Economic Development Revitalization Act
Madam President, I thank the Senator from Montana for yielding and also for bringing this issue before the Senate. I am reluctantly opposing my dear friend but doing so on the principles that are inherent in what we have tried to accomplish in the Dodd-Frank legislation; that is, to provide for transparency in the pricing of financial products. With that as a starting point, I will begin.
One aspect I think we have to consider is not just this specific amendment but the growing attempt to undermine the ability to implement the reforms incorporated in the Dodd-Frank legislation, which are actually critical not just to protecting consumers but also to providing a foundation for an effective financial system in the United States, which is the foundation, I believe, of a growing and thriving economy.
So this debate is not just about interchange fees; it is about comprehensively dealing with the problems we saw manifest themselves in the financial crisis of 2008 and 2009, where market discipline collapsed, where some great institutions failed and some were on the verge of failure. If they had failed, then the ramifications would not be simply restricted to Wall Street; they would have been felt on Main Street, and we would be in a worse financial position than we are today.
But this specific amendment deals with the interchange fees or swipe fees. The first issue I think we have to recognize is these are hidden fees. They are charged in each transaction a consumer makes using a debit card. Every time you swipe the card--which serves as an electronic check--there is a fee. But the consumers do not see this fee. So basically you have a disguised price. If the price is disguised, then the consumer does not have a real indication of the cost. If he does not know the cost, then that affects the rational economic decisions we assume consumers are making every time they make an economic decision.
But at the end of the day, despite the fact that the consumer is unaware of these fees, he or she ends up paying them in higher prices for gas, for milk; in fact, they have been paying these higher prices for the privilege of using a debit card for years and years and years.
Debits cards are used more than checks today, more than credit cards to pay for everyday purchases. These secret fees--in a sense, you might even describe them as hidden taxes on consumers--add up to billions of dollars a month. The Durbin interchange provision of the Dodd-Frank Wall Street reform law sought to make these interchange fees transparent and public for the very first time. It requires that for transactions involving debit cards issued by banks with assets over $10 billion--the largest banks, not the community banks, not the credit unions but the largest banks--that these interchange fees set by a card network on behalf of its issuing banks must be reasonable and proportional to the amount it costs the issuer to conduct the transaction.
This is the law of the land. The Federal Reserve was given the responsibility of implementing the law through regulations, and they are on the verge of publishing those regulations.
Senator Durbin proposed this provision because businesses such as, in my home State of Rhode Island, Cumberland Farms--the old convenience store chain that I grew up with and the quintessential small business, a family-owned business--pays almost as much in these hidden fees as it earns each year in profits. These fees roughly equal their profit.
Interchange fees are Cumberland Farms' second largest expense. It is not the milk. It is not the gasoline. It is not a lot of things. It is their second largest expense. For example, despite the fact that the total number of gallons of gasoline they have sold has remained flat, the interchange fees have increased 270 percent, from $13 million in 2003 to a projected $48 million this year. Again, the number of gallons of gasoline they have sold has remained flat, but their interchange fees have gone up almost 270 percent.
Cumberland Farms' CEO calls this increase a ``runaway train.'' When gasoline was $2 per gallon, interchange fees were about 3 cents per gallon. Now that gas prices are about $4 per gallon, interchange fees have increased to 5 cents a gallon. So for the same 15-gallon fill-up, the hidden fees increased 63 percent. So the motorists, the local Rhode Islanders filling up at the local corner gas station, are paying for greater interchange fees, on top of the increase in the price of gasoline.
The actual debit card services have not changed. But because the price of gas increased, the fees almost doubled. That is a pretty good deal for Visa and MasterCard and the banks. Unfortunately, as these fees continue to increase, they increase gas prices, they prevent investment, and they preclude new hiring. Indeed, the convenience store industry reports that, overall, it pays more in these fees than it is earning in profits. That is overall across the board and across the country.
There is another example, a very local company, a very small business: Chocolate Delicacy in East Greenwich, RI. It pays a swipe fee on every piece of chocolate sold when paid by a debit or gift card, which amounts to 60 percent of their purchases. The owner, Marie Schaller, told me she feels like she has no choice but to pay the fee. ``If I don't, I would lose over half of my sales.'' The growing swipe fees have meant a cutback in hiring for Marie.
At the Beehive Café, located in Bristol, RI, a cup of coffee costs $1.75. The swipe fee is 15 cents. Because card fees are hidden and there is no ability to negotiate them, owner Jennifer Cavallaro said:
Visa and MasterCard have inserted themselves into every single transaction that takes place--equating to a tax on commerce. This is not free enterprise; the small business person is trapped.
When consumers pay for some drinks with debit cards, 7-11 owners in Rhode Island told me they lose money on every transaction. So why don't supermarkets, drug stores, and other merchants negotiate to pay less? Well, they can't. The fees are set by Visa and MasterCard and the card networks. They have no bargaining power.
Most merchants in America are left with no choice but to accept the cards. They cannot play if they do not pay. In July 2010, we passed an interchange provision so the Federal Reserve could study the fees and decide whether they are reasonable. In fact, the Federal Reserve found that they were not reasonable nor proportional.
The Federal Reserve found that the average swipe fee was 44 cents for every purchase, but the processing costs were less than about 12 cents per purchase, giving them a 30-percent margin on their actual cost.
In December of last year, the Federal Reserve proposed rules to limit the fee to reasonable rates. The Federal Reserve's top economists are reviewing and considering over 11,000 comments on their current reasonable fee proposal.
Chairman Bernanke has said they are committed to issuing a final rule by July 21 of this year. I believe they should be given the chance to study all the comments and complete the rule. Only by letting them do their work instead of disrupting it are we going to be able to see if the new reasonable fee structure can open up this system and make these fees more reasonable and transparent.
Banks and card issuers that receive the fees have been vocal about their objections, preferring to keep the fees hidden and ever rising beyond the current 44 cents. With such a large profit margin in this line of business most of us can understand why. MasterCard said in its Annual Report to Shareholders:
We are devoting substantial management and financial resources to the defense of interchange fees.
Visa told its shareholders that the rules ``may give retailers greater ability to route debit transactions onto competitive networks which can reduce the processing fees we currently earn.''
So the credit card companies are very much aware that there could be a better competitive environment for merchants and consumers if this legislation goes through. That is what they told their shareholders.
Small banks, under $10 billion in assets, are exempt from the rules. A survey conducted by the American Banker found that an overwhelming majority believe the law actually helps small banks. Small banks will have a competitive advantage since their fees are not limited by the rule.
The United States is not alone in closely examining these fees. The European Union, Canada, Australia, New Zealand, Israel, Spain, South Africa, and Switzerland already regulate swipe fees. In addition to the ever-increasing swipe fees merchants are forced to pay for, merchants also bear the brunt of the cost of fraud, contrary to some of the assertions the industry has made.
It is my understanding that after fraud claims, networks typically raise interchange fees of the company that has been subject to the fraud and often engage in litigation against merchants to recoup fraud losses. Of course, all of these costs--the merchant's costs and, I think, also the interchange costs--are passed on to consumers.
Here are some examples: When criminals installed scanners to obtain customer account information at Michael's, a craft store, it was only the latest theft of such consumer data. Community banks were quick to respond and immediately issued new cards and returned stolen money. However, despite paying millions in interchange fees in the recent past, Michael's may have to reimburse Visa and MasterCard and the banks for these replacement costs.
In another example, in December 2006, T.J.Maxx discovered that computer hackers had broken into their computer network and had stolen customer payment card data. In March of last year, a Federal judge sentenced one of the computer hackers responsible to 20 years in Federal prison.
Since 2006, T.J.Maxx has spent about $170 million in costs related to this incident, including nearly $65 million to Visa and MasterCard to compensate banks for the cost of the fraud.
This, of course, is in addition to continuing to pay their interchange fees. The same hacker who hacked T.J.Maxx also hacked Heartland Payment Systems. That attack cost Heartland over $140 million, the majority of which was paid to Visa and MasterCard and other banks to compensate for the cost of the fraud. Heartland Payment Systems had to pay the banks and Visa and MasterCard for the computer fraud committed.
So the consumer pays for the data breaches, the consumer pays for the debit card fraud, and the consumer pays more and more for interchange fees. I think any further delay in the rules to require reasonable swipe fees only harms small businesses and, in the end, the consumers.
The amendment before us provides for at least a 12-month delay in the rule, in addition to a 6-month study, and effectively a completely new version of the proposed rule. I think it is unreasonable. There is no reason for delay. The Federal Reserve has what Chairman Bernanke characterized as, in his words, plenty of information from over 11,000 comments to the Federal Reserve's December 2010 rule proposal.
In addition, the Federal Reserve has done an enormous amount of surveying of the industry, again in the words of Chairman Bernanke. I think the proposal before us provides the banks another way to avoid transparency in their operations.
The Federal Reserve should be allowed to finish their rules to establish a reasonable fee for debit card services. Then we can work with the banking regulators to make sure their rules do in fact work, and do in fact provide for a more transparent, competitive marketplace to the benefit of merchants and consumers.
Our market system only works well if merchants and consumers have the information they need to make informed choices, and that was what was at the heart of this provision in the Dodd-Frank Act. I believe that is what is at the heart of the Dodd-Frank proposal overall, which is to provide better information, more transparency, whether it is credit cards or debit cards or complicated derivatives, because armed with better information individual consumers and individual merchants can make better choices about economic decisions that will accrue to the benefit of all of us.