Transcripts For CSPAN3 Hearing Examining Credit Debit Card Transaction Fees 20240707

>> 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're going to talk about a hidden fee that fuels the fires of inflation across america every day. what they may not know is this swipe fee is contributing to the problem of inflation. when swipe fees on credit and debit cards go up, as they recently did, it increases inflation. consumers ultimately pay the price. ironically, this journey for me started in this very room 16 years ago. arlen specter was a chairman at the senate judiciary. he called the hearing on swipe and interchange fees. i attended because i was not familiar with those terms. i heard for the first time what a swipe fee was. the fact that, when i used my debit and credit card, the swipe fee was being charged to the retailer that i was ultimately paying. and then, i learned there was virtually no negotiation of those fees. retailers were at the mercy of the credit cards and banks in terms of what those fees would be. there was no competition because we have a duopoly here, well represented at this table, and that created a situation where the market forces do not work. they are not supposed to work. they are not designed to work. what has happened in america, we all know. the statistics on the amount of americans paying with plastic tell the story. these are from 2020. i'm sure after the pandemic and our change in lifestyle, they are even greater. the number of 2020 transactions involving debit cards, 86 billion. the amount involving credit cards, 41 billion. between the two, credit and debit cards, 2020, 127 billion transactions in america. how are we doing with cash transactions? 32.8 billion. how about the use of a check? 5 billion. we are becoming a nation, maybe even a world, that pays with plastic. and today we are going to ask a few questions about how those payments are made, and the charges imposed. this committee held a hearing with witnesses with visa mastercard 16 years ago to discuss competitive fees. we are back. here's what i learned. visa and mastercard control about 80% of the current credit card market. they have established a system of fees and rules that apply to every transaction of the billions i 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 do not see it at a check at the restaurant. it is there. some of that cut they keep themselves, most of it is given to the bank that issued the card. the fee that visa and mastercard require is called an interchange fee. it is usually charged as a percentage of the transaction, plus a flat fee. for example, 2%, plus $.10 per transaction. that means when a card transaction of $100 is made, the merchant gets less than $98 after fees are deducted. and merchants end up raising the prices of their products to make up for the deducted fees. you might ask, how much of america has been charged with interchange fees by visa and mastercard since that hearing 16 years ago in 2006? according to payments consultancy mspi, it's $794 billion, all built into the prices retailers have to charge and consumers 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 let visa and mastercard set the fees on their behalf. so the same schedule of fee rates applies for all banks in the network. this means that all banks in the network are guaranteed the same interchange fee, regardless of how efficient or inefficient the bank is in running a card operation or preventing fraud. it is a gravy train. when visa and mastercard raise interchange fees, banks want to issue more cards. because they make more on each swipe. and visa and mastercard profit when there are more swipes because they take their own cut, called a network fee, from the merchant on each swipe. but merchants and their customers take it on the chin. and we are going to hear that firsthand today. what can merchants do to try to keep fee rates down? not much. visa and mastercard are negotiating agents for thousands of banks. if a merchant wants to be able to accept payments from customers, they have to agree to visa and mastercard's fees and terms. i remember at that hearing 16 tables, at that table, one of the customers, for one of the retailers had a stack about three inches tall. they had asked for a copy of the contractual agreement with visa and mastercard when it came to imposing fees. they quickly said, this is not the complete contract. they would only give us part of it. three or four inches tall, and you expect a grocery store or restaurant to go through this? bottom line, when fees go up, it costs more to use money. and that cost gets built into prices consumers pay. visa and mastercard raised their swipe fees two weeks ago, despite bipartisan opposition from congress. it is obvious. we are suffering from inflation. do not raise these hidden fees again. they did it anyway. we urged them not to do it. they did not listen. and we will talk about it today. the credit and debit card systems are not competitive marketplaces. when you don't have real competition, what happens? you get higher cost, less innovation, weaker security. and new potential competitors get stifled. it is a sweetheart deal for the dominant networks, for the biggest banks, and for certain cardholders who have ritzy rewards programs. but the average small business and consumer pay the price. other countries have figured this out, incidentally. you cannot have a fair system when you let networks fix the swipe fees without competition or 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 to debit cards. in 2010, i wrote that law that placed reasonable limits on debit interchange fees that visa 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 competitive marketplace, there needs to be some limit on visa and mastercard's fee fixing. here are a few steps i would like to suggest. let's have transparency and make it clear to consumers in their monthly statement how much of their card purchases are being deducted as interchange fees. you know you have the information, and you know you can provide it. maybe if consumers knew how much of their cards would be costing their favorite restaurants, they would use 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 mastercard tell banks they cannot 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 cards. security innovators and startups are being shut out of the current system. and let's reduce inflationary pressure by preventing network fixed swipe fees from being jacked up to unreasonable levels. we got a lot to talk about today. we are joined by a distinguished panel. i thank them for joining this spirited discussion. and let me turn to senator grassley. sen. grassley: first of all mr. chairman, thank you for holding this hearing. and i particularly want to thank you for including financial institutions in the panel. interstate and swipe fees is the amount of money that merchants pay for accepting a debit or credit card. these fees vary depending on many factors, but in general end up being 1% to 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. these may have to -- 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 than if they use 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 impact. and i look forward to hearing from all of you on this 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 credit card market. i look forward from hearing whether these rates reflect market forces. i think though that when a subject like this comes up, particularly at a 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. that blame game doesn't work, as president biden spends trillions of dollars of money as fast as could be spent. a liberal wishlist, even when economists are warning about inflation. earlier this month, the bureau of labour statistics reported the 12 month increase of inflation for march was 8.5% year over year. this was the largest increase in over 40 years. all of this obscures the actual rising cost that iowans have been hit with in the midwest. the price of ground beef, 24.5% up. bacon, 26% up. porkchops, 23%. chicken, 31%. eggs, 22%. these are not luxury items, but absolute necessities for the family 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. sen. durbin: thank you. we have six witnesses, thank them for joining us. i'm going to give a short introduction to each before they are recognized. first witness is laura shapiro karet. she is chair and ceo of giant eagle, a supermarket chain headquartered in pittsburgh. 470 locations throughout pennsylvania, ohio, west virginia, maryland, and indiana. she served as ceo of giant eagle since 2012. previously served as senior vice president of marketing. she has worked for giant eagle since the year 2000, and has a bachelors degree from amherst. glad to have you here. second witness, bill, senior advisor to visa's chair and ceo, a position he has held since 2020. he is responsible for strategic initiatives. previously served as visa's president of europe, north america, and latin america. and he helped lead the company's restructuring in 2007 and its ipo in 2008. undergraduate degree from west virginia university and an mba from notre dame. thank you for being here. next witness is linda kirkpatrick, president of north american for mastercard. she is responsible for overseeing mastercard's operations and customer facing activities in the u.s. and canada. she has been with mastercard since 1997. and she previously served in a leadership role involving investor relations of u.s. strategy and communication. compliance programs and dispute resolution management. she has a degree from manhattanville college. thank you for joining us. next witness is ed -- close? did i get it right? that is because i represent chicago. he is the senior director of the federal director at the consumer program of the public research group. he has worked for them since 1989. oversees the federal consumer program, helps improve consumer reporting laws, identity theft protections, product safety regulation and more. cofounder of the americans for financial reform, received his undergraduate and master's degrees from the university of connecticut. senator blumenthal, take notice. our next witness is charles kim, executive vice president, chief financial officer of commerce bankshares, responsible for all financial functions of the company, as well as the company's strategic planning and marketing, technology, enterprise operations, and consumer card business. he has been with commerce bank and received his undergraduate and mba degrees from washington university. final witness is doug cantor. since 2021, he has served as general counsel for the national association of convenience stores. he previously practiced law and was general counsel to the merchant payments coalition. in his career, he worked as deputy chief of staff for the u.s. department of housing and urban development. and as a public school teacher. he received his ba from the university of virginia, and jd 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 swear the testimony you are about to give will be the truth, the whole truth, and nothing but the truth, so help you god? let the record reflect that all the witnesses responded in the affirmative. now gives them permission to proceed. ms. karet: members of the committee, i am laura karet, ceo, president and executive chair of giant eagle, one of the nation's largest multiformat food, fuel and convenience retailers. with approximately 34,000 team members operating stores within five midwest states including pennsylvania and ohio. on april 22 of this year, with no negotiation or threat of competition and straining them, visa and mastercard imposed a fee increase that will cost giant eagle $1.3 million annually. i appreciate the opportunity to talk to you today about the impact of these swipe fees place on our business. i am proud to serve as vice chair of fmi, the food industry association. fmi works with and on behalf of the entire food industry to advance a safer, healthier, and more efficient consumer supply chain. fmi's membership includes nearly 1000 supermarket member companies that collectively operate almost 33,000 food retail outlets and employ nearly six million workers. our industry historically operates on razor thin margins of 1% to 2%. we operate in a highly competitive market, and as inflation has driven prices higher, our customers have become even more conscious on how they are spending their money, driving down profits. there are three points i would like to make today. first, giant eagle swipe fees have materially increased over time. and the april 22 unilateral increase will only exacerbate this problem. visa and mastercard together control 85% of the market. on april 22 of this year, both visa 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 fee increases without deviation or exception. in my estimation, this cannot possibly comply with either the letter or the spirit of our nation's antitrust laws. this latest price increase fits the pattern we have seen for years. giant eagle has been paying higher and hyman payment fee costs. electronic tender sales make up about 82% of our sales transactions to our company. of the 82% that are electronic tender, about 37% of total sales are visa and mastercard. but when you look at total card processing fees, visa and mastercard make up over 62% of those fees. over the past four years, our fees have grown from 57% of total fees to 62% of our total fees, while at the same time, visa and mastercard 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 ebt cards. it is interesting to note, those snap transactions are completed securely without visa or mastercard, and without incurring swipe fees. it is hard for us to understand why snap ebt cards could accommodate the changes this a sedated -- necessitated by the pandemic, but visa and mastercard used it as an avenue to raise prices. second, millions of customers suffer when swipe fees increase. because of the unilateral fee increases, visa and mastercard -- that they announced on april 22, my company and my customers will be paying an additional $1.3 million in swipe fees. this fee increase came on the heels of visa reporting in its march 22, 2022 quarterly financials that its profit margin was just above 50%. third, there must be competition in the debit and credit card markets. visa and mastercard are the only vendors that giant eagle cannot negotiate with. when giant eagle buys ketchup paper towels, its suppliers compete to give giant eagle the best price. ultimately, our customers benefit from a competitive market. in contrast, visa and mastercard do not compete for merchant 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 everyday. i would be pleased to answer your questions. sen. durbin: thank you. mr. sheedy of visa. make sure that button is on. mr. sheedy: good morning. chairman durbin, 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 payments through its secure transaction processing network. i am pleased to share with the committee the many ways visa works to promote safety, security, innovation, and competition to drive economic growth and financial inclusion. recently, we have taken a number of important steps to support the economy and 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 secured digital tokens so that transactions can be processed without sharing a cardholder's incentive account information, and implementing changes to promote accurate transaction processing. as a payment network, visa takes its role very seriously. that the goal of fostering balance, security, and 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 in being the best way to pay and be paid. we remain steadfast in our focus to deliver in this commitment. our success is based heavily on investing in and enhancing the security of our network. more so than any other part of our business. trust and security are the foundation of everything we do. in the last five years, we have spent over $900 billion in fraud protection and security. in 2021 alone, our fraud prevention programs prevented nearly $26 billion in fraud. cardholders choosing visa can count on our zero liability protections on unauthorized transactions. visa stands behind every transaction company. merchants who choose to accept visa are guaranteed payment when a transaction is properly authorized on our network. competitive pressures on visa to maintain and improve upon its reliability, innovation, and security, have never been more pressing. advances in 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 available at checkout, especially online, is a reflection of this competitive environment and continued expansion of consumer and merchant choice in payments. in addition to cash, checks ,and traditional u.s. payment networks, we also compete with digital wallets, by now, pay later solutions, fintech and big tech, real-time payment systems, and cryptocurrencies. with the majority -- with this massively changing competitive environment, visa is even more clear about our first order of priority. our success depends on our ability to deliver innovative, safer, and more secure payments and a strong alley proposition to consumers and merchants. payments will continue to evolve through new payment uses, new business models, new frictionless commerce. however, regulatory interventions focusing exclusively on card networks could chip consumer spending away from networks like visa into more expensive payment methods with more risk, less reliability, and fewer protections in security. visa 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 have made that enable small retailers and community banks and credit unions to compete with larger merchants and larger banks to deliver robust capabilities, positive customer experiences, and security protections. this has created a vibrant, competitive environment that allows americans and global economy to thrive and grow. we appreciate the opportunity to address the committee on these important issues, and i look forward to taking your questions. sen. durbin: thank you very much. ms. kirkpatrick from mastercard. ms. kirkpatrick: good morning. i am linda kirkpatrick, i am the president of 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 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 business, our products allow them to more effectively support their communities. the value we bring to banks is 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 do not receive from cash and check. in addition to increased sales and operational savings, merchants receive guaranteed payments, even when consumers do not 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 first weeks of the pandemic, we announced a $250 million financial package to support them through this crisis. the value we bring to merchants is clearly demonstrated by the growth in global locations where our products are accepted, which has nearly doubled over the last five years. this includes an incremental 24 million small businesses since 2020. and for consumers, mastercard products provide access, convenience, and peace of mind. consumers are never responsible for fraudulent activity that may occur on their accounts. further, electronic payments kept commerce alive for consumers and 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 grown 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 and partnering with merchants across their co-brand portfolios and other services. as part of balancing the interest of all stakeholder groups, mastercard sets default interchange rates by cardholder banks to merchant banks for the benefit of guaranteed payments, transaction processing, and account servicing. mastercard does not earn 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 implement changes to our 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 would 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, real-time payment platforms, digital currencies, wallet providers, and other forms of payment. there is no question that the variety of payment options available to consumers is robust. mastercard does not hold or exercise market power. we embrace consumer choice and have embedded this concept into our business strategy. in summary, we are 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 and choice to consumers. and small businesses to help them thrive. i appreciate the committees time and look forward to your questions. >> thank you. please. >> thank you, senator durbin. chair durbin, members of the committee, i am with the u.s. public research group. we are a nonprofit consumer advocacy organization and to serve as the national office for the state. all consumers pay more at the store and the pump because of nonnegotiable, nontransparent 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 could not negotiate the prices it paid for buying and selling things on its government platforms. it is incredible to me that even the government is not big enough to hold visa and mastercard accountable. the worst problem occurs if you are a small, -- a small merchant having to pay for second-highest price of cost of goods served sold, and might be higher, rent might be higher but probably bank fees are the next highest fee that you pay. what you have to do? because of the complicated rules you discussed in your opening statements, the contracts and etc., they have for bid the merchant from doing anything to lower the costs. he has got no choice but to bake the price of these overpriced fees into the cost that everybody pays, including the cash customers who might be low income. they are probably subsidizing. and despite with the associations and networks will say today, the bulk of the interchange be 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. i'm very happy we are holding this hearing and i want to point out there is nothing to restrain these networks in this market failure that we have in the card network ecosystem. and when talking about percentage-based fee is, when prices go up because of inflation, the bank earns more money without doing anything or making anything. visa, i believe, has been quoted recently in earnings calls, in the plus depressed, -- in the press, inflation is a net net win for us. it is a market failure. i want to commend the durbin amendment for going after some of the key aspects in the debit part of the system. first, you narrowly and proportionately, you cap to fees to a reasonable and proportional basis on some debit cards, but not all. second, he went after debit card routing, an important area that needs to be fixed. the federal reserve is also working on a debit card update to rule i i, which implement did this amendment and that would make it easier for merchants to pick and choose networks not owned by the incumbent players. want to point out that europe and canada are examples. many other examples around the world of places that regulate these fees 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 relation, ifr, their rates believe are about 10% of u.s. rates. u.s. rates are not really restrained and that is why we need the durbin amendment and we need to expand the durbin amendment. they're been important actions taken by the department of justice and the federal trade commission. the federal trade commission does not have jurisdiction over banks, but it does have jurisdiction over the card networks. the federal trade commission has forced visa to change the way that consumers are told about their choices in using swipe card machines, and the department of justice in particular went after visa's acquisition of plaid, a nascent competitor that does important work. i look forward to working with the committee on other solutions and i support your talking about having a disclosure on your bank and credit card statement that says how many swipe fees have paid. consumers don't know what a swipe fee is. that they would know. sen. durbin: thank you. mr. kim from commerzbank. >> good morning chairman durbin, making member grassley and members of the committee. i am pleased to testify on the behalf of commerce. it is a midsized bank founded in 1865 in kansas city. we employ talented people in almost every state represented on this committee. we offer full suite payment services including debit and credit cards for consumers and businesses and merchant card acceptance services that keep money moving in communities we are privileged to serve as well as all over the world. wherever customers are traveling or shopping, something that would not be possible without interchange of the networks. the views expressed in my testimony are broadly held among my colleagues at the thousands of midsized and community banks across the country. this week, members have come to this committee -- letters have come to this committee signed by community bank or associations, credit -- from small to large, to public and nonprofit credit unions. urban, rural and suburban, we are united in our view. price controls in the form of interchange regulation like the urban amendment harm consumers, small businesses and competition in our communities. what is interchange and is there a competition around that? simply, our payment system requires constant protection and investment and we need a way to pay for it. i believe banks and merchants should share the cost. banks and credit unions invest billions into the payment system before, during and after the sale. merchants contribute when they use a small system to make a sale. there interchange is a fee, a convenient and proportional way to pay their share. when we compete for merchant card business, it is competitive. we are against many merchants trying to give a better deal. it used to mean banks selling a card terminal but today there are many competing. the average consumer probably gets tired from hearing people so merchant services, but cards are not the only that, there is a venn, paypal, cash app, same-day aca, by now and pay later. merchant payment solutions at all price points, including free and some more costly than credit. a decade ago, my banks executive chairman predicted that durbin amendment would cause harm to consumers it will affect banks at all sizes. now that we can quantify the size of the harm, and how the promises made about protecting banks turned out to be empty. minimum balance and monthly fees are up, debit card rewards are scarce or nonexistent and the cost of accepting cards rise. these are because of federal banking regulators and academics. her research from university of pennsylvania law professor who is a senior economic policy maker in the biden treasury department, banks were 35 to 40% less likely to offer free checking accounts following the passage of the amendment. the largest merchants, this has been a windfall. if some get more market share, but for smaller businesses and financial institutions, they cannot tap into a law that encourages consolidation and scale. the costs have been steep. small banks and credit unions which have been exempt, we have seen this drop 30% on pin debit transactions. this is a result of this being -- price controls. the fed found nearly 99% of merchants did not pass any savings to customers. 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 will not happen if we cut 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. policies like the durbin amendment to create rigid rules and investment camps -- caps that limit us. the payments world is evolving and smaller institutions are facing cost to upgrade, offer new products and stay in the game. interchange is an investment in the main dutch american commerce, not a junk fee. i arched the committee to look at both sides of the story and put the consumer first. thank you for having me. >> thank you, mr. kim. >> thank you, chairman durbin, raking up her grassley and members of the committee for having me and having this hearing. we appreciate the opportunity because we think this is an incredibly important issue. the credit card market is broken. visa and mastercard centrally set the fees that the banks that issue consumers cards charge. those banks compete on every other prize they said, every other interest rate they said, every other part of their business, but not here. they could do it here. this is a concentrated market with large institutions like j.p. morgan chase, beck of america, wells fargo. none of them are setting their own prices. that does not make sense. on top of that, visa and mastercard set the terms which cards are accepted, which makes sure to insulate those fees from any other competitive market pressure to make sure they can stay high. they have a rule that says to merchants if you want to take any single visa or mastercard, you must take every sigel one and the prices on these cards can be different for businesses. they can be factors of twice or three times as high. by doing that and restraining merchants prices and the price signals and they can send to their consumers, they make sure there is no market pressure here. that is why we have a market failure. it does not have to be this way and it should not be this way. we need competition in this market. that is the bottom line. there is lots of discussion on this panel and has been this morning about how many other forms of payment there are. this is not about the other forms of payment. this is about credit cards. thankfully, we have had the reform of debit cards which has been good. but on credit cards we have not. the interesting thing is, as folks on the panel talk about there is by now and pay later, cryptocurrency, all of these things. yes there are, but installment loans and other things are not credit cards. they are conflating these markets. senator grassley this morning talked about the rising prices in different markets, beef, chicken and 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 everyone can just eat chicken. it is ok, it is very competitive. that is not ok. we need to deal with the competition problem and credit cards to have a fair deal for merchants and consumers, and for the u.s. economy. $138 billion just last year were charged in fees that consumers don't see last year. we all end up paying and it creates this inflationary cycle, particularly because it is a percentage of the transactions. when there is inflation, that drives up prices. we are not saying visa and mastercard caused inflation. they did not. everybody can have their own opinions. but it does exacerbated because the fees are high percentage way they are charged creates this inflation. that is what we would all expect when there is no competition. it is very predictable. one other thing i like to say on this, we have heard a couple of things this morning on how there is a payment guarantee for merchants. there is not. the federal reserve, every couple of years, looks at debit fees in particular. they have found that merchants pay 56% of the fraud on debit cards. 56%. 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 fee of payment, they are losing most of it when fraud is being committed. so we need our facts straight we talked about this, and we need competition in this market. we all know competition does work. it works throughout our economy. we don't let folks set other people's 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, have seen more innovation since the durbin amendment on debit cards with more encryption and other security types of innovations that came afterward. and people have more money in their pockets when there is competition and lower prices. can spend more, and consumer spending helps drive the economy. i appreciate the committee looking at this important issue and i look forward to the conversation. sen. durbin: thank you, we will have five-minute rounds of questions. i will start. it turns out the issue of inflation was addressed directly by the chief financial officer of visa. i hope i pronounce his name correctly. on january 27, earnings call, he is asked how inflation impacts visa. his answer, and i quote, net-nets. we are a beneficiary of inflation. he also said to the extent there is inflation driving up ticket size, clearly it is official to us. so let's put the rest -- put to rest the theory this has nothing to do with inflation. it appears to have some relevance. can i ask you, incidentally, she told us coincidentally april 22 was chosen by both visa and mastercard as the day to raise fees. was that just a coincidence, or coordination? turn on your mike, please. >> i apologize. we do not raise the fees in april. 90% of businesses in the united states see a change in their rates that we are down by 10% effective with the april changes. sen. durbin: is correct -- ms. karet? >> no. we calculated exactly the fee increases. while some fees down, others significant they, the net effect is our fees went up. sen. durbin: both the same day? >> yes. sen. durbin: i want to ask you about these canadians. in canada, there is a debit card system called interact. it is the most widely used system in canada. it has the lowest rate of fraud globally. the website says interchange for interact debit is set zero. how is it possible these crazy canadians are getting no charge of interviews -- interchange fees on debits and have less fraud? how can that be? >> it is not the case that canadian merchants don't have interchange fees. sen. durbin: in the debit cards. >> there is value in the debit space that consumers derive from transacting at merchants. sen. durbin: what you mean by value? defined terms. >> when consumers shop at canadian merchants, they receive value through the form of guaranteed payments, lower risk, purchasing power. therefore, there are interchange fees on debit transactions in canada. it is a direct result of the value that those merchants are delivering, and that consumers are driving. sen. durbin: he noted what is happening in europe so let's stick with the program. try to explain to me the difference in debit and credit card interchange fees and where the european union has set a standard of .2% and .3%, respectively. 1/8 or 1/10 of which is charged in 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 and south korea also limit interchange fees. what lessons can we learn from these countries who have decided that interchange fees are too high in the united states? >> those countries know that the credit card system is a market failure in the ways that the banks are forced to accept all of the fees from the networks, and that consumers are forced to pay increased prices. they're not going to have it. they said no. u.s. congress strengthen the durbin amendment, expand into credit cards and lower interchange across the board. sen. durbin: to make sure i understand the scope of interchange fees, if i decided i wanted to give money to catholic charities for the people, ukrainian refugees in poland, and i used my credit card or debit card to make that nation, would you be collecting interchange fee on that transaction? mr. patrick? -- ms. kirkpatrick? >> mastercard does have interchange fees, or the banks does charge them. across all transactions, for the benefit that the consumers are receiving from that transaction. there is a cost associated with servicing that transaction and servicing that account. sen. durbin: and the interchange fees apply to sales tax and paying on my restaurant bill? >> does. sen. durbin: why? >> it is the total value. you can't just look at interchange as 1 -- >> more than the total value. >> you are looking at the total cost of servicing that account, which includes fraud to come 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? sen. grassley: before my five-minute started, i would ask you entered letters from stakeholders into the record. as a 2020, statistics show that he said mastercard combined for 84% of all general-purpose credit cards within the united states. some would characterize this as a duopoly, able to extract above market payments for their services, so to you, what will be your response to these concerns and do visa and mastercard abuse market power? i would like to have mr. canter and ms. karet listen in response. do you want to start out? >> yes, senator, thank you. we operate in a highly competitive market--market. merchants and consumers have never had more choices to check out and pay. one thing i think is important to understand about our payments network and the level playing field we set with interchange is the same interchange flows through our network and gets passed to in the same exact manner to thousands of institutions across the united states, small bags and small credit unions to larger players. they all compete with one another and innovate in that complex, dynamic marketplace and ultimately the consumer base from the competition. -- the consumer wins from the competition. the consumer has products tailored for them and investments are made in the system to manage risk and keep the system secure with a high integrity and that consumer is empowered to shop at the point of sale, the merchant benefits from that flow. it is that balance we are trying to accomplish. any notion we are not operating in a highly competitive market, we disagree with. sen. durbin: anything to add? >> the system has ever been more competitive than it is today. there are competition that comes from buy now pay later providers, while the providers, digital currencies, regional debit networks. and the definition of market power is an institution that can raise prices while also reducing consumption. mastercard's 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. by virtue of that, we are incentivized to create balance across all stakeholders, both merchants and banks. if we set interchange rates to hide, merchants won't accept. if we set them too low, banks won't issue. our goal is balance and our goal is consumer value. >> thank you, senator. this is not a balancing of the marketplace. economists at the kansas city federal reserve have looked at this and they said because merchants and retail in the united states are so competitive, these fees can get set well beyond any semblance of value up until the only breakpoint is where retailers would lose money and go under for accepting the card. that is the one breakpoint. in other markets, we don't say because something has great value, we allow price setting centrally rather than competitive market prices to rule the day. as he talked about in your opening statement with beef prices and chicken and others, just because those are valuable products, many of them -- many of us need to eat them to survive. really important. but we would not say they can centrally fix the prices and that is ok. there needs to be a market system to discipline those prices. we don't have that here and be innovation in other kinds of technologies and payments does not make up for the lack of innovation and the antitrust problem in credit cards. it really shines an incredible spotlight on the fact that we have not had that type of innovation and those have not advanced. the market power and visa -- visa and mastercard have been stubborn and they have held onto that market, including since the department of justice one a second circuit decision finding that both visa and mastercard have market power in this market. 1 >> ms. karet, add but don't repeat. >> i will try my best. everything a one of these items is negotiated in terms of price, how we market it and how we merchandising. when procter & gamble comes to -- let's say there are 50 sizes and flavors. 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 cap promoted. you can't incentive people to do one thing another other. visa and mastercard effectively control 80% of the market and they are the only vendor which we cannot negotiate with and it is a take it or leave it proposition. i'm not an economist, so i don't know what technically qualifies as a duopoly. that said, to me, if it walks like a duck and talks like a duck. >> i have two questions i will survey for an in writing. >> thank you, the order of earlybird rules, i know the presence of senator tillis, so now it is senator blumenthal. >> thanks to senator durbin for his leadership on this issue over many years. i served as state attorney general for a number of years as he knows, we are grateful to you for your leadership. i am just a country lawyer from connecticut and i spent a lot of time on the road in connecticut. i spent a lot of times in a convenience store and pumping gas and i hear and 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 the skyrocketing prices at the pump or any of the other commodities. there are big oil companies and we are gripped by their greed, they prioritize shareholder profits and keep supply constraint and prices higher. that is one reason i have helped to spearhead with the senator the measure called the big oil would fall profits tax act amount which would establish a tax on industry profiteering and lower consumer costs, which relief rebates. but i am struck in your testimony that the vast majority of gas for american consumers has seen its fee is rise by as much as 26.5%. consumers in connecticut are hit by that increase in fees. 26.5% increase in a single year as they are struggling with these higher prices. i understand with the dutch shiner send the card industry says they have imposed a cap on those fees at a dollar and $.10. -- a dollar $.10. but that is not necessarily -- does it? >> is a wonderful question and a complex object as we deal with global issues. what would you like me to respond to? >> what i would like to know is how are consumers impacted by that 26.5% increase? >> we all know the retail price of gas is at historical highs right now, but that is related to the commodity market where the price of a barrel of oil is also at historical highs. it was not 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 pricing and gasoline is one of the most competitive -- competitively dynamic markets i am aware of. we follow street pricing. and the margins are impacted, as the cost of goods go up. so do the prices. >> let me ask mr.canter the same question. >> thank you, our members sell about 80% of gasoline across the country including in connecticut. we have wonderful members doing that they are. the energy information administration has look specifically at gasoline pricing and they divided up the country into different regions and found there is 100% pass through of both cost increases cost decreases into the retail price of gasoline in every region of the country. these fees, without question, get paid by consumers every day. i will tell you, 26.5% is an unbelievably high increase. our members are reporting to us that this year, fees are up much more than that. we had a number we talked to this week. there fees are up 49% this year. this is completely unsustainable in an industry where we know people are upset about gas prices and by the way, for the retailers themselves, as gas prices go higher, their margins get smaller and the ftc has documented this. but the fees get higher at the same time. we have members literally, some during the past three months, who have sold at no margin just to keep some market share. >> the term has been used by the officials from visa and mastercard that this market has never been more competitive, that it is highly competitive. but they are including in the market different companies like apples and oranges, correct? >> that is exactly right. >> what 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. there were problems the way visa and mastercard controlled what was happening with the payment card terminals that accepted chip cards, they have had other open investigations about actions by visa and mastercard to try to block the competition on debit cards. so there are some things they can do, but they are limited because they don't have jurisdiction over the banking industry. the department of justice had taken some action as well. the antitrust division has perhaps brought more cases in the payments area than any other area over time. but as you know, litigation is hard, it takes a very long time and it is best at finding compensation for past problems. congress is best at designing what is the way for the future to look in terms of having a competitive market. >> thanks, senator blumenthal. senator lee. >> 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 merchants has been important to us at the front end of the pandemic, we lowered rates for supermarkets, restaurants and education merchants. recently, 90% of the merchants in the system will receive a 10% reduction in the rates they process. and what is really important, i would like to stress this, we are not raising rates. the average rate in our system for visa credit has been flat since 2016. >> i get that. i want to be clear, i'm asking you to respond specifically to the charge that it amounts to cartel behavior to agree to charge the same interchange fees. >> we disagree. the setting of a default interchange fee, we feel, is highly competitive in the ways in which it delivers the same interchange fee to thousands of financial institutions that then go into the marketplace on behalf of consumers and merchants and compete and innovate. we feel the market -- the model works very well in a system where you needed banks supporting merchants. there is no way to operate the system other than interchange fees. >> will you need the network effect for your system to work. >> in order for there to be a coordination of activities where consumers can transact from a card that is issued by a credit union in utah with a merchant in new york, online or in person, you need a default interchange fee you know how the flows are going to work. having that be the same interchange fee irrespective of the competition promotes competition. >> my responses they don't need to do that. i submitted with my testimony an article from an nyu economist who has pointed out that because of the concentration in the market on the issuing side and on the acquiring merchants side, but just 90 contracts would cover 72% of all of the credit card volume. big banks can easily set their own prices, you don't need that going on and there been more concentration since then. i would know that having the same fees does not promote level playing field competition on the bank side, either. john blom from the community bankers testified before congress and hearing that there -- their costs were higher than the largest bank, but if you lock them into the same prices on higher costs, of course they are not going to be able to compete in the same way. because large banks have won over a one of those small bank customers into the credit card market which is why it is so much more concentrated the debit cards as a result. >> mr. kim from out there with me and if you want to respond to this, that's great but i would also ask separately, what would happen to credit card rewards in the universe in which you imagine there is suddenly an alternative network for which merchants could process transactions? >> the interchange pays for roughly 60% of interchange revenue goes out in the form of rewards. and it goes not just to the wealthy, everybody loves rewards. it is a more broadly distributed value that people in all socioeconomic classes find. there were debit rewards before the laws changed and those rewards clearly went away -- largely went away. using those rewards go away and you would see banks of my size and smaller, maybe even larger, the economics of issuing credit cards, it is not what it once was. there is competition, it is harder to do. it is interesting to come back to the last question, maybe -- i don't even know if i agree that the largest banks could negotiate with the billions of merchants and set the interchange, but if they could, that would put me out because i can't. >> time has expired but i have one question i want to ask. if an understanding correctly, you are saying banks would still get paid for that transaction, but get paid less and likely rewards programs would be casual -- a casualty. there might be some elective arm , the right. quick sizing we would get paid, yeah. >> if that is the case, couldn't one argue that this is a manifestation of lack of competition, and that the price is being artificially inflated by lack of competition? consumer rewards provide a means of sharing in the monopoly rents you might say in order to inflate demand and squeeze merchants. what is your response to that? >> the purpose of rewards is not to squeeze merchants. it is so you have a value proposition that makes people want to use your card. the competition, the billboard space is intensely competitive and can, it is hard for a bank my size to compete with the likes of chase that strikes a deal with southwest airlines. perhaps continues, it would not be as rich, but it's me out. >> senator lee and senator cowan's. >> thank you mr. chairman. thank you for this. i'm glad we have represented the whole range of potential impact -- input, consumer advocates, networks, merchants and banks that are a credit card issuer. we have to look at all the different sides of this credit card transaction universe when i tended to assess whether there is sufficient competition, what capping fees we do it with a copy points as dust cons was as might be. i'm glad you were able to intensify -- testify from this perspective. i've heard from banks in my state that our credit card issuers and they depend on interchange fees to support the credit cards they offer to consumers. credit unions and community banks in particular are concerned that a substantial interchange means they would no longer sustain cards to individuals who might not otherwise be able to access credit cards. i think the issue is not just losing rewards programs, but access to credit and the ability of smaller issuers to compete at rates lower than you might get from the major card. how do issuing banks rely on interchange to offer credit services, and what impact would be if that revenue substantially declined for your bank? >> i think you are on the nose with your comments. interchange is one source of revenue, interest and fees are another source of revenue. one of things that makes lending, making small loans is expensive, that is why you don't see a lot of people doing it. it moves online where the costs are lower. a lot of banks have been pushed out of the business because the revenue stream is not there. the interchange used to make it a more profitable business, now that we pay the rewards to consumers, it squeezed that as well. i think what you would see, the smallest banks depend on larger banks like us to issue credit cards. the margins there are even thinner. i think you would see the element of issuing cards from institutions, that would go away and the larger banks would have the skill to do business in a profitable way. >> i have also heard from retailers in my state, family-owned grocery store, their margins are so small that for them to pay an increase in interchange or swipe fees, this is where -- where you said it depends on where you're listening. on fraud and data breach, one concern i have heard from a credit union in dover, delaware is that covering the cost of reassuring cards, of investigating and paying off the costs associated with the major data breach are not sustainable for credit union or a small bank without interchange. is that something you have seen in your experience, ms. kirkpatrick? >> i will start. the situation with fraud and cyber risk, the risk associated with merchants and consumers transacting all line -- online is an enormous issue. a decade or so ago we had a risk at the point of sale with counterfeit cards that had been primarily on the part of data breached by merchants and cyber criminals. we addressed that with pulling out chip cards and chip terminals. we have the same issue facing us online. there's roughly $10 billion of fraud annually online with merchants and consumers, transacting in a way that generates fraud. among the changes we are making, have made in april is to encourage the adoption of secure digital tokens that will authenticate the consumer and provide more guarantees and assurance to the merchants so we can address that fraud. it will require merchants to do their part. we have invested $9 billion as i've mentioned in the last five years in fraud and security protection. issuers are also investing. you have to make the same push to address this online than we did with the physical point of sale with the chip cards. >> thank you. >> the senator, you raised important points in your earlier comments that i thought would be helpful. we do have a track record around the world of summit reforms and we have not found in other parts of the world the parade of problems that mr. kim and some of his brethren talk about. in other parts of the world, credit has been available, but cards have still been used frequently and there are still rewards and all of those things. i did want to clarify that we as merchants, and laura was clear about this in her testimony, we have not asked for a caps on credit card fees. there is a different market where we think there needs to be competition. competition and market prices will help us here in ways that get at the types of problems you are worried about. >> can i ask a closing question? i would be interested 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 or consumers in terms of low-cost banking services? if i might. >> thank you for the question. i think there are a lot of pressures on banks to lower the prices and provide better services to lower income consumers. a lot of that is being done through partnerships between banks and consumer advocates. but on the issue of bank fee's and the price of banking, i think the banks always look to figure out a way to blame the latest regulation. they love to blame the durbin amendment. i can't believe that the numbers are there to say that the durbin amendment has hurt lower income or all americans. i don't see it. >> chairman durbin, my hunch is i could. should conclude this. i would say debit interchange is part of a checking account, and checking accounts have become more expensive with consumers. when the income went away, we had to look harder at how we did business and 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. there rewards went away that they got on debit cards and i would say that's got to be limiting access. >> a thank you. consumers have saved tremendously. if you look over the first five years of the amendment being implemented, the producer price index that tracks wholesale cost that consumers pay was up. the consumer price that retailers charge to consumers is only up 3%. there were still inflation, small amounts, but there was tremendous consumer savings in that spread. retail profit margins did not budge or go up in the slightest. this is something we should put to rest because it is a good question. retail in the united states is one of the most competitive markets there is. in the united states or around the world, those profit margins, the industry survives on 1.11% profit margins. the banking profit margins are over 30%. the highest industry sector that is trapped that way. it is remarkable. one of two things is happening when the credit card industry argues that prices, consumer prices don't flow through and costs don't flow through. either they don't believe competitive markets work, or they have been living so long with centrally setting the fees that they have forgotten how competitive markets work. retail is unbelievably competitive. >> thank you for your forbearance and the broad range of testimony at the hearing. >> thank you, senator. i am sure you are all aware of the infamous durbin amendment did exempt banks with lower than $10 billion in assets, which would not apply to mr. kim's bank. but for those, they reported that small banks and credit unions received 53.49% of total debit change -- interchange revenue, even though they conducted 35% of the number of debit transactions. the infamous amendment was a boon to small banks and credit unions. >> thank you. i believe senator tillis and senator blackburn have worked out an agreement. >> go ahead. >> and logistic around anyway. -- i am going to stick around anyway. >> well, thank you all. thick you mr. chairman. i want to say, mr. kim let me come to you on this. i saw you shaking your head about banking profit. and let's continue with that. >> i think those statistics, a lot of times banks look at revenue as net interest income, so the 30 or 40% applies, but if you think about the grocery pays a lot for their costs, it is not account for the cost of money. when you do that, the profit margin becomes lower. >> all right. ms. karet, let me come to you. i have talked to retailers and heard from retailers to talk about they have to eat this cost. they say it is most harmful to smaller businesses, mom-and-pop's. 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 up the overall cost of doing business and compliance. correct? >> senator, yes, thank you. to put this into perspective, picking up on what was said earlier, we operate on about a 1% profit margin. >> ok, talk to me about how this contributes to the out-of-control inflation we have. right now, inflation is at a 40 year high. you've got the cost of milk and eggs and bacon and coffee -- coffee is up over 100%. when you are buying a bag of beans. so talk a little about that added cost and the impact on the consumer. your consumer. >> the way the credit card swipe fees work is they are 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. >> right. >> that means there are more costs we have to bear and pass along to 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 pita butter and jelly sandwich, and putting a couple cookies in there. ok. mr. kim, i want to talk with you. i had read the study the talked about the harmful impact of the durbin amendment. and the comment was that it was one of the most -- laws and regulations in terms of its negative impact on the availability of fundamental banking services. so, give me the explanation of how this is adversely impacting the un-banked, the under banked. >> [indiscernible] >> -- would use debit cards, the under banked would use debit cards and if that contributed to revenues associated with those checking accounts and services we offer them, those revenues went away and it made us -- it forced us to increase the cost on those accounts. you saw in the banking industry was a decline, and the amount of free checking that was offered. the baking industry is resilient, and we figured out how to overcome things like she can probably do the same thing for her business, you figure out the ways to overcome challenges and now i think the banking industry has a good record of offering services to the under banked. so we have worked our way through that. >> how did this affect your customer mix? did your customer base grow? as people moved to debit cards -- >> we probably saw -- this is our own statistics -- stagnation. there is not much appeal at the lower end with the big numbers are. >> so a change to the credit routing system would -- what kind of impact without have? -- would htat have? >> it would reduce the money available associated with credit cards, and expensive proposition for some buddy of our size and it has been a declining business for a number of years. competition, regulation, it is the most regulated business we are in. we spend money on compliance officers and responding to regulators in that business and you can get in trouble if you do some thing wrong and we get out. >> my time is expiring. missed kirkpatrick, i will submit my question because i want to know what your cost is, because you accept the responsibility for loss, for fraud, for things of that nature. i would like to know that percentage. what that means to mastercard each year. how much that costs you. >> thank you, senator blackburn. for i recognize the next senator, i asked consent to enter into the record the report of the american bankers association that in 2010, the year the durbin amendment was enacted, 53% of americans had free checking. five years later, under the american bankers association, the majority of americans about 61% have free checking. the free checking has gone up and -- senator? >> thank you, mr. chairman. it is good to know the amendment had some positive impacts. so, thank you. until then, i actually signed a letter when i was in the u.s. house that raised questions about your amendment. but it is good to know it all worked out. [applause] -- [laughter] [laughter] goodnes gracious. you have described how this leads to higher cost for consumers and i saw that the average american family -- due to feeds. is that the bulk of the interchange fees go to rewards programs. i was looking at a chart, it was 20, but the chart shows that based on household income, the lower the household income, the greater the use of cash prepayments into the cards. according to this chart in 2019, if you made under $25,000 in household income, you generally pay with cash 55% of the time. 5% credit and 31% debit. if you are making over $200,000, it would be 10% cash, 625% credit, 15% debit. based on what he testified, most of these reward fees go to higher income people. is that correct? >> that's exactly right. the federal reserve economists at the federal reserve bank of boston have done studies that show the same thing. essentially, the worst off americans, people that don't have credit or debit cards, pay fees swipe fees. pay these increased swipe fees, because merchants, due to the rules imposed on them by the dominant duopoly, mastercard and visa, they can't do anything else but to bake the fees into all of the costs that consumers pay including low income americans. >> while some of the large companies like amazon and walmart may be able to negotiate for lower interchange fees, small businesses don't have that kind of power. >> that is right and thank you. >> so, for ms. karet and mr. canter, can someone briefly tell me what this is and what impact does this rule have on the fees paid by merchants and often passed on to consumers and with the >> the pretense is that if you take mastercard or visa i do have to take all of their products. there are lower fee products and higher fee products. higher fee products tend to be the reward cards we are talking about. something 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 cannot say i am only going to accept this type of visa or mastercard. >> that is correct. >> you mentioned antitrust. >> interesting there are two pieces to this rule, both of which are a problem. you have to take if you are a merchant every single type of guard, even if they are very expensive to take the least expensive one, and that is destructive of competitive market rates on those cards. the second one 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. it tells these banking institutions that they no longer have any incentive to go to a merchant and say, how about we come up with the deal to do business together, because all of the merchants are required to anyway, and that is what is so destructive of this competitive market it white it inflates these to such a large degree. >> if we were to eliminate this rule, it would lead to greater competition? >> there was no question it would lead to more competition. there are other rules that are problematic. that is one of the central things getting in the way of real market competition. >> did you want to add something? in a situation like that, i think there might have been the case that went before the supreme court where a merchant said i do not want to take all of these different cards from one entity. that might be an area for us to explore. to eliminate this rule. wouldn't merchants like that? >> we think that would be a great area to explore to open up the market. >> thank you, senator hirono. mr. tillis. >> i do not want to suggest i would malign the durbin amendment. some of it might work. we always have to look at refreshing things based on the circumstances of the day. mr. kim, just to go back to the gao report, can you talk about that the durbin amendment has had on the amendment in general, the things you are most concerned with. give me the top two. >> the gao report, take my word for it, take the government accountability office. they found it was among the top five laws and regulations, they cited the cost and availability of banking services, and that is a statement. there are other arguments about those things, but that is a fact . >> as you are going through this, with the federal reserve bank, it was indicated that 99% of the savings realized from the durbin amendment were not passed back to the consumer. i think, i am not a cheerleader for businesses, i am a cheerleader for consumers. i am trying to figure out if we are considering policy that is going to have a benefit for the consumer. it would suggest that this amendment did not. is that accurate? >> that is what the facts would say. figuring out exactly how the prices are passed -- the amendment was done along time ago but that is a fact. >> i wanted mr. cantor to briefly respond. i am the last one here so i may be able to indulge the chairman a little bit, but not too long. there are two things. the federal reserve bank of richmond made clear that it does not say what the credit card industry said. there is a study that is a survey to look at any actual economics that have passed through. they have done a survey, so you could not be relied on to say whether it was passed or not, and they had by his issues did they flagged them in their survey. >> would it be fair to say that 99 percent, there may have been in an unhealthy amount that didn't go back to the consumers? asked they also asked the question wrong. merchants don't set the prices by saying this cost went down, and now, i am lowering this price. they say what is the market. and i have to compete with the guy down the street. over time, the profit margins become very narrow. it goes down to their costs. we all know that is how the market works. asking is the wrong way to get at it. >> i want to get it something else. i want to see if my first impression, if we talk about the dollar amount, increasing as the transaction amount increases, is it fair to say, mr. sheedy, that there is also a proportional amount of risk, and potential default of pavement involved? is that a part of the rational behind the percentage going up? there is a risk of fraud in some of those that you have to recapture? >> that assumption is correct. as volume has increased, the risk of fraud increases, and we have seen --. >> please talk a little bit about card not present, and additional rising costs in the area where they have internet transactions. additional risks that you have to recoup some of the cost or you can't have operational business. something that is important for consumers. >> mastercard is sending billions of dollars against this, and as volume increases, it fosters more sophistication, and that means that mastercard has to invest more to protect against fraud. we have spent billions of dollars to protect consumers against fraud. just last year, one of our cybersecurity tools prevented $10 billion in fraud for consumers across the card not present environment. >> i am saving you for last. >> senator, thank you. the consumers want to transact online, and they enjoy the convenience. merchants find that they can reach new customers, and lower their costs to provide services online. the difficulty is the way the system works at the moment, safety and security has been our high priority. there is still too much fraud, too much uncertainty, so one of the changes we are making in april, and we created an incentive through interchange. it just isn't a pass-through. it is also a mechanism by which we can make the system more safe and secure. with one of the changes we made in april, we are seeing a rapid adoption of these secure digital tokens to better authenticate transactions online so the consumers and merchants can more safely and assuredly transact. that is good for everybody. it is good for merchants and consumers. >> isn't it fair to say that if we were to go in and dramatically decrease what you could charge to recoup the cost of your operation, you would have to take a look at the risks of people newly vulnerable. credit cards too. wouldn't some of the most credit challenged people be hurt the most if you have to make a business of population. >> to answer your question, interchange has been priced regulate by governments around the world's and other markets. you see a narrow weighing of issuance in those countries. those fees to those consumers end up going up, and the features and benefits go down. we think that would be a horrible outcome. >> that is correct. we have been very sensitive. we have a lot of retailers across the nation. a lot of the recipients of paycheck protection, and a number of other things. we have implemented them in response to the impact of covid was to recognize that we have a lot of businesses out there on the bubble. and i know that your sector is struggling mightily with some of the shutdowns and other things we have been dealing with. but, let's assume that the fees were cut in half. would that solve all of the problems in your industry? the answer and laugh is all i need. if we are talking about having a meaningful impact and a reduction in consumer prices, there are a lot of other policies we have to talk about. it is not going to make a big difference. you have a lot of supply chain problems. you have a lot of inflationary problems. tell me about -- if you could ask congress to act on any policy matter that would help the retail industry, would this be in the top of the list, or are there other things we should look at that would affect the fundamental problem that you are suffering through. >> thank you for asking a question, if you'll indulge me one second. >> i will indulge you as long as the chair will. >> hopefully the chair will indulge me. i'd like to go back to the fraud question that has not been stated. the merchants bear the cost of online fraud. when a card is not present, the merchant bears the cost of that fraud. what is happening, through covid , and through natural consumer behavior, there is a mix of shopping that moves online. our costs are also going up from that perspective. we are talking about the cost that these guys have invested, and i believe they have. in terms of antifraud, i think it is really important to number -- remember we are paying the cost of online fraud. that said, to answer your question, in terms of what i would want, the credit card fee issue is one of the biggest issues we have that i think, the government has a role in it. i don't know what the government could do related to our inability to source toilet paper. that is from the beginning of the pandemic. we have plenty to a paper now, -- toilet paper now, but credit card fees, as i said before, we operate on a 1% profit margin. bank fees today are our third-largest costs. we actually pay more in bank fees then we make. what we are looking for is fair competition. not asking for huge regulatory things like caps and decreases. if you want to have decreases, i will take them, but that is not what we are asking for. what we are asking for is to create a level playing field so there is competition. what doug said before is exactly right. competition works. and in this industry, there is not any. i do believe that is the role of our government -- to create a level playing field. >> i think i will have a hearing this afternoon that will be loosely related to the subject, but i also think it is something that we in our banking -- our capacity as banking as we take a look at that. i believe in hyper competition. i believe that it is incredibly important. if there is a basis for anticompetitive behavior, we have a division at the doj to deal with it, but a lot of the things we can do to meet the burden, i look forward to taking that up in the banking committee. thank you all. >> by virtue of the miracle of zoom, i think we will join the senator from minnesota. are you on board? >> i am on board. thank you very much. i want to first ask, as you know, mr. chair, one of my jobs is chairing the antitrust subcommittee and i do align the area. i thought i would take a little bit of time to ask you about this. a number of our witnesses have testified about a lack of competition in credit and debit card markets, resulting in higher interchange fees that can harm consumers, merchants, and do you think that stronger antitrust enforcement could lead to stronger debit and credit markets? >> thank you. i do believe that there is more antitrust enforcement that would be welcomed here. it would be needed. it is an area where the antitrust division of the department of justice has been active over time has been the federal trade commission. as these litigations go on for a very long time, they involve a lot of economists, and so, there are, as you pointed out, big pieces of the puzzle that are still unresolved. how the fees get set, how the rules and restraints go around protecting those fees from market forces, absolutely, some more enforcement would be welcome. >> very good. in your opinion, you've got an active antitrust division, you have interest in going after cases, but in your opinion, what is the impact of bringing court decisions like the american express, towards the credit card market? >> we disagree with the opinion in american express versus ohio. we think it will cause problems not just in his area, but frankly, in dealing with other technology letterforms, which has been a focus. i know a senator in your subcommittee, that can be problematic. but what is important to note is that even under they standard -- the standard articulated in american express versus ohio, this market is an antitrust problem. 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 we have some. these antitrust cases, they are very important. courts really have a different role in this, so we want to pay attention to the congress's role, as well. >> very good. the way i look at it. this is off the topic, but if you have a monopoly, which we have in the tech area. google has 90% market share, we have a monopoly. you have to at the same time, maybe this is what you're getting at a very different context, you have to ensure there are rules of the road in place by industries, so that it will not be a change in the courts in my case with tech. that will take years, and you have to be able to ensure that there are not preferences for the product to create an anti-competitive marketplace. that is what this is about. mr. kim, i have a question of you. >> sure. >> ok. you testified that the payment system requires constant investment protection. that the interchange fee will cover much of that cost. you can agree that the transaction has to be safe, that there is a security issue, threats, those things. from the perspective of midsize and community card issuers? >> we have to have 24/7 customer service for transacting, whatever time zones problems , with transaction, if we have to -- if we are going to networks, around the world, they are not as reliable. it is important to choose our networks because they are not created equally. so sometimes, we have to resolve problems there. we are constantly looking at data to try and assess fraud. we have a substantial fraud attempt with bots trying to open up accounts, and open up credit card accounts. they in turn try to extract money from us. so it is that kind of investment in data investment, information, so we can collect cell phone numbers, and tell people that a transaction went through on your card. was it really you? and can we do that instantaneously. so those are some examples of how we invest to make the transaction and payment business work. >> very good. and, the crescent along the same line, can you talk about how you see midsize and community card issuers fitting into the payment landscape now, and into the future? that is my last question. >> that is a challenging thing. we spent a lot of time looking at all of the financial technology firms that are getting into the business, and taking away parts of it from the traditional baking industry. and how can we partner with them effectively, and compete against them, and so, certainly, it is, as many have said, apples and oranges, but i think it is all payments, so maybe they are all apples. a lot of competition is going on, and it is hard for us, but we have to be nimble. we have to partner with smart organizations, and they have to help us with networks. my ability to process transactions internationally at all times of the day, it depends on the networks and depends on these investments in the network. that is going to be -- we have to have good partners. that's how we continue to do -- exist in the payment ecosystem. >> all right. thank you. thank you, senator. >> senator klobuchar. i have a few questions. first, let me say, we did a little research when you ran into the panel about commerce bank, and i am familiar with it, living in the region. i want to thank you for continuing to offer free checking, even through the onslaught of the durbin amendment. you continue to offer free checking. it is noteworthy, and i want to make sure it is part of the record. on your profitability, your bank is doing well. would you agree? >> yes. >> you are not exempt from the durbin amendment because your valuation is over $10 billion. that is correct. we are resourceful, and we are nimble, and we figure out how to do things. we did discontinue free checking for a brief time and we introduced it again this year. >> when you talk about the product margins, what we are reading here, i will say, what you're dealing with, 1.5 percent, that is about as thin as it gets in terms of vulnerability. the one thing that you said earlier that stuck with me, among other things, was that the change in fee came in a stack of papers that was 300 pages long -- long. >> it was a very large stack? . >> did you have to hire a lawyer? did someone go through this with you? >> we are lucky that we have a team of accountants and lawyers to go through that. but, it is a very complicated thing to understand. i think purposely so. to understand what the fees are, how they are changing. >> mr. cantor, ms. garrett has said she has a staff, a professional staff to do this. you are representing convenience stores. some are large chains, but some are not. how do they cope with 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 would note, with respect to free checking, i want to clear this up. a couple of questions today dealt with this gao report. the gao got a couple of studies handed to us, and at least one of which was cited by mr. kim. what the studies did was they looked at the decline of free checking, starting in january of 2009. the durbin amendment did not go into effect until october of 2011. so there is actually almost three years of decline in free checking while this was going on. and i cite many articles. frankly, i ran out of the energy to continue citing them. this was during the time of the financial crisis. yes. free checking was going away before the durbin amendment ever happened. this properly cited the study that free checking continue to go away after passage of the durbin amendment. but it was over a year before any of that took effect, and the study notes that we are not going to look at other changes in that because they are not taking effect for more than year after passage. all of this is a sideshow, frankly. one, to distract from the anticompetitive activity and 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 reform that came into effect, years later. and the aba numbers you cited show they actually went up when you look at the right time period. free checking has its own competitive market dynamic, and it mostly having to do with interest rate environments, and how banks are competing and want to compete to get more money and depositors in the value they place on that. it is an unrelated thing, there. >> senator, can i add something on the gao report? banks rely heavily on the report, and it claims that there has been a downfall of everything. it is not a study. it is largely based on a survey of a few stakeholders that the gao interviewed, and some stakeholders said, what is the worst thing you've seen? was it the credit card act or the durbin amendment, and a small number of stakeholders said the durbin amendment was bad. i am unimpressed with the gao study. >> covid-19 is one of the worst things that we've ever faced. at least for now. but who knows? it could get worse going forward. my bottom line is simple. when i walked into this room 60 years ago, with a stack of papers, and i had one of the customers of visa and mastercard say we cannot even get the complete contract. they give us the summary of it, and we couldn't read it if we received it -- that is so complex, and it lacks any effort towards transparency. simplicity. secondly, there is no competition. they announced the fee change for the same day. they are coming at you. it is a dual engine force in this situation. i don't think that is healthy. i think that if you believe in the market economy, competition is part of it. isn't it? shouldn't it be? i think that is what most mbas conclude. maybe even liberals. i would say that this conversation would continue, and we are going to have a hearing on the subject at least every 16 years, and i think the american people need to hear the story of these fees that cost merchants and customers, and why they are not disclosed. there is a reason. i think there would be a revolt, even more strongly against them. we are facing inflation, and the last thing the american people need is a higher swipe fee. i wish both companies would resist the urge to make some money when they can. this hearing will remain open for a week. i have some letters and statements. whether they are for me or against me, or for or against me all will be included in the , record. the hearing stands adjourned. thank you. 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