from which they receive no benefit? Our
view is no. And our bill would prohibit this practice. That
would be an arrangement between the card issuer and the card
user. If banks or credit card companies want to offer me
airline miles, for example, my corner store should not have to
pay. I should pay for that.
Fourth, should the government be able to set rules of the
road and require the banks and credit card companies to play
fair? Our view is yes. And that is why our bill empowers the
Federal Trade Commission to prohibit unfair or anticompetitive
practices.
Mr. Chairman, what is at issue here is a question of
fairness and reasonable regulations. Credit card companies have
near monopoly power. Individual merchants, one of whom, Kathy
Miller from the Elmore General Store in Vermont, doesn't.
And we welcome your consideration of these four policy
questions that are presented by our bill. Thank you.
[The prepared statement of Representative Welch can be
found on page 58 of the appendix.]
The Chairman. I thank our colleagues.
Do any of the members here have questions for our
colleagues?
If not, we will thank them, and we will be in touch with
them.
Let me at this point, because we often have the most
members here when we just start out, we have a third colleague
who was interested in the credit card bill, the gentlewoman
from New York, Ms. Lowey. I didn't inform her in time for us to
do the formal clearing process. Would there be any objection if
she were to speak on the next panel? Hearing no objection then,
Ms. Lowey can be notified that she can come if she would like
to and is able to; I know that is always a problem. Our two
witnesses are excused.
Mr. Welch. Can we stay for a few minutes?
The Chairman. Yes. You won't be able to ask questions.
But is there any objection to the gentlemen sitting with
us?
No?
That kind of undercuts my argument that you were in a
hurry, but go ahead.
We will allow the Members to join us, but the size of this
committee prohibits us from giving questioning privileges
because we never have enough time for our members.
We will now begin our opening statements. We can start my 5
minutes, please.
There are two bills before us today. One, as I said, is
something we are familiar with. That is the bill that would
move up the date of the credit cards. I thought that we could
have done it more quickly. We accommodated people in the
industry who said, well, we need time to prepare. We said at
the time, many of us, that if this time were used instead to
take advantage, we thought, of the time lag to move things up,
that would be very problematic for us.
In my judgment, some of that has happened. Recently, Bank
of America announced that it would in effect be abiding by the
main portions of the bill right away. That is welcome both for
the customers of Bank of America, but also because it is an
indication that one of the large credit card companies--and
they have a massive operation here--is able to comply, that the
timeframe is not as bad. This is not brand new to them. They
have known about it for a while. I think the case is very clear
that this is the kind of protection that shouldn't wait, and we
should move forward.
The interchange bill is different. It is new for us. It is
a complex one. I will say, let me give a little history, I was
on the committee--I am not sure any other members were at the
time--early in the 1980's, when Congress, and I know some of
the credit card companies tell us we should not interfere and
we should leave this to the free market, but that wasn't their
posture in the early 1980's when they lobbied Congress
successfully to pass a bill interfering with the right of
merchants to do certain things with regard to credit cards.
I thought that was a violation of free market principles
and voted against it. I was outvoted. In fact, I was so heavily
outvoted that it passed on suspension and was signed by
President Reagan. And I thought it was a lapse from free market
principles.
Those who argue that we shouldn't be dealing with the
interchange issue because it is interfering with the free
market, my response has been, well, the best way to do that is
simply to remove any legislation that regulates what merchants
can do with regard to the credit card industry.
But the credit card industry has supported and maintained
support for legislation in which the Federal Government
restricts merchants' choices. And once you have done that, it
is kind of hard to go back to being for the free market. The
notion, having imposed that set of restrictions on merchants,
it makes it harder to give discounts for cash; having imposed
or to charge more for the card, having imposed that restriction
on the merchants by Federal legislation, it seems to me very
hard for the credit card industry to now go back and argue that
they want to stick with the free market.
It reminds me of the comment that had been made, I believe,
by Harry Warner or Jack Warner in the motion picture industry
about one of the motion picture stars, that he knew her before
she had become a virgin. There are some things which, once
lost, are not easily recovered, in my judgment.
So that I think is what we have before us today. But it is
a complex subject. It is a three-sided operation, because you
have customers, the merchants, and the credit card companies.
It is a subject that is an important one. Our colleagues on the
Judiciary Committee had looked at it some from the antitrust
standpoint, and they may still go ahead and do that. That is
their jurisdiction.
But we have jurisdiction as well. And this is the beginning
of a serious look at this issue.
With that, I will recognize the gentleman from Texas for 5
minutes.
Mr. Hensarling. Thank you, Mr. Chairman.
Indeed, we do have two bills before us. Before I discuss
them, I would at least like to acknowledge the absence of the
author of one of them, the gentlelady from New York. Clearly,
she is dealing with a great personal tragedy in her life. And
although I have debated her frequently on the subject, she has
certainly been a great professional in bringing this credit
card legislation to the House. And even though I disagree with
80 percent of the legislation, to get something that is of this
import passed through this House has spoken well of her.
I am somewhat sensitive of debating the issue in her
absence, but knowing that we have debated it frequently, I know
that there are plenty of people on her side of the aisle who
will be able to--
The Chairman. If the gentleman would yield, I thank him for
that gracious statement.
Let me say on behalf of our colleague, Ms. Maloney, she is
fully understanding of this. And I am sure she will be
appreciative of the sentiment and, of course, has no objection
to the gentleman going forward.
Mr. Hensarling. Thank you.
I think before considering the implications of either of
the two pieces of legislation, we need to take a very careful
look at where we are in this economy.
Since we have passed the President's economic stimulus
program, unfortunately, another 3 million of our fellow
citizens have lost their jobs. We now have the highest
unemployment rate we have had in a quarter of a century at 9.8
percent. Most professional economists believe that will soon
tick up to 10 percent.
I need not tell you where we stand with respect to the debt
and the deficit. The Federal Reserve released information
yesterday that I believe showed that total consumer credit
outstanding, which includes everything from credit card debt to
loans for recreational vehicles, fell $12 billion in August, or
5.8 percent in a seasonally-adjusted annual rate--the 7th
straight month of declines--longest stretch since 1991.
Other Federal Reserve data has indicated that credit card
lines have now been cut, I believe, by 25 percent in the last
year. In the last 2 years, credit card lines have been cut by
$1.25 trillion. I am very concerned about the impact that this
has on small businesses.
We have had testimony in this committee room, and I have
had lots of testimony in the Fifth Congressional District of
Texas which I have the honor of representing, that tells me
that small businesses that rely upon credit cards are having
trouble accessing credit lines to preserve and create jobs. And
I think job one of this committee and this Congress ought to be
getting this economy moving again, getting people jobs. And so
I am concerned about the potential unintended consequences that
either of these pieces of legislation would have.
Now, speaking first to what we have known as the Credit
Cardholders' Bill of Rights, I would just say, and now we have
a new piece of legislation that would essentially move up the
timetable for this legislation. I do not believe there is a
good time to enact a bad bill. This is a bad bill. I believe in
20 percent of it. I do believe that consumers have been misled
on disclosures. I do believe there are deceptive practices out
there. But unfortunately, this bill goes way beyond that. And I
am afraid that both bills may have the potential to simply
exacerbate a credit crunch at a time when small businesses are
having trouble accessing credit, again, to create and preserve
jobs.
Ultimately, the so-called Credit Cardholders' Bill of
Rights, which I still view as a ``credit cardholders' bill of
wrong,'' erodes risk-based pricing. And it is risk-based
pricing that has allowed millions of people to access credit
who haven't been able to access it before, including, again,
small businesses. I believe in many respects, it represents
another bit of bailout legislation, because it tells the people
who do it right, ultimately they are going to pay higher fees
and higher interest rates to help subsidize those who do it
wrong.
And I hate to say that I told you so, but when we debated
this bill, I predicted what would happen. And indeed, we see it
happening. Now, credit card companies, in anticipation of this
legislation, are cutting back the lines even further. And I am
afraid we could exacerbate the situation.
With respect to the interchange, I am still very curious
ultimately what this bill is going to do to help consumers. I
am not unsympathetic to those who complain about it, but I am
wondering, how is this any different from the costs that one
pays for payroll, one pays for real estate, or their
advertising. It is a cost of doing business. If there are legal
restraints of trade here, I would like to hear about them. If
there are legitimate antitrust issues, I would like to hear
about them. Otherwise, I see my time is up, so I will have to
hear about them later.
Mr. Gutierrez. [presiding] I gave you a little extra time
there because we are friends.
I yield myself the remainder of the time. On April 30th of
this year, I stood next to Chairman Frank and other members of
this committee after we passed the CARD Act on the House Floor
and listened as the chairman issued a warning to the credit
card-issuing banks. Chairman Frank told the banks that if they
began to speed up rate increases or continue the practices that
we had just prohibited, then we would move up the
implementation date on the CARD Act. He cautioned them in no
uncertain terms that this committee would not hesitate to stop
them if they continued to take advantage of and abuse
consumers.
With that warning, the House passed an amendment to allow
the banks sufficient time to implement substantial strict and
admittedly complicated changes to the way they do business. But
I never anticipated how uncomplicated it would be for the banks
to continue with the very practices that we had just banned. We
were reasonable. We were fair. The banks were not. We can't
turn back the clock, but we can make sure that the banks'
unreasonable practices do not continue to affect more American
households.
Today, we must begin the process of accelerating the
implementation date of the Credit Cardholders' Bill of Rights.
When I got home that day from the signing ceremony for the
legislation at the White House, I had a notice in the mail. It
said that my bank was increasing my rate, decreasing my
available credit, and increasing fees across-the-board. This
was the very day President Obama signed the bill into law.
What I hope to find out during the third panel of this
hearing is why it is so easy for credit card companies to
nickel and dime their customers as quickly as they do, while at
the same time it takes so long to end unfair and deceptive
practices that this Congress has banned?
I listened to my colleague, Mr. Hensarling, talk about
risk-based pricing. And I will just end with this, not to take
any more time, what changed? What changed between the day we
passed the bill and the day I arrived home to get my changes
from my credit card company? I have the most secure job that
exists in this economy, a government job. I can't think of a
more secure job. I still have--I have been a nine-term Member.
I don't know, did they make some evaluation that I had an
opponent in the next primary who was going to knock me out? I
wish they would let me know. I haven't had an opponent in the
last 3 elections in the Democratic primary, and I have a 90
percent Democratic district.
So I tell you all that to say, I don't understand what the
new risk was. I have an 800-point credit score. We pay our
bills on time. Maybe we do it too well. So I was a risk? No,
what they decided to do was change the terms of our contract as
they did to advance and to accelerate it. We told them, don't
do it. We gave them an amendment. We were fair to the banks,
and the banks were not fair to the consumers.
We will now proceed--oh, we have Mr. Castle for 2 minutes.
Mr. Castle. Thank you, Mr. Chairman. I have concerns about
both pieces of legislation here.
First, with respect to the CARD Act and moving up the date,
let's recall that date was already moved up from what the
Federal Reserve was doing to what we did in legislation. The
net result of that has been, as Mr. Hensarling has indicated to
us, that we see fewer people getting credit at this time. We do
see people getting cut back on the credit which exists. And we
are seeing many jobs in the credit card industry in this
country being already reduced, and probably many more to be
reduced when all this goes into effect. So it has had some
negative economic effect, particularly for people who can't now
get credit and cannot now go out and spend in our economy. We
need to at least consider this. I am not suggesting we should
just oppose the bill arbitrarily, but we need to consider all
the consequences of what we are doing.
And the same thing applies with respect to the interchange
legislation. I listened to our two distinguished colleagues who
spoke about that. And as has been indicated here, I heard no
mention of reduction of costs as far as consumers are
concerned. Apparently, the concern is strictly with those who
are handling the cards in their business and what they are
doing. And I would agree completely with the concepts that were
put forward. We do need to have greater transparency, the full
disclosure. This is not something that necessarily seems to
affect consumers, because nobody has indicated they would
reduce costs if indeed legislation like this would pass.
But I think among the merchants and those people who are
issuing the cards, there indeed needs to be an openness and a
responsibility. So we can approach this legislation, but we
need to approach it very carefully. I don't think in this time
of our economy, that we can afford to just pass legislation
which is going to be too vindictive in terms of reduction of
interchange fees or even elimination of the same. The same
thing applies to the credit card legislation. We just need to
be very cautious about the downside consequences.
I appreciate the opportunity and I yield back, Mr.
Chairman.
Mr. Gutierrez. The gentleman yields back.
Congressman Scott, you are recognized for 2 minutes.
Mr. Scott. Thank you very much, Mr. Chairman.
I want to thank the chairman for holding this important
hearing on credit card issues. I want to focus mainly on the
simmering battle between the banks and retailers regarding
credit card interchange fees. I have constituents in both camps
who have vigorously pleaded that their case is very important
on this issue.
At the center of the debate is the question of whether or
not banks are overcharging merchants for processing credit
cards and other products at the point of sale. The retailers
claim that interchange fees have unfairly increased annually,
despite better technology and more efficient processing
systems. The banks claim that the system is more complex than
the retailers describe. And they also are carrying the risk of
data protection and credit losses. Both industries are in the
unfortunate situation of operating on thin margins of profits.
So I hope this hearing will focus on what the consumer
wants, since they are stuck in the middle. In this economy, the
consumers want easy access to their credit. They want no hassle
at points of sale. They want use of multiple types of payment
products. And they most definitely want protections against
fraud and low prices.
This is a very, very important hearing this morning, Mr.
Chairman. I thank you for yielding me time on this important
issue.
Mr. Gutierrez. Mr. Hensarling, any other time?
Then, we will go to our second panel.
Ms. Kathy Miller, board member of the Vermont Grocers
Association, you are recognized for 5 minutes.
STATEMENT OF KATHY MILLER, OWNER/OPERATOR, THE ELMORE STORE,
ELMORE, VERMONT; BOARD MEMBER, VERMONT GROCERS' ASSOCIATION
Ms. Miller. Good morning, Mr. Chairman, Congressman Welch,
and members of the House Financial Services Committee.
I would like to thank you for allowing me to testify today.
My name is Kathy Miller. And I--along with my husband Warren
and daughter Kelly--am the owner of the Elmore Store in Elmore,
Vermont.
I am also here today as past Chair of the Vermont Grocers
Association, and on behalf of the Food Marketing Institute and
National Grocers Association, which represents our Nation's
supermarkets and grocery stores.
We appreciate you holding this hearing and for the
opportunity to provide testimony on credit card interchange
fees, also known as swipe fees to merchants who have to pay the
fee each time a card is swiped.
Thank you to my Congressman, Peter Welch, for inviting me
here today to testify.
It has been 3 years since I testified before the Senate
Judiciary Committee at the invitation of Senator Leahy on the
anticompetitive and anticonsumer practices of the credit card
companies.
Unfortunately, many of the same problems still exist today,
and interchange fee costs have continued to rise at the expense
of small businesses like ours. This is a store that we have
owned and operated now for 26 years. I am a fifth generation
Vermonter, with deep roots in Elmore. I am the ``mom'' part of
the operation. My husband Warren, ``pop,'' is minding the
store, so I can be with you today. Warren has recently served 2
terms in our State legislature in Montpelier.
We are not only committed to our store, but to our
community and to the State of Vermont as well. You may wonder
why we do what we do 7 days a week, 96 hours a week, 364 days a
year. To be honest, sometimes we ask ourselves that same
question. But we believe that we can and do make a difference
to the people in the community who depend upon us. My concerns
as a small independent store may seem small to you, but they
are a huge burden to us and very real.
Congressman Welch listened to these concerns from Vermont
storekeepers like me, and he wrote legislation to try to
address several of them. Warren and I commend Congressman Welch
for introducing this important legislation to protect small
businesses like our store in Vermont. And we look forward to
consideration of the Credit Card Interchange Fees Act by this
committee.
Since I told my customers I was coming to Washington, D.C.,
to testify on this issue, I can't even tell you how many of my
customers were unaware of the hidden fees. They swipe their
cards and think all is free because there is no charge to them
at all. Obviously, we lose money on many small transactions,
and too much on others. So we have to raise prices because we
can't absorb it all. In the grocery business, we compete by
lowering prices, not by raising them.
I am not a lawyer, but I know this is a huge problem that
retailers across the United States, large and small, are
facing. So I ask you to look at this matter seriously.
I have customers who apologize to me for using their cards.
I keep telling them, please, keep coming in the store and
shopping. We need and appreciate your business. We have
streamlined our business to reduce costs as best we can.
Maintenance doesn't get done as it should. Less money goes out
in payroll. But we just can't keep absorbing these fees in
these tough economic times.
If the interchange swipe fees were fair and reasonable,
Warren and I would have more money to invest back into our
business. An example is, we only have one phone line to save
money. I can't take a deli order. I can't do grocery orders
with my line tied up to swipe credit cards. What happens in a
small country store is when a customer swipes their card for a
pack of 35-cent gum, it is pre-priced, and it costs us 21
cents. The swipe fee on that sale costs us 21 cents, so I just
lost money. I might as well just let them take the gum. A 99-
cent bag of chips is prepriced, again, and it costs us 74
cents. The credit card fees are 23 cents. I can only make 2
cents on that sale. What is wrong with this picture?
Congressman Welch's bill would allow us to set reasonable
minimum purchase requirements. Visa and MasterCard require us
to accept all their cards if we take any. And they market a
whole host of affinity cards with so-called free features. I
rode in on a plane. I haven't been on a plane in, I can't tell
you how long. And I have lost it now, but there was a napkin in
front of me, ``get free airplane rides.'' Nothing is free.
Oh, here it is. Thanks.
So what they can't tell you is they charge merchants higher
interchange rates for accepting these cards. Warren and I
haven't gone on a vacation in 10 years; yet every day we are
paying for our customers' trips when we take their credit
cards.
The Visa and MasterCard contract rules are not law, so why
do we comply with them? This hasn't happened to us yet, but we
have heard stories of other small businesses being threatened
with excessive fines for breaking the rules, even for something
as minor as requiring a $5 minimum to use a credit card. A
$5,000 a day fine, which I hear is Visa and MasterCard's going
rate these days, would simply put us out of business. I had a
store owner call me to say, ``We are going to get fined
$25,000. What should we do?'' I said, ``Take your signs down.
We can't set minimums.''
The average supermarket industry profit margin last year
was 1.43 percent. That means a profit of $1.43 on a $100
transaction. The interchange paid to the bank to issue that
card on the same transaction is more than that. I would like to
ask you on your next ride home to take a look and see how many
vacant storefronts there are in your small downtowns. Just this
last winter alone, 6 stores closed within a 50-mile radius of
us.
Some days I feel like I should just turn my keys in, but
too many people count on us. Elmore is a town with 850 people.
We are the hub. We are mom and pop. We are just trying to keep
our doors open.
Thank you very much, and I would be pleased to answer
questions.
[The prepared statement of Ms. Miller can be found on page
215 of the appendix.]
Mr. Gutierrez. Thank you very much.
Mr. David Evans, a lecturer at the University of Chicago
Law School.
Welcome.
STATEMENT OF DAVID S. EVANS, LECTURER, UNIVERSITY OF CHICAGO
LAW SCHOOL
Mr. Evans. Good morning. Thank you very much.
I would like to thank Chairman Frank and Ranking Member
Bachus for inviting me to testify.
Members of the committee, my name is David S. Evans, and I
am a lecturer at the University of Chicago Law School and also
a visiting professor at University College London.
Despite the law school affiliations, I am actually an
economist. I have written on the payment industry from both the
business and policy perspective, including ``Paying with
Plastic,'' which has become the standard reference work on the
industry.
I represent solely myself at the hearing today. But in the
interests of transparency, I just want to note that Visa funded
my research on the payment card industry for many years. In
recent times, though, I have been a business adviser to many of
the innovative entrants into the payments business. And that
includes several companies that compete with the incumbent
networks and issuers in part by offering lower merchant fees.
Economists have been studying the subject of interchange
fees and related practices since the early 1980's. There has
been a flurry of research in the last decade. Much of the
research is based on the new field of economics known as two-
sided markets. Businesses that create value by bringing
different kinds of customers together are said to be two-sided.
So a stock exchange like NASDAQ brings liquidity providers and
liquidity takers together, while a matchmaking service like
eHarmony brings men and women together.
Payment cards help merchants and individuals to transact
with each other. So cardholders and merchants are in effect the
two sides of the business.
I have appended to my statement today an article that I co-
authored with Dick Schmalensee that provides some of the key
references that back up some of the things I am going to say.
So this research provides several insights. First, it turns
out that it is very difficult to say in practice that the
interchange fee charged by a payment network is too high, too
low, or just right from the standpoint of public welfare. And
it is even more difficult for a regulator to have any
confidence that it could establish a better interchange fee.
This argues for caution in price regulation of interchange
fees.
Government regulation is appropriate when it is possible to
both identify a market failure and fix that failure without
creating significant unintended consequences. That is not
possible with the current economic state of knowledge on
interchange fees.
H.R. 2382 wisely stays away from specific price regulation,
in my view.
Second, and very importantly, any change that is made to
the pricing for one side of a two-sided business will tend to
have an opposite effect on the other side. Two-sided businesses
recover their costs and they earn profits from both sides. So
if a two-sided business earns less on one side, it usually has
to earn more on the other side. Many daily newspapers, for
example, are charging people more because they are making less
money from advertisers.
In evaluating the bill before you, it would be prudent in
my view to anticipate how the changes to merchant pricing and
other changes will ultimately affect cardholders. There
probably is not a free lunch here.
Third, the customers of two-sided businesses interact a
lot, and the platform makes money by promoting valuable
interactions. But the platform also has an interest in policing
bad behavior. So eBay, for example, is a two-sided business. It
tries to get buyers and sellers to swap a lot of stuff. But it
also has rules that buyers and sellers have to follow; eBay
protects buyers by kicking sellers that repeatedly fail to meet
their end of the bargain off of eBay.
I mention this in the context of H.R. 2382 because many of
the policies that the bill seeks to restrict at least arguably
benefit one side of the market, namely individuals who carry
cards and want to use them freely and easily. A card brand can
provide benefits to individuals by assuring them that their
card will be accepted everywhere and that these individuals
won't be surcharged.
One could also argue that the network policies that are the
subject of H.R. 2382 are anticompetitive or contrary to the
public interest, but I believe it would be prudent to consider
the procompetitive explanations as well as any anticompetitive
ones that you want to think about.
Most likely, again, there is no free lunch here either.
Prohibiting the networks from imposing various restrictions
will likely impose some collateral costs on end consumers.
And if I have one more minute to continue, there are many
elements to this bill, and I have not done a careful study of
it. I would like to suggest, however, that payment cards is one
of the most complex industries that economists study. There are
many moving parts and interdependency between merchants,
cardholders, processors, acquirers, networks, and other
players. And as a result, there is a greater risk in this
industry than in many others for government intervention to
have unintended consequences.
Finally, I am not aware as an economist of any systematic
evidence that would support the position that the payment card
network practices targeted by H.R. 2382 cause public harm
overall once we take into account the interests of consumers,
or that the types of restrictions on payment card networks
suggested in the bill would ultimately enure to the public.
I also don't believe that any of the targeted practices are
in fact anticompetitive under U.S. law.
Thank you, again, for the opportunity to appear before this
committee. And of course, I would be very happy to respond to
your questions. Thank you.
[The prepared statement of Mr. Evans can be found on page
191 of the appendix.]
Mr. Gutierrez. Thank you.
Mr. Mark Caverly, executive vice president of the Local
Government Federal Credit Union, on behalf of CUNA and the
Electronic Payments Coalition, you are welcome. You have 5
minutes.
Mr. Caverly. Thank you. Good morning.
Mr. Gutierrez. Good morning, sir.
STATEMENT OF MARK CAVERLY, EXECUTIVE VICE PRESIDENT, LOCAL
GOVERNMENT FEDERAL CREDIT UNION, ON BEHALF OF THE CREDIT UNION
NATIONAL ASSOCIATION (CUNA) AND THE ELECTRONIC PAYMENTS
COALITION (EPC)
Mr. Caverly. Mr. Chairman, members of the committee, thank
you for the opportunity to testify today in opposition to H.R.
2382, the Credit Union Interchange Fees Act of 2009.
My name is Mark Caverly, and I am speaking today on behalf
of the Credit Union National Association and the Electronic
Payments Coalition. My credit union is a member of CUNA, the
largest advocacy organization for America's 92 million credit
union members.
And CUNA is a member of the EPC. The EPC includes credit
unions, banks, and payment card networks that move electronic
payments quickly and securely between millions of merchants and
millions of consumers across the globe. The goal of the EPC,
and the reason I am before you today, is to speak for the
consumer and to protect the value, innovation, convenience, and
competition in today's electronic payments system.
I serve as executive vice president for the Local
Government Federal Credit Union in Raleigh, North Carolina. We
serve the financial needs of local government employees,
elected officials, volunteers, and their families. My credit
union has 178,000 members, and we are the issuers of 173,000
debit cards and 16,000 credit cards for our membership.
To begin, allow me to cover the who, what, and why of
interchange. Who is responsible for interchange? Interchange is
the responsibility of the merchant and the merchant's bank.
Card issuers such as my credit union who assume the risks of
fraud, nonpayment, and the administration of the card program
receive interchange.
What is interchange? First of all, interchange is not a fee
on consumers. To the contrary, interchange represents the
merchants assuming their fair share of the financial
responsibility for the card payment system. Merchants receive
many benefits and tremendous value from accepting cards. The
merchant discount fee, which includes the interchange amount,
is the merchants' cost of doing business for accepting this
valuable form of payment. The credit union's cost of doing
business includes funding costs, credit losses, billing and
collections, customer service, data processing, and compliance.
The value merchants receive when we administer these programs
and assume significant risks for their benefit far exceeds the
interchange fee.
Why is interchange important to credit union members? As an
issuer, my credit union receives interchange when our members
use their debit and credit cards. Interchange helps us support
the card programs for the benefit of our members or the
consumers. In fact, interchange for my credit union's card
program represents 14.4 percent of my credit union's total
income year-to-date.
Our concerns regarding this legislation come down to a
simple point: If my credit union's interchange decreases,
consumer costs increase. Reducing the merchants' interchange
responsibility would result in costs shifting from merchants to
consumers, and increased fees for consumers to obtain debit and
credit cards.
While the bill simply references credit card interchange
fees in its title, the bill would also address debit card
interchange, and would create significant changes to the
foundation of the electronic payments system. The bill reduces
consumer choice and increases consumer costs and confusion in
many ways.
But allow me to share a few examples with you. First, the
merchants are seeking to abolish the honor-all-cards rule or
practice that merchants must follow. As a consumer, you may
choose to carry only one credit card and one debit card with
you. Now, imagine your favorite chain restaurant has either
decided not to honor cards issued by credit unions or has
entered into an agreement with a large financial institution.
The restaurant tells you that they won't accept the card of
your choice or will only offer more favorable prices to the
cards issued by the large financial institution. Consumers want
honor-all-cards because it gives them the choice as to what
card to carry.
Second, gas stations are seeking to abolish the current
system regarding charge-backs. Essentially, it would absolve
them from the financial responsibility when they allow card
transactions to be processed in violation of the preauthorized
amount for the sale. If this were enacted, my credit union will
assume even more of the risk of fraud and an increase in the
risk of nonpayment. And as a nonprofit financial cooperative,
when our costs increase, so do the costs to our consumer
members.
Finally, by not mentioning data security, this bill allows
merchants to continue to walk away from their data security
responsibilities. Cleaning up after merchant data security
breaches is a significant cost that we as credit unions
continue to pick up.
In conclusion, credit unions oppose H.R. 2382 and other
legislation designed to decrease the merchants' responsibility
for the value they receive from the card payment system. If
merchants are successful in reducing their fair share of
responsibility for the card payment system, the consumers will
pick up the difference.
Thank you for giving credit unions and their consumer
members an opportunity to share our position on interchange and
the card payment system.
[The prepared statement of Mr. Caverly can be found on page
110 of the appendix.]
Mr. Gutierrez. Next, we have Mr. Ed Mierzwinski, consumer
program director, U.S. PIRG.
Please, you are recognized for 5 minutes.
STATEMENT OF EDMUND MIERZWINSKI, CONSUMER PROGRAM DIRECTOR,
U.S. PIRG
Mr. Mierzwinski. Thank you, Chairman Gutierrez, Mr.
Hensarling, and members of the committee.
I am Ed Mierzwinski, of the U.S. Public Interest Research
Group.
This is a very fascinating consumer issue. And we have
supported the Welch-Shuster bill, H.R. 2382, to give merchants
a fairer shake against the credit card companies and the credit
card networks. We believe that the proposed bill addresses a
number of flaws and problems in the system.
Let me describe just briefly how it works. First of all,
approximately 2 percent of every dollar that you spend goes to
a fee called the merchant discount, but the bulk of it is this
interchange part that is essentially nonnegotiable. Recently,
debit and credit combined passed all cash transactions.
If you presume for the purpose of discussion that 50
percent of transactions cost the merchant 2 percent more than
its other transactions, then he or she has to raise his or her
costs to all consumers, including those who don't pay with
credit or debit, by 1 percent; 50 percent raises your costs 2
percent, so 100 percent pay 1 percent more. So all consumers
pay more at the store and more at the pump because of
interchange that is nonnegotiable, nontransparent to the
merchant.
Second, it is a really kooky system in a lot of ways. One
of the ways is that merchants are forced under this honor-all-
cards provision to accept a Visa card that looks exactly like
another Visa card, except that it costs the merchant 3 percent
or more instead of 1 or 2 percent. Why does this Visa card cost
more than that Visa card? Well, it is because of rewards
programs. Interchange doesn't just pay for fraud. Interchange
doesn't just pay for the system. It pays for solicitations, the
5 billion trees that cry every year because of all the--well,
maybe it is not 5 billion trees, but it is 5 billion letters
from credit card companies, the solicitations, and the rewards.
So who benefits from rewards? I submit that only
convenience credit card users benefit primarily from rewards.
The purpose of rewards debit is to drive people to debit
transactions so that merchants can earn more money. But
revolving credit card users don't make money on rewards. If it
costs you 25 percent APR to carry a balance and you are getting
a 1 percent reward, you are not benefiting from rewards. So it
is not all credit card customers; it is only some. And it is
not all consumers; it is only those who use cards.
There are other problems with the system. Merchants are
prevented by these thousands of pages of contractual gibberish
from providing their customers with a choice of a lower cost
discount for cash. They may not be prohibited explicitly, but
the merchants tell me that it is a serious problem that the
banks force on them. They make it very difficult for them to
offer their customers discounts for cash.
So I think there are some serious problems in the
interchange system that will be addressed by the Welch-Shuster
bill and that will benefit all consumers.
Again, I am concerned with all consumers. I am not simply
concerned with credit card customers. Today we have an increase
in the use of debit, but not all of that debit is associated
with bank cards.
I want to make one point unrelated to the bill. I would
encourage the committee to also look at increasing the consumer
protections that apply to all prepaid cards. As we use more
payroll cards, as we use more prepaid debit cards not
associated with bank accounts, as lower-middle-income working
families accept their social welfare benefits through EBT, they
are all paying interchange, but the merchants--I am sorry, the
banks and the interchange networks are not providing those
consumers with the same consumer protections as consumers have
with the gold standard of a credit card or the less than gold
standard of Regulation E, which provides consumers of bank-
issued debit cards with consumer protections. We need a whole
revamp of the payment system to protect consumers.
In the couple of seconds that I have left, I also want to
strongly support the bill to accelerate enactment of the final
provisions of the Credit Cardholders' Bill of Rights. The banks
have been behaving badly.
And then I want to say, how did we get into this mess in
the first place with the credit card companies? Well, the
reason is we didn't have a regulator whose job was to protect
consumers. And that is why this committee needs to pass a
strong consumer financial protection act that restores Federal
law as a floor, not a ceiling. Keeping preemption is a big
mistake. I urge you to stick with the bill and not support any
amendments to add preemption to the bill. Thank you.
[The prepared statement of Mr. Mierzwinski can be found on
page 200 of the appendix.]
Mr. Gutierrez. The Honorable Ann D. Duplessis, Liberty Bank
senior vice president of retail banking and marketing and
sales, on behalf of the Independent Community Bankers of
America.
You are recognized for 5 minutes.
STATEMENT OF THE HONORABLE ANN D. DUPLESSIS, SENIOR VICE
PRESIDENT, LIBERTY BANK AND TRUST, NEW ORLEANS, LOUISIANA;
STATE SENATOR, DISTRICT 2, LOUISIANA STATE SENATE, ON BEHALF OF
THE INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA)
Ms. Duplessis. Thank you, Mr. Chairman, and members of the
committee. Again, my name is Ann Duplessis, and I am a senior
vice president of retail banking with Liberty Bank and Trust, a
$400 million community bank headquartered in New Orleans.
I am also a proud Louisiana State Senator, representing
areas in New Orleans, in and around New Orleans' Lower Ninth
Ward, eastern New Orleans. I am also the chairman of the
Commerce, Consumer Protection, and International Affairs
Committee, and am pleased to be here today on behalf of the
Independent Community Bankers of America to discuss this very
important issue of interchange.
I also asked that you be given a separate ICBA statement on
the credit card bill, and hopefully that can be included in the
records.
Just a little bit about Liberty Bank. We started in a
trailer in New Orleans about 37 years ago, and we have grown to
more than 13 locations across 5 States. We are one of the five
largest African-American-owned financial institutions in the
country. In addition to my current role at Liberty Bank, I was
also a small business owner, operating a hair salon and day spa
and a business consulting practice.
On behalf of ICBA's nearly 5,000 member banks, I want to
thank you for the opportunity to testify on the important role
credit and debit card interchange fees play in supporting
community banks and our customers. The payment card system
provides tremendous benefits to consumers and merchants, but it
is not cost-free. Liberty Bank is both an acquiring bank for
merchants and a card issuer. Our customers are both individual
consumers and local merchants who have decided, after shopping
around, that we can provide them with the best acquiring
services.
Even a relatively small acquirer like Liberty Bank can
provide merchants full access to the global electronic payment
systems. As a community banker serving local merchants, and as
a former small business owner, I strongly believe the key
points in this entire debate over interchange fees is being
masked behind misleading rhetoric from the large merchants that
stand to benefit by congressional action.
The most important concern for any small retailer, their
banker, and ultimately the customers who pay for the goods and
services is merely the cost of handling money. Money is given
and received in many forms, all of which have costs. Cash and
checks have given way to plastic, not only due to consumer
preference but also because accepting electronic payments is a
more efficient and less costly way for merchants to provide
these services. I know because I have seen this firsthand as a
business owner and as a banker who every day works to improve
the bottom line of my local retailers.
Credit cards are the only loan or credit product that
generally allows the consumer to control how much he or she
will owe and whether he or she will pay a finance charge or
just be a convenience user. Our credit card programs are not
huge profit centers, but they have real value and give me the
basic ability to offer products to consumers and merchants
coupled with superior customer service that community bankers
can provide.
Distorting the network rules in favor of large retailers
and away from consumers would jeopardize the ability of
community banks to continue to offer these services. If more
small banks stop offering interchange-supported products and
services, it is likely that the industry would consolidate into
just a few very large issuers and acquirers.
In the Credit Card Interchange Fee Act, large merchants
simply want Congress to intervene so they can pay less and
follow fewer rules for the benefits they receive from the card
accepters.
This bill would also create a burden for consumers by
reducing their flexibility. Today, Liberty Bank cardholders
know that their payment card will be honored at any merchant
accepting electronic payments. This bill would allow a merchant
to now dictate to consumers the terms of use and which cards
that consumer must carry. If a Liberty Bank card is no longer
accepted universally, my customers may be forced to apply for
multiple cards that they don't want or need, thus decreasing
credit scores and making it more difficult to get credit. It
would create an incredibly inefficient and uncertain shopping
experience if customers no longer control their own payment
choices.
Mr. Gutierrez. The time of the gentlelady has expired.
Ms. Duplessis. Thank you.
[The prepared statement of Ms. Duplessis can be found on
page 180 of the appendix.]
Mr. Gutierrez. You are very welcome.
And now, we have Mr. Mallory Duncan, senior vice president
and general counsel, National Retail Federation, on behalf of
the Merchants Payments Coalition.
You are recognized for 5 minutes, sir.
STATEMENT OF MALLORY DUNCAN, SENIOR VICE PRESIDENT AND GENERAL
COUNSEL, NATIONAL RETAIL FEDERATION, ON BEHALF OF THE MERCHANTS
PAYMENTS COALITION
Mr. Duncan. Thank you, Mr. Chairman. I want to thank the
ranking member and members of the committee. I would like to
thank you and the members of the committee for allowing me to
appear.
Let me state the obvious. We are retailers. No one believes
in free markets more than we do. We know that free markets work
when there is transparency, few fetters on competition, and
ideally, an absence of concentrated market power. That is the
world we face with most of our suppliers, and it is what we as
an industry deliver to our customers.
Retail competition is fierce. It is reflected in very thin
profit margins, typically around 2 percent. With margins that
narrow, when costs go up, so do prices. When costs go down,
competition pushes prices down as well. You can buy great
electronics for a fraction of the price you would have paid a
few years ago. That is the beauty of the competitive market.
We want to provide value to our customers, and that is why
we are so concerned by what the credit card companies are doing
to us and to the American consumer; they are doing it with
hidden fees, arcane rules, and overwhelming market power.
The credit card market is broken and needs to be fixed. The
card industry has told you that the market is functioning fine,
that it is so complicated and two-sided that you had best just
ignore it. That sounds like what they said about subprime
loans. But in truth, it is a very simple scheme; they don't
want oversight because what they have is a privately regulated
cartel.
The banks and the members of Visa and MasterCard will tell
you the market is competitive. As appendix A at the back of my
testimony indicates, in part that is true, they do compete for
customers, but on the merchant side, the opposite is true.
Since its inception Visa and its big banks have gotten together
and decided how much they are going to charge to process
payments. Once the decision is blessed, all issuing banks
charge the same fee regardless of the bank's name that is on
the card. These otherwise competing banks huddle under the Visa
and MasterCard rules as one, and insist that merchants accept
their cards, fees, and rules on a take-it-or-leave-it basis,
with no opportunity to negotiate. No merchant can stand up to
that.
Now, both firms have changed recently their structures, but
the net result is the same. We have here cartels operating in
violation of the antitrust laws. But there is more. They also
fix the rules, rules designed to support the cartel and to hide
its operation from consumers who ultimately pay most of these
fees. It is this lack of transparency and these confining rules
that the Welch-Shuster bill addresses. Let me give you a couple
of examples.
The card companies have what they call a nondiscrimination
rule. It prohibits merchants from giving customers a discount
if the customer uses the card with lower fees. This is a
remarkably anti-competitive rule. It is like Coca-Cola telling
grocery stores that they could be fined or their right to sell
Coke products revoked if they charge people less for Pepsi than
for Coke. Its effect, of course, is to discourage the market
from moving towards cheaper forms of payment. Welch-Shuster
would open the market up to competition.
Or take pricing generally. The card companies' rules say
that the regular price we offer the public must be the credit
card price, but a 2 percent profit margin isn't large enough to
absorb a 2 percent interchange fee. So a shopping cart of back-
to-school clothes that we would willingly sell for $99 cash has
to be priced somewhere around $101 because of their rules. But
look at what is happening, $101 becomes the regular price for
$99 worth of cash merchandise. And regardless of whether one
uses cash, check, or food stamps, we all end up paying the
credit card company price. In effect, interchange acts as a
privately imposed hidden sales tax on U.S. commerce.
As to transparency, most consumers don't realize that
rewards cards cost far more to use than does a regular card. Do
consumers know that swiping rewards cards drives up the price
of everything they buy even higher?
Now, if I may, I would like to raise one issue that NRF is
very concerned about that does not apply to the Welch bill, and
that is debit cards. Cash and check pass at par, that is face
value. The Federal Reserve says that in return for a $100
check, a bank must give you $100 in exchange, yet $100 on a
debit card is subject to interchange fees. But what is a debit
card other than a plastic check? There is no loan; they are
even called ``check cards.'' It is time for Congress to demand
that Fed do for plastic checks what they have long insisted on
for paper checks. Otherwise, again, we will end up eating up
the value.
In conclusion, you should know that the bulk of interchange
goes to a handful of banks. There are roughly 10,000 banks in
each of the card networks, yet more than 80 percent of the
interchange goes to just 10 big banks. But they don't show up
here to defend it. Apparently they are not only ``too-big-to-
fail,'' they are ``too-big-to care.''
[The prepared statement of Mr. Duncan can be found on page
144 of the appendix.]
Mr. Gutierrez. We are now going to go to the question
portion of this hearing.
This is quite an educational process. And I think that of
everyone who has testified, I want to figure out a way that we
help out Mrs. Miller from Vermont and her store and her family
business. She seems to have made--not that the rest of you
didn't make compelling arguments, but the most compekking
argument.
Is there anything else you would like to add, something
that you didn't have time for in your 5 minutes?
Ms. Miller. Not really, just maybe a few things. I know
they keep talking about cash discounts and credit and that kind
of stuff. Maybe in a bigger store where you scan, that wouldn't
be an issue. Well, mom and pop stores, as long as I own the
store--I have been there for 26 years--I never going to have a
scanning system. It is all manual. That would be an absolute
nightmare as far as the storekeeper and employees. I was given
a copy of what the rules were as far as discount and point of
sale, and I don't understand them. I would be more than glad to
share it with you. It talks about setting a standard price, and
it is just kind of gibberish to me.
Mr. Gutierrez. We want to see what we can do to make sure
we keep businesses such as yours--
Ms. Miller. Keep it simple.
Mr. Gutierrez. Right, keep it simple and keep it
understandable and keep it in business.
Ms. Miller. And the big thing with Congressman Welch's bill
is--I haven't been out of Vermont very often, but a lot of our
stores do have minimum setup, $5, $10, whatever. And I guess
that is what I am looking for is the flexibility to be able to
do that. I am not discriminating against a sale, I am not
saying you can use this card, you can use that card, but that
definitely would help us.
My examples with the potato chips and the gum, that is
real. It happens every day of the week.
Mr. Gutierrez. I will never walk into a mom and pop grocery
store in my neighborhood--
Ms. Miller. But we want them to walk into our store. Don't
drive by and get your big pack of gum at Wal-Mart.
Mr. Gutierrez. I will go hungry before I use a credit card
after your example today. I mean that sincerely. It is
outrageous what happens.
Ms. Miller. I am on Route 12, and we are 23 miles from
Montpelier, our State capital, and we are near Stowe, the ski
capital of the East. So people are on their bicycles, and they
have a piece of plastic in their back pocket. And I want them
to come into my store, so that would definitely help me. They
might walk out with an Elmore Store T-shirt on, and they won't
have to carry it, they can do that.
Mr. Gutierrez. I get it.
Ms. Miller. Other things I know, like when I testified in
front of Senator Leahy's committee, they talk about litigation.
And I am not part of the litigation, I don't understand the
whole situation, but that has been going on for years. Small
retailers can't wait years and years and years for more change.
And they talk about the monthly fees. I don't know what my
monthly fees are until I get my bill. Number one, I still get
one in the mail because I am an old-fashioned girl. I like
paper and pencil, and I use my computer because my bookkeeper
makes me do it, but I still do all my own stuff. But I don't
know until the end of the month what is getting taken out of my
checking account.
Mr. Gutierrez. So there is the end of the month, and there
is this--
Ms. Miller. It is like, whoa. July and August is a busy
time, and $600 a month is a lot out of a small store. So you
have to have that in your checkbook, and it is just like--it is
huge, and you don't know what it is, but you have to be
prepared.
Mr. Gutierrez. What we will probably do is, we will
probably be in touch with you just to get more examples from
you and others like you.
Ms. Miller. And one more small example, and I don't mean to
interrupt you.
Mr. Gutierrez. Absolutely.
Ms. Miller. Two months ago, all of a sudden, I got a three-
page letter saying I had to either say yea or nay to an $8.95 a
month fee for breach of security insurance. And I figured that
was covered by my home or my store insurance policy. So I
called my local insurance company in Montpelier and they were
like, gee, that is a really good question. It took her probably
a week to get back to me and she said, you are not covered. So
there is another $8.95 a month. So you never know what is going
to come from where.
Mr. Gutierrez. Well, what we will do is we will make sure
that we have a conversation. We have your testimony, but we
will have a further conversation. I know Congressman Welch will
work on making sure that happens because there is a lot of eye
opening information here at this hearing.
I know that in my neighborhood, I guess you pay one price
for gasoline if it is cash and another price if it is a credit
card, except it doesn't happen in every neighborhood in
Chicago. It is only in certain neighborhoods in Chicago this
happens, where there is a duality of prices for gasoline.
And the other thing, the big retailers. I went to a big
retailer, and they have a sign that says, ``Use your debit
card, we will give you 3 percent back.'' Guess what I did? I
used my debit card because I have cash in my debit account, and
they gave me 3 percent back and I was happy to get it. You
can't do that.
Ms. Miller. No.
Mr. Gutierrez. It is unfair.
Ms. Miller. And when somebody walks in my store, I don't
want to treat people differently. Everybody should be on a
level playing field and be treated the same.
Mr. Gutierrez. We are going to try to do that, Ms. Miller.
That is going to be our intent.
Ms. Miller. Thank you, I appreciate your time.
Mr. Gutierrez. You have Congressman Welch on the committee.
We will be talking to him some more.
Thank you so much.
Mr. Gutierrez. Congressman Hensarling, you are recognized
for 5 minutes.
Mr. Hensarling. Before I get into my line of questioning, I
have a statement here from the Financial Services Roundtable in
opposition to both bills. I would ask unanimous consent that it
be entered into the record.
Mr. Gutierrez. Hearing no objection, it is so ordered.
Mr. Hensarling. Thank you, Mr. Chairman.
Indeed, Ms. Miller, you give very compelling testimony. I
have heard from a number of very small retailers in my district
in Texas, but I am still trying to figure out exactly who is
``David'' and who is ``Goliath'' in trying to figure out the
public relations battle. Is it a battle between your little
grocery store versus Visa? Or is this Wal-Mart versus Liberty
Bank, a community bank that I assume serves a lot of low-income
and minority people in the Ninth Ward of New Orleans. I am not
so certain that it is easy to discern who is ``David'' and who
is ``Goliath'' here, nor do I necessarily think that is a good
way to legislate.
I guess the question I have here--and Mr. Duncan, I don't
have all of your written testimony here in front of me, but did
I hear you make a declarative statement that the payment
systems of Visa and MasterCard violate our antitrust laws?
Mr. Duncan. Yes, you did.
Mr. Hensarling. If so, why are we here? Why haven't the
courts already acted?
Mr. Duncan. Well, the courts actually, Congressman, have
acted in some instances. The Justice Department brought a case
against Visa and MasterCard for another set of rules, which was
the exclusionary rules.
Mr. Hensarling. There again, we have antitrust laws on the
books. If these companies have violated them, I would assume
that the practices of which you complain about today, would
have already been fined and received cease and desist orders.
So are you saying in some cases yes, in some cases no?
Mr. Duncan. I am saying litigation takes years, antitrust
litigation takes years, and, unfortunately, antitrust
legislation is backward looking. So a decision the court makes
today covers what happened--
Mr. Hensarling. Well, I am anxious to see the rulings of
the courts, but my guess is that reasonable minds may end up
disagreeing.
Mr. Duncan, my guess is there are very practical
impediments, barriers to entry, in this market, but are there
legal barriers to entry for people setting up a new payment
card system? Listen, I know it is a capital-intensive business,
but so is the airline business. New airlines have been created
in the last few years. So why don't you all get together and
create your own credit card network?
Mr. Duncan. Well, there are, as you have mentioned,
practical barriers to entry in this market. The two cards, Visa
and MasterCard, have 85 percent of the market.
Mr. Hensarling. I understand the practical barriers. Are
there legal barriers? If so, I would like to work on them; I
believe in more competition as opposed to less. Are there legal
barriers of entry that you would like to make this committee
aware of?
Mr. Duncan. I am not sure that there are legal barriers to
entry that are necessarily within the jurisdiction of this
committee.
Mr. Hensarling. Well, let me ask you this: I assume that
your members believe they do receive some value in these
payment systems. For example, the ease of the payment, you
don't have to worry about the bounced checks. I assume you have
a fairly sophisticated antifraud network.
What we are discussing now is the price that I think I
heard either you or Ms. Miller describe as either abusive or
unfair. So you do acknowledge you get some benefits, we are now
debating whether or not the price is fair. Is that--
Mr. Duncan. There are benefits to cards in some instances,
yes.
Mr. Hensarling. And so, again, the complaint here is the
price. But how does this differ from if your rent goes up, your
utilities go up, your payroll goes up, your insurance premiums
go up? All of that comes into the base price of your item.
Sooner or later, it gets pushed off onto the consumer and you
ostensibly are trying to make a profit. So how is interchange
somewhat unique from every other cost that your membership
deals with?
Mr. Duncan. Actually, that goes to the very first point you
raised as to who is the ``David'' and who is the ``Goliath''
here. The difference is, it is not a question between the
Elmore Store and a large bank; the debate is between open
competition and privately regulated markets. Visa and
MasterCard--
Mr. Hensarling. Well, it sounds like it could be open
competition if we don't have legal barriers to entry.
I see that my time is starting to wind down. I am also
curious about--I guess I will ask this as a rhetorical
question--the ability of retailers to deal in cash only. I can
tell you right now, I just had a son turn 6 years old, and his
birthday cake was purchased from Casa Linda Bakery in Dallas,
Texas. They only take cash, and they have been successful for
decades and decades.
Mr. Duncan. I guess the last point would be that all these
other items you mentioned--the rent, the utilities--we can
either negotiate or control them. We cannot control
interchange.
Mr. Gutierrez. Ms. Miller, I see you are over there trying
to get in a word edgewise. I ask unanimous consent that Mrs.
Miller has 30 seconds.
Ms. Miller. Thank you.
Do we have any control? No. When I take somebody's card, I
have that equipment in front of me, and I swipe the card. It is
through my local bank--I choose to use my local bank because of
the technical support. Does it cost me a little bit more? Yes.
But I am in a rural area. If I have an issue, I can make a
phone call 24-7. I have a real person who can help me out.
As far as your payroll, payroll is something you can
control. That is why it is Cathy and Warren at the Elmore
Store. I have two part-time employees and I employ three high
school students.
Rent, utilities. You bring in the natural cooler systems.
We were actually the first one--
Mr. Gutierrez. Your 30 seconds is up, Ms. Miller. I am
sorry.
Senator Duplessis?
Ms. Duplessis. Thank you, Mr. Chairman.
I would like to just make a few comments to clarify some of
the issues that Ms. Miller suggested.
First, I would like to also invite her to be a customer of
Liberty Bank, because obviously, the bank that you are dealing
with is not giving you the best deal.
At the end of the day, every merchant has a depository
account. That is where the money flows. And so the relationship
that a merchant has with its banker is what causes the
negotiation. Every day, when I look at my merchant accounts, we
look at total relationships and we negotiate their fees.
Mr. Gutierrez. Thank you.
Congresswoman Waters, you are recognized for 5 minutes.
Ms. Waters. Thank you very much. Let me welcome all of our
panelists here today, and thank you for coming.
You are here at the Congress of the United States at a very
interesting time.
What I am gleaning from the testimony is that two of the
organizations that I have fought very hard for, the credit
unions and minority banks, are kind of caught in an unusual and
difficult situation. First of all, many of us are just at this
time very unhappy with the major banks in this country. We have
bailed them out. They have tightened the credit on everybody,
individual consumers. And I am particularly concerned about
these exchange fees or interchange fee--what do you call them?
Interchange. I remember testimony that came from one of the
panelists here--Mr. Mallory Duncan, weren't you before the
Judiciary Committee?
Mr. Duncan. I was.
Ms. Waters. And at that time, I thought there should be
some real concerns about antitrust and collusion based on your
testimony. I don't know what is happening over in that
committee, but I am going to direct my staff to pay attention
to that aspect of this.
Let me just say particularly to our credit unions and
minority bank panelists, there has to be some changes made in
the way that these fees operate now. I understand the problems
that you are presenting to us today, but the overall problems
and the abuses just trump the problems that the minority banks
and the other companies are having.
So what I am going to do is work with the authors of this
legislation to see if I can address some of your concerns as we
make the changes that need to be made, but it cannot stay the
same.
I just don't understand, merchants are forbidden to impose
a surcharge for the use of payment, credit or debit cards,
under the no surcharge rule. Merchants are required to take all
credit cards bearing the card association brand on our all
cards rule. They are required to accept these cards at all
outlets. Merchants are prohibited from offering discounts to
particular types of cards. The nondifferentiation rule. Who
made these rules? Where did these rules come from?
Mr. Miller. Isn't it Visa and MasterCard?
Ms. Duplessis. No. May I make a response to that?
Ms. Waters. Sure. Yes, please.
Ms. Duplessis. I think some of the issues that you brought
up are inaccurate. First, that there is no charge or difference
that Visa or MasterCard requires for cash or credit. The second
thing is, imagine you are shopping or you are going to make a
purchase. This bill would allow credit merchants to change at
their will who and what type of credit card they will accept.
So today, you walk in Target or Wal-Mart or Saks, and you have
a credit card that you typically use. Tomorrow, Saks may say
they don't accept that.
Ms. Waters. But excuse me, if I may. That has always been
the way that credit cards worked in this country. I have credit
cards that cannot be used. It didn't just start yesterday. And
it still goes on all over the country. So what is different?
Ms. Duplessis. It is the networks. Your merchant can decide
whether it will accept Visa, MasterCard, Discover, American
Express, or any of the other credit card companies. They can
decide which one of those companies they will accept. But if
they decide to accept the Visa, MasterCard, Discover, American
Express, then they have to accept all cards using that logo,
that network. The difference here is, they can say I accept
Visa, MasterCard, but I only accept this type of card that
Visa, MasterCard uses.
Ms. Waters. But this is a rule that was basically developed
by the big credit card people.
Ms. Duplessis. No, this is what his bill would do to us. It
would change the ability for that consumer--if I have a Visa
card and I decide--and ``X'' merchant accepts Visa, then I can
use any type of Visa card that I have, whether it is a rewards
card, an affinity card, or any type of card at that store to
make a purchase. If this legislation passes, that store may
say, we accept Visa or MasterCard, but not that particular
issuer. That is the dangerous part. And that is the part that
would create a very uncertain, very inconsistent--
Mr. Gutierrez. Your time has expired.
I ask unanimous consent that the National Association of
Convenience Stores and the Society of Independent Gasoline
Marketers of America; the Electronic Transactions Association;
the Independent Community Bankers of America; the National
Black Chamber of Commerce; the Blackhawk Network; the Honorable
Betsy Markey; and the American Bankers Association all have
unanimous consent for their statements to be included in the
record.
Hearing no objection, it is so ordered.
And next we have the ranking member, Mr. Bachus. You are
recognized for 5 minutes, sir.
Mr. Bachus. This interchange fee is a serious issue. I
think most of the members are trying to study it and make a
judgment. But my remarks are going to be on something else.
Mr. Mierzwinski, you made the remark--and I think it was in
connection with implementation of the new credit card bill--
that you believe the banks are behaving badly?
Mr. Mierzwinski. That is correct, sir.
Mr. Bachus. I know Congresswoman Waters says that she and
her colleagues are very upset with most of the big banks. I
think you would admit that is a broad generalization of all
banks.
Mr. Mierzwinski. Well, I think that in the credit card
market, as you know, Mr. Bachus, the credit card market is
extremely concentrated, there are just a few banks. According
to studies that will be discussed in the second panel by some
of my consumer colleagues, all of the big banks are either
raising interest rates dramatically, raising minimum payments,
jumping on consumers with massive changes to their cards. And
so if the credit unions aren't doing it, that is great, but
they have such a small part of the market.
Mr. Bachus. Well, let me say this; we passed credit card
legislation that increased their cost--I think we all would
accept that--and it exposed them to risks that they didn't have
before. And I think at the time we debated it, there were
pretty broad statements by both the industry and by Members of
Congress that this was going to result in--that they were going
to have to raise the rates in many cases, that they were going
to have to restrict credit in many cases. In fact, I read
studies at the time that said they may have as many as 25
percent of the folks who were extended credit probably may be
denied credit cards going forward depending on how it was
implemented.
So I don't think it should come as a shock to any of us,
including consumer groups, that they are raising rates and they
are limiting their exposure. In fact, I would submit, if they
made any mistakes--and they did over the past several years--it
was overextension of credit, giving credit cards to people who
probably should not have had them, giving them too much credit.
And they have taken tremendous losses on it. And their costs
are going up. They don't escape a bad economy.
I am just saying that I think of everything we do here,
that we don't approach this from the banks are behaving badly.
I understand your frustration, but I can say that it could have
been predicted that people were going to be getting notices
that their rates were going up because--yes, and some of the
changes I think were good, but it was also very predictable
that it was going to cost more because somebody has to pay for
it.
Mr. Evans, let me shift gears and ask you a question. You
did a recent University of Chicago study on the Consumer
Financial Protection Agency, as it is so called?
Mr. Evans. Yes, that is correct.
Mr. Bachus. You state that under conservative assumptions,
that legislation would increase interest rates consumers pay by
at least 160 basis points, reduce consumer borrowing by at
least 2.1 percent, and reduce net new jobs created in the
economy by 4.3 percent?
Mr. Evans. Those are the findings, yes, sir.
Mr. Bachus. And that is conservative, right?
Mr. Evans. Certainly, the first two are.
Mr. Bachus. Okay. 160 basis points? You said what now?
Mr. Evans. The first two statements you said, the 160 basis
points, that is conservative.
Mr. Bachus. Conservative. That it would raise interest
rates by that amount and reduce consumer borrowing by at least
2 percent?
Mr. Evans. That is correct.
Mr. Bachus. What effects would that have on our economy?
Mr. Evans. In the long run, it would have a terrible effect
on the economy. And remember, the CFPA is a very onerous and
very intrusive form of regulation. So in the long run, my
belief and the result of the study is it would have a serious
effect in terms of the access that consumers and, very
importantly, small businesses will have to credit.
In the short term, I think it is particularly problematic,
the CFPA, and the reason it is particularly problematic is it
creates an enormous amount of uncertainty for lenders, imposes
a lot of potentially very high costs on them, and I think in
the short term the result of the passage of the CFP Act in its
current form would have a very serious effect on access to
credit and a negative effect on the economy.
Mr. Bachus. And those were conservative assumptions. I
can't imagine if--
Mr. Gutierrez. The time of the gentleman has expired. We
are going to recess. We have some votes, and we will be back
right after the votes.
[recess]
Mr. Watt. [presiding] The Chair has asked me to continue
the process. I was the next in line to ask questions anyway, so
we will consider the hearing reconvened and I will yield myself
5 minutes as soon as we find somebody who can operate the clock
for us.
Let me just make a couple of comments in my 5 minutes of
time. I am one of those people who has the luxury--or the
curse--of serving on both the Judiciary Committee and the
Financial Services Committee. And I think I got some
appreciation during the last term of Congress of how
complicated a subject this whole interchange fee issue is over
in the Judiciary Committee when there was an effort made to
solve the retailers' problem by allowing them to band together
and disregard the antitrust laws as a counterweight to the
power of the industry on the other side. I didn't think that
was a reasonable solution, not because I didn't think probably
that there were some problems that needed to be addressed, but
I just didn't think that was the appropriate solution. It was
the only solution that the Judiciary Committee could really
fashion within its jurisdiction since it has jurisdiction over
the antitrust laws, but that didn't necessarily make it an
appropriate solution to the problem.
There are multiple players here. The one thing I found out
is that there are retailers, there are banks, there are credit
card companies, there are credit unions who, despite the fact
that they issue credit cards, have a slightly different
position sometimes than the banks, and of course there are
consumers. So I identified at least five different interests
that have to be taken into account during my evaluation of this
in the Judiciary Committee.
I think today's hearing actually is a very productive thing
because one of the concerns I had about what we were doing in
Judiciary was that I didn't think we had enough hearings for
people to understand the relative interest of those five and
potentially other parties to this discussion. And while we
don't ever understand completely the totality of nuances and
facts and different circumstances in any area that we legislate
in, I think we do better legislation the more we understand
about the various interests that people have in it, and we have
at least then the capacity to try to balance those interests
from a public policy perspective. So that is kind of the way I
am approaching this. I think this is a valuable hearing because
it adds to the level of knowledge that we as members of the
committee have to try to fashion a solution.
Now, having said that, the question I would raise I guess
is this; we did a credit card bill on the consumer side that
constrained certain kinds of conduct vis-a-vis consumers. Is
there anybody who thinks that some kind of legislation on the
other side that has the potential to impact consumers through
interchange fees is not an appropriate exercise? Is there
anybody on this panel who believes we should be doing nothing?
Just raise your hand if you believe we should be doing nothing.
Ms. Duplessis. I do.
Mr. Watt. Tell me why you think we ought to be doing
nothing.
Ms. Duplessis. I am not going to say that I believe that we
should be doing nothing--
Mr. Watt. Okay. Well, then you are not going to be
responsive to the question I asked. I didn't ask what we ought
to be doing, I just asked is there anybody who believes we
ought to be doing nothing.
Is there anybody who believes--and my time is running out--
who believes that we shouldn't at least be taking a look at the
interchange fee side of this equation in the interest of
consumers and all of the parties as we did on the other side
when we addressed--maybe not the same way, but some kind of
framework on the interchange side of this equation? Does
anybody think we shouldn't be at least exploring that
possibility?
Mr. Caverly. I just want to make a comment.
Mr. Watt. Mr. Caverly is getting ready to make a comment. I
am not sure it is in response to my question, but go ahead.
Mr. Caverly. I think there is a danger in getting involved
in regulating interchange fees.
Mr. Watt. There is always a danger in everything we do, I
understand that. But my impression, to be honest with you, is
that there is so much inconsistency out there, and that this is
an area that at least we need to be looking carefully at. I am
not sure that I have decided what the solutions ought to be. I
am not sure I even understand all of the problems that exist; I
am just trying to get a basic understanding.
But my time has expired. I used most of it making my
opening statement. So I am going to go on to Mr. Sherman from
California for 5 minutes.
Mr. Sherman. Thank you, Mr. Chairman.
We have dealt with this same issue in Judiciary where the
proposed solution was to deal with antitrust law to allow
retailers to get together and bargain. Over there, what I
suggested was, what if we limited to retailers with 500 or
fewer employees. And my concern then was that the proponents of
dealing with the interchange fee paint this picture, and I
don't have to describe the picture that well, it is actually
the same picture that is on Cathy Miller's report, and that is
a picture of a small store. And they say we have to help the
small store. And then I proposed an amendment that would limit
it all the way up to 500 employees, and the proponents of the
bill beat the amendment.
Why, Mr. Duncan, do we not simply address the picture that
is being painted, which is that the small stores aren't being
treated well? Why do we need to help WalMart?
Mr. Duncan. Well, it is not a matter of helping WalMart or
the small stores solely. The problem is we have a market that
is not working, as we discussed in Judiciary. And if we believe
that competition is good for all merchants, all banks, and all
consumers, then we need to remove fetters on competition for
everyone.
Mr. Sherman. I understand the theory. But if WalMart's
costs go down, does that mean they charge me lower prices or
make higher profits? And if the interchange fee is less, does
that mean that I don't get my miles? The point here is that the
credit card companies are competing. They are competing to try
to get as many cards in people's hands as possible. Sometimes,
that is a problem in that they extend credit that people can't
afford to pay. They have been jolted out of doing that. They
may be going too much in the other direction.
But right now, the stores have to pay a lot. And the cards
compete for business by giving me free miles. Why should I lose
my free miles so that WalMart's costs go down? How certain am I
that WalMart is going to pass that savings on to me?
Mr. Duncan. Well, let me try to explain how the savings
works. Obviously, every merchant, if this were to pass, would
pass the savings on in a different way. Let me explain how that
works. Merchants compete for market share. And if you are in a
market that favors low-cost products, you want to grow that. So
what you will do--
Mr. Sherman. Sir, I am in a market that favors high profits
and big dividends. So I will shop at the stores in my area. I
am not going to get lower prices. I am not going to get a
cleaner store. I am just going to see that WalMart's dividends
per share go up. How does that help me?
Mr. Duncan. If in fact--let's take two stores competing, if
they are in the cost-sensitive market. If one of them is
returning the costs and the other isn't, as I said in my oral
testimony, the one that is returning the costs grows their
market share.
But you could have a different scenario. You could have a
high-end store which says--I will use Nordstrom as an example,
and they don't compete on price, they compete on service. And
so they will provide more of what their customers want in terms
of more service because that is how they--
Mr. Sherman. You are assuming that retailing is such a
competitive market that every savings is passed forward to
consumers. And I am telling you about a different area, where
in fact it isn't so competitive, and the lower costs translate
into higher dividends for shareholders. If the image you are
trying to paint in favor of this bill is a small store, I would
think we would want to limit it to small stores.
But I want to ask one other question. Why not simply solve
this problem by giving me a 1 percent discount for paying cash?
Why won't your members do that for me?
Mr. Duncan. There are two questions there. One of them is,
do the card companies put up barriers to us providing discounts
for cash? And they have put enough barriers in place that most
retailers can't do it. A few can. That is the quick answer to
that.
Mr. Sherman. What are these barriers and why can some
retailers jump over them in a single bound and others are
constrained by gravity? I have been told by the other side that
all your members are just free to give me a cash discount. They
don't, for their own marketing reasons.
Mr. Duncan. No, that is not accurate.
Mr. Sherman. What if we simply prohibited all barriers to
giving a discount for paying cash?
Mr. Duncan. That is an excellent idea, and in fact that
idea was proposed in the other body by Senators Durbin and
Bond, and the banks screamed bloody murder that we might pass
the savings on to consumers, so they tried to block it.
Mr. Sherman. I will for the record ask Mr. Caverly to
respond to that and see if he screams bloody murder about that.
I yield back.
Mr. Caverly. As a follow-up to that statement, I believe
the merchants already have the ability. Irrespective of any new
legislation, merchants can provide a cash discount under the
current rules. And back to the question, there has been a lot
of discussion about consumers and how the consumers are going
to benefit.
Mr. Sherman. My time has expired.
Mr. Watt. [presiding] The gentleman's time has expired. The
gentleman from New York, Mr. Meeks, is recognized.
Mr. Meeks. Thank you, Mr. Chairman. And I have been
listening to the hearing in my office, and I am not sure--I
heard Mr. Scott's opening statement. And I kind of agree with
him, because I have constituents on both sides. And so that is
why I have been listening with a lot of intent.
But let me just ask a question, I think that Mr. Sherman
was asking to Mr. Duncan, and just say, what if we included in
this bill language that said all savings from this bill had to
be passed through to customers, and they had to be posted
transparently so that they could ensure you are not simply
extracting margin from credit card companies to pass through to
individual retail companies? Would you have any objection to
that?
Mr. Duncan. Sure. Absolutely.
Mr. Meeks. You would have an objection?
Mr. Duncan. I would have an objection because you would
simply be substituting one restraint, the restraints they put
on us now as to how and when we can offer discounts, for a
different set of restraints as to how we would have to accord--
Mr. Meeks. Let me go on that because it seems on the one
hand, someone is saying this is going to save the consumers
some money. And if it is going to save the consumers--that is
the reason--then it seems to me it should not be a problem in
posting, well, this is how we are saving you some money. And as
a result, the money is not going back into our pockets, this
money is going to consumers.
Mr. Duncan. I see what you are saying. Let me say it a
different way. As I was just saying to Mr. Sherman, different
stores will respond depending upon their particular market. So
one store might decide, for example, that we are going to give
you free gift wrapping if you use a cheaper form of payment.
You use a debit card, you use cash, we will give you free gift
wrapping. That is a savings to the consumer, but it is not in
the same way as a dollars savings that you would see.
Mr. Meeks. I want to ask you that in a second, but I want
to go just about another concern because we only have these 5-
minute interviews here. But Ms.--I hope I am pronouncing your
name correctly--``Duplessis?''
Ms. Duplessis. ``Duplessis.''
Mr. Meeks. ``Duplessis.'' Senator Duplessis. I was
listening to you also. Here is one of the concerns that I have
about unintended consequences. And I think this is what you
were getting at, I just want to make sure, about reducing
access to credit. And especially it is important at this time
when our economy is in the most need, and generally I think
people utilize their credit cards more as they spend more
money.
And I think what your testimony--based upon your testimony
this morning, I am concerned that it will further have a
disproportionate impact on access to credit, especially for
minorities and people of color and others who are already--
basically, those people who are already on the margin of being
able to have access to credit. Can you share your thoughts on
that?
Ms. Duplessis. Yes. You are right on target with what we
are talking about when we say that there could be some
unintended consequences. But in addition, on the merchants'
side, when we talked about unintended consequences that they
are not factoring into this equation, we are talking about the
issue that cash is not a cheaper form of payment. Cash is
perhaps a more expensive form because that merchant, by using
electronic payments, that merchant now does not have to pay for
the transportation of that cash. That merchant, while that cash
is sitting in their cash register, it is not earning interest
for them. When they are using an electronic form of payment,
that cash is deposited in their accounts immediately. So that
merchant has immediate availability to reinvest those dollars.
We have not even talked about the money that they are
making as a result of being able to have immediate availability
of cash. In addition, they do not have courier expenses, which
goes to the bottom line. That is a cost savings for being able
to accept electronic payment.
Mr. Meeks. Let me ask Mr. Duncan. I am sorry I am cutting
you off, because I see my time is about up. But I heard in his
testimony or read in his written testimony that he said debit
cards are plastic checks. Who is responsible for collecting the
payment in the case of a bounced check? And I thought that is
the retailer. As opposed to, in the case of a credit card or a
debit card, isn't it the bank or the credit card company that
is behind it? Is that not correct? And so therefore, I am
wondering, are there good estimates of the cost burden that
collections on bounced checks imposed on retailers before
credit and debit cards became the predominant form of payment?
Mr. Duncan. There have been a number of companies who have
looked into that. And I hate to disagree with the senator, but
in fact the cost of accepting cash is a fraction of the cost of
accepting credit cards or debit cards, a small fraction.
Checks, we have found, cost us virtually nothing in comparison
with the cost of taking debit cards or credit cards.
Let me just put it a simple way: It doesn't cost any more
to carry a $10 bill to the bank than it does to carry $1,000 in
bills to the bank.
Ms. Duplessis. Yes it does, sir. As a banker, there are
things called analysis charges. And every bill that you deposit
into a bank, there is a charge for handling that money.
Mr. Duncan. Let me say that a $1 bill versus a $100 bill.
Ms. Duplessis. Okay.
Mr. Green. [presiding] Excuse me, friends. While we are
enjoying the debate, the chairman expects us to move along. We
have another hearing that will take place here at 2:00 today.
Mr. Scott of Georgia is now recognized for 5 minutes.
Mr. Scott. Thank you, Mr. Chairman. Could you all tell me
why the interchange fees have been rising so? Particularly with
some of the technological changes that are being made, why have
they been rising so fast?
Mr. Caverly. The fee itself as a percent of the transaction
has not risen. That fee as a percentage has stayed relatively
flat over the last decade. What you are seeing, though, is an
increased use of plastic cards as a form of payment, an
increase in sales volume associated with the use of debit and
credit cards. But the fee itself as a percentage has remained
relatively flat.
Mr. Mierzwinski. Mr. Scott, if I could just respond. It is
a time when it should be declining; because of the cost of
providing the product, it should be declining, not staying
flat.
Ms. Duplessis. Actually, the costs of providing the product
has escalated, because we now have other issues to contend
with, fraud and those types of issues, breaches in card
security that sometimes the merchant doesn't have the necessary
infrastructure to stop card breaches. And so those costs are
borne by the bank and the issuing card carrier, holder, because
we now have to try and handle those issues that the merchant
doesn't bear.
Mr. Scott. But isn't fraud going down?
Ms. Duplessis. No, not at all. It is getting worse.
Mr. Caverly. We also have to contend on an ongoing basis
with data breaches. And in late 2008, early 2009, there was a
data breach at a merchant processing company, and that caused
our credit union to reissue about 50,000 new cards at a cost of
$150,000. So there are ongoing costs.
Yes, I understand the theory is the payment system is in
place, but there are ongoing costs, and they are escalating.
Ms. Miller. Sir, if I could interrupt whenever you are
ready?
Mr. Scott. Yes.
Ms. Miller. In my small store, in my situation I go to the
bank. We do daily deposits. I deposit cash. It doesn't cost me
money to deposit cash. It doesn't matter if I put in $1 or I
put in $1,000. If I deposit a check that I decide to take from
a consumer, it costs me 15 cents to deposit their check into my
banking account. So if a customer writes me a check for $1.35
for a bottle of water, I pay 15 cents.
If they decide to ask my husband Warren for $200 cash back,
I have to go somewhere, it costs me 15 cents. If the person
uses their debit card, their credit card in my store, it costs
me 20 cents every time I swipe that card, plus my transactions
fees, which I find out at the end of the month.
And I beg to differ--maybe in Mr. Caverly's situation, he
says fees haven't gone up--but my fees have gone up. And since
I testified in 2006, credit card usage has gone up over 50
percent in our store. People are using plastic. I want to be
able to take it. I don't want to discriminate against my
customers. I don't want to say, okay, you are giving me cash,
this is going to be your price.
We are a small operation. We don't scan. And it would just
be a major nightmare. And I would suggest if you removed any
barriers, give us a chance to give a consumer a discount or a
free product for any type of payment.
Ms. Duplessis. Sir, can I read a statement from Visa and
the rules with regards to surcharging?
Mr. Scott. Sure, go ahead.
Ms. Duplessis. If I may. It says: ``Always treat Visa
transactions like any other transaction. That is, you may not
impose a surcharge on a Visa transaction, but you may, however,
offer a discount for cash transactions.''
So I don't understand why we keep saying that Visa or
MasterCard doesn't allow merchants to charge a discount for
using cash. It says it directly in the agreement between the
merchant.
Ms. Miller. I am not saying--okay. Go ahead.
Ms. Duplessis. Would you like this?
Ms. Miller. I am not saying that is not true. I know I
can't add a surcharge to my consumer.
Ms. Duplessis. You have been saying all along that you
can't.
Mr. Scott. All right.
Ms. Miller. No, I am saying I can do a cash discount, but I
don't want do a cash discount.
Ms. Duplessis. You don't want to do a cash discount. That
is different than not being able to.
Mr. Green. The member is in control of the time. Mr. Scott.
Mr. Scott. I have 5 minutes. And now some of that is gone.
But if you do, just allow them to come through me. This is good
give-and-take. This is exactly what we need.
Let me ask a couple of questions about our credit unions
and smaller banks. How can reasonable rates be established so
that some of the smaller community banks and credit unions can
continue to offer credit services for their customers?
Ms. Duplessis. It is all about relationships, sir. If I
have a merchant who is banking with Liberty Bank, that merchant
is based on the number of relationships or the type of
relationships they have with me, i.e. their personal accounts,
a loan, other types of products, then I can in totality look at
those relationships and negotiate their fees and as well as
their interchange fees.
So this notion that merchants and retailers can't negotiate
interchange fees is just false. We do it all the time. But it
is based on a relationship that individual small retailer has
with their bank.
Mr. Green. The time has expired, Mr. Scott. We will have to
get the question for the record. Thank you.
Mr. Moore is recognized for 5 minutes.
Mr. Moore of Kansas. Thank you. Mr. Caverly, while some may
be more concerned with large firms like Visa or WalMart in this
debate, I wonder how this interchange proposal will affect
small businesses who need access to credit: community banks and
credit unions, as well as small merchants who are competing
against large retailers.
As you know, our financial system remains fragile. And I
hear from small businesses in Kansas that have lost access to
credit, or they see their credit line slashed, if there is a
dramatic change in interchange rules today, what effect would
it have on credit unions and community banks?
Mr. Caverly. The effect would be significant. Kind of going
back to this specific bill with the honor-all-cards rule, I
think that would create mass confusion for our consumers, for
our members, to not have the confidence that when they walk up
to a merchant and see the Visa sticker on the door that their
card will be honored or accepted.
But with respect to a reduction in interchange fees, there
is a cost, there is an ongoing cost to offering these card
programs. And in this discussion--the question of what would
happen if interchange fees are reduced is not an academic
question or an academic discussion. We can look at what
happened in Australia when the government did step in and
reduced interchange fees. The merchants received to the tune of
about $900 million a year in benefit. That benefit was not
passed on to consumers. What did happen, though, is many small
issuers, perhaps like a credit union or a small community bank,
were forced out of the market. But ultimately, consumers ended
up paying more because now to replace that loss in interchange
income, the issuers had to begin charging fees, annual fees for
cards, higher annual fees for rewards programs.
So I think ultimately that is the impact. Significant
impact on the credit union, but more importantly a significant
impact on our membership and consumers.
Mr. Moore of Kansas. Senator Duplessis, do you have any
additional comments?
Ms. Duplessis. No, I think he basically hit the nail on the
head.
Mr. Moore of Kansas. Thank you. In today's economy, Ms.
Miller, would sweeping changes to interchange rules help or
hurt small retailers? And would you be concerned these small
retailers would lose access to credit?
Ms. Miller. Yes, it would help us. I don't believe that we
would lose access to credit or to the use of it. It has just
become so predominant in our world today, if the consumer wants
it, it is going to happen.
The big thing, when I testified earlier, is just if we
could set up a minimum, like Congressmen Welch and Shuster have
proposed in this bill, it would be a godsend to small
businesses. Because--like my examples with the gum, my examples
with the potato chips, a bottle of water. It is real and it
happens every day. So yes, it would help us, sir.
Mr. Moore of Kansas. Okay. Thank you. I am aware the
Government Accountability Office, GAO, is working on a report
they will release soon on interchange fees. But looking at the
report they wrote last year on the impact of interchange fees
on the Federal Government, the GAO found that in countries that
have rolled back interchange fees to less than 1 percent of
transactions, consumers did not necessarily reap the benefits.
I don't know if there is a lot of interest in simply
transferring profits from one industry to another, but why not
require all savings from interchange fees be automatically
transferred to consumers?
Ms. Miller, do you have any views on that? And Mr. Duncan
as well?
Ms. Miller. To be totally honest, I have never thought of
it the way that you are talking about it. Would it be passed on
to my consumers? Yes, it definitely would. You talk about
competition, there is not a lot around us. We are a small
store. There are 850 people in town. We have a one-room school
house across the road. You have to go 25 miles to Montpelier,
you have to go 50 miles to Burlington. I have to take care of
my customers. If I don't take care of my customers, the doors
are going to close. I need help.
Mr. Moore of Kansas. Mr. Duncan, do you have any thoughts?
Mr. Duncan. Sure. Let me start with the GAO report. It is
unfortunate in that GAO report that the staff chose to rely on
a study that was actually a MasterCard study, rather than going
to the Federal Reserve Bank of Australia. Because if they had
spoken with the Federal Reserve Bank, they would have found
that in fact there had been significant savings to consumers as
a result of the changes in Australia.
And in fact, I was at a conference in Chicago just
recently, the Chicago Fed, where they talked about $1.1 billion
in returns to consumers as a result of the changes that they
had made there.
In terms of the other issue, if I may just briefly--
Mr. Moore of Kansas. Sure.
Mr. Duncan. In terms of the honor-all-cards rule, I think
there has been some mischaracterization of the Shuster-Welch
bill. The honor-all-cards rule when it was first enacted was
actually an honor-all-banks rule. What it said is if you got a
card from Nevada or a card from Colorado or Massachusetts, they
all have to be accepted.
What the card companies did was they took that rule and
they perverted it and they said it is not just honor all banks;
it is honor all products that we put our name on. So if we
issue a very expensive product, you have to take that. The
Welch-Shuster bill would take it back to the original honor-
all-banks rule so cards from all banks and all credit unions
would still be accepted.
Mr. Moore of Kansas. Thank you, sir. I yield back.
Mr. Green. Thank you. Mr. Cleaver is recognized for 5
minutes.
Mr. Cleaver. Thank you, Mr. Chairman. Mr. Duncan, you said
earlier, and I think several have quoted you that the debit
card is a plastic check. And you still stick by what you said
earlier?
Mr. Duncan. Yes.
Mr. Cleaver. Okay. Senator, do you agree?
Ms. Duplessis. No. Well, I agree that it could be
considered a plastic check, absolutely.
Mr. Cleaver. Okay. When a check is presented by a merchant,
either through the machine--Emanuel Cleaver has just written a
check here for $50--they do the machine to check the balance,
and they come back and say sorry, you are writing a check for
$35, you only have $25 in your account, I am sorry, we can't do
business.
Ms. Duplessis. You bring up a really good point. That is
called remote deposit capture, in which a merchant can take
that check, run it through a scanner, and it talks with the
bank to determine if funds are there.
Mr. Cleaver. Okay.
Ms. Duplessis. But there is a fee for that, too. That
merchant pays a fee. You can call it an interchange fee, but
there is a fee that merchant pays for that convenience.
Mr. Cleaver. Right. Good. Now, but then we have a problem.
And that is the same thing could be done with a debit card. It
is a plastic check. But it is not. And so what the debit card
does is create a high-interest loan. And if you are making
loans, what is the difference between a loan shark, which is
defined as an interest rate of between 10 and 20 percent--the
new definition, not the Mafia and the Godfather stuff--but the
definition of 10 to 20 percent. So if you can find out that a
paper check has insufficient funds, couldn't you also find out
that the debit card--
Ms. Duplessis. You do. It is all real-time. It is all the
same process.
Mr. Cleaver. So explain how banks were able to end up with
$24 billion, with a ``B,'' billion dollars in overdraft fees.
Ms. Duplessis. That is when you use the old process of
depositing a check. And that is an extremely great point.
Because for that merchant, they have a couple of options. They
can take that paper check, not pay for the service of scanning
that check to get real-time dollars, and have those dollars
automatically deposited into their account. They don't have the
cost of a bounced check.
But if they take that same check and bring it to their bank
for processing, then they have some risk there. They have the
risk that the check will not be honored. That is a cost to that
merchant.
Mr. Cleaver. So when the debit card is swiped--
Ms. Duplessis. Real-time.
Ms. Miller. If there is no money there, it says
``declined.''
Ms. Duplessis. It says ``declined.'' Same with the check.
It is the same process, two different machines.
Mr. Cleaver. Okay. But explain how you end up with a $24
billion balance sheet on overdrafts with both debit cards and
paper checks--
Ms. Duplessis. You don't.
Mr. Cleaver. --which is up 35 percent from last year.
Ms. Duplessis. No, sir, you don't. Let me try and get you
there. What is happening, when that transaction comes in, it
depends--you have in a person's activity, you have numerous
transactions that are posted.
Mr. Cleaver. Okay. I don't want to learn. What I want you
to do is tell me, how did the banks come up with $35 billion
more than they did 2 years previous to that in overdraft fees?
Ms. Duplessis. It wasn't based on real time authorization.
It was not based on real time authorization, sir. If that bank
gives you an authorization that the money is good, whether you
do it with a check and it is scanned, or with a debit card,
when you get an authorization the money is automatically,
immediately--they call it presentment--taken from your account.
So the overdrafts that banks receive, the billion dollars
that you say that the industry has received--
Mr. Cleaver. Twenty-four billion.
Ms. Duplessis. But you are talking an industry, not one
bank. The industry, that the industry has received, is not
based on credit card or check scanning real-time transactions.
Because the money is already accounted for.
Mr. Green. The gentleman's time has expired. We will now
recognize the ranking member, Mr. Hensarling, for as much of my
time as he may consume. And I will have 5 minutes.
Mr. Hensarling. Thank you, Mr. Chairman. I appreciate your
indulgence. I just have a couple more questions. And in the
interests of time, I am happy to have the witnesses submit
their answers in writing.
The question of the Australian experience has come up. It
is the only similar legislation I have seen in a modern economy
dealing with interchange. Mr. Duncan, apparently you take issue
with the prevalent studies that say that when merchant fees
dropped, they did not result in lower prices from consumers. So
I would be interested in what studies you have, if you would
submit them in writing, since what I have seen shows--
Mr. Duncan. I will submit the statements of the Federal
Reserve in fact, yes.
Mr. Hensarling. Fine. Send that, please.
Also, I have seen studies that show that after that
legislation was passed, merchants began adding credit card
surcharges to goods, increasing costs to consumers. And on the
competition side, one of the major bank cards shut down in
2006, lessening competition for consumers.
Again, if you have facts or studies that are to the
contrary, if you would submit those in writing.
One question for you, Mr. Mierzwinski. And that is, it is
my understanding if this legislation passes, that the usual
contract clause that ensures that consumers have universal
acceptance of their cards will be thrown out. And as an
organization that ostensibly lobbies in favor of consumers, if
you would submit an answer in writing how that benefits the
consumer, because at the moment, it is beyond me.
Thank you, Mr. Chairman, for your indulgence.
Mr. Green. Thank you.
With the remainder of my time, which is a little more than
3 minutes, let's just start with Ms. Miller, and we will give
each of you an opportunity to give a closing statement. I do
ask that you be as terse as possible so that the rest of your
colleagues will have an opportunity to respond.
Ms. Miller, any final words that you would like to share
with us?
Ms. Miller. I wasn't really ready. But I guess my biggest
thing is, please support Congressmen Welch and Shuster in this
bill. If I can be of any more assistance to anybody, I am only
a phone call away, an e-mail away. I want to help.
And another thing, too, I don't know if you really
understand this; we can't talk to our customers about this. I
can't, according to their rules and regulations, tell my
customers what they are paying in fees through my business. So
I am going to go back to the store tonight, and tomorrow
morning everybody's going to be like wow, what is up? And I
can't talk about it. So please support their bill. Thank you.
Mr. Green. All right. Sir?
Mr. Caverly. To respond to that comment, my understanding
is that Visa and MasterCard both allow the merchants to provide
that information to their customers in terms of the fee
structure. That can be provided by a merchant to their
customers.
In closing, or to wrap this up, I think Congressman Scott
had mentioned this in his opening comments, that I think the
key question is what would happen to the consumer? And again, I
am here representing the 92 million--
Mr. Green. I am going to have to ask that you wrap it up,
because I do want to hear from the other panelists.
Mr. Caverly. Okay. I am here representing the 92 million
credit union members and the 178,000 members in my credit
union. And I think ultimately, whether it is this legislation
or other legislation that will reduce interchange fees, it is
going to hurt the consumer.
Mr. Green. Next, please.
Mr. Mierzwinski. Very briefly, first, I will respond in
detail to Mr. Hensarling's question. But I don't believe the
honor-all-cards rule is actually meant as a consumer protection
rule. I refer to Mr. Duncan's comments.
Second, I strongly concur with Mr. Cleaver that we need
overdraft protection at point of sale so that consumers can
decline and not pay those billions of dollars in overdraft fees
since they have the real-time solution.
And third, I would submit the interchange market is broken
and needs reform. But the retail market, I need to be convinced
the retail market is broken and needs the kinds of reforms the
banks claim it needs.
Mr. Green. Thank you, sir. You will each have approximately
30 seconds.
Ms. Duplessis. Thank you. What I would like do is just ask
that you really consider and truly understand the true
unintended consequences that trying to regulate these fees
could have not only on the small community banks, but also on
the merchants themselves. I don't think they actually realize
what those unintended consequences will be.
Mr. Green. Sir?
Mr. Duncan. I would first of all echo Ms. Miller's comments
about the Welch-Shuster bill. And I would add to that just one
point. For markets to work so that everyone benefits, we need
two things: We need transparency and we need competition. We
don't have either of those now. And the bill will help us
achieve that.
Mr. Green. Thank you very much. This panel is excused. And
we will ask that you move away as expeditiously as possible.
We ask that the next panel move forward and be seated. And
we thank you for your patience. We did have a number of votes
that interceded. So thank you very much for your patience that
you have demonstrated.
Thank you. We would like to welcome this, our third and
final panel. And we are honored to have with us today the
deputy director for national priorities for Consumer Action,
Ms. Ruth, and I believe the last name will be ``Susswein.''
Ms. Susswein. ``Susswein.''
Mr. Green. ``Susswein.'' Thank you.
We have the senior vice president and general counsel for
ABA Card Policy Council with the American Bankers Association.
This would be Kenneth J. Clayton.
We have the president of the National Small Business
Association, Todd McCracken.
We have the senior compliance counsel with the National
Association of Federal Credit Unions, Anthony Demangone.
And finally, we have the manager of the Safe Credit Cards
Project, the Pew Charitable Trusts, Mr. Nick Bourke.
We will start with Ms. Susswein, and each of you will have
5 minutes. And when you finish, Ms. Susswein, I will of course
announce the next speaker.
You may proceed. You now have 5 minutes to summarize your
comments.
STATEMENT OF RUTH SUSSWEIN, DEPUTY DIRECTOR, NATIONAL
PRIORITIES, CONSUMER ACTION
Ms. Susswein. Thank you, Congressman. And thank you to the
committee for having me testify today on behalf of Consumer
Action. I am Ruth Susswein with the nonprofit education and
advocacy group Consumer Action. For more than 2 decades, we
have been reporting on credit card rates and fees to track
industry trends and assist consumers in comparing cards. We are
one of the groups that consumers call when they have a credit
card problem.
I would like to express our appreciation today, first of
all, for the chairman's leadership on consumer protection
issues, and particularly for supporting the Consumer Financial
Protection Agency. We are also grateful for the tenacity on
this issue. We strongly support H.R. 3639, to establish an
earlier effective date for the Credit CARD Act.
We are going to focus our testimony today on the exploitive
practices of some card issuers and how some of these practices
have taken place since the Act was signed into law.
We have been conducting extensive annual credit card
surveys at Consumer Action since the mid-1980's. We survey each
of the top credit card issuers, from banks, credit unions, and
low rate issuers. In our 2009 survey, we discovered that
between March and June, some major credit card issuers had
arbitrarily increased rates, spiked fees, and hiked minimum
payments. There appeared to be no rational reason for these
increases, no jump in the prime, no other reason other than
issuers making good on threats that credit would dry up and
cardholders would see costs rise with the passage of the Credit
CARD Act.
A few examples: Bank of America has a Platinum Plus card
that the purchase rate went up to 46 percent. Citi had 3 cards
that went up 26 to 42 percent within that March to June period.
Within 3 months, some cards went up as much as 3 percentage
points. We have also found fees that spiked between March and
June.
Consumer Action also assists consumers with all sorts of
problems. And we hear from our complaint hotline. I would like
to give you just a brief sample of some of the things we have
been hearing about this problem. A Chase customer for 19 years
saw his minimum payment jump from 2 percent to 5 percent; his
amount raised, going up from $250 a month to over $600 a month.
He told us, ``We have excellent credit. We have done a terrific
job managing our money during severe economic conditions.'' And
yet this is a terrible way to treat good customers.
A Maryland cardholder contacted us in desperation when her
rate more than doubled. It went from 12.49 percent to a
whopping 29.9 percent; her monthly minimum went from an
affordable $151 a month to $471 a month. She couldn't pay it.
When she contacted the issuer to try to arrange an affordable
payment plan, she was turned down. And she acknowledged that
she had been late with one payment when her due date was moved
back a week from the 4th to the 30th. She understood being hit
with a late fee, but not a 140 percent interest rate hike.
We happened to intervene on that cardholder's behalf, and
ultimately, the bank was able to help her. But not everyone is
that fortunate. Had the Credit CARD Act been in effect already,
her late payment would not have allowed her rate to more than
double, and that entire ordeal could have been avoided.
We hear from scores of cardholders who have paid on time
each month who have seen their rates rise, often double, often
for no reason at all. We hear from cardholders who say they
have three and four cards where they have seen rates as much as
double.
One cardholder I spoke to yesterday said, ``I have done
nothing wrong. I have lived up to my obligations, and I am
being treated like a deadbeat. And when I call the company and
complain, what they say is, `there is nothing we can do about
it.'''
Cardholders who have seen their rate go from 7.9 fixed to
17.9 variable complain to the company and are told it is a
business decision based upon economic factors. Factors that are
beyond a cardholder's control, even though they are told their
rates are based on risk-based pricing.
If the credit card law was in effect today, issuers would
still have the freedom to raise rates for arbitrary reasons,
but they would not be able to apply the increase to the balance
in most cases.
We don't accept the notion that card issuers must find ways
to replenish their coffers on the backs of cardholders. We
think there is a direct link between some of the indefensible
practices and today's high default rates.
There is no logic in taking a customer who is responsible,
who is meeting his monthly bills and paying interest to boot,
and hiking rates, spiking minimum payments, and transforming
the healthy customer into an unhealthy one. We think that
cardholders have cried out to Congress to add fairness and
limits to this lopsided lending system.
Mr. Green. Ma'am, we will have to get the rest of your
statement in the record. You will be asked some questions, and
perhaps you will have an opportunity to expound. But we must
move forward. Thank you so much. I am sorry.
[The prepared statement of Ms. Susswein can be found on
page 221 of the appendix.]
Mr. Green. Mr. Clayton, please, you will have 5 minutes to
summarize.
STATEMENT OF KENNETH J. CLAYTON, SENIOR VICE PRESIDENT AND
GENERAL COUNSEL, ABA CARD POLICY COUNCIL, AMERICAN BANKERS
ASSOCIATION (ABA)
Mr. Clayton. Thank you, Mr. Green. Thank you for the
opportunity to testify on H.R. 3639, a bill that would move up
the effective date of the broad mandates of the CARD Act to
December 1st of this year.
Let me say at the outset that all card lenders, whether
they are the largest financial institutions in the country or
the smallest community banks, are working hard to implement the
CARD Act as soon as possible. The Act requires a fundamental
change in the credit card marketplace, with consumers provided
greater control over the terms and use of their card. Card
issuers recognize that Congress has spoken, and that changes
must come in how we interact with our customers.
However, while we understand that some members of this
committee continue to express concern over actions taken by
issuers in the marketplace, we believe that there are both
strong practical and policy reasons for not adopting H.R. 3639.
In short, we believe that its enactment will actually
exacerbate the problems experienced by consumers, small
businesses, and the broader economy in accessing reasonably
priced credit.
In my testimony today, I would like to make three basic
points:
First, full implementation of the provisions of the CARD
Act is a practical impossibility. Implementation of that Act is
an enormous task, requiring the complete reworking of internal
operations, risk management models, funding calculations,
employee training, and computer coding necessary to service
hundreds of millions of accounts every day. To do this right
requires an investment of hundreds of millions of dollars,
thousands upon thousands of manpower hours, and perhaps, most
importantly, sufficient time. The timeframe provided in H.R.
3639 is inadequate for the task at hand. The Federal Reserve
just recently issued an 800-page proposal seeking public
comment on provisions of the CARD Act. Comments are due in mid-
November. There is not sufficient time for the Fed to review
the comments, revise the rule to incorporate appropriate
changes, issue a final rule before December 1st, and expect
institutions to immediately change their systems to fully
comply with the new rules by that December 1st date.
It becomes even more difficult when you consider that in
some instances, proposed rules do not yet exist, and that
technological solutions to the various challenges posed by the
new rules will take time to develop.
Besides the practical hurdles of speeding up compliance,
other negative consequences are likely. Thousands of small
community banks that issue credit cards would be negatively
impacted by the change. Retailers that offer private label
cards in concert with major card issuers run the risk of system
failures at the peak time of the holiday season. This is due to
the inadequate time under the proposed bill to implement and
test the systems changes required. This could mean significant
lost sales for retailers at a time period where merchants
typically receive 25 to 40 percent of their annual sales
volume, not to mention the substantial customer confusion,
anger, and loss of convenience that would be caused.
My second point is that the industry is very sensitive to
the concerns that you, Mr. Chairman, Congresswoman Maloney, and
others have raised over increased rates in the marketplace. The
CARD Act includes a provision requiring 45-day advance notice
for any rate increase, with the right for the consumer to say
no. That provision has already been implemented and went into
effect on August 20, 2009, nearly 2 months ago. Thus, consumers
are already protected in this area.
My third and final point is this: The cumulative impact of
six straight quarters of job losses is putting tremendous
financial pressures on both individuals and financial
institutions. Falling behind on debt payments is an unfortunate
side effect of high unemployment and a frozen job market.
Simply put, this has made for a very difficult lending
environment, and the industry is experiencing significant
losses. Lenders must take steps to mitigate risk, which has led
to the price increases and credit line reductions that you have
seen in the marketplace. To do otherwise would seriously
compromise our ability to make loans in the future.
The requirements of the CARD Act that limit prudent risk
management merely exacerbates the challenges presented by the
economy. Moving up the effective date of that Act would
increase the likelihood of systems failures, expensive
litigation, and underwriting problems, adding to the pressure
to increase rates and cut available credit. We believe that
consumers, small businesses, and the U.S. economy will suffer
if such a result comes to pass. Thank you for considering our
views.
[The prepared statement of Mr. Clayton can be found on page
120 of the appendix.]
Mr. Green. Thank you.
Mr. McCracken, you are recognized for 5 minutes, sir.
STATEMENT OF TODD McCRACKEN, PRESIDENT, NATIONAL SMALL BUSINESS
ASSOCIATION (NSBA)
Mr. McCracken. Thank you very much. I appreciate the
opportunity to be here today. Again, my name is Todd McCracken.
I am the president of the National Small Business Association,
America's oldest small business advocacy organization.
When I testified before this committee's Subcommittee on
Financial Institutions and Consumer Credit in March, I spoke at
some length to the difficulties America's small business owners
were encountering in their attempts to access credit.
Unfortunately, the situation is little improved.
In its July 2009 quarterly Senior Loan Officer Opinion
Survey, the U.S. Federal Reserve reported that over the
previous 3 months, domestic banks continued to tighten
standards and terms on all major types of loans to businesses
and households. Banks also reported that they expected their
lending standards across all loan categories to remain tighter
than their average levels over the past decade until at least
the second half of 2010.
Credit cards are now the most common source of financing
for America's small business owners. According to our 2008
nationwide survey of small- and mid-sized businesses, 44
percent of small businesses identified credit cards as a source
of financing that their company has used in the previous 12
months, more than any other source of financing, including
business earnings.
The results of more recent internal surveys have been even
more dramatic. When asked what types of financing their firms
have used in the previous 12 months, 59 percent of the small
businesses in 2009 identified credit cards. In 1993, only 16
percent of small business owners identified credit cards as a
source of funding. And over a third of the respondents in the
credit card survey also reported that a quarter or more of
their overall debt financing was comprised of credit card debt.
In 2009, small business owners have experienced a litany of
abuses and deteriorating credit terms unrelated to their past
performances. Nearly 80 percent of the small business
respondents to the credit card survey said that the terms of
their cards have gotten worse in the last 5 years. Almost half
of the respondents reported that they had encountered a credit
card due date that seemed to change randomly. And 57 percent
reported that they had received a bill too close to the due
date to mail their payment in on time.
Furthermore, a quarter of the respondents reported that
their interest rates increased between February and April 2009,
while a third reported their credit limit had been reduced in
the previous 6 months.
According to a recent article in the Wall Street Journal,
credit card lines have been cut by over $1.25 trillion in the
last 2 years, and 10 percent of all credit card accounts have
been canceled. The same article asserts that lenders began
reducing available credit by ZIP Code in the fourth quarter of
2007, and have been cutting inactive accounts, whether or not
the customer viewed the account as a liquidity vehicle for the
past 4 quarters.
While NSBA supports the expedited enactment of the
protections contained in the Credit CARD Act, it also urges
Congress and this committee to address two additional aspects
of the credit card industry that urgently need reform. One is
the absence of explicit protections for small business cards;
and two is the secretive and uncompetitive interchange system.
The largest loophole, we believe, in the Credit CARD Act
was the absence of the explicit protection for small business
owners who use their cards for business purposes. Since the
legislation amended the Truth in Lending Act, which, except for
a few provisions, does not apply to business cards, its
protections were limited to consumer credit cards. Although the
credit cards of many, if not most, small business owners are
based on the individual owner's personal credit history, it is
conceivable that issuers could legally consider them exempt
from the law's vital protections. Although in the past, issuers
appear largely to have kept most of their cards in compliance
with TILA, there is no guarantee this convention will continue,
especially when one considers that its basis appears to have
been practicality and not legal obligation. Since issuers were
able to subject consumer cards to the most egregious of
practices, there was little incentive to distinguish between
consumer and small business cards.
An unintended consequence of the Credit CARD Act is that it
could provide just such an incentive. Thankfully, legislation
has been introduced that would correct this oversight and
extend equal protection to the cards used by small business
owners with 50 employees or fewer.
The Small Business Credit CARD Act of 2009 also contains an
opt-out provision so that small business owners who do not want
their cards protected in such a manner can choose to keep any
current agreements.
H.R. 3457, this was the bill, is supported by a range of
organizations from consumer groups to small business groups,
and I respectfully request this committee consider this
bipartisan, commonsense legislation as soon as possible.
I am going to submit my statement on interchange fees for
the record--because I think you have dealt with that to a great
extent today--and conclude.
If millions of small firms are going to be created during
this recession, as they have been in previous recessions and
economic downturns, then they are largely going to be financed
with credit cards, given the current lending environment.
Although credit cards are an inherently expensive and volatile
source of financing for many entrepreneurs, they are also
indispensable.
Congress can and must ensure, however, that they are not
allowed to function simply as a mechanism with which to siphon
capital from the backbone of the economy to the top 10 U.S.
banks.
[The prepared statement of Mr. McCracken can be found on
page 194 of the appendix.]
Mr. Green. Thank you, sir.
Mr. Demangone is now recognized for 5 minutes.
STATEMENT OF ANTHONY DEMANGONE, DIRECTOR OF REGULATORY
COMPLIANCE/SENIOR COMPLIANCE COUNSEL, THE NATIONAL ASSOCIATION
OF FEDERAL CREDIT UNIONS (NAFCU)
Mr. Demangone. Good afternoon. My name is Anthony
Demangone, and I am the director of regulatory compliance at
NAFCU and its senior compliance counsel. As the committee is
well aware, there have been many recent changes to the Truth in
Lending Act and Regulation Z over the past year-and-a-half. The
Federal Reserve Board has taken numerous actions regarding
credit card regulations, real estate lending, and student
lending, among others.
Most recently, the Federal Reserve Board announced an 841-
page proposal to implement provisions of the Credit CARD Act,
set to go into effect February 22nd of next year.
In short, America's credit unions have been asked to handle
a seemingly endless number of changes to the lending law. I
fear these changes are being adopted with only larger
commercial banks in mind.
I assure you, however, the resources of the credit union
industry and other small institutions are being stretched to
the limit. This challenge is further exacerbated by the short
compliance deadlines included in the Credit CARD Act, deadlines
made even shorter by the legislation this committee is
examining today.
It is with this in mind that NAFCU strongly opposes the
Expedited CARD Reform for Consumers Act. NAFCU understands that
the Credit CARD Act was a response to a legitimate need to rein
in unscrupulous credit card practices. Unfortunately, the
measures targeting unscrupulous lenders created operational
burdens for an entire industry. Simply put, credit unions will
not be able to bring their systems into entire compliance by
December 1st of this year.
The best argument against a shorter effective date is the
unintended consequences of the 21-day provision included in the
Credit CARD Act. This provision was intended to require lenders
to send out credit card statements 21 days in advance of the
payment due date for their credit card account. Unfortunately,
the provision was drafted so that it applied to all open-ended
consumer plans. This seemingly small issue proved to be a very
substantial and costly problem for credit unions. It will
likely lead to the end of credit unions issuing consolidated
statements, the elimination of the ability to pick due dates,
and weekly and biweekly payment dates will cease to exist for
open-ended lending.
Simply put, the 21-day issue is the largest single
compliance burden the credit union industry has faced in the
last decade. More importantly, it is an issue that could have
been resolved easily if not for the fact that the effective
date followed so quickly after the bill was signed into law.
When Congress passes legislation, it dictates what must be
done. Federal agencies and private industry, however, are
responsible for determining how it gets done. Simply put, there
needs to be sufficient time between when Congress decides what
must be done and when industry is required to have their
operational systems in place to accomplish that end.
Equally important is the fact that it would be virtually
impossible for the Federal Reserve to promulgate regulations to
meet the December 1st effective date. Moreover, even if the Fed
could act in time, I assure you industry could not. We are
currently digesting the 841-page proposal the Fed recently
announced, which will implement the provisions set to go into
effect February 22nd of next year. Many institutions will have
difficulty modifying their operations to meet that date, much
less a December 1st deadline. Given that compliance is
factually impossible, there seems little reason to move the
date forward.
Taken together, the CARD Act and the subsequent changes to
Regulation Z will create significant changes in the credit card
industry. It is customary, natural, and necessary for lenders
to reconsider their own business plan and practices in light of
such dramatic changes. Indeed, it would be irresponsible for
management to carry on current practices without considering
the long-term effect these changes will have on the market. Yet
a shorter effective date will force many lenders to ignore or
discount long-term planning for the simple reason that they
must devote all of their time and energy to compliance.
The bill's provisions regarding increasing interest rates
and changing terms makes sense when considered individually.
However, they will dramatically change the way institutions
conduct their conduct. An artificially short effective date,
however, handcuffs senior management, and will make long-term
strategic planning more difficult.
While we understand the committee's concerns with the
abuses in the credit card industry, a December 1st effective
date will do little to alleviate the problem. At the same time,
an earlier effective date will exacerbate our operational
problems, likely create new problems, and increase the overall
cost of compliance for all lenders.
Thank you for the opportunity to provide our views on this
important topic, and I am pleased to respond to any questions.
[The prepared statement of Mr. Demangone can be found on
page 129 of the appendix.]
Mr. Green. Thank you, sir.
Mr. Bourke, 5 minutes.
STATEMENT OF NICK BOURKE, MANAGER, SAFE CREDIT CARDS PROJECT,
THE PEW CHARITABLE TRUSTS
Mr. Bourke. Thank you, Mr. Chairman. My name is Nick
Bourke, and I am the manager of the Safe Credit Cards Project
at the Pew Charitable Trusts. We are a nonprofit, nonpartisan
organization dedicated to fact-based solutions to important
public policy challenges, including safe and transparent credit
cards.
In 2007, my project began studying the perceived dangers in
credit cards. And one of the things that we did is we reached
out to the industry, and we tried to find some voluntary
market-based solutions, and we tried to find other solutions,
including doing independent research. I am going to talk about
some of our research here today. More results will be published
later this month.
In 2008, the Federal Reserve made the legal determination
that certain practices are unfair and deceptive. And one of the
questions we had was, how widespread are these practices? So we
looked at the application disclosures of all consumer credit
cards offered online from the largest 12 issuers. This is a
group that accounts for approximately 90 percent of the
outstanding balances.
We did this research last December and we did it again this
July. And our July study covered more than 350 credit cards
from these issuers. We found several things, including that
median advertised rates had gone up significantly, 13 to 20
percent, depending upon a consumer's credit profile. But that
is not all.
The first point I would like to make today is that since
the passage of the Credit CARD Act, the situation has not
become better for consumers. For example, 97.7 percent of the
cards that we reviewed included anytime/any-reason change in
terms and policies, which allowed the issuer to change the
agreements, including raise interest rates on outstanding
balances. That is up from 93 percent in December.
Overall, more than 90 percent of the cards that we looked
at contained the most troublesome, unfair, and deceptive
practices in the Federal Reserve's review, low to high
application of payments, so-called hair-trigger penalty
repricing, and so on.
None, not one of the cards that we looked at would have met
the Federal Reserve's fairness threshold, let alone met the
Credit CARD Act. In fact, we saw some evidence that some
issuers were moving in the opposite direction.
My second point is while issuers wait to remove these
unfair and deceptive practices, or to implement the Credit CARD
Act, American families are at risk of significant harm. I have
heard a lot of concern in this chamber just today, asking what
is the impact on consumers and how can they benefit?
Well, let's look at two of these practices. Anytime/any-
reason changes in terms and penalty interest rate increases on
outstanding balances: In our March 2009 report, we discussed
how just these two practices cost consumers at least $10
billion in a 1-year period. That is more than $800 million per
month. So it would seem that time is against consumers in this
situation.
What does it mean to an individual? Well, let's assume that
you have a $3,000 balance, a relatively modest balance. If an
issuer decides to raise your rate by 5 percentage points, that
is about $150 a year. But if they decide to raise your interest
rate by about 15 percentage points, that is $450 per year. And
15-percentage point increases are all too common based on our
research. And your monthly minimum payment is going to swell
dramatically.
So in conclusion, our research supports accelerating the
consumer protections in the Credit CARD Act. The Act will
strengthen the agreements between cardholders and issuers, and
it is designed to enhance transparency and fair dealing, which
should make the market more competitive over time.
Now, I do want to take this opportunity to recognize that
the long-term benefits of the Credit CARD Act will depend in
large part on what the Federal Reserve does next, especially in
its rulemaking, to prevent unreasonable or disproportionate
penalty fees and charges.
Whatever the effective date of the Credit CARD Act, it will
be important to ensure that the Federal Reserve takes the time
and the effort to enact strong consumer protections as well.
And we have made some suggestions in that regard. Thank you
very much.
[The prepared statement of Mr. Bourke can be found on page
59 of the appendix.]
Mr. Green. Thank you for the additional 50 seconds that you
have yielded.
Mr. Bourke. My pleasure.
Mr. Green. The gentleman, Mr. Watt, is recognized for 5
minutes.
Mr. Watt. I was kind of hoping you would go first, Mr.
Chairman, so I could gather my thoughts.
First of all, I apologize for missing the first three
testimonies. I was trying to get here because I always like to
hear the testimony more than I like to hear the questions,
really. It is generally more helpful.
I assume, Mr. Clayton, you disagree vigorously with what
Mr. Bourke testified. Do you?
Mr. Clayton. It depends on which part you are talking
about.
Mr. Watt. The part where he thinks either that these
practices have gotten worse, or that we need to expedite the
implementation of--
Mr. Clayton. We disagree with both.
Mr. Watt. Okay. And why?
Mr. Clayton. In terms of expediting, as I mentioned in my
opening statement--and I apologize, and I will be glad to chat
with you about it--it is impossible for us to comply with the
moving up of the effective date of the provisions of the Act.
This is a massive rewrite of the way we do business. We
understand that Congress has spoken, and we understand that we
have to change our ways.
Mr. Watt. If he is right that you are changing the terms
and moving the target on your own, is it less difficult to do
that than to change the targets in a direction that complies
with the new statutory provisions that are coming online?
Mr. Clayton. Mr. Watt, we disagree with the statement
that--
Mr. Watt. Okay. Well, maybe I should have gotten you to
address that part of it first, then.
Mr. Clayton. Can I say quickly that Congress has already
acted on the issue of interest rate increases and basically
said, as of August 20th of this year, that consumers have to
get 45 days advance notice, and they can say no to any rate
increases. So we have heard the concerns about increased rates.
The Congress has spoken and said you cannot do that, and they
have given an implementation/transition period. And they have
said if someone in the marketplace increases the rate, as
alleged, the consumer can say no, they can close their account,
and they can pay back their balance in a reasonable amount of
time. So the problem that is being alleged isn't there anymore.
Are interest rates being increased? Yes. It is broadly a
function of the marketplace and the economy and the significant
number of unemployed people who are out there, and the fact
that a lot of people aren't paying back their bills, and the
only way we can loan in the future is to have people pay back
their bills, and we have to deal with that. And so that is how
the market is reacting.
Mr. Watt. I assume that nobody on this panel is dealing
with interchange fees. Has that issue come up on this panel, or
that was all of the last panel dealing with that? Nobody here
is dealing with that? Okay. I won't ask any questions about it.
We beat that horse to death in the last panel.
Okay. I am sure I could be more constructive if I had heard
the testimony or if I had read the testimony, either one, both
of which I confess to not having done. So I think,
constructively, I will just yield back to the gentleman who
heard the testimony. I will yield him the balance of my time.
Mr. Green. Your time will be put to good use. Thank you,
Mr. Chairman.
We will now hear from Mr. Cleaver for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman.
I do want to bring up interchange fees because I think
there is a connection. I am wondering about the coincidence
that the interchange fees are rising so dramatically now at the
same time that we are closing in on the deadline for the new
credit card law coming into effect. I am sure you were here
earlier, so you heard the exchange with the representative from
the bank. I talked about overdraft fees reaching $24 billion,
which is up 35 percent from the previous year.
Are all of you saying that is just coincidental? Will
anybody say it is coincidental?
Mr. McCracken. I am not sure there is a strong connection.
We think the interchange fees need to be looked at, and it does
create a difficult situation for a lot of small companies,
especially small retailers. They can't control the prices, they
are deeply frustrated by it, and we think the system needs to
change.
I don't see a significant connection because this has been
building for some time now with interchange fees. I don't see
something that has happened in the last 6 months.
Mr. Cleaver. Well, I am just basing this on the FDIC study.
I didn't just pull that figure up. It was a 35 percent
increase?
Mr. McCracken. Well, if you are talking about a 35 percent
increase in--one of the things that you have seen happening is
more people are using cards increasingly--
Mr. Cleaver. Debit cards?
Mr. McCracken. Debit cards, and we have seen, of course,
the trend in the increasing use of credit cards for a long
time. It has been a steady rise. But you have mentioned and all
of us mentioned before the increase in overdraft fees. And that
I think also is directly tied to the increasing use of debit
cards over credit cards.
Mr. Clayton. Mr. Cleaver, can I jump in for a second?
Mr. Cleaver. Yes.
Mr. Clayton. I want to be clear here. Interchange fees are
not going up. The aggregate amount of fees taken in because of
interchange has increased because--
Mr. Cleaver. I understand that. It is about 2 percent, 175
of which probably is the interchange fee.
Mr. Clayton. That is credit cards. For debit cards, it is
below 1 percent. That is different from overdrafts. I just
wanted to be clear.
Mr. Cleaver. I understand that. What I want to do is make
sure that I am wrong, that there is no coincidence.
Mr. Demangone. Sir, speaking on behalf of Federal credit
unions, I can say there is no correlation to any increases in
fee income with regard to overdraft protection and the changes
that were in the Credit CARD Act. Those are separate.
I would like to point out that our entire industry has been
dealing with the overdraft issue. The Federal Reserve and the
NCUA were working on this as far back as 2005, giving best
practices on ways to better implement these plans more
transparently. And the Federal Reserve has a proposal out there
which will take effect sometime in 2010 which will greatly give
consumers the ability to either opt in or opt out of overdraft
protection programs. So the regulators have really taken this
issue up strongly. And I think if things would just be allowed
to play out as they are, I think you will see consumers are
already on track to gain a lot of new benefits and rights in
the coming year just from the existing regulations that are
about to be implemented.
Mr. Cleaver. Okay. Since you brought up the issue of
regulations, I think all of you would agree I think that--or
maybe I should ask whether or not you think you should be able
to impose on consumers rules that are unfair or deceptive or
anticompetitive.
Mr. Demangone. I can obviously say, no, we don't think any
unfair, deceptive rules should be placed on members. As member-
owned financial institutions, a lot of the problems that you
have heard, people keep talking about the top 10 credit card
lenders, I guarantee you there is not a Federal Credit Union
that is one of them. We have a usury ceiling of 18 percent. We
have a prohibition against prepayment penalties. So it is
frustrating for us as an industry to sometimes be painted with
a broad brush. People point to the big credit card lenders--
Mr. Cleaver. I don't want to do that. So everybody would
agree that you do not want the ability to impose rules that are
unfair or deceptive or anticompetitive; everybody agrees? Okay.
So then why won't you support giving a regulatory body the
authority to review rules that you already comply with?
Mr. Demangone. Ultimately, I think what it is going to do
is it is like adding another referee to the football game. We
are going to have to pay for that referee's salaries.
Ultimately, it is going to increase compliance costs for each
Federal credit union. And who bears those costs ultimately? The
member owners.
The Federal Reserve and NCUA we think already do a
commendable job of enforcing actions. Are they perfect? No. And
I think you will see them redouble their efforts in the years
and months moving forward, but just to create a brand new
agency, thinking that just another agency is going to protect
consumers, I think there is a risk that it will be completely
the opposite. Federal credit unions may move out of--
Mr. Cleaver. I know. But you already comply with the things
that would be regulated.
Mr. Demangone. But if it applies to credit unions and there
is another layer of examinations, that will greatly increase
their compliance costs. It will be another examination that we
have to prepare for, deal with, and that ultimately costs
dollars in personnel and lost time, and ultimately member
owners will bear those costs.
Mr. Cleaver. Thank you, Mr. Chairman.
Mr. Green. Ms. Susswein, you were interrupted, and I
apologized to you, and you haven't had an opportunity to speak,
so I would like to accord you some of my time. I have about 5
minutes, so I would like to accord you some of my time to
finish your statement.
If you could, please leave just enough for me to ask one
question, please.
Ms. Susswein. Thank you, and thank you for your time.
I really just wanted to make a couple of final points. One
was that we think that, frankly, lenders have taken advantage
of Congress' generous timeframe in which to implement the law.
Lawmakers accommodated card issuers who claimed that they
needed time to reprogram computer systems. And we understand it
is complex, but issuers have used the time to use consumers as
pawns in their game to maximize profits.
If card issuers allocate payments right now from the lowest
rate to the highest rate, my question is, why do they need 9
months to reverse that practice? That is a huge benefit to
consumers, and one that wouldn't seem to take so long.
There are elements to this legislation, as we understand
it, that won't really be put into practice actually until
August, 15 months after enactment. That seems to be an enormous
amount of time. And we see the kind of damage that has been
inflicted that I discussed earlier in my testimony to
consumers.
The main point we want to say is that we strongly support
implementation of this credit card law as soon as possible.
December 1st sounds just fine to us. Consumers need the
assistance now. Consumers have cried out to Congress over time
saying that what we need is help in limiting some of these
practices and curbing some of these abusive tactics. Congress
heard us and enacted the Credit CARD Act, and we feel that it
is time to move it up and to be able to take advantage of those
protections.
Lastly, I just want to point out that while Mr. Clayton may
feel that the problem is solved, from a consumer's perspective,
having an opt-out is an excellent tool and we are very pleased
to have it. But if we were all to opt out of every card we have
because of its abusive practices, we wouldn't have any credit
as consumers, and companies would be out of business because
they wouldn't have anyone to lend to.
Mr. Green. Thank you.
Mr. Demangone, you indicated by way of gesture that you
would like to respond to that, very briefly.
Mr. Demangone. Well, the issue of how you process payments
is not all that complicated, and it is something that could be
done rather quickly, but I would say that is probably one of
2,000 issues that lenders need to deal with within the Credit
CARD Act and subsequent regulations. It is kind of a death by a
thousand blows.
Fee structuring and disclosures need to be changed,
periodic statements need to be reworked. There are so many
operational issues that credit unions need to rely on third
parties. Those third parties have indicated to us, the
individuals who would be responsible for doing this, that they
can't actually make the operational changes necessary just for
the periodic statements.
Just yesterday, I spent literally 3\1/2\ hours with a
credit union dealing with their rate and fee schedule trying to
interpret 2 sections of the HOEPA rules which became effective
October 1st. Every aspect of lending in a financial institution
is being amended right now, so they need all the time they can
to comply with RESPA, Truth in Lending, HOEPA, MDIA, all those
requirements that are coming together all at once.
Mr. Green. Mr. Bourke, you have indicated by way of gesture
that you would like to respond. As briefly as possible, please.
Mr. Bourke. Thank you, Mr. Chairman.
The low to high application of payments rule is one of the
biggest aspects of this bill in terms of what it will save
consumers. I would argue that probably the biggest aspect of
this bill, the most important one for consumers, is stopping
the practice of increasing interest rates on outstanding
balances. And even though we do have new disclosure rules and
right-to-cancel rules in place as of August, the core of the
bill, the part that prevents issuers from raising interest
rates on outstanding balances and really giving the consumers
the benefit of the bargain that they already made isn't going
to take effect until February. And between those two issues,
outstanding balances and application of payments, those are
probably the biggest money-saving components for consumers.
Mr. Green. Thank you. My question, quickly, will be a
follow-up on what you said, Mr. Bourke, and follow-up to what
Mr. Cleaver broached, and it is, are you convinced that all of
this is coincidental with reference to the interest rate
question that you just raised? Is it coincidental? That was the
essence of what Mr. Cleaver was asking. If you think that it is
coincidental, kindly extend a hand into the air so that I may
see--
Mr. Bourke. I am sorry?
Mr. Green. If you think the raising of the interest rates
is coincidental, kindly raise a hand into the air.
Mr. Clayton. I know I am not allowed to rephrase the
question--
Mr. Green. My time is up, but I would like to at least get
the answer, if you would. If it is coincidental that interest
rates going up at this time, to the extent that they have, it
just happens to work this way, it has nothing to do with the
fact that there are some rules that will be taking effect later
on in the year, in fact, that would be February 22, 2010.
Hands, please.
If not, I will indicate for the record that everyone on the
panel thinks that it is not coincidental. We do have one.
Mr. Clayton. Mr. Green, I would like to add something into
an explanation to that question, if you would like.
Mr. Green. What I will have to ask you to do is submit it
for the record in writing if you would.
Our time has expired. And the Chair will note that some
members may have additional questions for the panel, this panel
as well as the others, which may be submitted 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.
The hearing is now adjourned.
[Whereupon, at 1:45 p.m., the hearing was adjourned.]
A P P E N D I X
October 8, 2009
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