tv Hearing Examining Credit Debit Card Transaction Fees CSPAN May 17, 2022 2:25pm-4:31pm EDT
good morning, this hearing will come to order. american consumers today are rightly worried about inflation. and rising prices for the goods they buy. today we are going to talk about a hidden fee that fuels the fires of inflation across america every day. what they may not know is that this swipe fee is contributing
to the problem of inflation. one swipe fees on debit or credit cards go up lately just recently did, it increases inflation. and consumers, ultimately pay the price. ironically, this journey for me started in this very room 16 years ago. arland specter, was the chairman of the senate judiciary committee. he called the meeting on swipe ease and interchange fees. i tended because i was not familiar with those terms. and i heard for the first time with a swipe fee was. and in fact why use my debit card and credit card, the swipe fee was being charged to the retailer that i was ultimately playing. and then i learned, that there's virtually no negotiation of those fees. retailers were at mercy to the banks and credit card holders. there was no competition because we have a do awfully here. and that created a situation
where the market forces really don't work. they are not supposed to work. they are not designed to work. what is happened in america, we all know that the statistics on the amount of americans paying with plastic tell the story. these are from 2020. i'm sure after the pandemic, and without changing lifestyle, they are even greater. the number of 2020 transactions involving debit cards, 86 billion. the amount involved in credit cards, 41 billion. between the two, credit debit cards, 2020, 127 billion transactions in america. so how are we doing with cash transactions? 32.8 billion. how about the use of a check? five. five billion. so we are becoming a nation that clearly, maybe even a world, the place with plastic. and today we're going to ask a few questions about how those
payments are made and the charges that are imposed. this committee, held a hearing with witnesses from mastercard 16 years ago. to discuss competitive fees. and here's what i've learned. visa and mastercard control about 80% of the credit and debit card market. they've established a system of fees and rules that apply to every transaction of the billions i've just mentioned. involving cards used by thousands of banks. each time a credit or debit card is used, visa and mastercard charge fees that take a cut out of the transaction. you don't see it on the check at the restaurant, but it's there. some of that cut the keep for themselves. the fee that these mastercard require is called an interchange fee and it's usually charged as a percentage of the transaction plaza flat fee transaction of $100 is made, the merchant getfor example, ten pl-
that, means when a car transaction of $100 was, made the merchant gets less than $98 after the fees are deducted. the merchants have the razor processes of their products to make up for the deducted fees. you might, ask how much of americans been charged in interchange fees by visa or mastercard since that hearing 16 years ago in 2006? according to payments consultancy we mspi, it's 794 billion dollars, all built into the prices reach have to charging customers have to pay. interchange fees are designed to avoid competitive market pressures. banks get the, fees but banks do not set the fees. , instead the banks like visa and mastercard at the fees on their behalf, so the same schedule a fee rates applies for all banks in the network. this means that all banks in the network are guaranteed the same interchange fees, regardless of how efficient or
inefficient the bank is in running an operation or preventing fraud. it's a gravy train. when visa and mastercard raise interchange, these banks want to issue more cars because they make more on each swipe. and visa and mastercard private when there is more stripes, because they take their own, cut called a network fee from the network on each flight. but merchants and their customers take it on the chin, and we're going to hear that firsthand today. what can merchants do to try to keep the fee rates down? not much. these are in mastercard are negotiating agents for thousands of banks. if a merchant wants to be able to accept payment from those banks customers, they have to agree to visa and mastercard fees in terms. i remember that, hearing 16 years, ago that table, one of the customers, one of the retailers, i had a stack about three inches tall. they had asked for a copy of the contractual agreement with
visa and master card, when it came to imposing fees. they quickly said, this isn't the complete contract, they would only give us part of it. three or four inches tall. and you expect a grocery store, a restaurant to go through all of this. bottom line, when fees go up, it costs more to use money. and that cost gets built into prices that consumers pay. visa and mastercard razor swipe fees two weeks ago, just by bipartisan opposition from congress. it was obvious, we are suffering from inflation. don't raise these hidden fees again. they did it anyway. senator marshall and i, representatives wells and vandyne it hurts them not to do it, they didn't listen. we'll talk about it today. the credit and debit card systems are not a competitive marketplace. when you don't have real competition, what happens? you get higher, cost less innovation, weaker security. and new potential competitors get stifled. it's a sweetheart deal for the
dominant networks, for the biggest banks and for certain cardholders who have ritzy reward programs. but the average small business and that consumer, they pay the price. other countries have figured this out, incidentally. you can have a fair system when you let networks fix the swipe fees without competition regulation. so, the european union, australia, china, india, israel, south korea and more have stepped up to create reasonable swipe fee limits. we have the durbin amendment, that applies only two debit cards. in 20, ten i wrote that, law that place reasonable limits on debit interchange fees that viva and mastercard fixed on behalf of big banks. it has generated a lot of talk over the last few years. and a lot of tv commercials. and, boy, the big banks hate the durbin amendment like the devil hates holy water. in the absence of a competitive marketplace, there needs to be
some limit on visa and master cards fee fixing. here's a few steps i would like to suggest. let's have transparency and make it clear to consumers, in their monthly statements, how much their card purchases are being deducted as interchange fees. you know you have the information, and you know you can provide. it may be, if consumers knew how much of their cards were costing at their favorite restaurants and retailers, they would use less costly cards. second, let's stop the practice of charging swipe fees on the part of the transaction amount that is sales tax. that is a swipe tax on top of a sales tax. give the consumers a break! let's stop the exclusivity deals, where visa and master cartel banks they can't use any other network on their cards. let's give merchants a choice of card network options on each swipe and each online sale. let's make sure that someone besides the dominant network plays a role in setting security standards for cars. security innovators and
start-ups are being shut out of the current system. let's reduce inflationary pressure by preventing network fix white feeds from being jacked up unreasonable levels. we have a lot to talk about today, we're joined by a distinguished panel. i thank them for joining the spirited discussion and let me turn to senator grassley. >> first of, all minister chairman, thank you for holding this hearing. thank you for working with us on this side of the aisle to make sure the interests of all stakeholders are taken into consideration. and i particularly want to thank you for including financial institutions in the panel. interstate and swipe fees or the amount of money that merchants pay for accepting a debit or credit card. these fees vary, depending on many factors. but in general, and up being between one and 3% of purchases. i just learned, including sales
tax. a great focus has been paid to these fees as more and more consumers use credit and debit cards to make their purchases. as many of my colleagues know, this is an issue that has passionate voices on both sides. many iowa businesses have complained that it seems that these fees are high for accepting credit and debit cards for purchases. these businesses want to give their customers the option to pay using different methods, but that can be difficult if fees are eating into already tight margins, especially for small business owners. they may have to then pass along these costs to the consumer. on the other hand, there are a number of benefits to card usage for both consumers and businesses, including
convenience, security and increased purchasing power. consumers may spend more money on cards then if they used cash. consumers may also benefit through rewards or cash back on their cards. there is a balancing act here that we need to acknowledge, and that any future action should be carefully considered for possible in fact. i look forward to hearing from all of you on the subject. as this is a judiciary committee hearing, we are looking at competition and whether interchange fees are set above rates that would be found in the competitive market. two witnesses here today represent visa, mastercard, the two largest payment networks in the united states. with over 80% share of credit card market. i look forward from hearing
whether these rates reflect market forces. i think, though, on the subject like this, when it comes up particularly at the time of high inflation, that is a factor that brings attention to a lot of expenditures that people might feel are unnecessary. it seems like every industry, including merchants and banks, have been blamed by the president for inflation and the blame game doesn't work, as president biden spends trillions of dollars of money as fast as could be spent. a liberal wish list, even when economists were warning about inflation. earlier this month, bureau of labor statistics reported the 12 month increase of inflation from march was eight and five tenths percent year over year. ice is the largest increase in over 40 years.
all of this obscures the actual visiting costs that i winds have been hit with in the midwest. the price of ground beef, 24 and a half percent up. bacon, 26% up. pork chops, 23%. chicken, 31%. eggs, 22%. these are not luxury items. but absolute necessities for families dinner table. these staggering increases are negatively impacting all americans and must get under control, and that is not by spending trillions more that are being proposed. i yield. >> thanks, senator grassley. we have six witnesses, i think them for joining us. i'm going to give a short introduction to each before they are recognized. first witness is laura shapiro to cat, she is the ceo of giant, eagle a supermarket chain
headquartered in pittsburgh, 470 locations throughout pennsylvania, west virginia, ohio and indiana. she served as ceo of john eagles it's 2012, previously served as a senior executive vice president chief strategy officer and senior vice president of marketing. she's worked for giant eagle since the year 2000, as a bachelor degree from amherst. glad to have you here. second witness, bill shady, senior adviser to these as chair and ceo, a position he's held since 2020. he's responsible for strategic initiatives. previously served as visa as president of europe, north america and latin america and he helped lead the country's restructuring in 2007 and its ipo in 2008. undergraduate degree from west virginia university nba from notre dame, thank you for being. here next witness is linda kirkpatrick, president of north america king mastercard. she is responsible for overseeing master cars
operations and customer facing activities in the u.s. and canada. she's been with mastercard since 1997 and she previously served on a leadership role focused on strategy, u.s. communication, global rules and standards, compliance programs and dispute management. she has a degree from manhattan college. thank you for joining us. next witness is ed mierzwinski, can i get that right? that's because i represent chicago. he's at the reach surge group known as perg. he has worked at perg since 1980, night oversees a consumer program, helps to lead efforts to improve credit reporting, lots identity have protection, product safety regulation and more. cofounder of the americans for financial reform, received his undergraduate degree and masters degrees from the university of connecticut.
senator blumenthal, take notice. our next witness is charles kim, executive vice president, chief financial officer of commerce bank shares responsible for all financial functions of the company. as well as for the company strategic planning, marketing, technology, enterprise operations and consumer card business. he's been with commerce bank, he received his undergraduate and empty degrees from washington university and st. louis, the hilltop. final witness is doug kantor. since 2021, mr. kantor as our national council for the board of convening. stories of previously practice law, where he was merchant counsel to the payments coalition among other organizations. in his career, he worked at deputy chief of staff of the u.s. department of housing and urban development as a public school teacher. we received his b.a. from the university of virginia, his j.d. from yale law school. again, thanks to all the witnesses for being here. now, it is customary in this
committee for us to ask you to take an oath to tell the truth. so, if you would all please stand and raise your right hand. do you farm the testimony you're about to tell before the committee is the truth, nothing but the truth, so help you god? >> -- >> let the record show that all the witnesses answered in the affirmative, which gives us permission to proceed. we'll start with miss karet. >> chairman durbin, ranking member grassley and members of the committee, i am laura karet, ceo, president and executive chair of giant eagle, one of the nation's largest multi format food fuel and convenience retailers. with approximately 34,000 team embers operating more than 470 corporate independently owned and operated store locations throughout five midwest states, including pennsylvania and ohio. on april 22nd of this year, with no negotiation or threat of competition because trading
them, visa and master card imposed a fee increase that will cost jim eagle one point $3 million annually. i appreciate the opportunity to talk to you today about the impact of swipe fees on our business. i'm also proud to serve as vice chair of fm i, the food industry association. fmi works with an on behalf of the entire food industry to advance a safer, healthier and more efficient consumer food supply chain. fm eyes membership includes nearly 1000 supermarket companies that collectively operate almost 33,000 food real tail as an employee approximately 6 million workers. our industry, historically, operates on razor thin margins of one to 2%. we operate in a highly competitive market and, as inflation has driven prices higher, our customers have become even more conscious of how they are spending their money, driving down profits. there are three points i'd like
to make today. first, giant eagles swipe fees have materially increase overtime and the april 22nd unilateral increase will only exacerbate this problem. these are in mastercard, together, control 85% of the market. on april 22nd of this year, both these and mastercard increased the fees retailers pay and they also created new categories of fees. every bank that issues credit and debit cards adopted these fees increases without deviation or exception. in my estimation, this cannot possibly comply with either the letter or the spirit of our nations antitrust laws. this latest price increase fits the pattern we've seen for years. giant eagle has been paying higher and higher payment fee costs. electronic tender sales make up about 82% of our sales transactions for our company. the 82% that are electronic tender, about 37% of the total
sales are visa and mastercard. but, when you look at the total card processing fees, visa and mastercard make up over 62% of those fees. over the past four, years our visa and mastercard fees have grown from 57% of our total fees to 62% of our total fees, while at the same time fees i mastercard sales as a percentage of total sales have declined by almost 2%. in stark contrast, during the pandemic, my company and others like it were authorized by the usda to accept online payments from our customers, using the supplemental nutrition assistance, snap, e.t. cards. it's interesting to note that those snap electronic transactions are completed securely, without fees are mastercard, and without incurring any swipe fees. it is hard for us to understand why snap itty-bitty cards could accommodate the changes necessitated by the pandemic, but visa and mastercard use it as an avenue to raise prices.
second, millions of customers suffer when swipe fees increase. because of the unilateral fee increases, these are and matter card, that they announced on april 22nd, my company and my customers will be paying an additional 1.3 million and swipe fees. this fee increase comes on the heels of visa reporting, it is march 22nd, 22 quarterly financials, that is profit margin with just above 50%. third, there must be competition in the debit and credit card markets. visa and master card are the only vendors that jayapal can't negotiate with. when jayapal buys ketchup or paper towels, its suppliers compete to give jayapal the best price. ultimately, our customers benefit from a competitive market. and, contrast the zen master cart do not compete for emerging business. the fees associated with accepting any type of payment for a particular good should be incidental to the transaction and certainly should not be
among our highest expenses. this expense, swipe fees, is third only to labor and rent that we face. i applaud this committee for looking at ways to achieve robust competition in the use of credit and debit cards. similar to the robust competition we must take part in every day. i would be pleased to answer your questions. >> thank you, miss karet. mr. xi di of visa? >> -- >> make sure that button -- >> sorry. chairman, ranking member grassley, members of the committee, thank you for the opportunity to testify today. for more than 60 years, visa has enabled people, businesses and governments to make and receive payment service sucker transaction processing network. i'm pleased to be able to share with the committee the many ways with which visa works to promote safety, security, innovation and competition. to drive innovation growth and financial inclusion.
recently, we have taken a number of important steps to support the economy, to maintain the security, reliability and stability of our network. these steps are intended to help businesses of all sizes, including those that may be struggling due to the effects of the pandemic and consumers across the country. at the outset of the pandemic, we lowered interchange rates for certain key segments, including grocery, stores restaurants and education. in april, we lowered interchange rates for the majority of u.s. businesses. visa is also taking steps to make online payments more secure, by encouraging the use of secure digital tokens, so that transactions can be processed without sharing a cardholder sensitive account information and implementing changes designed to promote accurate transaction processing. as a payments, network visa takes its role in setting interchange rates very seriously, with a goal of fostering balance, security, stability while growing the overall payments ecosystem. it is important to note that visa does not earn revenue from interchange fees.
our brand promise has always been rooted and being the best way to pay and be pay. we remain steadfast in our focus to deliver on this commitment. our success is based heavily on investing in and continually enhancing the security of our network. more so than any other part of our business. trust and security at the foundation of everything that we do. in the last five years, we have spent over nine billion dollars on fraud protection and security. in 2021 alone, our fraud protection programs help merchants and financial institutions prevent nearly 26 billion dollars in fraud. cardholders choosing visa can count on our zero liability protections on unauthorized transactions. , because that stands with every program such as the reliability and efficient resolution. merchants who choose to accept visa, excuse me, merchant searches weeks that these are guaranteed payment when a transaction is properly authorized on our network. competitive pressure is on visa to maintain and improve upon
its reliability, innovation and security have never been more pressing. new competitors, new ways of paying, advances and security as well as cyber risks are emerging at a dizzying pace. as consumers and merchants pay digitally more often, getting into payments has become as easy as developing and marketing and attractive app. the growing number of payment options now available to check out, especially online, is a reflection of those competitive environment and the continued expansion of consumer and merchant choice in payments. in addition to cash, checks and traditional u.s. payment networks, we also compete today with digital wallets, buy now pay later solutions, fintech and big tech, realtime payment systems and cryptocurrencies. with the majority within this massively changing competitive environment, visas even more clear about a first order priority. our success depends on our ability to deliver innovative, safer, more secure payments and a strong value proposition to
consumers and merchants alike. payments will continue to evolve through new payment uses, new business models, new frictionless commerce. however, regulatory interventions focusing exclusively on card networks could shift consumer spending away from networks like visa and to more expensive payment methods with more risk, less reliability and fewer protections and security. these are is proud of our security and fraud fighting tools. another truly important benefit of our network is that we level the playing field between large and small players. the investments that we've made have enabled small retailers and community banks and credit unions to compete with larger merchants and larger banks to deliver a robust capabilities, positive customary experiences and security protections. this has created a vibrant, competitive environment that allows american economies to
grow. we appreciate the opportunity to address the committee on these important issues and i look forward to taking your questions. >> thank you very much, mister sheedy. miss kirkpatrick from mastercard. >> good morning, chairman durbin, ranking member grassley and members of the committee. i'm linda kirkpatrick and i'm the president in north america at mastercard. it is my pleasure to appear before you this morning to discuss three things. first, the value that mastercard brings to merchants, banks, consumers and governments. second, recent interchange adjustments. and third, the robust competitive environment in which we operate. having worked at mastercard for 25, years i can personally attest to the value that we bring to our stakeholders. our role is to enable commerce in a safe and secure way. for banks, we provide products that support their customer base, allowing them to deepen relationships and extend financial tools to consumers. for credit unions who help
people buy homes and start businesses. our products to allow them to get more effectively support their communities. the value brings the banks as evidenced by the greater than 45% growth in cards in the u.s. over the past five years. for merchants, electronic payments provide them with benefits and protections they don't receive from cash and check. in addition to increase sales and operational savings, merchants receive guaranteed payments, even when consumers don't pay their bills. banks absorb these costs, which are, on average, higher than the average merchant cost of acceptance. mastercard is deeply committed to small merchants. within the first weeks of the pandemic, we announced a 250 million dollar financial package to support them through this crisis. the value we bring the merchants is clearly demonstrated by the growth in global locations where our
products are accepted, which is nearly doubled over the last five years. this includes an incremental 24 million small businesses since 2020. for consumers, mastercard products provide access, convenience and peace of mind. consumers are never responsible for fraudulent activity that may occur on their counts. further, electronic payments kept commerce alive for consumers and small businesses during the pandemic. in fact, the u.s. government used our products to quickly deliver critical aid to vulnerable americans. this value is clearly demonstrated by the spend on our products in the u.s., which has joined by nearly 60% over the past five years. to be clear, banks, merchants and consumers are all critical stakeholders for mastercard. their success is our success, which is why we work so hard to
find balance in the system. in particular, i have personally spent many years supporting airing and partnering with merchants across our cobra and portfolios and other services. as part of balancing the interests of all stakeholder groups, mastercard sets default inshore charge rates as the fees charged by cardholder banks to the merchant banks for the benefit of guaranteeing payments, transaction processing and account to servicing. mastercard does not revenue from interchange, nor do we set the fee charged directly to the merchants. our rates seek to incentivize both card issuance by banks and card acceptance by merchants. without these rates, more than 90 million merchants would need individual contracts with thousands of banks, which would be impractical. in 2020, we announced our intent to adjust rates to reflect current market conditions and investments. these adjustments represented the first significant changes in over a decade.
after a two-year delay resulting from the pandemic, we implemented changes to a default rates, which included some increases and some decreases. including for small merchants. based on our modeling, the net impact of these and other recent changes is virtually neutral to the ecosystem. finally, i'd like to note that the payment industry has never been more competitive than it is today. in addition to cash and check, we aggressively compete with several global and regional networks and, increasingly, with buy now pay later providers, person to person and account to account services, realtime payment platforms, digital currencies, wallet providers and other forms of payment. there is no question that the variety of payment options available to consumers as robust. mastercard lot holder exercise market power, we embrace consumer choice and have embedded this concept into a business strategy. in summary, we are deeply committed to supporting all of our stakeholders, including
merchants, banks, governments and consumers. and we are extremely proud of the way our products enable financial inclusion enjoys to consumers. and small businesses, to help them thrive. i appreciate the committee's time, and i would for your questions. >> thank, you miss kirkpatrick. mr. mierzwinski, please. >> thank you, senator durbin. chair durbin, senator grassley, members of the committee. i am ed mierzwinski, i'm not the u.s. public interest research group. where a nonprofit consumer advocacy organization and service the national office for the state perg. all consumers pay more at the store and more at the pump because of non negotiable, non transparent fees that are set by the card networks, not by the banks themselves. i want to point out that, when i testified in 2010, chair durbin, before your
appropriations committee, that was on the matter that even the government couldn't negotiate the prices that it paid for buying and selling things on its government platforms. it's incredible to me that even the government is not big enough to hold visa and mastercard accountable. but the worst problem occurs if you are a small merchant having to pay your probably second highest price of cost of goods sold might be higher, rent might be higher. but probably bank fees are the next price, the next highest fee that you pay. so, what do you have to do? because of the complicated rules that you discussed in your opening statement, senator durbin, the inches thick contracts, etc, etc. they forbid the merchant from doing anything to lower the cost in a store, he's got no
choice to bake the price of these overpriced swipe fees into the costs that everybody pays, including the cash customers who might be low income. and they are probably subsidizing and, despite when all of the associations and the networks will say today, the bulk of the interchange fee goes to pay for affluent consumer rewards cards. it does not go to the other important issues of security, those are small items compared to rewards. so, i'm very happy that you're holding this hearing and i want to point out that there is really nothing to restrain these networks in this market failure that we have in the card network ecosystem. when talking about percentage based fees, when the prices go
up because of inflation the bank earns more money without doing anything or without making anything. earningthese are, i believe, hn quoted recently in earnings calls in the press. inflation is a net net win for us. so, it is a market failure. i want to commend the durbin amendment for going after the key aspects in the debate part of the system. first, you narrowly and proportionately kept fees to a reasonable and proportional basis on some debit cards but not all. second, you when academic heard rounding, an important area that needs to be fixed. the federal reserve is also working on a debit card update to rule i which amended the durban event. that would make it easier for merchants to pick and choose
different words that are not owned by the incumbent players. i want to point out that europe in canada are examples, many other examples around the world, of places that regulate these fees much more aggressively across debit and credit networks. the fact is, there interchange rates are lower and lower. i believe europe's rates under the interchange fee regulation, i f r, i believe the rates are about 10% of u.s. rates. u.s. rates are not really restrained, and that's why we needed the durbin amendment, that's why we needed to expand the durban event meant. there have been some important actions taken by the department of justice and the federal trade commission. i federal trade commission doesn't have jurisdiction over banks, but it does have jurisdiction over the card networks. into the federal trade
commission has forced visa to change the ways that consumers are told about their choices in using a swipe card machines. and the department of justice, in particular, went after visas acquisition of plaid, nascent competitor that does a lot of important work. so, i look for the working with the committee on other solutions that i strongly support your talking about having a disclosure on your bank and credit card statement that says how many swipe fees you've paid. consumers don't know what's wifi is, then they would know. thank you. >> thank you, mister mierzwinski. mr. kim, from commerce bank. >> good morning chairman durbin, ranking member grassley members of the committee. i'm pleased to testify before you today on behalf of commerce bank team members who serve communities up and down america's heartland. congress is a mid size, bank founded in kansas city in 1865.
we are honored to employ talented people and all almost every state represented on this committee. we offer a full streak of payment services, including debit and credit cards for consumers and businesses and merchant cart acceptance services that keep money moving in those communities where privilege to serve, as well as all over the world, seven by 20, for wherever our customers are traveling or shopping. something that would be impossible without interchange and the networks. the views expressed in my test phony are broadly held among my colleagues and colleagues at the thousands of mid sized and community banks across the country. just this week, letters have come to this committee signed by state banker associations, community banker associations, credit union leagues and minority owned banks. from small the large, from public to non profit mutual banks uncooperative credit unions owned by their depositors. urban, rural and suburban, where in our view. price controls, in the form of
interchange regulation like the durban amendment, i'm consumers, i'm small business, arm competition and harm communities. so, what is interchange? and is there a competition problem around? it simply, put our payments distant requires confidence myth and protection, and we need a fair way to pay for it. i believe both banks and merchants should share in the cost of the payment system. banks and credit unions invest billions of the building and securing the payment system before, during and after the sale. merchants contribute to those caused by paying a small fee when they use the system to make a sale. that is interchange, and as a fee, it's just a can be data proportional way to pay their share. when we compete for merchants card business, it's extremely competitive we're up against many players trying to give the merchant a slightly better deal. that used to mean just other banks selling a card terminal, but today they're many independent providers competing. i think the average merchant probably gets tired of hearing from people trying to sell the merchant services. but cars are the only choices
today. there is venmo, paypal, square, cash app, toast, are tp, buy now pay later, new payment reveals a merchant payment solutions at all price points. including free and some more costly than credit. a decade ago, my banks executive chairman testified in the house and predicted that the durban amendment would cause great harm to consumers and will affect banks of all sizes. now, the data is in and we can quantify the size of the harm and how the promises made about protected community banks and lowering prices turned out to be empty. many consumers have lost access to free checking, minimum balance and monthly fees are up, the head that rewards are scarce or nonexistent and small merchants have seen their cost of accepting cards rise. he's our findings of the federal banking regulators and respected academics, presses from the federal board and -- a law professor was now senior economic policy maker in the biden treasury department. thanks for 35 to 40% less
likely to offer free checking accounts following the passage of the amendment. for the largest merchants, as i've been a windfall, and it's held some get more market share. but, for a smaller businesses and financial institutions that can tap into a law that encourages consolidation in scale, but costs have been steep. and, fact small banks and credit unions, which will prominently proclaim as exam from the price caps, we've seen their interchange revenue drop 30% per swipe on pin debit transactions. this is a direct result of small issuers being covered by the laws backdoor price controls, known as routing mandates. richards promised congress they will reduce prices after the law passed, but the fed found that nearly 99% emergence did not pass on any savings to their customers. at the very, least this should make us skeptical about the current demands and the debit routing rules, that they should be expanded and extended to credit cards. our nation needs to keep up when it comes to payments technology and security, and that won't happen if we cut the investment out of our own infrastructure. countries like china and russia
are investing heavily in innovating their payment systems, and will present a challenge to america's leadership in this key area of national and economic security. yet, policies like the durban amendment cray rigid rules and investment has that limit our potential to do the same. the payments world is rapidly evolving, a smaller financial institutions are facing enormous cost to upgrade, offer new products and just in the game. interchange is an investment in american commerce, not a junk fee. i urge the committee to look at both sides of the story and put the consumer first. thank you again for having me. >> thank, you mr. kim. mr. kantor? >> thank, you chairman, derby senator grassley, members of the committee for having me here today and having this hearing. we really appreciate the opportunity, because we think this is an incredibly important issue. the credit card market is broken. these are and mastercard centrally set the fees that the banks that issue consumers cards charge. those banks compete on every
other price they set, every other interest rate they set, every other part of their business but not here. they could do it here, they are very big institutions, this is an incredibly concentrated market with large institutions like jpmorgan chase, bank of america, wells fargo. none of them are setting their own prices. that doesn't make any sense. then, on top of, that visa and mastercard set the terms by which cards are accepted. which make sure to insulate those fees from any other competitive market pressure, to make sure they can stay. they have an honor of cards rule that says to merchants, if you want to take any single visa or mastercard, you must take every single one. and the prices on these cards can be incredibly different for these businesses. they can be factors of twice or three times as high. by doing that and then restraining merchants prices and the price signals that they send to their consumers, they make sure there's no market
pressures here. that's why we have a market failure. it doesn't have to be this way and it shouldn't be this way. we need competition in this market. that is the bottom line. there's lots of discussion on this panel, and has been already this morning, about how many other forms of payment there are. this isn't about the other forms of payment, this is about credit cards. because, thankfully, we've had some reform of debit, guards which has been quite good. but i credit cards, we have not. the interesting thing is, as folks on the panel talk about. well, there is buy now pay later, there's cryptocurrencies, all these other things. yes there are but installment loans and other things are not credit cards, they are conflating these different markets. senator grassley, this morning, talked about the rise in prices and different markets. beef, chicken, other products. nobody on this committee would think it acceptable if there was a price fixing scheme going
on in the beef market that caused prices to be high and someone else came in and said, well, don't worry, everyone could just eat chicken. it's okay, it's very competitive. that's not okay. we need to deal with the competition problem and credit cards to have a fair deal for merchants and comes to mers and, frankly, for the u.s. economy. because the 138 billion dollars, just last year, that were charged in fees that consumers don't see, we all end up paying and it does create this inflationary cycle. particularly because it is the percentage, most of, it a percentage of the transaction. so, when there is inflation, that drives up prices. and look, we're not saying these are mastercard caused inflation. they did not. everybody can have their own opinions there. but it does exacerbated, both because the fees are very high and because the percentage of the way that they're charged trades inflation. and, look, that is what we would all expect when there is no competition. it's very predictable.
one other thing i would like to say on this is we've heard a couple of things this morning about how there is a payment guarantee for merchants. there is not. the federal reserve, every couple of years, looks at debit fees in particular. and they have found that merchants pay 56% of the fraud on debit cards. 56%. now, look, i don't know what everyone means by guarantee when they hear that word, but my gosh, paying 56% does not say to me that our members are getting a guarantee of payment. they're losing most of it when there is fraud being committed. so, we need to have our facts straight when we talk about this and we need to have competition in this market. we all know that competition does work. it works throughout our economy, we don't let folks set other peoples prices in a centralized way in other parts of the economy.
when we have that type of competition, prices are lower. we have more innovation. frankly, we've seen more innovation since the durbin amendment on debit cards. with more encryption and other security types of innovations that came right afterward. and people have more money in their pockets when those competition and lower prices, they can spend more and that consumer spending helps drive the economy. so, i really appreciate the committee looking at this important issue and i look forward to the conversation. >> thanks, mister kantor. we'll have five-minute rounds of questions. all start. financial o turns out that the issue of inflation was addressed directly by the chief financial officer of visa. i hope i pronounced his name right, -- , on january 27th earnings call. he was asked how inflation impacts visa. his answer, and i quote, net net, we are a beneficiary of inflation.
he also said, quote, to the extent that there's inflation driving uptake in size, clearly, it's beneficial to us. so, let's put to rest the theory that this has nothing to do with inflation. it appears to have some relevance. can i ask you, mr. sheedy, incidentally, miss karet told us that coincidentally april 22nd was chosen by both visa and master card as the day to raise the fees. was just a coincidence, or coordination? turn on your might, please. thank you. >> i apologize. senator, we did not raise the fees and april. in, fact 90% of businesses in the united states see a change in their rates that were down by 10%, effective with the april changes. >> miss karet, were you wrong? >> no, we calculated, we had a 300-page amendment. a fee schedule. we calculated exactly the fee increases for us. while some fees went down,
others went up significantly. the net effect is our fees went up. >> both companies, the same day? >> yes. >> mr. sheedy, here's a customer who has some evidence otherwise. i ask you, miss kirkpatrick, you are in charge of mastercard north america. i want to ask you about these crazy canadians. how in the world can you explain this? in, canada there is a debit card system called interact. it is the most widely used interact or debit card system in canada. it reports it as one of the lowest rates of fraud globally. the website for interac says, i quote, interchange for interac debit is currently set at zero. how is it possible these crazy canadians are getting no charge on it or change fees on debates and have less fraud? how can i possibly be? >> well, senator, it's not the case that canadian merchants don't have interchange fees. there is value -- >> in the debit cards. >> there is value in the debit space that consumers derived
from transacting at merchants. and there's value that the merchants receive. >> what do you mean by, that you have to define terms. >> when merchants shop at eight -- when consumers shop at canadian merchants, they received value through the form of guaranteed payment, lower risk, purchasing power. and so, therefore, there are interchange fees on debit transactions in canada. it's a direct result of the value that those merchants are delivering and that consumers are driving. >> mr. mierzwinski, you noted what's happening in europe so let's stick with the program for a minute. try to explain to me the difference in debit and credit card interchange fees where the european union has set a standard of 0.2% and 0.3%, respectively. 18 or one tenth of what is charged of the united states. clearly, their system is much different than ours and we have no regulation.
other countries like australia, brazil, china, india, israel, malaysia, south korea also limit interchange fees. so, what lessons can we learn from all of these countries who have decided that interchange fees are way too high in the united states? >> well, i think those countries know that the credit card system is a market failure and the ways that the banks are forced to accept all of the fees from the networks and the consumers are forced to pay increase prices, they're not going to have it. they're not going to have it and they said no. and u.s. congress should strengthen the durban amendment, expanded to credit cards and lower interchange across the board. >> to make sure i understand the scope of interchange fees. if i decided that i wanted to give money to catholic charities for the ukrainian refugees in poland, and i use my credit card or debit card to
make that donation, would you be collecting an interchange fee on that transaction? mr. kirkpatrick? >> the interchange fee is for mastercard does have interchange fees. or the banks to charge and her charge fees to consumers. rather, to merchants. across all transactions. for the benefit that they consumers are receiving from the transaction. so, there is a cost associated with servicing that transaction and servicing that account. >> and the interchange fees also apply to sales tax on paying my restaurant bill? >> it does. >> why? >> again, it's the total value that the consumers aren't arriving when they shop at a merchant. >> on attacks? >> it's the total value. so, you can't just look at interchange as -- one >> more than a total value. >> as one element, you're looking at the total cost of
servicing that, account which includes fraud, guaranteed payment, increased purchasing power and the ability to use that product anywhere mastercard is accepted. >> and we look at it across the world, where interchange fees are regulated and restrained and we don't see this rampant fraud. senator grassley? >> before my five minute starts, i'd as cure unanimous consent to add statement from stakeholders into the record. >> without objection. >> as of 2020, statistics show that visa and mastercard combined for 84% of all purpose, general purpose credit cards within the united states. some have characterized this as a duo of bubbly, able to extract above market prices for their services. so, to mr. sheedy and miss kirkpatrick, what would be a response to these concerns and duties and mastercard abuse market power? and then i'd like to have mr. kantor and miss karet listen
and respond. mr. sheedy, you want to start out? >> yes, senator, thank you. senator, we operate in a highly competitive market. merchants have never had more choice at the checkout, consumers have never had more choices to be able to pay. one of the things that i think is important to understand about our payments network and the level playing field that we sat with interchange is the same interchange flows through our network and gets passed to, in the same exact manner, to thousands of financial institutions across the united states. small banks and small credit unions, two larger players. they all compete with one another in innovate in that complex, very dynamic marketplace. ultimately, the consumer winds from that competition. when the consumer is empowered to transact with products that
are tailored for them and investments are made in the system to manage risk and keep the system secure with high integrity, and that consumers empowered to shop at the point of sale, the merchant benefits from that flow. so, is a balance that we're trying to accomplish, and any notion that we're not operating in a highly competitive market, we fundamentally disagree with. >> you have anything to add, miss kirkpatrick? >> i would say that the payments and ecosystem has never been more competitive than it is today. in addition to the networks, as i discussed earlier, there are competitions that come from by now pay later providers, wall providers, digital currencies, regional debit networks. and the definition of market power is really an institution that can raise prices well also reducing consumption. and mastercard motivations are the exact opposite. we are motivated to drive more transactions through our network, that is how we generate revenue, that is how
we win. so, by virtue of that, we are incentivized to create balance across all stakeholders. both merchants and banks. if we sign interchange rates too high, merchants won't accept. if we set interchange rates to low, banks won't issue. and so, therefore, our goal is balance and our goal is consumer value. >> mr. kantor and then miss karet? >> thank, you senator. that's not how it works. this is not a balancing of the marketplace. because, look, economists at the kansas federal reserve have looked at this and they have said, because merchants and retail in the united states are so competitive, these fees can get set while beyond any semblance of value, up until, the only break point is where the retailers would actually lose money and go under for accepting the cards. and that is the one break point. and, look in other markets, we don't say, because something has great value we allow price
siding, essentially. rather than competitive market prices to rule the day. as you talked about in your opening statement, with beef prices and chicken prices and others. just because those are valuable products, many of them as need to eat them. to survive, it's really important. but we wouldn't say, oh, they can central effects of prices and that's okay. there used to be a market system to discipline those prices. we don't have that here and, frankly, the innovation in other kinds of technologies and payments does not make up for the lack of innovation and the antitrust problem in credit cards. in fact, it really shines an incredible spotlight on the fact that we have not had that type of innovation in credit cards, and those haven't advanced. in the market power of these and mastercard have been incredibly stubborn and they've held on to that market. including, ever since the department of justice won a second circuit decision finding,
certified in the supreme court, that both visa and market mastercard have market power in this market. miss karet, at but don't repeat. >> i'll do my best, thank you. i'd like to come at us from a slightly different angle. our average store carries over 50,000 items. every single one of which is negotiated in terms of price, how we mark today, how we merchandise it. when proctor and gambles comes to charge us about selling tied, of which there is 50 different sizes and flavors a bit, they don't come in and say you have to take all 50. they don't come in and say take it or leave it. they don't come in and say you can't promote it, you can't incentivize people to do one thing versus the other. visa and mastercard, effectively, control over 80% of the credit market and they are the only vendor which we cannot negotiate with, and if they take it or leave it
proposition. and that, again, i'm not an economist and i don't know what's technically qualifies as a do awfully. that said, to me, if it walks like a dark and talks like a duck. >> i have two questions i will submit in writing. >> thank you. on the democratic side, the order on early bird rules, blumenthal, whitehouse, coons and -- and i know the presence of senator tillis. so, at this, point senator blumenthal. >> thanks, mister chairman. thanks to senator durbin for his leadership on this issue over many years and all of us who have served at the state level. i served as state attorney general for a number of years as mr. mierzwinski knows. we're quickly grateful to you for your leadership. i'm just a country lawyer from connecticut. miss karet, i spent a lot of time on the road in connecticut, i spent a lot of time inconvenient stores and pumping
gas and i hear it to see the anger of consumers when they go to pay for what they buy. i know that the credit card companies are not the only ones responsible for these skyrocketing prices at the pump or any of the other commodities. i there are big oil companies and we are gripped by their greed. they prioritize shareholder profits and keep supply constrained and drive prices higher, that's one of the reasons that i've had to help spearhead with senator whitehouse a mentor measure called the big oil windfall profits tax act. which would establish a tax on industry profiteering and lower consumer costs with relief rebates. but i am struck, in your testimony, that the vast
majority of gas for american consumers has seen its fierce rise by as much as 26.5%. consumers and connecticut are hit by that increase in fees. 26.5% increase in a single year. as they are struggling with these higher prices. now, i understand that the card industry says that they've imposed a cap on those fees at $1 ten cents. but that doesn't adequately protect consumers, does it? >> so, senator, it's a wonderful question and a complex object, as you know. we're dealing with global economy issues. specifically, what would you like me to respond to? >> when i would like to know is
how our consumers impacted by that 26.5% increase? >> so, as we all know, the retail price of gas is at a historic high right now. but that is directly related to the commodity market, where the price of a barrel of oil is also at historical highs. it wasn't so long ago that oil was between 60 and $70 a barrel. at some point, early on in the ukraine war, oil hit $140 a barrel. retail prices and gasoline it's one of the most competitively dynamic markets that i'm aware of. we follow street pricing, and the margins are impacted as the price of, the cost of goods goes up. so do the retail prices. >> let me ask mr. kantor the same question. >> thank, you senator.
i think it's a really important question. i remember cell about 80% of all the gasoline across the country, including in connecticut, we have some wonderful members doing that there. the energy information administration has looked specifically at gasoline pricing and they divided up the country into the different regions and found that there is 100% pass through of both cost increases and cost decreases into the retail price of gasoline. in every region of the country. and so, these fees, without question, get paid by consumers every day. i will tell you, 26% and a half percent, it's in an incredibly high increase. our upon customers are parting twice this year they're much higher than that. we had a member we talk to this week, their fees are up 49% this year. this is completely unsustainable in an industry where we know people are upset about gas prices and just, by the way, for the retailers
themselves, as good as prices go higher their margins get smaller. and the ftc has documented this. but the fees get hired the same time. we have members, literally, some during the past few months, we have sold that no margin just to try to keep the market share. >> that term has been used by two officials from visa and mastercard. that this market has never been more competitive. it's highly competitive. but they are including, in the market, different companies like apples and oranges. correct? >> that's exactly right. >> let me ask you, why can the ftc do in the absence of legislation? can it act to try to foster competition? >> the ftc has investigated and
done some good things. for example, when there were problems -- what was happening with the payment card terminals and accepted chip cards. they've had hoped in investigations that actually give you that mastercard to try and block the competition of debris cards. so, there are some things that can, do but they are limited because they don't have jurisdiction over the banking industry. the department of justice and taken some action as well, in fact, their antitrust vision has perhaps brought more cases in the payments area than any other area over two time. but, as you, know litigation is hard, it takes a very long time. and it's really best at finding compensation for pass problems. really, congress is best at designing what is the way for the future to look, in terms of having a competitive market. thank you, mr. chairman. anytime you look at a competition issue i'm interested in how it affects consumers. representing my case as i do,
i'm concerned about how things affect utah. utah once -- people in utah have suffered from the inflation from excessive federal spending. they have seen their monthly expenses go up more than $700 a month, just their ordinary monthly expenses, $8,400 plus per year just by the same gas -- just to buy the same basket of goods and services they were purchasing before but it is all more expensive before. -- all more offensive now. when approaching this in the topic, i'm looking at how this would affect them and how it affect them. and what, if anything, we have to do about it. with that in mindw,i mr.th --
with that in mind, mr. sheedy, some argue it is anticompetitive for them to get together and agree they all will charge the same interchange fees to merchants. what is your response to that? >> senator, visas -- visa sets the interchange fees, requiring banks and to issuing banks. we do that on our own. we certainly do it with input from the marketplace. the impact that the pandemic has had on m input from the marketplace. the impact that the pandemic has had on merchants has been really important to us. at the front end of the pandemic we lowered rates. to restaurant and education merchants. and recently 90% of the merchants in the system will receive a temperate reduction
in the rates that they process. and, what i would like to stress is that we are not raising rates. the average rate in our system for visa credit has been flat since 2015. >> i get that, i've got limited time. i just want you to be clear what i'm asking. i'm asking you to respond specifically to the charge that it amounts to cartel behavior. to agree to charge at the same interchange fees. >> we disagree senator. the setting of a default interchange fee, we feel is highly competitive. in the ways in which he delivers the same interchange fee to financial institutions, and then go into the marketplace on behalf of consumers and merchants, and compete. and innovate. and so we feel that the model works very well and the system where you need tens of thousands of banks supporting
millions of cardholders and millions of merchants, there's no way to operate the system other than setting a default interchange. >> for it to be effective. you need the network effect for your system to work? >> in order for there to be a coordination of activity or consumers can transact from a card-less issue to a credit union in utah, with a merchant in new york. online or in person. you need to have a default interchange fee so you know how the economic flows are going to work. having that be the same interchange fee, irrespective of the size of the financial institution, that promotes competition. >> mr. cantore what's your response to that? >> one they don't need to do that, i submitted my testimony and an article from an nyu economist who has pointed out because of the concentration in the market on the issuing side and the acquiring merchant side that just 90 -- would cover the volume.
those big banks could set their own prices. you don't need that going. on and there's been much more concentration since then. the other thing, having the same feast does not promote level playing field competition. on the backside either. john -- from the community of bankers, testified previously before congress in hearings, that their costs to transactions, because they are smaller situation, or much higher than the largest banks. but if you lock them into the same prices on higher costs, of course they're not going to be able to compete in the same way, and those large banks have won over a lot of the small by customers into the credit card market which is what credit cards are so much concentrated then debit cards as a result of that. >> mr. kim, go with me if you want to respond to this that's great to, but i also wanted to ask you separately, what would happen with credit card rewards in the universe in which you imagine there is suddenly an
alternative network for which merchants could process transactions? >> so the interchange pays for i think roughly 60% of internally of the revenue -- i think everybody loves their rewards. i think it's a broadly distributed value. and in-depth it, there were debit rewards before the laws changed. and those largely went away because interchange helped subsidize those things. so you would see those rewards go away, and for the more you would see banks of my size and smaller and maybe even somewhat larger. the economics of issuing credit cards, it's not what it once was. there's lots of competition, it is hard to do. the big banks you know, to come back to your last question, maybe and i don't even know that i agree that the largest banks could negotiate with all the millions of merchants and
set the interchange, but if they could that we just put me out. because i can't. >> it seems my time has expired i have one follow-up question. so just by understand you correctly, you're saying the base would still get the banks with still get paid. like a paid less and likely rewards programs would be a casualty of them. there might be something left that might not. >> yeah i would assume, depending on the revenue, we get paid yeah. >> so that's the case, can one argue that this is a manifestation of a lack of competition. and that the prices being artificially inflated by lack of competition, and the consumer rewards providing a means of sharing a monopoly in the monopoly rents you might say. in order to deflate demand and squeeze merchants? what is your response to that? >> the purpose of rewards is not to squeeze merchants, it's
so you have a value proposition that makes people want to use your card. and the competition you know, the reward space is an intensely competitive space. again it's hard for a bank my size to compete with the likes of chase, who strikes a deal with southwest airlines. maybe that continues, you know but it puts me out. >> thank you mister chairman. >> thank you senator lee. senator coons. >> thank you to you and the ranking member for convening this conversation today. i'm glad to see that on this panel we have represented the whole range of potential input. consumers, consumer advocates, and the bank, that is a question credit card issuer. clearly i think we have to look at all of these four different sides of the credit card transaction universe. when attempting to assess whether or not there's sufficient competition, what tapping fees would do, or the consequences might be. and mr. kim i'm glad you're able to to testify today, and
provide a bank perspective. i've heard from credit unions, large, banks and credit card issuers, and they depend on interchange fees in order to be able to support the credit cards that they offered to consumers. credit unions and community banks in particular are concerned that a substantial decrease an interchange would mean they could no longer sustain credit card programs that extend credit. individuals who might otherwise not be able to access credit cards. so i think the issue here is not just losing rewards programs, but losing access to credit and losing the ability of smaller issuers to participate in and compete at rates that are lower than you might get from the major card. how do issuing banks rely on interchange to offer credit services and what impact would it be if that revenue substantially declined for your bank? >> i think you are on the nose there with your comments. so interchange is one source of revenue, interest and fees on
credit card or another source of revenue. if that, and one of the things that makes lending or making small loans that's very expensive. that's why you don't see a lot of people doing it. that's why it moves online or the cost or low. so we've been pushed you know a lot of banks have been pushed out of this business because the revenue stream is just not there. in fact, the interchange used to make it a more profitable business, but now we pay the rewards to consumers, it really squeezed that as well. so i think what you would see, and it's a very small step banks, depend on large banks like us to help issue credit cards. so the margins there are even thinner. and i think he would just see that that element of competition, of issuing cards from the smallest institution to the credit unions, and from mid size banks. i think you see that just go away. and it would be the larger banks that has the scale they can still do business in a profitable way. >> meanwhile one of the challenges, and i've heard from retailers my state. family owned grocery stores,
that their margins are so small that for them to pay an increase in interchange or swing fees, this is a you know where you sit depends on where you're listening to. so on fraud and data breach, one of the concerns i've heard from a credit union. is that covering the cost of reissuing cards of investigating, paying off the pro-the cost associated with the data breach, are not sustainable for credit union or small bank. not without interchange. so mr. sheedy is this something you've seen in your experience? >> so senator, the situation with fraud and cyber risk, and the risk associated with merchants and transactions online is an enormous issue. a decade or so, we had a similar magnitude of risk at the point of sale with counterfeit cards that have been generated primarily on the part of data that have been
breached by merchants and cybercriminals. we address that with rolling out chip cards. and ship terminals. we have the same issue facing us now online. and there is roughly ten billion dollars of fraud annually online. and that's with merchants, consumers, all transacting in a way that generates fraud. and then one of the changes were making or have made in april, is to encourage the adoption of a secure digital token, that would authenticate the consumer and provide guarantees and more assurance to the merchants so we can address that fraud. it will require the merchants to do their part. even we've invested $9 million is dimensionalized five years in fraud and security protections. issuers are also investing. we have to make the same type of push to address this fraud online that we did in the physical point of sale. which is the cards. >> thank you. i'm sorry i think mr. kantor
wants to address something. >> senator you raise some really interesting points near earlier comments. and that could be helpful. because we took a track record around the world of some of the forums, and we have not found in other parts of the world the parade of problems that mr. kim and some of his reverend talk about. because the world of credit has still been available, credit cards of still been used very frequently. and they still have rewards all sorts of things, and i just want to clarify that we as merchants, and laura was clear about this in her testimony, we have not asked for a cap on credit card fees. there's a different market where we think there needs to be competition. competition and market prices will help us here in ways that get the type of problems you're worried about o this questi>> i ask a question, mistr chair. if you could briefly speak to this question. now that we have a decade of experience and what happened with capping fees for debit, do
we know whether the imposition of interchange fee caps led to lower prices for consumers? and better access for lower income borrowers, consumers, in terms of low-cost banking services? mr. mierzwinski, if i might, mister chairman? >> thank you for the question, senator. i think that there are a lot of pressure is on banks to lower the prices and to provide better services to lower income consumers. and a lot of that is being done through partnerships between banks and consumer advocates. but on the issue of bank fees and the price of banking, i think the banks always looked to figure out a way to blame the latest regulation and they love to blame that durbin amendment. i can't believe that the numbers are there to say that the durbin amendment has heard
lowering come more all americans. i just don't see it. >> chairman durbin, my hunch is i should probably conclude this question at this point. but i'd be grateful if mr. kim and mr. kantor could briefly speak to it? >> sure, let. them >> briefly. >> i would say that debit or changes part of a checking account and checking accounts have become more expensive for consumers. when that income went away, we had to look harder at how we did business and how we priced things in order to make up for that. i would say, lastly, in terms of access to rewards and, things people with debit cards frequently are the more credit challenged folks. they can't get a credit card. the rewards went away that they got on debit cards. i would, say that's gotta be limiting access. >> mr. kantor? >> think, you senator. consumers have saved tremendously. if you look, at over the first five years of the amendment being implemented, the producer price index attracts wholesale cost that retailers pay was up
9.4%. the consumer price index that retailers charge because of his was only up 4.3%. so, there was still inflations, mall amounts. but there was tremendous consumer savings and that spread. and retail profit margins did not budge or go up in the slightest. this is something we should put to rest, here because it's a really good question. retail is, in the united states, one of the most competitive markets there is. in the united states or around the world. those profit margins, laura's industry survives on 1.1% profit margins. the banking profit margins are over 30%, the highest industry sector that is tracked that way. it is remarkable, either one of two things is happening when the credit card industry argues that prices, consumer prices, don't flow through and cost don't flow through. i do they don't leave competitive markets work or they've been living so long
with centrally setting the fee that they forgotten how competitive markets as we work. retail is unbelievably competitive. >> mister chairman, thank you for your forbearance are for the broad range of testimony at today's hearing. >> thank, you senator coons. let me add for the record, i'm sure you're all well aware, the infamous durbin amendment did exempt banks with lower than ten billion dollars in assets. that would not apply to mr. kim 's bank. but for those, the federal reserve reported in 2021 those mall banks and credit unions receive 53.4 9% of total debit interchange fee revenue in 2019. 13 billion dollars. even though they only conducted 35% of the total number of debit transactions. it turns out, the infamous durbin amendment with a bill into the small banks and credit unions. thank you. i believe senator tillis and senator wash burn -- or senator blackburn outworked at an agreement. >> senator blackburn. >> senator blackburn?
>> go ahead. >> you need to go. >> i'm going to stick around anyway. >> well, thank you all, thank you mister chairman. i want to stay, mr. kim, let me come to you on this. i saw you shaking your head about banking profits and let's continue with that. do you want -- to >> share, i think a lot of those a death of, a lot of the time the banks look at revenues and net income. and 30, 40% applies. if you go to the grocer who pays for a lot of further costs, so it doesn't account for the cost of money. when you do, that the profit margin becomes lower. >> all right. miss karet, let me come to you. i've talked to retailers i had heard from some retailers that talk about they have to eat this cost. and they say is most harmful to smaller businesses, the mom and
pops. and, when i talk to people who are in the grocery and convenience store business, they talk a good bit about this. because this is something that drives of the overall cost of doing business and compliance. correct? >> senator, yes, thank you. just to put this in perspective, picking on what was said earlier, we operate on about a 1% profit margin. >> okay, so, talk to me a little bit about how this contributes to this out of control inflation that we have. because, right now, inflation is at over a 40 year high. you've got the cost of milk and eggs and bacon and coffee, coffees up over 100 percent. when you're buying a bag of beans! so, talk a little bit about that added cost and the impact on the consumer, your consumer. >> so, the way the credit card
swipe fees work is the percentages. when the price of goods go up, what is happening is the credit card companies are getting a higher percentage on a higher sale. so, that means there is more cost than we have to bear and pass along to our customers. >> so, that means the price on the shelf for a package of oreos is going to cost more the summer? >> that is absolutely correct. >> when they are packing lunches for kids to go to camp and making a peanut butter and jelly sandwich and putting a couple of cookies and there. okay. >> -- >> now, mr. kim, i want to talk to you. i read the geo sunday that talked about the harmful impact of the durbin amendment. and the comment was that it was one of the most harmful laws and regulations in terms of its negative impact. on the availability of
fundamental banking services. so, give me the explanation of how this has adversely impacted the unbanked, the under banked. i >> -- [inaudible] -- woody's debit cards and be under banks would use debit cards. that contributed to the revenues associated with those checking accounts on those services that we offer them. those revenues went away, and it meant it forced us to increase the cost on those accounts. so, what you saw on the banking industry was a decline. the amount of rejecting that was offered. now, you, know the banking industry is resilient and we figure out how to overcome things and, overtime, just like this karet probably can do the same thing in her business. you figure out ways to overcome
challenges and now i think the banking industry has a good record of offering services to the under banked. and so, we worked our way through. that >> had this effect your total customer makes? did your customer base grow? as people move to debit cards? >> you, know we probably saw sort of a -- this is our own statistics. we saw stagnation there, so not much appeal at the lower and, where the big numbers are. >> and so, a change to the credit routing system would -- what kind of impact would that have? >> again, i would say, what that would do is reduce the money available, associated with offering credit cards. it's kind of an expensive proposition for somebody our size. it's been a declining profitability business for a number of years, for a number of reasons.
competition, regulation. it's the most regulated business where, when we spend the most money on compliance officers and responding to regulators and that business. there's a lot, you can get in trouble if you do something wrong and you get out. >> right, my time is expiring. miss kirkpatrick, i have a question for you but as a courtesy i will submit it because i want to know what your cost is. because you accept the responsability for laws, for fraud, for things of that nature. i'd like to know that percentage, with that means to mastercard each year. how much that costs you. >> thank, you senator blackburn. before i recognize that there are node, i'd ask consent to enter into the record the report of the american bankers association. that, in 2010, the year of the durban and men wasn't acted, 53% of americans had free
checking. five years later, under the durban amendment, the american bankers association reports that the majority of americans now have of 61% of free checking. so, free checking has gone up and knocked down. senator her on oh? >> thank, you mister chairman. it's good to know that the durban amendment had some very positive impacts. so, thank you. although i was told that i actually signed a letter when i was in the u.s. house, that raise questions about your amendment. but it's good to know that it all worked out. goodness gracious. okay, mr. mierzwinski, you described in your opening statement how credit card fees lead to higher prices for consumers, and i saw an estimate that the average american family spent $700 a year as a result of higher prices, due to credit card fees. and you say it that the bulk of
the interchange fees goes to rewards programs. and i was looking at a chart that's from 2019, but the chart shows that, based on household income, the lower the household income, the greater the use of cash for payments and debit cards. for example, according to this chart, in 2019, if you made under 25,000 and household income, you generally paid with cash 55% of the time, 5% credit and 31% that it. and then, if you made over 200, 000, and it would be 10% cash, 65% credit, 15% a bit. so, based on what you testified, most of these rewards go to higher income people. is that correct? >> that's exactly right, senator. the federal reserve economists at the federal reserve bank of
boston have done studies that show the same thing. essentially, the worst off americans, the people that don't have credit or debit cards, pay evs swipe fees, pay these increase white fees because merchants, due to the rules that are imposed on them by the dominant do wobbly of mastercard and visa, they don't do anything else but to bake the fees and to all of the costs that all consumers pay, including low income americans. >> and then, while some of the really large companies like amazon at walmart may be able to negotiate for lower interchange fees, small businesses don't have that kind of power. >> that's exactly right. thank you for that. >> so, for miss karet and mr. kantor, i have a series of questions relating to the honor of cards role. first of all, can somebody briefly tell me what that is?
and then, what impact does this rule have on the fee is paid by merchants and often passed on to consumers? with the elimination of the throwers elton greater competition and lower fees? >> so, the honor all card pretense is that, if you take mastercard or visa, you have to take all of their products. so, there are lower fee products and hire free products. fyi, the higher fee products tend to be the reward cards were talking about. something that i think you should know is that visa and mastercard are actively transferring customers into the higher rewards cards, so we end up paying a higher fee overall. >> so, a merchant can't say i'm only going to accept this type of visa or mastercard? >> correct, that's correct. >> isn't that a tying case? somebody mentioned and i trust.
>> senator, thank you. interestingly, there's two pieces to this honorable cards role both of which are a problem. one of which is that you have to take, if you're a merchant, every single type of card, even if they're very expensive, to take the least expensive one. and that is destructive of competitive markets on the rates on those cards. but the second one, also, is you have to accept the cards from every banking institution under the visa and mastercard umbrellas if you want to take any of them. what that does is it tells these banking institutions, even the largest ones, that they no longer have any incentive to go to a merchant and say, hey, how about we come up with a deal to do business together? because all the merchants are required to anyway. and that's what's so destructive of this competitive market and why it inflates fees to such a large degree. >> so, if we were to eliminate this rule, would that lead to -- i think you just answered my question. would it lead to greater competition? >> there is no question, it
would lead to competition. there are a few other roles, including the setting of the prices, that are problematic here. but that is one of the essential things getting in the way of real market competition. did you want to add something? so in a situation like that, i think there might open a case that went before the supreme court where a merchant, said i don't want to take all these or have to take all these different kinds of cards from one entity. that might be an area for us to explore to eliminate this on or off cards rule. when merchants like that? especially small merton merchants? >> we think that would be a great area to explore. to open up the market yes. >> thank you mister chairman. >> thank you senator, senator tillis. >> thank you mister chairman. i did not want to suggest bob
that -- i think some like the policies to work some of it doesn't, we'll have to look at refreshing things based on the circumstances. mr. kim, just go back to the d o apart report. can you talk a bit more about the effect that the german amendment has had on banking in general. the things you're most concerned with. give me the top two if you have to. >> yes the g.a.o. report, don't take my count for it. take the government accountability for it. it's the most side it, has significantly affected the cost of banking services. that's a statement. there are other arguments but that's a fact. >> as you're going through this, i'll say the federal reserve bank of richmond, it indicated that nearly 99% of the savings from the durban amendment were
not passed back to the consumer. i think we're here of sensibly in on not a cheerleader for businesses, i'm a cheerleader for consumers. so i'm trying to figure out if we're considering policy here, it has to have a net benefit to the consumer. it would suggest that the durban amendment didn't. is that what it says. >> yes that's what that study would say. that's what the facts in the study would say. now figuring out how exactly price changes are passed on that's a complicated thing, and the durban amendment it's been a long time ago. but that in fact is a study. >> i want mr. kantor if you can briefly respond. so unless one here i might be able to indulge the chairman a bit. >> two quick things. one of the federal reserve bank of richmond, they made clear actually that it does not say what some of the credit card industry says. their study was a survey, it didn't look at any actual economics of what's passed through. they just did a survey.
so it cannot be relied on whether was pastor or not. and they had biased issues that they flight in their survey. >> would it be fair to say though that 99% that it may have been an unhealthy amount that can go back to consumers. >> no because they also asked the question wrong. merchants don't set the prices by saying hey this cost went down, now i am lowering this price. what they say is what's the market? and i have to compete with a guy down the street. so overtime, their profit margins become narrow. and it goes down to their cost. we all know that's how competitive market works. so asking it was the wrong way to get it. >> just something else, i just want to see if my first impression was right when we talk about the dollar amount, the increasing as a transaction amount increases you know is also fair to say that mr. xi, and miss kirkpatrick, that there's also a proportional
amount of risk and potential default payments involved? is it part of the rationale behind the percentage going up, is that there is a risk of fraud and some of those. but you have to recapture it right? >> yes, that assumption is correct. as williams increase the risk of fraud increases. and we've seen. >> yes talk a little bit about card not president, an additional rising cost in the area. and transactions. and additional risks, but you have to recoup some of the costs or you can have an operational business. something that is important for our consumers. >> mastercard spending billions of dollars to protect consumers against on one fraud. certainly it has volume increases and gets more sophisticated this so mastercard has to invest more to protect against that fraud. and we spent billions of dollars to protect seniors against fraud. just last year, one of our cyber and security tools, prevented $10 million in fraud
for consumers across the environment. >> okay and now mr. sheedy, and then when we come back to you miss -- save you for. last >> the consumers want to transact online. they enjoy the convenience. and merchants find they can reach new customers, and lower their costs to provide services online. the difficulty is, the way that the system works at the moment, as safety and security has been a high priority. there's still too much fraud, too much uncertainty, so one of the changes that we are making an april, and we created an incentive through interchange. an interchange is not just a pastor, it is also a mechanism by which we make the system more safe and more secure. with one of the changes that we made in april, if we are seeing a rapid adoption of the secure digital tokens, to better trans authenticate transactions online, so consumers and merchants can more safely and
assuredly transact, well that's good for everybody. good for merchants and good for consumers. >> isn't it fair to say that if we were to go in and dramatically decrease what we could, but what we could charge or recoup or cost of operations, but you would have to take a look at the risk of the people you would be willing to issue credit cards to? some of the most or wouldn't some of the most credit challenge people be hurt the most by this. if you have to make a business solution about the population? >> one way to answer your question senator, is that when interchange has been priced regulated by governments around the world, and in the markets, you see a narrow wing of the issuance of credit cards in those countries. >> that's logical. >> and those fees for those consumers end up going up. and the features and the benefits they get from those cards go down. we think that that would be a horrible outcome. >> and we've not been very
sensitive, we have a lot of retailers in north carolina, across the nation, a lot of recipients have the paycheck protection program. and one of the things was to recognize that we've got a lot of businesses out there in a bubble. and i know in your sector, it is struggling with some of the shutdowns and other things that we've been dealing with. but, let's assume that the fees were cut in half, would that solve all your problems? in your industry? the answer and the life is all i needed. so if we're talking about having a meaningful impact in consumer prices, there's a lot of other policies that we have to talk about here. this is not going to make a big difference. you have a lot of supply chain problems, you've got a lot of inflationary problems, so tell me a little bit about you know if you could ask congress to act on any policy matter that
would help the retail industry, would this be on the top of the list? or are there other things we should be looking at? to affect the fundamental issues of problems for emergence. >> senator thank you for asking the questions, if you could indulge me for one second. >> i will indulge or certainly. >> well hopefully the chair will also indulge me. i'd like to go back to the par question, there is an important fact it is not been stated. which is the merchant bears the cost of online fraud. so the merchant would bear the cost of that fraud and through covid and behaviors, the mix of shopping has moved online. so our costs are also going up from that perspective. and we're talking about the cost you know which these guys have invested, and i believe they have in terms of anti fraud. i think it's important to remember that we are paying the cost of online fraud. that said, to answer your question in terms of what i
would want. the credit card swipe fee issue is one of the biggest issues that we have. that the government has a role in. i don't know today what the government could do related to our inability to source toilet paper. you know that's just from like that's the beginning of the pandemic. so we have plenty of toilet paper now. but, credit card fees as i said before, we operate on 1% profit margin. bank fees today are third largest cost. we actually pay more in bank fees that we make. but we are looking for is fair competition. not asking for huge regulatory things, like captain decreases and look if you want to have a decrease i'll take them. but that's not what we're asking for. what we are asking for is to create a level playing field. so that there is competition.
what doug said before is exactly right. competition works. and in this industry, there isn't any. and i do believe that that is the role of our government to create level and fair playing field. >> i think that i'm going to have a hearing this afternoon that is loosely related to the subject, but i also think at some point that we in the banking committee, and our capacity, we take a look at that. i believe in hyper competition. i think that it's incredibly important. if there is a basis for any competitive behavior we've got a division in the doj to deal with it. but i think a lot of the things we can do to ease the burden and address these issues i look but i look up yelich fort taken it up with the banking qamishli commission. thank you all. >> thank you, and by the miracle of zoom, i think we will be joining the senator
from minnesota. are you on board? >> i am on board. so thank you very much. chair durbin. and, i want to first ask because as you know mister chair, one of my jobs is the chair of a subcommittee on trust. i do a lot in that area. i thought i would take a different approach and ask you about this mr. kantor. today a number of our witnesses have testified about a lack of competition in the credit and debit card market. higher interchange fees that could high that could hurt consumers, merchants and do you think that a stronger -- could lead to more markets debit and credit card markets. >> thank you senator, i do think more and better anti-trust -- would be welcome here. it's needed. and this is an area where the antitrust division of the department of justice has been
active over time. as has the federal trade commission. but there is a lot more to be done and this goes on for a very long time. . >> there's still a big puzzle how these rules and these fees get set. and absolutely, some more enforcement would be welcome. >> very very good. >> in your opinion, and you know you've got an active antitrust division, you've got interest in going after cases but in your opinion what is the impact of the supreme court decisions like ohio v american express. >> we disagree with the decision in american express versus ohio. we think it will cause problems not just in this area, but
frankly dealing with other platforms that have been a focus. and i know senator of your committee and of others in congress. so that could be problematic. so what is important to note though, is that even under the standard articulated in american express versus ohio, this credit card market you know it is an antitrust problem. and there is plenty of consumer harm in the record of cases that are going on right now. to show that it is an antitrust problem. that said as i mentioned earlier, there is an important role for congress to play here to decide how competition should work going forward so that we have some. these antitrust cases, and courts really have a different role in this, so we want to pay attention to the congress's role here as well. >> okay very good. >> yes the way i look at it,
this is off this topic. but if you have monopolies, and google has 90% market share, which no doubt that's monopoly. but you have to at the same time, and maybe this is what you're getting at in a very different context, you have to ensure that there are rules of the road in place by industry. so there's not gonna be a change through the courts like in my case with tech, which will take years it would at least have to make sure that they are not referencing their own products,. you know and that is what this is about. so i have mr. kim, and i have a question of you. yes. >> sure. >> okay. >> you testified that payment systems require constant investment and protection, and the interchange fees cover much of that cost.
so security issues threats all those things, can you talk about the type of costs that interchange feast helped cover, from mid size and community -- card issues. >> sure we have to have seven by 24 customer service available to our customers. wherever they're transacting. whatever time zone. so when there are problems with transactions, if they have to you know for going on networks. it really around the world that is not as reliable, it's important for us to be able to choose our networks. but all networks are not created equally. so sometimes we have to resolve problems there. we are constantly looking at data to try to assess you know we had a substantial fraud a witch in one case they try to open up accounts and open up credit card accounts, and intern extract money from the consumers and ultimately us. so it is that kind of investment in data, investment
in information so that we can collect cell phone numbers, until people hay his transaction or this transaction went through a new card, was it really you? and we can do that instantaneously. that some examples of how we invest to make the transaction and payment business work >> okay, very good. and the question kind of along the same line, can you talk about how you see mid size and community cartridge fitting into the payment landscape now and into the future? that's my last question. >> sure, so that's a challenging thing. you know, we spent a lot of time looking at all the financial technology firms that are getting into the business, and taking away parts of it from the traditional banking industry, and how can we partner with them effectively, or compete against them. and so, certainly, as many have said, you know, across apples
and oranges, i think it's all payments, maybe they'll all apples. lots of competition going on there. it's hard for us. we have to be nimble. we have to partner with smart organizations that can help us with networks. you know, my ability to process transactions internationally at all times a day depend on the networks and depend on the investments in the networks. and that's going to be, we have to have good partners, and they have to be able to help us. that's how we will continue to exist in the payments ecosystem. >> all right, excellent. thank you very much. thank you, senator. >> thank you, senator klobuchar. i just have a few questions. mr. kim, first, let me say with a little bit research when you are added to the panel, about commerce bank, you are familiar with it of course living in the region. i want to thank you for free checking even through the onslaught of the durbin amendment, you continue to offer free check answers. it's note where the, i want to
make sure it's part of the record. and on your profitability, your bank's doing pretty well. would you agree? >> yes. >> and you are not exempt from the durban amendment because your valuation is over ten billion? >> that's correct. and we are doing well, but we are resourceful, and we are nimble, and we figure out how we do things. and i would say, we did discontinue free checking for a period of time, and we introduced it recently in the last year. >> glad you did that. and when you talk about your profit margins, i won't repeat what you are reading here. but i will say, miss carat, what you're dealing with, one and a half percent is as hard as it gets in terms of vulnerability. the one thing that you said earlier, among other things, was that the change in free came in a stack of papers 300 pages long? >> it was a very large deck. >> did you have to hire a
lawyer? or did anyone go through this with you? >> so we're looking at that we have a good team of accountants and lawyers to go through that. but it's a very complicated thing to understand, and i think, purposely so, to understand what the fees are and how they're changing. >> and mr. kanter, mr. carrot has said she has the staff, professional staff to do this. you're representing convenience stores, some of them are large chains, but some are not, so how do they cope with the 300 page fee change? >> they can't. 60% of them are single store operators. and they don't even get the hundreds of pages, frankly. they don't get any of this. they just take the increases, and it is very difficult for their businesses. one quick thing i'd note to, with respect to this free checking question i want to clear up because a couple of the questions today dealt with this g.a.o. report. g.a.o. got a couple of studies added to it, at least one of
which, i think maybe both of which were cited by mr. kim. but what those studies did was they looked at the decline of free checking, starting in january of 2009. the durban amendment didn't go into effect until october of 2011. so there's actually almost three years of decline in free checking while this was going on, and i cite many, many articles. i, frankly, ran out of the energy to continue citing them. but this was during the time of the financial crisis. and, yes, free checking was going away before the german amendment ever happened. and mr. kim probably cited the study for noting that, rechecking even continue to go away after passage of the durban amendment, but it was over a year before any of that took effect. and the study notes that, we're not gonna look at other changes
in dock frank, because they didn't take effect for more than a year, after passage. all of this is just a sideshow, frankly, one, to distract from anticompetitive activity and credit cards, but number two, to try to discredit the reforms that occurred, losing free checking because of the financial crisis, and the difficulties, banks were in at the time, it is not the same as a reformed came into effect years later, and that the aba numbers you cited show actually went up when you look at the right time period. so, free checking has its own competitive market dynamics that mostly has to do with interest rate environment and how banks are competing, and want to compete to get more money and from depositors and the value they place on that. so it's an unrelated thing. >> thanks very much. >> senator, can i add something about on that jay report? the banks were buying heavily on that this report, the claims the durban amendment has caused
the downfall of everything. it's not a study. it's largely based on a survey of a few stakeholders the g.a.o. interviewed, and some stakeholders said, what's the worst thing you've seen. was it the credit card act? or was it the turban amendment? or was it the creation of the cfpb? and they simply, a small number of stakeholders said the durbin amendment was bad. i am unimpressed with the g.a.o. study, the most recent one. >> i have been edged out by covid-19, as one of the worst things we've ever faced. [laughs] at least for now, but who knows, it could get worse going forward. my bottom line is simple. it goes back to 16 years, when i walked into this room and saw that stack of papers, and had one of the customers of visa mastercard say, we can't even get the complete contract. they give us the summary of it, and we couldn't read it if we received it.
it was so complex. it lacks any effort toward transparency or simplicity. and secondly, there is no competition. they announced a few changes both companies the same date. they're coming at you, miss karat. you know they are. it's a dual engine force in this situation. i don't think that's healthy. i think if you believe in the market economy, competition is part of it, isn't it? shouldn't be? i mean, that's what most nba's conclude, maybe even liberals. so i would say that this conversation will continue. we're going to have a hearing on this subject, at least every 16 years. [laughs] i think the american people need to know the story about these fees that cost merchants and customers, and why they're not disclosed, there's a reason. i think there would be a revolved even more strongly against them. we are facing inflation, and the lasting american people need is higher sweaty. i wish both companies had
resisted the urge to make some money when they can. the hearing record will remain open for a week. i'm gonna have some letters and statements, whether there for me, or against me, or for or against the durban amendment, all will be included in the record. at this point, i will stand the jury, thank you.