for having us here today and the members of the committee for allowing us to share some information on what i believe is an important topic an important issue and that interchange fees in h r twenty three eighty two i'd also like to thank congressman walsh for his leadership on this issue and working together with me on h r twenty three eighty two i believe action is needed to help level the playing field between consumers small business and credit card companies by requiring greater transparency and prohibiting unfair and abusive practices when it comes to interchange fees last summer's your magic rise in gas prices was a prime example of the  flexibility of credit card companies towards merchants and consumers over the interchange as most of us know fuel prices doubled and the interchange basically doubled with the fuel prices while the credit cards did nothing to add value but were able to collect the windfall profits because of that also as fuel prices rose above authorized transaction transaction limits major credit card companies reserve the right to repay gasoline merchants a lower price that was actually purchased particularly on smaller transactions i join with congress and well to introduce h r twenty three eighty two to curb this type of practice this legislation focuses heavily on transparency in hopes of determining whether credit card companies are pursuing agreement here and many small businesses have that same problem try to understand what's happening in here h r twenty three eighty two it also prohibits profits from interchange fees from being used to subsidize credit card rewards programs small businesses and ultimate consumers should not be financing the perks of luxury card holders to put the impact of interchange fees into perspective of a business i want to consider a convenience store chain in my district sheet example corporation which has three hundred sixty three stores in six states as i said is headquartered in my district last year she paid twice as much as they took in a net income after taxes the second largest expense after dollars eighty percent of that money goes to banks not ten percent of our banks ten banks now part of that volume but part is also due to the market power of credit card companies and big banks passed the card act on the house floor and listened as the chairman issued a warning to the credit card issuing banks chairman frank told the banks that if they began to speed up rate increases or continue the practices that we had just prohibited then we would move up the implementation date on the card that he cautioned them in no uncertain terms that this committee would not hesitate to stop them if they continued to take advantage and abuse consumers with that warning th house passed an amendment to allow the banks sufficient time to implement substantial and it minutely complicated changes to the way they do business but i never anticipated how complicated it would be for the banks to continue with the very practices that we had just we were reasonable we were there the banks were not we can't turn back the clock but we can make sure that the banks and reasonable practices do not continue to affect more american households today we must begin the process of accelerating the implementation date of the credit card holder bill of rights when i got home that day from the signing ceremony for the legislation  at the white house i had a notice in the mail when i arrived on that friday it said that my bank was increasing my rate decreasing my available credit and increasing across the board this was the very day president obama signed  there to the banks and the banks were not fair to the consumer getting cut back on the credit we're seeing many jobs in the credit card industry in this country being already and probably many more to be reduced when all this goes into effect has had some negative economic effect of particularly for people who can now get credit and cannot now go out and spend in our economy we need to at least consider this i'm not suggesting we should oppose a bill arbitrarily but we need to consider all the consequences greater transparency full disclosure this is not something that necessarily seems to affect consumers because that has indicated they will reduce costs if indeed legislation like this would pass but i think among the merchants and those credit card issues i want to focus mainly on this battle between the banks and retailers regarding credit card interchange i have in both camps who have vigorously pleaded the case is very important on this issue at the center of the debate is the question of whether or not our overcharging merchants for processing credit cards and other complex than the retailers described and they are carrying the risk of data protection and credit losses industries are fortunate situation of operating on we appreciate you holding this hearing and for the opportunity to provide testimony on credit card interchange also known as merchants who have to pay the fee each time a courtesy thank you to my congressman peter welch for inviting me here today to testify it's been three years since i testified before the senate judiciary committee at the invitation of senator leahy on the anti competitive anti consumer practices of the credit card company unfortunately many of the same problems still exist today and interchange the costs have continued to rise at the expense of small businesses like ours this is a story that we've owned and operated now for twenty six years i'm of this generation vermonter with deep roots and more on the mom part of the operation my husband warren poppy is minding the store so i could be with you today warren is recently served two terms in our state legislature and mom tell you we're not only committed to our store but our community and state of vermont as well you may wonder why we do it we do seven days a week ninety six hours a week three hundred sixty four days a year to be honest sometimes we ask ourselves but we believe that we can and do make a difference to the people in the community that depend upon us my concern is a small independent store may seem small the u but it's a huge burden and very real congressman welch listen to these concerns from vermont storekeepers like me and he wrote legislation to try to address several of them warn and i commend congressman welch for introducing this important legislation to protect small businesses like our store in vermont and we look forward to consideration of the credit card interchange fees backed by this committee since i told my customers i was coming to washington d c to testify on this issue i can't even tell you how many of my customers were unaware of the hidden they swipe their cards and thank all those free because there's no charge to them at all obviously we lose money on many small transactions and too much on others so we have to raise prices because we can't absorb it all in the growth business we compete by lowering prices not by right raising them i'm not a lawyer but i know this is a huge problem that retailers across the u s large and small are facing so i ask you to look at this matter seriously i have customers who apologize for using your card i keep telling them please keep coming in the store and shopping we need and appreciate your business we have streamlined our business to reduce costs as best we can maintenance doesn't get done as it should less money goes out payroll but we just can't keep observing these fees in these tough economic times the interchange swipe fees were if the interchange fees are fair and reasonable warning i would have more money to invest back into our twenty one cents the swipe on that sale cost us twenty one cents so i just lost money i might as well just let him take the gum and ninety nine cent bag of chips again cost of seventy four cents the credit card fees are twenty three cents i go and make two cents on the sale what's wrong with this picture congressman knowledge as bill would allow us to set reasonable minimum purchase requirements visa and mastercard require us to accept all their cards if we take any and they make a whole market of host of affinity cards so called free features rode in on a plane i have a plane and i can't tell you how long and i've lost it now but there's a napkin in front of me get free airplane ride on nothing's free thanks  so we can't tell you what they can't tell us they charge merchants higher interchanged rates for accepting these cards one morning i haven't gotten a vacation in ten years yet every day we're paying for our customers trips when they when we take their credit card the visa master card contract rules are not lost so why we comply with them well it hasn't happened yet but we've heard stories of other small businesses being threatened with the best of fines for breaking the rules even for something  minor as requiring a five dollar minimum to use a credit card a five thousand dollars fine a day fine which i hear is a master card going rate these days it simply put us out of business i had a story call me to say they were going to get fined twenty five thousand dollars what should we do i said take your minds down we can't set minimum the average supermarket industry profit margin last year was one point four three percent that means a profit of a dollar forty three on a hundred dollar transaction the interchange paid to the bank that issued that card in the same transaction is more than i would like to ask you on your next ride home to take a look and see how many vacant storefronts there are on your small downtown just this last winter alone six stores close within a fifty mile radius of us the innovative entrants into the payments business and that includes several companies that compete with incumbent networks and issuers in part by offering lower merchants p now economists have been studying the subject of into change fees and related practices since the early one nine hundred eighty s there's been a flurry of research in the last decade much of the research is based on the new field of economics known as two sided market businesses that create value by bringing different kinds of customers together are said to be two sides to a stock exchange like nasdaq brings liquidity providers and takers together while a matchmaking service like e harmony brings men and women together payment cards help merchants and individual trends to transact with each other so this research provides several insight first it turns out that it is very difficult to say in practice that the end to change the charge by a payment network is too high or too low or just right from the standpoint of public welfare and it's even more difficult for a regulated to have any confidence that it could establish a better to change this argues for caution in price regulation of into change the government regulation is appropriate when it's possible to both identify market failure and fix that very without creating significant unintended consequences that's not possible with the current economic state of knowledge to change h r two three eighty two wisely stays away from specific price regulation in my view second very importantly any change that's made to the pricing for one side of a two sided business will tend to have an opposite effect on the other side to side of businesses recover their costs in the profit live view to a to support how the changes the merger pricing and all the changes will ultimately affect cardholder there probably is not a free lunch here third the customers of two sided businesses interact a lot and the platform makes money by promoting valuable interaction but the platform also has an interest in policing bad behavior so e bay for example is a two sided as it tries to get buyers and sellers to swap a lot of stuff but also has a rule that buyers and sellers have to follow side of the market namely individuals who carry cards and want to use them freely and a card rank can provide benefits to individuals by assuring them that their card will be accepted everywhere and that these individuals won't be surcharged one could also argue that the network policies of the subject of h r to create two are in a competitive or contrary to the public interest but i believe it would be prudent to consider the pro competitive explanations as well as any anti competitive ones that you want to think about most likely again there's no free lunch here either we're hitting the networks from opposing various risk restrictions will likely impose some collateral costs on end consumers and if i have one more minute to continue there are many elements to this bill and i've not done a careful study of it i would like to suggest however that payment card is one of the most complex in this is that economists study there are many moving parts and into dependency between merchants card holders processors networks and position that the payment card network practices targeted by h r to cause public harm overall once we take into account the interests of consumers or that the types of restrictions on network suggested in the bill credit union has one hundred thousand members we are the issuers for one hundred seventy three thousand debit cards and sixteen thousand credit cards for membership to begin allow me to cover the who what and why of interchange who is responsible for first of all interchange is not a consumer to the contrary interchange represents the merchants assuming their fair share of the financial responsibility for the car payment system merchants receive many benefits and tremendous value from accepting car the merchant discount which includes the interchange amount is the merchant's cost of doing business for accepting this valuable form of payment the credit unions cost of doing business includes funding costs credit losses billion collections customer service data processing and compliance the value merchants when we administer these programs and assume significant risk for their benefit far exceeds the interchange why is interchange important to credit union members as an issue or my credit union interchange when our members use their debit and credit cards interchange helps us support the card programs for the benefit of our members for the consumers in fact interchange for my credit card program represents fourteen point four percent of my credit to shifting from merchants to consumers and increase consumer debit and credit cards while the bill simply references credit card interchange in its title the bill would also address debit card interchange and would create significant changes to the foundation of the payment system the bill reduces consumer choice and increases consumer costs in many ways but allow me to share a few examples with the first the merchants are seeking to abolish the honor all cards rule or practice that merchants must follow as a consumer carry only one credit card and one debit card with you now imagine your favorite chain restaurant has decided not to  issued by credit unions or has entered into an agreement with a large financial institution the restaurant tells you that they won't accept the card of your choice or will only offer more favorable prices to the card issued by the large financial  want on all cards because it gives them the choice as to what card to carry gas stations are seeking to abolish the current system regarding chargeback essentially it would have solved them from the financial responsibility when they allow card transactions to be processed in violation of the pre authorized amount for the sale if this were my credit even more of the risk of fraud and an increase in the risk of nonpayment as a nonprofit financial cooperative when our costs increase so do the cost to our consumer members finally by not mentioning data security allows merchants to continue to walk away from their data security responsibilities cleaning up after merchant security breaches is a significant cost that  share of responsibility for the car payment system the consumers will pick up the difference thank you for giving credit unions and their consumer members an opportunity to share a position on interchange  companies and the credit card networks we believe that the proposed bill addresses a number of flaws and problems in the system let me describe just briefly how it works first of all two percent of every hundred dollars spent two percent of every dollar that you spend approximately goes to a fee called the merchant discount but the bulk of it is this interchange part that is essentially non  consumers pay more at the store and more at the pump because of that is non negotiable nontransparent to the merchant it's a really cool system in a lot of ways one of the ways that merchants are forced under this honor all cards provision to accept a visa card that looks exactly like another card except that it costs the merchant three percent or more to debit transactions so that merchants can earn more money but revolving credit card users make money on a reward if it costs you twenty five percent to carry a balance and you're getting a one percent reward you're not benefiting from rewards so it's not credit card customers it's only and it's not all consumers it's only those who use the card there are other problems with the system merchants are prevented by the thousands of pages of contractual jibberish from providing their customers with the choice of a lower cost for cash they may not be prohibited explicitly but the merchants tell me that it's a problem with the bank for them they make it very difficult for them to offer their customers discounts for cash so i think there are some serious problems in the system that will be addressed by the we l bill and it will benefit all consumers again i'm concerned with i'm not simply concerned with credit card customers today we have an increase in the use of debit but not all of that debit  associated with bank cards i want to make one point unrelated to the bill i would encourage the committee to also look at increasing the consumer protections that apply to all prepaid cards as we use more payroll cards as we use more consumers a bank debit card with consumer protections we need a whole revamp of the payment system to protect consumers in the couple of seconds that i have left i also want to support the bill to  excel or the final provisions of the credit card bill of rights the banks have been badly and then i want to say how did we get into this mess in the first place with the credit card companies well the reason is we didn't have a regulator whose job was to protect consumers and that's why this committee needs to pass a strong consumer financial protection act that restores federal law as a floor keeping preemption is a big urge to stick with the well i'm also the chairman of the commerce consumer protection and international affairs committee and i'm pleased to be here today on behalf of the independent community bankers of america to discuss this very important issue of interchange i also asked that i be given a separate statement on the credit card bill and hopefully that can be included in the record just a little bit about liberty bank we started in a trailer in new orleans about thirty seven years ago and we've grown to more than thirteen locations across five states where one of five of the five largest african american owned financial institutions in the country in addition to my current role at liberty bank i was also a small business owner operating a hair salon and a spa and a business consulting practice on behalf of i c b a's nearly five thousand member banks i want to thank you for the opportunity to testify on the important role credit and debit card interchange fees play in supporting community banks and our customers the payment card system provides tremendous benefit to consumers and merchants but it is not a cost for liberty bank is both an acquiring bank for merchants and a card issuer our customers are both individual consumers and local merchants who have decided after shopping around that we can provide them with the best acquiring services even a relatively small acquire like liberty bank can provide merchants full to the global electronic payment as a community bank or serving local merchants and as a former small business owner i strongly believe the key point in this entire debate over interchange he is being masked behind misleading rhetoric from the large merchants that stand to benefit by congressional action the most important concern for any small retailer is their banker and ultimately the customers who pay for the goods and services is merely the cost of handling money efficient and costly wait for merchants to provide the service i'd know because i've seen this firsthand as a business and as a banker who every day work to improve the bottom line credit cards are the only loan or credit products that generally allows the consumer to control how much and whether he or she will pay finance charge or just be a convenience using a credit card programs are not  profit but they are real value they have real value and the basic ability to offer products to consumers and merchants coupled with the period customer service that community bankers can provide distorting the network rules in favor of large retailers and away from consumers would jeopardize the ability of community banks to continue to offer the service if more small banks stop offering support of products and services it's credit card companies are doing to us and to the american consumer they are doing it with hidden arcane rules and overwhelming market power the credit card market is broken and needs to be fixed the card industry has told you that the market is functioning fine so complicated two sided but you just ignored it sounds like what they said about subprime loans but in truth it's a very simple they don't want oversight because what they've got is a privately regulated cartel the banks that are members of mastercard would tell you the market is competitive as appendix a at the back of my testimony and in part that's true for customers but on the merchant side the opposite is true since its inception big banks have gotten together and decided how much they're going to charge a process payment once the decision is blessed all issuing bank charges the same regardless of the bank's name it's on the card otherwise competing banks huddle under the master card rules as one and insist that merchants except their cards rules on a take it or leave it with no opportunity to negotiate no marching can stand up to that now both f from consumers who ultimately pay most of this lack of transparency and the confining rules that the welsh used to bill addresses let me give you a couple examples the card companies have what they call a nondiscrimination rule prohibited merchants from giving customers a discount if a customer card with a lower this is a remarkably competitive rule it's like coca cola telling grocery stores that they could be fined or their right to sell coke products revoked if they charge people less for pepsi or coke the effect of course is to discourage the market from moving towards forms of payment well schuster would open the market up to so a shopping cart of back to school clothes that we would willingly sell for ninety nine dollars cash has to be priced somewhere around one hundred one dollars because of their rules but look what's happened one hundred one dollars become and that swiping rewards card drives up the price of everything they buy even higher now if i may i'd like to raise one issue very concerned about that's not the welsh bill and that is debit card cash and check passive par that's the federal reserve says that in return for one hundred dollars check a bank must give you one hundred dollars and one hundred dollars on a debit card is subject to interchange is i don't know if it's i haven't been out of a lot that's ok a lot of our stores have a minimum set up five dollars ten dollars whatever and i guess that's what i'm looking for the flexibility to be able one in the mail because i'm an old fashioned paper and pencil and i use my computer because my bookkeeper makes me do it i still do all my own stuff but i don't know until the end of the month what's getting taken out of my checking account so it's  where well you know what we'll do with we'll make sure that we have a conversation we have your testimony but that we have a further conversation i know congressman well we'll work on making sure that happens because there is a of eyeopening here i think at this hearing i know that in my neighborhood if you pay one price for gasoline if it another price it's a credit card you go to a large room except it doesn't happen in every neighborhood in chicago