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CREDIT CARD INTERCHANGE FEES

HEARING

BEFORE THE

ANTITRUST TASK FORCE

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JULY 19, 2007

Serial No. 110–77

Printed for the use of the Committee on the Judiciary

(

Available via the World Wide Web: http://judiciary.house.gov 

(II)

COMMITTEE ON THE JUDICIARY 

JOHN CONYERS, JR., Michigan, Chairman 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

LINDA T. SA ́ NCHEZ, California 

STEVE COHEN, Tennessee 

HANK JOHNSON, Georgia 

BETTY SUTTON, Ohio 

LUIS V. GUTIERREZ, Illinois 

BRAD SHERMAN, California 

TAMMY BALDWIN, Wisconsin 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

ARTUR DAVIS, Alabama 

DEBBIE WASSERMAN SCHULTZ, Florida 

KEITH ELLISON, Minnesota 

LAMAR SMITH, Texas 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

STEVE CHABOT, Ohio 

DANIEL E. LUNGREN, California 

CHRIS CANNON, Utah 

RIC KELLER, Florida 

DARRELL ISSA, California 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TOM FEENEY, Florida 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio

PERRY APELBAUM, Staff Director and Chief Counsel 

JOSEPH GIBSON, Minority Chief Counsel 

ANTITRUST TASK FORCE

JOHN CONYERS, JR., Michigan, Chairman 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

STEVE COHEN, Tennessee 

ANTHONY D. WEINER, New York 

ARTUR DAVIS, Alabama 

DEBBIE WASSERMAN SCHULTZ, Florida 

STEVE CHABOT, Ohio 

RIC KELLER, Florida 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

BOB GOODLATTE, Virginia 

CHRIS CANNON, Utah 

DARRELL ISSA, California 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

LAMAR SMITH, Texas, Ex Officio 

PERRY APELBAUM, Staff Director and Chief Counsel 

JOSEPH GIBSON, Minority Chief Counsel 

(III)

C O N T E N T S 

JULY 19, 2007

Page 

OPENING STATEMENTS 

The Honorable John Conyers, Jr., a Representative in Congress from the 

State of Michigan, and Chairman, Antitrust Task Force ................................. 1

The Honorable Steve Chabot, a Representative in Congress from the State 

of Ohio, and Ranking Member, Antitrust Task Force ...................................... 2

WITNESSES 

Mr. Steven C. Smith, President and Chief Executive Officer, K-VA-T Food 

Stores, Inc. 

Oral Testimony ..................................................................................................... 3

Prepared Statement ............................................................................................. 5

Mr. John Buhrmaster, President, First National Bank of Scotia, New York 

Oral Testimony ..................................................................................................... 7

Prepared Statement ............................................................................................. 9

Mr. Edmund Mierzwinski, Consumer Program Director, U.S. PIRG 

Oral Testimony ..................................................................................................... 11

Prepared Statement ............................................................................................. 14

Mr. Timothy J. Muris, Of Counsel, O’Melveny & Myers 

Oral Testimony ..................................................................................................... 25

Prepared Statement ............................................................................................. 27

Mr. Mallory Duncan, Senior Vice President and General Counsel, National 

Retail Federation 

Oral Testimony ..................................................................................................... 47

Prepared Statement ............................................................................................. 50

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Prepared Statement of the Honorable Lamar Smith, a Representative in 

Congress from the State of Texas, and Member, Antitrust Task Force .......... 87

Prepared Statement of the Honorable Sheila Jackson Lee, a Representative 

in Congress from the State of Texas, and Member, Antitrust Task Force ..... 88

Prepared Statement of the Honorable Steve Cohen, a Representative in Congress from the State of Tennessee, and Member, Antitrust Task Force ......... 92

Letter from Timothy J. Muris, Of Counsel, O’Melveny & Myers LLP to the 

Honorable John Conyers, Jr., with attachments: .............................................. 93

1. Submissions from a study by Javelin Research, April 2007

2. Submissions from a report by Aite ́ Group, ‘‘Five Misconceptions About 

Interchange in America,’’ 2005

3. Chart showing merchant discount rates in various European countries 

to rates paid by U.S. merchants in 2004

4. Submissions from a report by Aite ́ Group, 2005

5. Tables showing Visa U.S.A. Interchange Reimbursement Fees 

6. ‘‘Interchange Fees: Network, Issuer, Acquirer, and Merchant Perspectives: Panel Remarks,’’ Chair: Avivah Litan, Kansas City Federal Reserve 2005

Prepared Statement of the National Association of Convenience Stores 

(NACS) .................................................................................................................. 130

Page

IV

Prepared Statement of the National Grocers Association (NGA) ........................ 137

Letter from John Gay, Senior Vice President, Government Affairs & Public 

Policy, National Restaurant Association, to Chairman Conyers and Ranking 

Member Chabot .................................................................................................... 141

Letter from G. Kendrick Macdowell, General Counsel and Director of Government Affairs, National Association of Theatre Owners (NATO), to Chairman 

Conyers and Ranking Member Chabot .............................................................. 142

Letter from Randy Schenauer, Chairman, Government Relations Committee, 

Society of American Florists (SAF), to Chairman Conyers and Ranking 

Member Chabot .................................................................................................... 144

Letter from Brian E. Cartier, CAE, Chief Executive, National Association 

of College Stores (NACS), to Chairman Conyers and Ranking Member 

Chabot ................................................................................................................... 145

Letter from Lisa J. Mullings, President and C.E.O., NATSO, Inc., to Chairman Conyers and Ranking Member Chabot ...................................................... 147

Letter from Darrell K. Smith, President, National Association of Shell Marketers (NASM), to Chairman Conyers and Ranking Member Chabot ............. 149

Letter from Heidi M. Davidson, Vice President, Global Public Policy, 

MasterCard Worldwide, to Chairman Conyers, with enclosed news releases 150

Letter from the Petroleum Marketers Association of America (PMAA) to 

Chairman Conyers and Ranking Member Chabot ............................................ 154

(1)

CREDIT CARD INTERCHANGE FEES 

THURSDAY, JULY 19, 2007

HOUSE OF REPRESENTATIVES, 

ANTITRUST TASK FORCE

COMMITTEE ON THE JUDICIARY, 

Washington, DC.

The Task Force met, pursuant to notice, at 2:11 p.m., in Room 

2141, Rayburn House Office Building, the Honorable John Conyers, 

Jr. (Chairman of the Antitrust Task Force) presiding. 

Present: Representatives Conyers, Berman, Boucher, Lofgren, 

Delahunt, Waters, Cohen, Chabot, Keller, Cannon, Issa, and Smith. 

Mr. CONYERS. Good afternoon. The hearing of the Antitrust Task 

Force will come to order. We are delighted to have this stellar 

group of all-male witnesses. 

The issue that brings us together today is about a fee that affects 

the American consumer. Most people are unaware it even exists 

and how much of it they are paying, and so we are going to learn 

today some of the truths about the hidden interchange fee. You see, 

every time you use a payment card at the mall, at the grocery 

store, on the Internet, the merchant is charged a fee, which gets 

divided up three ways, between the merchant’s bank, the consumer’s bank, and the credit card company. It covers processing 

fees, fraud protection, billing statements, and other costs. 

Almost 90 percent of this fee is a so-called interchange fee, which 

is the payment made by the merchant’s bank to the consumer’s 

bank. The percentage of this amount is set by the credit card companies, generally Visa or MasterCard, and averages 1.75 percent of 

the total purchase. Last year, these fees totaled $36 billion, an increase of 117 percent since the year 2001. These fees are ultimately 

passed onto consumers in the form of higher prices for goods and 

services, whether they purchase these items by credit card, check 

or cash. 

Merchants are increasingly concerned about these fees because, 

as the rates rise and credit cards become more and more ubiquitous—and they cite the lack of public awareness about interchange fees among consumers, inconsistent charging practices, and 

the possibility that Visa and MasterCard may be setting the interchange fees—dare I say it—collusively, instead of allowing competition to work. 

Now, the payment card industry defends these fees, arguing that 

the credit card companies don’t prohibit disclosure of interchange 

fees to consumers, the fees are a result of healthy competition and 

are vital to the entire system of payment cards. In this regard, we 

are trying to clear up a couple questions: Are interchange fees imVerDate 0ct 09 2002 13:55 Jun 11, 2008 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6601 H:\WORK\ATRUST1\071907\36785.000 HJUD1 PsN: 36785
2

posing unfair costs on the consumer? Are interchange fees increasing at too rapid a rate, and why? And, finally, are our friendly credit card companies engaged in anti-competitive behavior? 

Now, I come to this hearing with as open a mind as I can, but 

I think the proof is on the credit card companies to give us some 

reassurance. And so I look forward to a frank discussion with all 

of you here today. 

I am happy to recognize now my friend, Steve Chabot, the Ranking Member. 

Mr. CHABOT. Thank you, Mr. Chairman. I want to thank the 

Chairman, the distinguished gentleman from Michigan, for holding 

this important hearing today, examining the role that credit card 

interchange fees play in our economy. We have an expert panel of 

witnesses with us today, and I look forward to hearing their perspectives on this issue. 

This hearing is yet another example of how technology has 

changed the way that we live, the way we work, we do business, 

and travel. Credit cards have brought consumers and merchants together in ways never thought possible. Coupled with the increased 

use of Internet, buying and selling has never been easier. 

And recent statistics prove it: there are more than 14,000 card 

issuers in the United States today, with one billion cards in use. 

Think of that. We have about 300 million people in this country, 

yet we have a billion credit cards in use. In 2002, consumers 

bought more than $43 billion worth of goods on the Internet. That 

figure rose to $100 billion in 2004. Experts predict that, by 2009, 

U.S. consumers will spend more than $5 trillion using electronic 

payment systems. 

Today’s hearing is about the costs of doing business with credit 

cards. In our market economy, supply and demand sets the prices 

of goods and services, and the Sherman Act was enacted to protect 

consumers from anti-competitive behavior. Recently, concern has 

been expressed that the interchange payment system is anti-competitive; yet, it is no secret, especially with the statistics that I just 

read, that the number of Americans buying on credit has increased. 

Consumers continue to obtain and use credit and debit cards for 

their convenience, ease, and, in certain instances, their rewards 

programs. 

However, this increase in consumer use has brought with it increased concern that merchants are paying disproportionately high 

transaction costs associated with credit and debit electronic payments. Businesses large and small want a more competitive and 

transparent system. In my district, I have received a number of letters from retailers and grocery stores and other merchants expressing concern about the impact that these fees have on businesses 

and their ability to provide goods and services. 

I look forward to hearing from our witnesses today and to gaining a better understanding of the market for credit cards, the origins of the interchange fees, the role that these fees play in facilitating transactions, and learning whether Government intervention 

is appropriate. I said in the last three antitrust hearings that we 

have had in this particular Committee that we have held that Government intervention is not always the best remedy, and we must 

be careful not to do more harm than good. Of course, sometimes 

3

Government action is appropriate, and it is for us to determine, 

and this is one of those hearings that will help us to decide that 

particular issue. But I think most of us are trying to keep an open 

mind on this. 

This hearing is a necessary first step in fulfilling our oversight 

responsibilities, and I again want to thank the Chairman for holding this hearing, and I want to also thank each of the members of 

the panel here for their attendance this afternoon. And we are hoping to learn a great deal. 

I yield back. 

Mr. CONYERS. Thank you very much, Steve Chabot. We will incorporate all other opening statements in the record. 

And I yield now to the distinguished gentleman from Virginia, 

Rick Boucher, to introduce one of our witnesses. 

Mr. BOUCHER. Well, thank you very much, Mr. Chairman. And 

I commend you, also, for organizing today’s hearing. Unfortunately, 

after this introduction, I am going to need to depart, but I look forward to receiving the benefit of testimony provided here today and 

learning more about this very important matter. 

I have the privilege this afternoon of introducing to the Committee a person who is not only a constituent of mine, but also a 

personal friend. His name is Steve Smith. He is the Chairman of 

the Food Marketing Institute, which includes 1,500 member companies, both food retailers and also food wholesalers. He is also the 

President and Chief Executive Officer of K-VA-T Food Stores, 

which operates more than 90 Food City grocery stores, 67 pharmacies, and 46 refueling stations in Virginia, Kentucky and Tennessee. 

Of particular interest to me is the focus that Steve Smith, 

through his various stores, has placed on the need to acquire from 

local farms in our region locally grown produce and also locally produced meat. He has worked with my office to foster the market in 

our region for sheep and value-added beef farming, as well as fruits 

and vegetables purchased from local farms, benefiting our economy 

and also providing very fresh local produce for the benefit of my 

constituents. 

So it is a privilege to welcome today one of our region’s most successful businessmen, who I know will have enlightening testimony 

for the Committee. And I am pleased to introduce to the Committee 

Mr. Steve Smith. 

And thank you very much, Mr. Chairman, for allowing this time. 

Mr. CONYERS. Mr. Smith, you have been introduced by one of our 

stars in the Congress, so I won’t add anything to it, but except to 

tell you, you have got a heavy burden to prove here. We welcome 

you, though, nevertheless. Please feel free to proceed. 

TESTIMONY STEVEN C. SMITH, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, K-VA-T FOOD STORES, INC. 

Mr. SMITH. Well, thank you very much, Congressman Boucher, 

for that kind introduction. 

And, Chairman Conyers and Members of the Committee, I am 

honored to appear before you today and present information of 

great concern to my company, to members of the Food Marketing 

Institute, and to the American consumers. I am here today to shed 

4

light on the best-kept secret, I think, of the credit card industry, 

and that is the hidden tax that has been thrust upon consumers 

due to the ever-increasing interchange fees that credit card companies charge retailers as a result of the collective pricing setting by 

Visa and by MasterCard and their respective card-issuing banks. 

This collective price setting does not occur in isolation. Rather, 

it is part and parcel of a system that imposes collectively set rules 

that effectively require merchants to keep the cost of accepting 

cards secret from their customers. The rules also prevent merchants from refusing to accept particular types of credit and debit 

cards that impose higher fees, including premium and corporate 

cards. Further, we cannot make brand preference based on card or 

payment type. Thus, the card systems can—and do—increase their 

collectively set interchange fees without any fear of resistance by 

the cardholders who remain unaware of the increased costs that 

they are imposing and incurring. 

The grocery industry is comprised of a variety of retailers, from 

big box retailers, nationally known, to small mom-and-pop retailers 

on the corner. Our industry serves probably the broadest cross-section of the retail industry that I can think of. And each of our consumers enjoy a very competitive marketplace that exemplifies what 

most Americans believe the free enterprise system to be. Because 

of this healthy competition, the profit margin in the grocery industry is generally in the 1 percent range. Now, I don’t know of any 

other industry that operates in such a competitive, low-margin environment. 

Now, when we first started accepting credit cards, our interchange rate was around 1 percent, about the same as our profit 

margin. The initial volume of card payments was low. And, quite 

frankly, our industry expected the rate charges would fall as transaction volume increased. This would be consistent with basic economic theory and our experience with various other aspects of our 

business. However, the exact opposite proved true. 

As credit card usage has become more prevalent and interchange 

fee rates have climbed, our costs have increased exponentially, resulting in a 700 percent rise in total interchange fees over the last 

10 years. Today’s high rate of credit card usage, combined with the 

fact that credit card companies are allowed to collectively set interchange rates, leaves retailers faced with the ‘‘take it or leave it’’ 

system. The retailer’s only practical option is to pay up and pass 

this uncontrollable expense onto our consumers. Because of these 

factors, the grocery industry now faces credit card interchange fees 

that can be over 2 percent of a sale, nearly double our industry’s 

profit margin of 1 percent. 

As FMI chairman, I represent over 26,000 retail food stores with 

combined annual volume of over $340 billion. These retailers have 

been put in the position of having to pass along to consumers over 

$4 billion annually in interchange fees. In the grocery industry, our 

very survival depends on customer attraction and retention amidst 

an intensely competitive marketplace. 

Every entity of the retail world is faced with some form of competition, and this competition serves as a safeguard to ensure that 

our practices and prices remain in check. Yet the reverse is true 

of the credit card companies. Visa and MasterCard, accounting for 

5

over 80 percent of the industry transaction volume, each work collectively with their members to drive rates upward rather than 

maintaining a healthy balance. In their non-competitive market, 

normal pressures do not apply. 

Visa regularly increases its collectively set interchange fee to encourage the issuance of cards, and MasterCard does the same. 

Meanwhile, the unsuspecting consumer is the conduit for the rise 

in fees, thanks in part to those collectively set rules that prevent 

merchants from responding competitively to the increased cost of 

particular cards. 

Fair and rigorous competition is the foundation of our industry. 

We are not lobbying to deny credit card companies their reasonable 

profits. We only ask that we not be faced with costs imposed on us 

that have been set collectively by card systems and their member 

banks in an environment that is deliberately designed to deprive 

American merchants of any freedom of competitive action. Given 

Visa and MasterCard’s market share, we simply don’t have the 

ability to say no to the card systems’ all-or-nothing proposition. 

The conventional wisdom tells us that, as volume grows, prices 

should fall, but instead credit card companies have created much 

greater volume and raised fees and costs substantially. This is contrary to the basic concepts of the American free enterprise system, 

and the situation is the result of card systems controlling 80 percent of an industry collectively setting prices in violation of the 

antitrust laws. 

And the great shame of it, my friends, is that the consumer bears 

the cost, and this fact has been effectively hidden from them. I 

don’t know of any other industry which is allowed to blatantly 

abuse both the consumer and the retailer. Credit card companies 

should be required to operate in the same competitive environment 

as any other facet of business throughout our Nation. 

Thank you very much, and I will be happy to answer questions 

at the appropriate time. 

[The prepared statement of Mr. Smith follows:]

PREPARED STATEMENT OF STEVEN C. SMITH

Chairman Conyers and Members of the Committee, I am honored to appear before 

you today and present information of great concern to my company, K-VA-T Food 

Stores, Inc., the members of the Food Marketing Institute and American consumers. 

I serve as President and CEO for K-VA-T Food Stores, Inc., a retail supermarket 

chain operating 95 stores under the Food City banner in Kentucky, Virginia and 

Tennessee. We are a family owned business, dating back to 1955. 16% of our company is owned by our associates through our Employee Stock Ownership Plan and 

we currently employ over 11,000 associates. 

Also, I serve as Chairman of the Food Marketing Institute, commonly referred to 

as ‘‘FMI.’’ FMI is a national trade association that has 1,500 member companies 

made up of food retailers and wholesalers in the United States and around the 

world. FMI’s members operate approximately 26,000 retail food stores with combined annual sales of $340 billion, representing three quarters of all retail food store 

sales in the United States. FMI’s retail membership is composed of national and regional chains as well as independent grocery stores. Our international membership 

includes some 200 companies from 50 countries. 

I am here today to shed light on the best kept secret of the credit card industry; 

that is, the great hidden tax that has been thrust upon consumers due to ever increasing interchange fees that credit card companies charge retailers as a result of 

collective price setting by Visa and by MasterCard and their respective card-issuing 

banks. 

This collective price setting—which looks to me like price fixing under the antitrust laws—does not occur in isolation. Rather, it is part and parcel of a system that 

6

imposes collectively-set rules that effectively require merchants to keep the cost of 

accepting cards secret from their customers. The rules also prevent merchants from 

refusing to accept particular types of credit or debit cards that impose higher fees. 

Thus, the card systems can, and do, increase their collectively-set interchange fees 

without any fear of resistance by their card holders who remain unaware of the increased costs they are imposing and incurring. 

My testimony today will focus on three topics: First, I would like to give you some 

understanding of the supermarket industry in today’s marketplace; Second, the history of electronic payment transactions in our industry; and last, the effect of interchange fees on the retail industry today and the hidden ‘‘tax’’ burden it has laid 

upon the consumers. 

The grocery industry is comprised of all types of businesses—from national ‘‘big 

box’’ chain stores to the traditional ‘‘mom & pop’’ store on the corner. It is my opinion that this industry serves a broader cross-section of the American public than 

any other retail industry. Each of those consumers enjoys a very competitive marketplace that exemplifies what most Americans believe their free enterprise system 

to be—specifically, each member of our industry has to fight, each and every day, 

to offer the consumer the best product at the fairest price in order to win them as 

a customer. 

Because of this healthy competition, the profit margin in the grocery industry is generally in the 1% range; that is, our operators generally only make $1 of profit 

for $100 of sales. I like to say that we are a ‘‘penny’’ business—I know of no other 

industry that operates in such a competitive, low-margin environment. 

Back in the early 1990’s, supermarkets first began experimenting with credit and 

debit card acceptance. When we signed on to accept credit/debit cards, the issuing 

banks actually paid retailers to accept their cards and offered a variety of incentives 

to entice retailers to ‘‘sign up’’ and join the system. 

Over time, our interchange fees were increased. And even though our profit margin was right around 1%, the same amount as our 1% introductory interchange fees, 

the initial volume of credit card payments was low. The industry fully expected that 

the rate charges would fall as transaction volume increased—this would be consistent with basic economic theory and our experience with various other aspects 

of our business. However, the exact opposite proved true. 

Today consumer use of credit and debit cards is at an all time high, with 60–65% 

of all payments in our industry made with plastic. As the credit card payment method has become more and more prevalent, and interchange fee rates have increased, 

our interchange fee volume began to increase exponentially—resulting in a 700% increase in total interchange fees over the past 10 years. Today’s high rate of credit 

card usage combined with the fact that credit card companies are allowed to collectively set interchange rates leaves retailers faced with a take it or leave it system—

basically it comes down to a decision to either swallow hard and pay high fees that 

are set with no competitive influences or turn your back on the 65% of your revenue 

from customers who have been influenced by the card industry’s advertising to believe they are social outcasts if they pay with actual cash. The retailer’s only practical option is to ‘‘pay up’’ and be forced to pass this uncontrollable expense on to 

consumers. 

Because of these factors, the grocery industry now faces credit card interchange 

fees that can be up to 2% or more of a sale. Please recall my earlier statement that 

our industry is a ‘‘penny business’’ or 1% of sales. Therefore, the effect is that fees 

set collectively by the credit card companies are now double the industry’s profit 

margins. 

As FMI Chairman, I represent 26,000 retail food stores with combined annual 

sales of $340 billion, or three quarters of all retail food store sales in the United 

States. These retailers have all been put in the position of having to pass-along the 

costs of these credit card interchange fees. As a result, consumers pay over $4 billion annually in FMI member stores and because the fees remain hidden, they don’t 

even realize it! 

To the ‘‘injury’’ of higher interchange fees, our members must add the ‘‘insult’’ of 

the anticompetitive, Visa and MasterCard Operating Rules. These rules prevent 

stores from setting minimum charges; require retailers to accept all cards, even premium rewards or corporate cards which carry a higher interchange fee and are not 

available to the majority of consumers; don’t permit retailers to make preferences 

based on card type or even payment type; and prevent retailers from reviewing the 

rules of practice without obtaining a signed nondisclosure agreement. 

In the grocery industry, our very survival depends upon customer attraction and 

retention amidst an intensely competitive marketplace. Every entity of the retail 

world is faced with some form of competition—from the contractors that build our 

stores and suppliers that provide our products to our utility companies. This comVerDate 0ct 09 2002 13:55 Jun 11, 2008 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6621 H:\WORK\ATRUST1\071907\36785.000 HJUD1 PsN: 36785
7

petition serves as a safeguard to ensure that our practices and prices remain in 

check. 

Yet the reverse is true of credit card companies. Visa and MasterCard, accounting 

for 80% of industry transaction volume, each work collectively with their members 

to drive rates upward rather than maintaining a healthy balance. In their non-competitive market, normal pressures do not apply. Visa regularly increases its collectively-set interchange fees to encourage the issuance of its cards and MasterCard 

does the same. Meanwhile, the unsuspecting consumer is the conduit for this rise 

in fees—thanks in part to those collectively-set rules that prevent merchants from 

responding competitively to the increased cost of particular types of cards. The only 

beneficiaries are those lucky few who qualify for the premium cards packed with 

rewards on airline miles, cash back, hotel rooms, etc. But even they often find that 

the greatly touted rewards programs lack the promised substance. 

My company operates 95 stores in 3 states. We see credit cards from every state 

in the country and I have yet to find even one bank that chose to offer an interchange rate lower than those collectively set and agreed upon by Visa or 

MasterCard. Fair and rigorous competition is the foundation of our industry. We are 

not lobbying to deny credit card companies their reasonable profit. We only ask that 

we not be faced with costs imposed on us that have been set collectively by card 

systems and their member banks, in an environment that is deliberately and collectively designed to deprive America’s merchants of any freedom of competitive action: 

given Visa and MasterCard’s market share we simply don’t have the ability to say 

‘‘no’’ to the card systems’ all-or-nothing proposition. 

The conventional wisdom tells us that as volume grows prices should fall, but instead credit card companies have created much greater volume AND raised fees and 

costs substantially. This is contrary to the basic concepts of the American free enterprise system. This situation is the result of card systems controlling 80% of industry 

volume collectively setting prices in violation of the antitrust laws. And the great 

shame of it all is that the consumer bears the costs and this fact has been effectively 

hidden from them. I hope that you can work with representatives of FMI and other 

merchant groups to develop solutions to end the anticompetitive conduct of the 

major card systems. I know of no other industry which is allowed to blatantly abuse 

both the consumer and the retailer. Credit card companies should be required to operate in the same competitive environment as every other facet of business throughout our nation. 

Thank you for the opportunity to testify.

Mr. CONYERS. Thank you very much, Mr. Steven Smith. 

Our next witness is the chairman of the Payment and Technology Committee of the Independent Community Bankers of 

America, known as ICBA. Mr. John Buhrmaster is the chairman 

of this ICBA committee, the only national trade association that exclusively represents community banks. He is the president also of 

the First National Bank in Scotia, New York, and has been recently appointed to the ICBA Bank as a director. He also served 

on the association’s Hurricane Katrina disaster task force. 

And we welcome you to this hearing. 

TESTIMONY OF JOHN BUHRMASTER, PRESIDENT,

FIRST NATIONAL BANK OF SCOTIA, NEW YORK 

Mr. BUHRMASTER. Thank you, Chairman Conyers and Ranking 

Member Chabot, Members of the Task Force. My name is John 

Buhrmaster, and I am president of First National Bank of Scotia, 

a $270 million community bank located in Scotia, New York, upstate New York. I am pleased to be here today on behalf of the 

Independent Community Bankers of America and its nearly 5,000 

member banks, just like myself. 

Today, I would like to focus on two key aspects of the interchange debate: how interchange affects consumers in the market 

and the impact of interchange on competition. 

It is important to realize that, for a community bank like mine, 

which is engaged in credit and debit card activities, both as an acVerDate 0ct 09 2002 13:55 Jun 11, 2008 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6601 H:\WORK\ATRUST1\071907\36785.000 HJUD1 PsN: 36785
8

quiring bank and a card issuer, our customers are both the consumers who trust us with their personal banking needs and our 

many local merchants. This might not seem obvious, but as consumers can shop around for a bank that best meets their financial 

needs, merchants setting up a credit card acceptance process can 

also shop around for a level of service, customer support, and a 

range of fees that best suits their business plan. 

If a merchant opts to sign with First National, it is getting a tremendous value because of the interchange system. Small business 

in and around my community can set up a deal with my bank 

where they are paying competitive fees, can accept plastic, and are 

assured a consistent payment experience, backed by sophisticated 

fraud detection systems. This acceptance is very important to the 

economic base of my community. 

The payment system in our country is not free. It did not materialize overnight and should be paid for by those choosing to take 

advantage of it. We don’t want our merchants to pay high fees, but 

interchange is a cost of doing business for them and is a cost to 

the acquiring side of my bank’s business. 

My aunt runs a winery in the Finger Lakes of New York. In setting up her business, she made the choice to accept credit cards. 

She told me that interchange is a good value for her business, because credit cards allow people to buy who might otherwise not. 

Sometimes they even purchase more if it is on a card, rather than 

if they are paying with cash. She views the interchange as a part 

of her overhead, and it helps her reach more consumers. 

Contrary to popular belief, for many community banks, the services we are able to provide thanks to the existence of a negotiated 

interchange fee system are not huge profit centers. For me and 

many community bankers, the variety of products and the high 

level of personal service we are able to offer consumers is what 

makes the system most valuable, not the profit opportunity. 

Some have also stated that the interchange system is not transparent and that these rates should be printed on payment card receipts. I have no problem telling the merchants the cost they incur 

to accept debit and credit cards, but printing interchange rates on 

customer receipts, beside adding an additional expense, would be 

the equivalent of my aunt telling her customers how much it cost 

the venue to pick the grapes. 

The interchange system enhances competition and functions so 

well that thousands of small community banks are able to stand 

toe to toe on both the issuing and acquiring side of the business 

and offer services to consumers in direct competition to banks like 

Citigroup and Bank of America, while providing the type of consumer experience that only a community banker can give. 

Our bank was founded in 1923, and I am the fourth generation 

of my family to serve as president. If we were forced to compete 

in an environment without the card networks negotiating interchange against the mega-banks with national footprints, our relatively small size would put us at a competitive disadvantage that 

would be difficult to overcome. 

I also want to point out that the interchange rates we currently 

receive as an issuer and pay as an acquirer are on a level playing 

field with the largest banks in our country. Consumers and merVerDate 0ct 09 2002 13:55 Jun 11, 2008 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6601 H:\WORK\ATRUST1\071907\36785.000 HJUD1 PsN: 36785
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chants are not always better served by something just because it 

is big, and that is where a community bank plays a vital role. 

I believe that aspect is often overlooked in this debate, because 

it is so easy to focus on the largest issuers and acquirers. I also 

believe it is inaccurate and misleading to characterize interchange 

as a hidden tax on consumers. It is no more a hidden tax than is 

the cost of check processing or the cost of counting cash or the cost 

of making change. And if anything, interchange is more transparent than the cost of other services. 

Interchange is a fee for a valuable service provided to the merchant. It is a fee that allows a bank like mine to support local businesses and give those businesses the ability to accept and to attract 

more customers with additional payment choices and allows those 

customers the flexibility of paying on credit. That is the benefit of 

a balanced market that works the way it is supposed to, with an 

intermediary like Visa or MasterCard standing in for us, successfully bringing together and meeting the payment needs of banks, 

merchants and consumers alike. 

Again, thank you, Chairman Conyers and Ranking Member 

Chabot for the opportunity to testify on behalf of ICBA and community banks in this country. I look forward to your questions. 

[The prepared statement of Mr. Buhrmaster follows:]

PREPARED STATEMENT OF JOHN BUHRMASTER

Chairman Conyers, Ranking Member Chabot, Members of the Task Force, my 

name is John Buhrmaster and I am President of 1st National Bank of Scotia, a $270 

million community bank located in Scotia, New York, and I am pleased to be here 

today on behalf of the Independent Community Bankers of America (ICBA). 

On behalf of ICBA’s nearly 5,000 member banks, I want to express our appreciation for the opportunity to testify on the important role credit and debit card interchange fees play in supporting community banks and our customers. While there 

are many aspects to the interchange debate, I would like to focus on two today: how 

interchange affects consumers in the market, and the impact of interchange on competition. 

THE IMPACT OF INTERCHANGE ON CONSUMERS

For a community bank like mine, which is engaged in credit and debit card activities as both an acquiring bank—i.e. a member of Visa or MasterCard that maintains 

the merchant relationship and receives the card transactions from the merchant—

and a card issuer, it is important to realize that not only are our customers the consumers who trust us with their personal banking needs, but also the many local 

merchants who have decided, after shopping around, that we can provide them with 

the best acquiring services to meet their needs. 

Just as consumers should always shop around for a financial institution that best 

meets their banking needs, a merchant who is setting up a credit card acceptance 

process should shop around for a level of service, customer support, and range of 

fees that best fits their business plan. If a merchant opts to sign with 1st National, 

at the end of the day, it is getting tremendous value because of the interchange system that I, as an acquirer, am able to utilize. The merchant does not have to extend 

credit directly. It gets guaranteed funds in its account right away, the ability to accept credit and debit cards carried by millions of consumers, and doesn’t have to 

worry about bounced checks. And also because of interchange, merchants, as well 

as cardholders and card issuers, all benefit from state-of-the-art fraud detection systems. These fraud-detection systems are even more important to smaller merchants 

who lack the deep pockets of their much larger competitors. The same applies to 

my bank as a small card issuer. 

There was a time when, if you wanted to use credit for a purchase, you had to 

shop at a large department store that could afford an in-house credit program. 

Today, most consumers can use credit to shop at even the smallest merchant because most consumers carry a line of credit in the form of a credit card in their wallets. What small retailer could afford its own proprietary card nowadays? Because 

10

of my ability to issue cards and be a merchant acquirer, small businesses in and 

around my community can set up a deal where they are paying competitive fees, 

can accept plastic, are assured a consistent payment experience, and are protected 

against the fraud I described earlier. This acceptance is important to the viability 

of my local merchants and the economic base of my community. 

Contrary to popular belief, for many community banks, the services I’m able to 

provide thanks to the existence of a negotiated interchange fee system are not huge 

profit centers. The real value lies in my basic ability to offer these products to consumers and merchants. Does it make me some money? Of course. But for me and 

many community bankers, the high level of personal service I am able to provide 

consumers is what makes this system valuable, not gigantic profits. 

In my estimation, government intervention in the interchange system would most 

significantly harm my customers who, again, include both small merchants and consumers. In all likelihood, without the incentive of interchange, community banks 

like mine would not be able to offer the same services we do now, which means 

fewer choices for consumers and less competition for their business. In addition, if 

more banks stop offering interchange-fee-supported products and services, I think 

it’s very likely the industry would consolidate into just a few very large issuers and 

acquirers, and costs of running the system that are currently covered by interchange 

would be passed on through the payments chain, with the final burden falling on 

your average consumer who uses a credit card. The payment system and infrastructure in our country is not free, did not materialize overnight, and should be paid 

for by those choosing to take advantage of it. 

We don’t want our merchants to pay high fees, but interchange is a cost to the 

acquiring side of my bank’s business. It is a factor in determining the merchant fee 

(‘‘discount’’) I charge the merchants my bank supports. This merchant discount is 

a cost of doing business just as the wholesale cost of Concord grapes—a significant 

industry in my part of Upstate New York—is a cost of doing business to a winery. 

The merchant winemaker needs to know the cost of both the merchant discount and 

the wholesale cost of grapes. The regular statements I provide to my merchant customers gives them explicit figures on the cost to them of card acceptance, just as 

the bills winemakers receive from grape growers tell them the wholesale cost of 

grapes. 

Also, as a card issuer, I could not afford to make those products available to consumers, giving them the opportunity build that relationship with their local bank, 

without interchange income. It is also likely that the remaining issuers would scale 

back reward programs and grace periods, turning credit cards into straight shortterm lending products and not the transaction accounts they have evolved into for 

many people who take advantage of free airline tickets and merchandise. 

Some have also made the assertion that the interchange system is not transparent, and that these rates should be printed on payment card receipts. I have no 

problem telling merchants the costs they incur to accept debit and credit cards. But 

printing interchange rates on customer receipts would be the equivalent of telling 

consumers how much it cost the vineyard to pick its grape harvest. The more relevant information for the consumer would be the wholesale cost of the grapes and 

the merchant discount paid. Right now, nothing prevents a merchant from voluntarily printing both on receipts; but doing so would add additional costs to the payment process. 

THE IMPACT OF INTERCHANGE ON COMPETITION

On the issue of competition, our bank was founded in 1923, and I am the fourth 

generation Buhrmaster to serve as President of 1st National. I can tell you with 

confidence, if I didn’t have a card network like Visa or MasterCard standing in for 

me to negotiate interchange rates against the mega-banks with national footprints, 

I—and maybe my father before me who served as President—would simply not have 

been able to compete for as long as we have. The financial services we provide to 

the people and businesses in our communities would have been gone long ago because we, quite simply, would not have been able to offer the competitive products 

and services to stay in business. 

Put another way, our interchange system works so well that thousands of small 

community banks are able to stand toe-to-toe, on both the issuing and acquiring 

bank sides of the business, and offer services to consumers in direct competition to 

banks like Citigroup and JPMorgan Chase, while providing the type of customer 

service that only a community banker can give. If we were forced to compete in an 

environment without interchange, our relatively small size would put us at a significant competitive disadvantage in negotiating the rates we would receive. It is important to note that the interchange rates we currently receive as an issuer and pay 

11

as an acquirer, are the same rates paid by the largest banks in our country. Without 

our market-driven system, how would a small bank compete against the clout of 

mega-banks? 

While big banks will always beat us in terms of economies of scale, they just can’t 

offer the flexibility to customers that we do. A person can walk into one of our bank 

branches and set up all of their financial services in one place, including walking 

out with one of our credit or debit cards. They can have a relationship with one 

bank that knows them and their community, and they can do that thanks to interchange. 

I’d also like to address what I believe is a very unfair characterization: that all 

interchange does is allow big institutions to take advantage of the little guys. Not 

only is that wrong, it’s also opposite of reality. Interchange, as I described previously, offers many protections against things like losses from fraud. Yes, the big 

issuers and big banks do drive interchange pricing. But some large banks choose 

to have interchange as a main profit center, and are very good at creating efficiencies. But consumers, including folks who walk in off the street and merchants, 

are not always better served by something just because it’s ‘‘big,’’ and that’s where 

a community bank plays a vital role. I believe that aspect is often overlooked in this 

debate, because it’s so easy to focus on the large issuers and large acquirers, ignoring the harm that could be done to the thousands of community banks should the 

interchange system be curtailed and not allowed to operate by the dictates of the 

market. 

I also believe it is inaccurate and misleading to characterize interchange as a hidden tax on consumers. It is no more a hidden tax than is the cost of check processing or the cost of counting cash and making change. Interchange is a fee for a 

service that allows a bank like mine to offer additional services to local businesses, 

gives those businesses the ability to attract more customers with additional payment choices, and allows those customers the flexibility of paying on credit. That’s 

the benefit of a two-sided market that works the way it’s supposed to, with an intermediary like Visa or MasterCard standing in for us and successfully bringing together and meeting the various payment needs of banks, merchants and consumers. 

Were there not some value to be added to a business model by accepting the costs 

of participating in the credit and debit card interchange fee system, we would see 

rates of electronic payments on the decline. Of course we all know, that is not the 

case and the number of electronic payments continues to grow. Only thanks to interchange can complete strangers exchange plastic for large-dollar items within the parameters of a controlled, predictable system. 

To conclude, ICBA strongly believes the credit and debit card interchange system 

in our country is working, and provides tremendous benefit to American consumers 

who are opting in greater numbers each day to use credit and debit cards. Merchants have many choices available to them with regards to the form of payments 

they wish to accept, just as consumers have many choices regarding the financial 

institution with which they choose to do business. I compete every day for the business of both merchants and consumers, and I do so in large part thanks to the availability of default interchange rates. Intervening in a functioning market will only 

harm the merchants and consumers currently benefiting from an efficient process. 

Again, thank you Chairman Conyers and Ranking Member Chabot for the opportunity to testify on behalf of ICBA, and I look forward to any questions you may 

have.

Mr. CONYERS. Thank you very much. 

We now have the consumer advocate with the U.S. Public Interest Research Group, Ed Mierzwinski. He has been before the Congress and State legislatures. He has written extensively on consumer issues. He is frequently quoted. You may have seen him on 

TV even, or read about him in the New York Times. And now we 

have him before us today. 

We welcome you, sir. 

TESTIMONY OF EDMUND MIERZWINSKI,

CONSUMER PROGRAM DIRECTOR, U.S. PIRG 

Mr. MIERZWINSKI. Thank you very much, Mr. Chairman. And we 

appreciate all your leadership on consumer issues over the years, 

as well. 

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I am Ed Mierzwinski, and I am consumer program director with 

U.S. PIRG. My testimony today is also on behalf of the Consumer 

Federation of America and Consumer Action, two leading consumer 

groups. After I submitted my testimony, Consumers Union also endorsed it, so some of the leading consumer groups all agree that 

interchange is a significant problem for the Congress to consider. 

A prime purpose of our organization is to advocate for a fair and 

competitive marketplace. And, quite frankly, we believe that the financial services markets work best when there is vigorous competition and consumers are protected from anti-competitive practices. 

The work of your Committee is very important in this regard. 

I have one simple message today: The deceptive and anti-competitive practices of the Visa and MasterCard payment networks 

have injured both consumers and merchants for many years. Interchange fees are, in fact, hidden taxes or charges paid by all Americans, whether they use credit cards, whether they use debit cards, 

whether they use checks, or whether they pay with cash. There 

may be some modest benefits to those cardholders who use cards 

and get some rewards, but I think those benefits are offset dramatically by the costs that all consumers pay, because, again, 

interchange is paid by all of us because of the way that the system 

works. 

The consumers who don’t use credit cards basically subsidize 

credit card usage by paying inflated products, prices inflated by the 

$36 billion of dollars of anti-competitive interchange fees paid each 

year. We present six main points. Again, all consumers, even those 

who pay with cash, pay more at the store and more at the pump 

because these interchange fees are passed along in higher costs of 

goods and services. 

The significant increased interchange fees signal a broken marketplace. Visa and MasterCard have tremendous market power. 

Merchants have no choice but to accept their cards on their terms. 

It is not surprising that interchange fees have increased significantly, even though costs have gone down and are much higher in 

the U.S. than in any other country due to these anti-competitive 

practices. In a competitive market, prices would fall when costs 

fall. 

Third, the card associations’ rules prevent merchants from informing consumers about the costs of payment and limit the ability 

of merchants to direct consumers to the safest, lowest cost, and 

most efficient forms of payment. I never use a debit card myself. 

I use an ATM card, but not a debit card. Debit cards are risky 

when you use them in a signature-based transaction. The rules 

that protect you are not as good as the rules when they use a credit 

card, but merchants would prefer you to use an online transaction, 

the PIN-based debit, but the Visa and MasterCard rules prohibit 

them from doing so. There are a variety of unfair and deceptive 

practices that they use to drive you to the higher cost payment, 

and rewards is simply one of them. 

Fourth, neither the card issuance nor the card network markets 

are competitive. Because of the lax merger policy of the Government regulators, the card issuance market is essentially an oligopoly. Interchange and consumer fees have increased as concentration has increased to enormous levels. 

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And, finally, I want to point out that interchange is only one 

problem of this oligopoly of the card networks. The issuing banks 

have become so concentrated that they are able to engage in a 

number of unfair practices to consumers. Owning a credit card 

company issuing credit cards is essentially a license to steal. The 

top 10 companies now control 90 percent of the market. Their contracts with consumers allow them to change the rules at any time 

for any reason, including no reason. And consumers are subjected 

to unfair mandatory arbitration if they want to change or dispute 

anything on their contract. 

You might ask, why would I be talking to you about these practices at the Antitrust Task Force? Well, there are three reasons. 

First, the industry will suggest the limitless benefits of credit 

cards. I submit to you that the story of the benefits is far more ambiguous, and I submit to you that the purpose of rewards, for example, is simply to get either merchants to pay more in merchant 

interchange fees or to get consumers to rack up high-cost credit 

card debt. And the concentration of the market facilitates these deceptive and onerous practices. The ability of the dominant card 

issuers to maintain this tight oligopoly is contributed to by these 

unfair practices. 

We urge the Committee to examine closely the competition issues 

that allow this oligopoly to treat customers so unfairly. In particular, we ask you to question whether DOJ, in approving virtually every recent credit card company merger with no conditions, 

has adequately reviewed the competition implications of the mergers. 

And, finally, we believe these deceptive and anti-consumer practices demonstrate the lack of competition in the card network market. Visa and MasterCard have the ability to prevent many of these 

unfair practices; they choose not to. About the only rule we know 

of that they have enforced—and enforced in a bad way, as you will 

hear from the merchants—is preventing merchants from offering 

discounts for cash. 

So we think that there is a lot of serious problems before the 

Committee. We are very pleased we have the opportunity to testify 

on behalf of consumers today. We look forward to your questions. 

[The prepared statement of Mr. Mierzwinski follows:]

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PREPARED STATEMENT OF EDMUND MIERZWINSKI


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Mr. CONYERS. Thank you very much. 

Our next witness is counsel for O’Melveny and Myers, Mr. Timothy Muris, esquire. He has had a lot of experience here defending 

these companies, and he is a former chairman of the Federal Trade 

Commission. And he served also on the Advisory Panel on Federal 

Tax Reform. 

So we welcome you to our Committee hearing and invite you to 

proceed, sir. 

TESTIMONY OF TIMOTHY J. MURIS, OF COUNSEL,

O’MELVENY & MYERS 

Mr. MURIS. Thank you much, Mr. Chairman. 

May I submit for the record my written testimony and a law review article I recently wrote? 

Mr. CONYERS. Yes, all the testimony is incorporated in the 

record, including your law review article. 

Mr. MURIS. Thank you, sir. 

I personally advise Visa on antitrust and consumer protection, 

but the views that I express today are my own. Let me make four 

points: First, payment cards benefit both consumers and merchants. Cards rank with the cell phone, microchip, and personal 

computer as one of the last century’s great inventions. The simplicity of pulling a card from your wallet or purse, however, belies 

an extraordinarily complex technological infrastructure that supports these transactions. It cost billions of dollars to create and 

allow the transactions to occur securely, reliably and efficiently. 

Second, payment cards are an example of a two-sided product 

connecting two groups of consumers. The challenge for any twosided product is bringing both groups on board. Newspapers illustrate how most two-sided products set prices. This is today’s Washington Post. Now, in a business sense, this is a vehicle to connect 

readers and advertisers. The readers, in fact, pay very little. The 

publishers get their money from the advertisers. If newspapers 

charged readers the direct cost of supply, they would lose many of 

them. Without enough readers, there wouldn’t be enough advertisers. Without both sides of the market working, not as many consumers would enjoy their newspaper, and advertisers would lose 

benefits of this medium. 

The economics of attracting the two distinct groups drives the 

pricing. The value of the two-sided product to one group is determined by its attractiveness to the other. The group with the lowcost substitutes—in this case, its readers, who can go a lot of other 

places for their news and information—gets the better deal. For 

payment cards—this is my Visa card—the consumer is king. 

To compete with the two historically dominant forms of payment, 

cash and check, the payment cards are priced to provide value to 

the cardholders. The industry has followed this model from its inception. Originally, the merchant discount, the amount that the 

merchants paid, was 7 percent; today, the average discount on 

American Express is about 2.5 percent, while Visa and 

MasterCard, larger companies, charge about 2.1 percent. Discover 

charges about 1.5 percent. 

Consumers and merchants clearly benefit. Walk into a McDonald’s, and you can now swipe your card to purchase a meal. Nobody 

26

made McDonald’s take the payment cards, but instead it found that 

the cards offered value for a price it was willing to pay. 

My third point is that merchants are wrong to analogize interchange to cartel price-fixing. Unlike a cartel, a four-party payment 

card system cannot exist without interchange. A default rate reduces the cost of negotiating separate fees between the thousands 

of acquirers and issuers. Moreover, for MasterCard and Visa to succeed, merchants need to honor cards from each of the thousands of 

issuers. Knowing that all cards must be honored, an individual 

issuer could then insist on very high fees. Merchants would then 

be subject to higher costs and would be less willing to accept the 

network. A default interchange rate, which the payment networks 

set, avoids this problem. 

The difference between the payment card systems in a cartel is 

stark. With cartel pricing, an end to the cartel lowers prices, raises 

output, and increased innovation. The end of interchange produces 

the opposite results and would lead to chaos. The merchants understand this. They don’t want interchange to end; instead, they just 

want to pay less. While they argue against the card systems setting 

their respective interchange rates, this is exactly what they want 

the Federal Government to do. 

This is not an antitrust remedy. One of the fundamental maxims 

of antitrust is that the market, not the Government, should set 

prices. Indeed, reasonableness is never a defense to price-fixing. 

Interchange began with Visa decades ago. Bank of America started 

a three-party payment system in California. Because banks could 

then not cross State lines, the bank tried to franchise its system 

outside of California with no takers. It spun off the system, renamed it Visa, and Visa then began interchange long before Visa 

had any significant market share. 

My final point is that we are here primarily because merchants 

want to cap the rates they pay for payment cards. Such caps would 

inevitably increase card prices to consumers, just as if you reduced 

the amount advertisers paid for newspapers. The merchants’ effort 

to regulate prices, therefore, poses a direct threat. 

Despite what you have heard, most consumers know that merchants pay when consumers use their cards. If consumers understood the threats that the merchants’ campaign poses to their wallets, the cards in their wallets, I suspect that we would see nothing 

less than a consumer revolt. 

I understand the full fury of the aroused American consumer. 

While chairman of the FTC, we created the National Do-Not-Call 

Registry. I suspect that many Americans feel as strongly about 

their plastic as they do about their dinner hour. 

Thank you very much, and I would be happy to respond to questions. 

[The prepared statement of Mr. Muris follows:]

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ATTACHMENT


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Mr. CONYERS. Very interesting. 

Our last witness is Senior Vice President and General Counsel 

for the National Retail Federation, Mr. Mallory Duncan. His job is 

to coordinate strategic, legislative and regulatory initiatives involving customer data, privacy, bankruptcy, fair credit reporting, and 

truth in lending. 

Well, you have got a big job there, my friend. He has been on 

a lot of boards of nonprofit organizations throughout his legal career, including the National Hospice Foundation. And we welcome 

you to this hearing. 

TESTIMONY OF MALLORY DUNCAN, SENIOR VICE PRESIDENT 

AND GENERAL COUNSEL, NATIONAL RETAIL FEDERATION 

Mr. DUNCAN. Thank you very much. Thank you very much, Mr. 

Chairman. Thank you very much. 

I am General Counsel of the National Retail Federation, and I 

am also Chairman of the Merchants Payment Coalition. I want to 

thank the Chairman and the Ranking Member for inviting me here 

today to speak on behalf of those two organizations. 

The MPC represents virtually every type of retail operation, from 

corner stores to the Nation’s largest retail chains. We want the 

Committee to appreciate what is going on here. This market is broken, and it needs to be fixed. 

The card industry has told you the market is functioning fine 

and that this is so complicated, four-sided markets, that it would 

be best if you just ignored it and moved on. But in truth, this is 

a very simple scheme, privately regulated, not by the market, but 

by a set of card company rules that they won’t make available to 

this or to any other Committee. 

The banks that are members of Visa and MasterCard will tell 

you that the card business is competitive. On one side, that is true: 

The banks compete for customers. Each tries to get consumers to 

carry their brand of card, and the piles of credit card offers in your 

mailbox is a test of that. 

But on the merchant’s side, the opposite is true. For example, 

Visa and its banks get together and decide how much they are 

going to charge to process card payments. All issuing banks agree 

to charge the same fees, regardless of which bank’s name is on the 

card. These otherwise competing banks, under Visa and 

MasterCard’s banner, insist that merchants accept their cards, fees 

and rules on a take-it-or-leave-it basis, with no opportunity to negotiate. And even though the fees are outrageous and the rules 

harsh, no merchant can stand up against that kind of power. 

We believe the two card associations each operate as an illegal 

price-fixing cartel in clear violation of Federal antitrust laws. Who 

are the banks among these cartels? Well, they are Citi, Chase and 

B of A, to name three. Their card divisions are each nearly the size 

of American Express. What business do these three banks have 

being in a price-fixing arrangement with each other, not to mention 

with thousands of other banks? If Kroger, Safeway and Publix 

agreed with every other grocer to set the price of milk at $10 a gallon, would anyone here believe that this to be a fine, functioning 

market, delivering value to consumers? 

48

The banks also fix the rules, rules designed to support the cartel 

and hide its operations from the consumers who ultimately pay for 

these fees. Let me give you just one example. Retailers are very 

competitive. The average net profit after wages, taxes, rent and 

goods is about 2 percent. For grocery stores, it is just about 1 percent. The card company rules say that the regular price we offer 

to the public must be the credit card price, but a 1 percent or 2 

percent profit margin isn’t large enough to absorb 2 percent in 

interchange fees. 

So a shopping cart of back-to-school clothes that we would willingly sell for $99 cash has to be priced at $101 because of their 

rules. But look what has happened: $101 has become the regular 

price for $99 worth of cash merchandise. And regardless of whether 

you pay with cash, check or food stamps, we all end up paying the 

credit card company price. 

Now, by the way, merchants are not allowed to show the interchange fee on the receipts the way we would show a sales tax, for 

example, which essentially is what interchange is. Now, as you can 

see here, interchange fees are growing at about 17 percent a year, 

and we expect them to hit $40 billion in 2007. That is more than 

annual fees, cash advance fees, late fees, and over limit fees combined. It amounts to more than $300 in hidden fees per household 

each year. 

Now, what does interchange pay for? Last year, Diamond Consulting independently studied interchange and discovered that only 

13 percent goes to pay for processing transactions. Most of the remainder taxes consumer prices to provide profits for the cartel and 

rewards for a relative few. 

Now, although we may disagree on the benefits, in his written 

testimony Mr. Buhrmaster accurately describes what is happening 

here. He essentially said the big banks set the rules, and they set 

them high, so high that even small or inefficient banks can make 

a profit, while the big banks make a killing. This is not the workings of a competitive market. 

Now, if you look at this chart, you will see that the blue line is 

the rise in the retail sales over the last several years, and the red 

line is the rise in interchange. These rising fees have other consequences on other businesses. At Balliets, a highly regarded $7 

million-a-year women’s clothing store in Oklahoma, interchange 

fees rose to more than $80,000 last year, topping the $60,000 the 

owner spent on health insurance for his employees. In order to pay 

the card companies this year, he was forced to reduce the company 

health insurance contribution from 70 percent to 50 percent minimum required by his carrier. He tells us that next year, Balliets 

may actually be forced to stop offering health coverage to its employees if interchange fees continue to rise. 

In conclusion, the collective setting of interchange fees represents 

an ongoing antitrust violation and is costing merchants and their 

consumers tens of billions of dollars annually. Competition authorities in the rest of the world has realized this and begun to address 

it, and the rates in those countries are lower. The U.S. rates are 

on the far right side of this chart; the other industrialized countries 

are to the left. 

49

The credit card system is an important component of our economy, potentially benefiting consumers, merchants and banks alike, 

but it has become dramatically tilted in favor of the two cartels 

that control the market. There are several pending lawsuits, but 

the courts’ remedies are limited. Courts can deliver damages, prohibit specific conduct, or become regulatory czars. Congress has 

much more nuance and flexible tools at its disposal. 

We urge you to study this problem and work with all of the parties on a solution to this anti-competitive market. Thank you. 

[The prepared statement of Mr. Duncan follows:]

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PREPARED STATEMENT OF MALLORY DUNCAN


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Mr. CONYERS. Thank you, Attorney Duncan. 

And I thank all the witnesses. 

Mr. DUNCAN. Mr. Chairman, I also have comments from other 

members of the MPC I would like to submit for the record, if I 

may. 

Mr. CONYERS. I would be happy to receive them. 

Mr. DUNCAN. Thank you. 

Mr. CONYERS. Well, men, we heard the preliminary opening 

statements in this case. And without rushing to any judgment, it 

doesn’t look so good for the credit card companies. So let’s see if 

we can find out a little bit more. 

Now, Mr. Buhrmaster, with all respect to your aunt’s winery 

business, she has not been found guilty of committing fraud in the 

Federal court system and holding back information like the credit 

card companies, so I would distinguish her conduct and her activities very much from the credit card companies. 

Mr. BUHRMASTER. Not to my knowledge, she hasn’t. 

Mr. CONYERS. Well, that is good enough for me, and we will 

check the kind of quality of her products, too, while we are at it. 

Mr. BUHRMASTER. It is very good, I assure you. 

Mr. CONYERS. Okay. 

Mr. BUHRMASTER. Would you like me to respond? 

Mr. CONYERS. No. [Laughter.] 

With regard to—this is a statement that could be the subject of 

another hearing that is quite separate. ‘‘The market, not the Government, should set prices.’’ That always grabs me by the collar, 

coming from a former Chairman of the Trade Commission. 

First of all, we find out the market isn’t setting the prices here. 

But even if it were, it wouldn’t make me feel better. I mean, markets sometimes go really crazy, and we have to bring in the Government. That is what all these agencies are trying to do is bring 

down prices. Following the market can get you into very big trouble. But we are not even using the market, as it turns out. 

So let me get to the main point of all this. What are we to do? 

Congressman Johnson, a Member of this Judiciary Committee, has 

introduced a bill which is supposed to—he has got some legislation 

that would—it is called the Arbitration Fairness Act, with respect 

to unfair use of mandatory arbitration, which is another little problem, where you can’t go in and sue on your own, but you are 

caught. And, of course, that is always in the fine print in many instances. 

So let’s get to the solution part of it. Mr. Mierzwinski, after we 

investigate thoroughly, complained to the high heavens, tons of 

mail, constituents raising sin, so what do we do? 

Mr. MIERZWINSKI. Well, Mr. Chairman, first, I want to thank you 

for bringing up Congressman Johnson’s bill, which all the consumer groups support. Arbitration, of course, is a separate issue, 

but it is related to the problem consumers face with their credit 

card companies. All their unfair issuer practices, you can’t do anything about them, and the Arbitration Fairness Act would solve 

that problem. 

By the way, the only people the Congress has ever protected from 

arbitration are car dealers. They said, ‘‘We are very small compared to car manufacturers,’’ and so Congress did exempt them 

59

from mandatory arbitration. We think consumers deserve the 

same. 

But on this particular issue, I think you are doing the exact right 

thing. The first step should be—sunlight is the best disinfectant, 

and the Committee is conducting its oversight role. I think there 

are some real questions about all of the mergers that have gone on 

in the issuer marketplace that have been just simply 

rubberstamped over at Justice. 

And the issue here is being litigated with all the retailer lawsuits, but I think it is important that Congress takes a look at it. 

That would be the first step to solve this problem of unfair interchange fees and try to dig into further some of these problems with 

non-transparency that the card issuer—I am sorry, that the associations have, where nobody knows what their rules are, nobody 

can look at their rules unless they sign an NDA, et cetera, et 

cetera. 

Mr. CONYERS. Well, the credit card companies are being sued all 

over the place, but they have settled one antitrust suit case for 

$336 million, where they were accused of fixing credit card foreign 

currency and exchange rates, but there are other lawsuits going on, 

and that is why they declined to come here today, to be present at 

the hearings. 

Steve Chabot? 

Mr. CHABOT. Thank you, Mr. Chairman. 

My first question—and it is kind of a series of questions. I would 

invite perhaps one representative from the credit card companies 

and one representative from the retailer folks or consumer folks to 

respond. And we have only got 5 minutes, so it is kind of hard to 

do this. 

But the first question would be this. If I am a business owner 

or retailer, and I want to be successful, how important is it to accept payments electronically? And what are my options for payment within the credit card industry? And would I negotiate these 

options with my bank or with the individual credit card companies? 

And what are my options if I choose to accept payments only in 

some form other than credit cards, like cash or check? And does acceptance of credit or debit cards impact my chances of success? 

And whichever one wants to take it, either side is fine with me. 

Mr. BUHRMASTER. I would be happy to answer that question. I 

am an acquirer, and I have merchant customers. We have about 

160 merchant customers, and these customers have made a choice 

to accept electronic payment cards. They don’t have to, but they 

have made a business decision, because it makes sense for what 

they do. 

When they make that decision, they will come to us—and they 

will probably go to another bank and maybe another payment processing company and ask us how much it is going to cost. They want 

to know what it is going to involve. What are the risks? What are 

the costs? And so forth. 

We can sit down, if they can tell us what their average volume 

is and how many customers that they expect, the average ticket 

size—that is the average charge that is made—and we can come 

pretty close to giving them an estimate of what it is going to cost 

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them to run this operation for themselves and what it will mean 

to their bottom line. 

Those businesses that come to me and ask for payment services, 

they understand this is a cost of operating your business. They 

want to attract those customers that want to pay by card. In today’s society, people want things now. Everybody wants it now, and 

the best way to have that is through electronic payments. In other 

words, that is how they can get things now, either on credits or 

using their debit card. 

Mr. CHABOT. Okay, thank you. And have you decided which one 

of the other three would like to—Mr. Smith? 

Mr. SMITH. Let me just address the first part. There is no negotiating with the credit card companies. It is a take-it-or-leave-it proposition. You don’t negotiate your fees. If you choose not to take 

credit cards, which we are free to do, we are turning our back on 

about 60-plus percent of transactions. And, again, that is not something that is very inviting for the retailers to tell their consumers, 

‘‘No.’’

I don’t think any of us in the retail industry mind taking a credit 

card. What we want is a fair fee to be able to be charged to our 

retailers. We want them to compete for our business just as we 

compete for our consumers. 

Mr. Muris made the analogy to cell phones and computers and 

credit cards being some of the greatest inventions. Look at what 

the cost of cell phones has done as volume has gone up. Look at 

the cost of computers as volume has gone up. But look at the analogy of credit cards: As volume has gone up, the fees have gone up, 

as well, when, in our opinion, they should be going down because 

of the additional usage. 

So it is just not a free market enterprise system, and that is 

what we would like for it to be. 

Mr. CHABOT. Mr. Buhrmaster, did you want to follow up? And I 

would invite either one of the folks if you would like to——

Mr. MURIS. Can I? 

Mr. BUHRMASTER. Please. 

Mr. MURIS. Merchants can do lots of things. Believe it or not, 

there are prominent merchants that don’t accept certain kinds of 

credit cards. Costco is one of the most successful merchants in the 

world in Mr. Smith’s line of business, and I can’t use my Visa or 

MasterCard or Discover card there. I can’t use Visa at Sam’s Club. 

On the other end, if you go to Neiman Marcus, you can use only 

American Express. Lots of small restaurants I go to don’t take 

cards. 

Merchants can offer cash discounts. We heard a lot of things—

and if someone gives me the chance, I would correct them for the 

record later—about restrictions on merchants. Merchants are allowed to discount for cash. They can advertise that fact. They can 

post big signs in the stores that they discount for cash. Merchants 

can steer customers—and many of them do, especially in the grocery business—to debit, which is cheaper. Discover is significantly 

cheaper. 

There are thus lots of options for merchants. And, in fact, the 

contracts are not take-it-or-leave-it. Supermarkets have negotiated 

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a better deal, in terms of interchange fees, than almost any other 

major group of merchants. 

Mr. CHABOT. I am just about out of time, so let me go back to 

the retailers. Mr. Duncan? 

Mr. DUNCAN. Thank you. Just a couple of points. First of all, in 

terms of supermarkets negotiating a better deal, what happened 

there, actually, was they gave the supermarket industry—this is 

monopolist. What does a monopolist do? They segment the market. 

They went to supermarkets and said, ‘‘We will give you 1 percent,’’ 

and cards came in at 1 percent, and then they began introducing 

new cards with extra high rates, but they weren’t part of the deal. 

So suddenly supermarkets are paying 2 percent for some of their 

transactions. 

This is not fair dealing. They changed the terms on merchants 

the same way they change the terms on consumers. 

Mr. CHABOT. Thank you very much, Mr. Chairman. I see I am 

out of time. I yield back my time. 

Mr. CONYERS. Okay. 

Mr. Howard Berman? No questions. 

May I gain the attention of my friends at the other end? Do either of you have any questions that you would like to pose to the 

witnesses? Okay, you can think of some. 

That is the way Bill Delahunt works. He is a very extemporaneous guy. 

Mr. DELAHUNT. Spontaneous is the word, Mr. Chairman. And I 

thought Mr. Berman would, but if you care. He is listening. 

Mr. BERMAN. I am meditating. 

Mr. DELAHUNT. What would be the problem, for the sake of 

transparency, on some document—the sales slip, et cetera—list the 

exchange fee? What is the problem with that? 

Mr. MURIS. There is nothing now that prevents merchants from 

doing that. Consumers aren’t interested, but if merchants want to 

go ahead and do that, they can. Merchants know what they pay, 

which is the merchant discount——

Mr. DELAHUNT. I am talking about the credit card——

Mr. MURIS. No, that is what I am saying. 

Mr. DELAHUNT. I am talking about—oh, the issuer you are talking about? 

Mr. MURIS. The issuer? 

Mr. DELAHUNT. Yes. 

Mr. MURIS. I am sorry, the issuer——

Mr. DELAHUNT. I am talking about the credit card companies. 

Mr. MURIS. Yes, the issuer has a relationship with the consumer 

and discloses the fees that it pays to the consumer, if that is——

Mr. DELAHUNT. But would the issuer have a problem, given the 

dimensions of the customer base—and having the wherewithal, in 

terms of the software, just for sake of transparency, put down what 

the exchange fee was in that particular transaction? 

Mr. MURIS. But the issuer—the transaction is between the consumer and the merchant, not the issuer. 

Mr. DELAHUNT. I understand that, sir. But for the issuer——

Mr. MURIS. I am sorry, the issuer can’t do what you are asking. 

Mr. DELAHUNT. Can he, Mr. Duncan? 

62

Mr. DUNCAN. Sure, certainly they could. I mean, look, they are 

the ones who have these prices, and they are the ones who develop 

these prices. If they wanted to disclose it, it would be a very simple 

thing for them to do. Frankly, it would be a lot easier for them to 

disclose it than for us to disclose it, because we don’t know how 

much a transaction is going to cost us until after you——

Mr. DELAHUNT. That was the rationale opposing it. What is the 

problem? 

Mr. MURIS. Well, in fact, the interchange fees are disclosed, and 

they are available on the Visa and the MasterCard Web site, if that 

is your question. 

Mr. DELAHUNT. Please, please, Mr. Muris, you know, on the Web 

site? I mean, some of us don’t know how to access a Web site, let 

alone asking the consumer to do that—I mean, in the real world, 

people get a slip. It would be very convenient for them, for the consumer, to understand what the exchange fee was. And what is the 

problem for the issuer to do that? 

Mr. MURIS. There is nothing that prevents when consumers engage in a transaction the merchant from disclosing that. I believe 

consumers aren’t interested in that information. Consumers are interested in the prices that they pay. 

Mr. DELAHUNT. But the consumer, I dare say, would like to 

know, you know, if they are paying 1 percent or 2 percent or 3 percent more what it was. Why not, just for the sake of——

Mr. MURIS. But consumers know what they pay to the credit 

card company. They know what they pay to the merchant. If the 

merchant, for whatever reason, wants to break it down——

Mr. DELAHUNT. They don’t know what—please. 

Mr. MURIS. Sure, they know. 

Mr. DELAHUNT. They know? They don’t know what the figures 

are. 

Mr. BERMAN. Would the gentleman yield? 

Mr. DELAHUNT. Of course I yield. 

Mr. BERMAN. I thought I heard one of you—I don’t know if it was 

Mr. Duncan or Mr. Mierzwinski—say that, under the contract between the merchant and the issuer, that the merchant wasn’t allowed——

Mr. DUNCAN. We have to advertise everything as the credit card 

price. There is——

Mr. BERMAN. Right. 

Mr. DUNCAN. So the price to the consumer—we have to tell the 

consumer is the credit card price. 

Mr. MURIS. Mr. Duncan said that the companies, Visa and 

MasterCard, prevent the disclosure that you are asking for, and 

they don’t. And, second, if the merchants want, they can offer a discount for cash and they can advertise it. There is nothing that prevents them from doing that. In fact, some merchants do. 

Mr. DUNCAN. May I mention this discount for cash? I mean, that 

is thrown around as if it were a panacea. In fact, they have a series 

of rules that they disclose to us through the merchant banks as to 

how you can offer a discount for cash. Most merchants understand 

those rules to say that you can offer a discount for cash as long as 

the credit card price is the most prominent price and the discount 

63

for cash is the smaller price, and it has to be separately listed in 

each instance. 

So that means, where do you see it? You won’t see it in the 

Sears, with 100,000 different items. They are not going to put 

200,000 prices on the merchandise. You will see it at a gas station, 

because they only have three products, regular, mid-level and premium. And so there it is conceivable you could put a lower price. 

But even when you have that option, they are trying to stop us 

from doing it in gas stations. Just this last couple of months, Visa 

went to a gas station in San Francisco, no less, that was offering 

a 10-cent-a-gallon discount for cash. They had a sign up that said, 

‘‘Credit price, cash price,’’ and Visa said, ‘‘No way. No can do, because it looks like the credit price is not the regular price. You 

have got to call that’’——

Mr. DELAHUNT. Reclaiming that time, I think that is easy to corroborate. I mean, and you are saying—or it has been said that, you 

know, we are trying to—that the retail industry wants Government 

to do what the marketplace should be doing. 

I mean, clearly, there is an appropriate role for Government in 

certain circumstances. We have usury laws, you know? I mean, the 

reality is, we have got, you know, in some States, there are caps 

in terms of interest rates. Otherwise, you know, we could follow the 

rule, you know, let it go. I mean, the mafia would be in good shape. 

It wouldn’t be interest; it would be called the vig under those circumstances. But maybe we are talking about the vig. 

And I yield back. 

Mr. CANNON. Mr. Chairman, I ask unanimous consent that the 

gentleman be granted an additional 2 minutes, because I am actually interested in hearing from Mr. Muris how it is obvious to the 

consumer, because it doesn’t seem to me to be obvious——

Mr. DELAHUNT. I yield to the gentleman, if I get an extra 2 minutes. 

Mr. CANNON. Then, Mr. Muris, you were insisting that it is obvious to the consumer. How is it obvious to the consumer? 

Mr. MURIS. I am saying what is obvious to the consumer is what 

the consumer cares about, which is the price that they pay. If Sears 

wanted to, however, Sears could post a gigantic sign that says, 

‘‘Minus X percent’’—pick 2 percent—‘‘Minus 2 percent for cash.’’ 

They don’t have to post it on every individual item. 

Most Americans, sir, most Americans know that merchants have 

to pay for credit cards. There have been surveys that show that, 

consumers understand that. Consumers also understand that they 

get a good deal from the payment card companies. There is enormous competition, despite what we have heard today. 

Mr. CANNON. Pardon me, but have there been any studies where 

you have asked consumers what they think they are paying for 

their credit card fees? 

Mr. MURIS. Yes. Credit card fees are disclosed. Okay, we are 

talking about two different things here. Consumers visit a merchant——

Mr. CANNON. Well, we only want to talk about one thing, and 

that is, what percentage of the final price that a consumer pays in 

a store does he think he is paying for the store and what does he 

think he is paying for you? Have there been any studies where you 

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have asked consumers what they think the appropriate interchange 

fee that the merchant pays should be? 

Mr. MURIS. Yes. When consumers are asked, do they know about 

that the merchant is paying? They say, ‘‘Yes.’’ And when they are 

asked, are they okay with the arrangement, at various price arrangements——

Mr. CANNON. Are they ever asked how much they think they are 

paying? 

Mr. MURIS [continuing]. Most Americans are okay with that. 

Mr. CANNON. Have you ever asked what Americans think they 

are paying when you ask those other questions? In other words, do 

we have any studies that indicate that Americans know what the 

fee actually is? 

Mr. MURIS. The fees that Americans pay for credit cards are disclosed. The prices that they pay in stores are disclosed. If the 

stores wanted to—as I have said——

Mr. CANNON. Pardon me. Pardon me. I guess it is my time, having had it yielded, I am asking a really simple question. I think 

most people know they pay a fee, but I don’t think they know that 

it is anywhere near what it actually is. I am just wondering if you 

have done any studies that you can show us where you have asked 

people what they think an appropriate fee to pay for a credit card 

transaction would be? 

Mr. MURIS. There are studies that address that issue. I would be 

glad to submit them for the record. But there is a more important 

point here, which is—if Mr. Smith or Mr. Duncan, who worked 

with me at the FTC years ago—if they feel that consumers want 

to pay cash, they can tell consumers that, ‘‘You will get a discount,’’ 

and they can say it is 2 percent or whatever it is they want, paying 

for cash. Why isn’t that a solution to the problem? 

Mr. CANNON. You are here telling me what you think the most 

important issue is and not really answering the question. I am 

looking forward to the report to see what people think they are 

paying. I was actually quite startled. 

Mr. SMITH. Mr. Chairman? 

Mr. CANNON. And yielding back—let me yield back to the gentleman from Massachusetts. 

Mr. CONYERS. The Chair is conflicted, because Mr. Smith was 

very agitated about trying to get in the conversation. So if we grant 

1 minute more to Mr. Delahunt’s time, maybe he can get in his two 

cents. 

Mr. DELAHUNT. I yield to——

Mr. CONYERS. Smith? 

Mr. DELAHUNT [continuing]. Smith. 

Mr. SMITH. Well, Mr. Chairman, it won’t take that long. We as 

a retailer do focus groups with our consumers on a periodic basis. 

And one of the questions we have asked our consumers, ‘‘Do you 

know what you pay or what we pay in credit card fees or debit card 

fees?’’ And I cannot—we have never hit double digits with people 

that even have an idea of what they pay. Most people think it is 

free. They think they get their credit card, they pay fees for the 

credit card, in a lot of cases, and they don’t have an idea that the 

retailer pays a fee. 

65

Now, some will say, ‘‘Yes, I am sure you pay some fee.’’ The vast 

majority of customers, when we do our focus groups, have not a 

clue that they are paying extra for their product because of credit 

card fees. 

Mr. CONYERS. Thank you very much. 

The Chair recognizes the very patient gentleman from Florida, 

Mr. Ric Keller. 

Mr. KELLER. Well, thank you, Mr. Chairman. 

And I have 23, 24 questions, and no way we are going to be able 

to get to it in my 5 minutes or before votes, so let me just give a 

brief opening statement to kind of lay out what my concerns are 

and try to get to as many questions as I can. 

I remain very open-minded about this issue. On the one hand, 

I think the electronic payment system, dominated by Visa, 

MasterCard, and their participating banks, has provided a very 

positive convenience to consumers and merchants over the past 10 

years. 

On the other hand, I am quite concerned that, despite the dramatic increase of the volume of interchange fee business, we have 

seen that interchange fee rates have not fallen, as we might expect, 

but instead have increased, along with the volume of business. And 

these costs have been passed onto consumers. 

Now, earlier today, I went down to the congressional liquor store 

on Capitol Hill to check out something. [Laughter.] 

I feel I could use it now, but I saw that a six-pack of Coke is only $3.65, and that is the exact same price of a six-pack of Pepsi. I saw 

that a six-pack of Bud Light is only $5.29. It is the same price as 

Miller Lite, exactly. Pepsi keeps Coke honest. Miller Lite keeps 

Bud Light honest. 

Why the heck isn’t MasterCard keeping Visa honest? Why 

doesn’t MasterCard say to the retailers and merchants, ‘‘Hey, they 

may charge you 2 percent fees, but we are going to have 1 percent’’? Why don’t we see that competition? Is there collusion going 

on between MasterCard, Visa and their participating banks? Or 

could it just be that the cost of business for these organizations has 

gone up and they have to incur costs associated with fraud and 

other expenses? 

The $64,000 question for me is: Can we find a way to hold down 

the increase in interchange fees without resorting to price controls? 

And I haven’t heard the answer to that yet. 

And I am just going to be honest with you. Both sides have very 

strong points and very weak points, and let me just tell you what 

I think they are, as I see it as a neutral observer. 

In terms of the banks and the credit cards, they have made a 

strong point in saying that they have provided a valuable service 

with the electronic payment system offering convenience and a 

strong point in pointing out we shouldn’t have price controls. That 

is not our way. On the other hand, they have no good explanation 

that I have heard for why we have seen these dramatic increases 

in interchange fees. 

On the other hand, I look at the merchants and retailers, and 

they have a very good explanation of the problem and the unfairness of having these fees jacked up dramatically over the past 10 

years. And in light of the fact that 60 percent of their customers 

66

are using MasterCard and Visa, they have you by the shirt. And 

on the other hand, the weakness here, you have not given us any 

good solutions at all. And so I would love to hear what the solutions are, outside of price controls. 

Let me begin with you, Mr. Smith, and make sure I am walking 

through this process property, at least Food City. I go to your store, 

and I buy $100 worth of groceries at Food City with a Visa card 

issued by my bank. It is my understanding that Food City, in 

terms of the allocation money, would pay approximately $2.10 to 

its bank, called the merchant discount rate. Its bank would then 

keep a processing fee of about 35 cents, and then Food City’s bank 

would pay an interchange fee of approximately $1.75 to my bank, 

the issuing bank. And then my bank would pay approximately 9.5 

cents to Visa or MasterCard, so for a grand total of about $2.10. 

Is that roughly how it works? 

Mr. SMITH. Mr. Keller, I am not sure I can tell you exactly how 

the transactions work. I can tell you that my bill is going to be over 

2 percent of my transaction. 

Mr. KELLER. Two percent. All right, and I know you are concerned about that, because it used to be 1 percent about a decade 

ago, right? 

Mr. SMITH. Yes, sir. 

Mr. KELLER. Now, let me ask you this. If you take that same 

$100 grocery example, and your customer instead uses of the credit 

card, uses a debit card, and he puts in PIN number, isn’t it true 

that Food City would only have to pay about 25 cents, rather than 

the two dollars in fees associated with the credit card? 

Mr. SMITH. That is correct. It would be much, much less than the 

credit card. 

Mr. KELLER. Why don’t you just put up a sign encouraging customers, ‘‘Please use your Visa debit card, and put in your PIN 

number, instead of using your Visa credit card’’? 

Mr. SMITH. We do encourage customers to use a PIN-based debit 

card, and a lot of our customers choose to do so. But by the same 

token, a lot of our customers choose to use a credit card for many 

different reasons. Maybe they don’t have the money in the bank at 

that particular time. Maybe it is rewards or points that they have 

been enticed with to be able to use that credit card. 

Mr. KELLER. Do you offer a discount to those customers who use 

their Visa debit card with PIN numbers or who pay in cash? 

Mr. SMITH. We do not. 

Mr. KELLER. Are you legally allowed to if you wanted to? 

Mr. SMITH. It is my understanding that we are not allowed to do 

that. Now, I heard Mr. Muris say that we are allowed to. Maybe 

we will look into that. I stopped by—and I know nobody can see 

this—but I stopped by my local commissioner of revenue. I live in 

the commonwealth of Virginia. And this is a property tax payment 

form that is put out by the county. And they surcharge. If you use 

a Visa or a MasterCard to pay your property taxes—which I didn’t 

realize people did, but they do—they actually allow them to surcharge. And it surcharges up to 3 percent. 

But we can’t surcharge. We cannot surcharge. If we can discount, 

that is news to me, but other entities, such as governments—I 

67

think the IRS does the same thing—surcharge consumers for using 

those credit cards. 

Mr. KELLER. Well, thank you. I have a ton more questions, but, 

Mr. Chairman, my time has expired. 

Mr. CONYERS. All right, you can put them in the record or send 

them to the witnesses to submit their responses if you would like, 

Mr. Keller. 

The very distinguished gentlelady from California, Maxine Waters. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

Before I move forward with my questions, I think we should 

make sure the record reflects that the Congress of the United 

States does not own a liquor store. [Laughter.] 

I can just see us bombarded with our citizens saying, ‘‘Aha, there 

you go, you have got a gym and a liquor store.’’ So the record reflect that that is some retail store that has adopted the name ‘‘Congressional Liquor Store.’’

Mr. CONYERS. So reflected. 

Ms. WATERS. Thank you. 

Secondly, for the study that Mr. Muris referred to, he wasn’t very 

exact about the time of the study, what the study entailed. He said 

he would submit it to us, and I would like the Chair to ask that 

that be submitted by a time certain, within the next 10 days or so. 

Mr. CONYERS. Is that all right with you? 

Mr. MURIS. Yes, sir. 

Ms. WATERS. All right, thank you very much. 

Now, to Mr. Duncan. I would like to explore with you this business about the interchange fees, and how they have increased, and 

how they do this. As a consumer, I know that credit card companies have the teaser rates that they get you in with and then they 

increase over a period of time. I also know that, once you become 

a customer, if you are late paying, they have a way of increasing 

your interest rates. They have a way of generating fees. 

And then I discovered that fee generation is a whole business, 

that there are companies who do nothing but teach banks and financial institutions how to create more fees. And I think something 

I read some time ago indicated that some of our businesses are getting more money, more profit in fees than they are on the actual 

services. 

So we know, as consumers and customers, how we have gotten 

caught up in the fee game and the fees that we have—explain to 

me, why do you think these fees have increased over a period of 

time, when everybody concedes that they should have been reduced? And what other ways and what other techniques are being 

used in order to get more money out of the merchants? 

Mr. DUNCAN. Congresswoman, there is a number of answers to 

that question. I guess the simplest one is to say that a monopolist 

will do what a monopolist does. And Visa and MasterCard are essentially a duopoly, and so they will try to find ways of profit maximizing. 

And not surprisingly, many of the same techniques they will use 

with consumers, such as teaser rates, they will also use with the 

merchant community. As someone mentioned a moment ago, they 

68

introduced a new category at a low rate and then flood the market 

with higher rate cards, which essentially drives that up. 

They also have rules, and we haven’t really focused on the rules 

today. But there are rules which the executive vice president of 

Visa says are the size of the New York City phonebook. That is 

1,900 pages, roughly. They will only disclose a fraction of that, and 

yet we are expected to abide by them. And the fraction they expose, 

in the case of one company, you have to sign a gag order. NRF 

could go on the line and look at those rules, but then I couldn’t talk 

to you about them and we couldn’t solve this problem. 

So they have a number of techniques, such as rate increases, 

that are governed by those rules, that cause prices to go up. I 

think, talking about the number of options, it is beyond the scope 

of the time we have here, but needless to say it is a profit-maximizing endeavor. 

If I may, may I just respond to one thing that Mr. Keller raised, 

in terms of the pricing? You saw similar pricing between Visa and 

MasterCard. This market is broken; it needs transparency and genuine competition. But currently, Visa and MasterCard don’t battle 

for merchants. They battle to get banks to issue their brand of 

cards. So this is the only market in which the competitors compete, 

by raising prices rather than lowering them. 

Ms. WATERS. Wow. I had another question, and I am so taken 

away—oh, I want to ask this. This Congress and most public policymakers wax eloquently about support for small business. As a 

matter of fact, if you polled the Members of Congress about their 

feelings and support for small business, that would rank very high 

in those public policy considerations that they work with, they deal 

with. 

I want to know the impact of these interchange fees on small 

businesses. Are our small businesses being hurt? Are they being 

ripped off? Are they being caused to go out of business, not to be 

able to have the inventory that they need because they are being 

gouged? 

Yes, sir? 

Mr. BUHRMASTER. Yes, thank you. I would like to respond to 

that. 

I deal with small businesses every day. My bank was the number-one small business lender in New York state for a bank our 

size. Small businesses have a variety of costs of doing business. 

They have insurance; they have lawyers; they have accountants; 

they have waste removal. 

When I look at a financial statement for a typical small business, 

you know, that accepts credit cards, what I am finding is, on average, insurance is more, it costs more for insurance, waste removal 

is fairly equivalent to the cost of your interchange fees, and legal 

and accounting is less. So it is a cost of doing business. It is built 

into their pricing structure overall. 

I don’t believe they are being gouged. I think they are getting a 

good service for it. You know, these are people that have to—these 

are merchants that have to reach the people. And right now, the 

most popular means of making payments is through credit cards. 

And if you take a look at the national savings rate, it was negative the first time, it is because people are getting used to putting 

69

thing on their credit cards. And I don’t think it is anything that 

is on Visa or MasterCard’s advertisements that is doing it; I think 

it is people’s desire for now. 

Ms. WATERS. Aside from the convenience for the customer and 

the merchant, what else does the merchant get for this fee? 

Mr. BUHRMASTER. For its fee? 

Ms. WATERS. For this interchange fee that they pay. 

Mr. BUHRMASTER. Well, first of all, the merchant has the fraud 

protection system, which is built into the system, that if someone 

comes in with a fraudulent card, if they don’t have that system 

there, they might accept that for payment and end up taking the 

loss later. However, by running it through the system properly, if 

they do everything properly, they are covered, and that is a valuable thing. You can’t have that with the check. 

With cash, of course, cash is king, but not everybody carries cash 

anymore. I mean, if you poll everyone in this room, how many people really have a lot of cash in their wallets? Most of us rely on 

those cards that are in our wallet to go to McDonald’s or to the beverage store. 

Ms. WATERS. Well, that is why the merchants are at the mercy 

of the issuers, because most people do rely on credit cards. I wish 

we did not have to, but you can’t travel in this country, you can’t 

get lodging in this country, you can’t do anything without a credit 

card, so we are at the mercy of the credit card companies. 

Yes, sir? 

Mr. SMITH. Congresswoman, if you assume this is the cost of 

doing business—which I wouldn’t disagree with—it is an uncontrollable cost of doing business. It is one we can’t negotiate. I can negotiate with the folks that are going to pick up my trash, and I can 

find the one that gives the best service and the best price. I can 

negotiate with a bank, if he is going to take my checks. I can negotiate prices on check processing. I can negotiate every one of my 

costs of doing business, but I cannot negotiate that cost of taking 

credit cards. 

Ms. WATERS. How would you recommend we could help you? 

Mr. SMITH. I wish I had a simple solution, because it is somewhat of a complex thing. I think that, when people compete, just 

as we compete in the retail grocery business, the consumer benefits. And that is what I hope that this group, along with Food Marketing Institute and some other participants in the Merchants Payment Coalition, can get together and come up with some very good 

solutions. 

Ms. WATERS. Yes, sir? 

Mr. MIERZWINSKI. Representative, if I could just add one quick 

point, the market power of the two card associations forces merchants to accept their product on the terms that are offered. And 

the terms that are offered are very, very complex, as you have 

heard. 

And I spoke to one small business woman—a doctor, actually, a 

solo practitioner—and she cannot find out until she gets her bills 

back from her third-party processor that some of the cards that she 

has accepted are these rewards cards with the much higher fees 

that she pays. They look like Visa cards to her, and they go 

through her machine just like Visa cards. They are all the same, 

70

but these new types of cards that are being offered are these rewards cards, these signature cards. 

And I would submit that the fraud detection and everything else 

is a cost of the companies—are doing for any of the cards and that 

you are not getting better fraud detection. You are simply paying 

for more rewards, but you don’t have any idea what you are paying. You have no choice in the matter, because of the market power 

of the company. 

Ms. WATERS. Yes, sir? 

Mr. MURIS. Ma’am, could I just make two points in response? 

One, I would like to submit for the record a letter from the Small 

Business and Entrepreneurship Council, which opposes what the 

merchants want to do, if I could submit that for the record. 

Mr. CONYERS. Without objection. 

Ms. WATERS. Before you—are you going to accept that for the 

record? 

Mr. CONYERS. I did. You don’t want to? 

Ms. WATERS. Well, I wish I had been able to object to that. 

Mr. CONYERS. You didn’t want to——

Ms. WATERS. Because I want to see it. Because I can’t imagine 

merchants sending a letter up here saying, ‘‘Don’t help us.’’

Mr. CONYERS. Well, we have accepted it for the record so you can 

examine it now. 

Ms. WATERS. All right. 

Mr. MURIS. And my second point is, in terms of small merchants, 

Visa and MasterCard are two of the greatest things that ever happened for the small merchants in America. 

Ms. WATERS. My time is up. Thank you. 

Mr. MURIS. If you don’t want to hear the answer, that is fine. 

Ms. WATERS. No, no, no, I don’t. 

Mr. CONYERS. I was afraid to tell her, her time was up. [Laughter.] 

So now that she acknowledges it herself, I mean—the Chair is 

pleased to recognize the Ranking Member of the full Committee 

from Texas, Lamar Smith. 

Mr. SMITH OF TEXAS. Thank you, Mr. Chairman. Mr. Chairman, 

I assume that the gentlewoman from California has, in fact, set the 

precedent and the standard for time allotted for questions? 

Mr. CONYERS. You may not make that assumption. [Laughter.] 

Mr. SMITH OF TEXAS. Mr. Chairman, first of all, I would like to 

ask unanimous consent to have an opening statement made a part 

of the record. 

Mr. CONYERS. Without objection. 

Mr. SMITH OF TEXAS. And I would like to also that I apologize 

to our witnesses for being slightly late today. I was over participating in a Conference Committee over on the Senate side on the 

9/11 bill, and that was the first meeting and somewhat mandatory. 

And, unfortunately, I have got to return as soon as I finish my 

questions to that Conference Committee. 

Mr. Muris, let me address my first couple of questions to you. 

And some of these questions are really follow-ups to questions related that you have been asked already. But how does Visa and 

Master Charge actually set their interchange rates? What factors 

go into those specific rates? 

71

Mr. MURIS. Well, they recognize that this is a two-sided market, 

and it is a two-sided market where the consumer is king. The consumers get tremendous value. They get the rewards cards. 

Mr. SMITH OF TEXAS. How are the actual rates set? Say it is 

roughly 2 percent. 

Mr. MURIS. The rates have been set in part by competition. In 

fact, we have heard a lot of talk about rates going up. The merchant discount rates haven’t gone up since the late 1990’s, and they 

did go up. And one of the reasons—Mr. Keller asked what happened—one of the reasons was——

Mr. SMITH OF TEXAS. Actually, let me go back to my question. 

What factors do you consider in setting those rates? 

Mr. MURIS. That is what I am saying. Competition between Visa 

and MasterCard to get banks to dedicate themselves to them was 

one of the factors that caused the increase in rates in the late 

1990’s. 

Mr. SMITH OF TEXAS. Is there an overhead factor? Is there an expense factor? Is there a cost factor? 

Mr. MURIS. But in a two-sided market it is frequent that one side 

gets subsidized. If I go on eBay, the seller pays it all and the buyer 

pays nothing. I mentioned newspapers when you weren’t here. In 

newspapers, the readers are subsidized by the advertisers. 

In payment cards, the cardholder gets a very good deal, and the 

merchants bear most of the costs. And that happens throughout in 

these so-called two-sided markets. 

Mr. SMITH OF TEXAS. Okay. You have gotten some criticism 

today about anti-competitive behavior. How do you—if the fees are 

so similar, if you talk about an individual going into a store and 

buying the same merchandise with the Visa and the Master 

Charge, the fees are going to be pretty similar, why isn’t that anticompetitive behavior? 

Mr. MURIS. Well, as Mr. Keller mentioned, in competitive markets, it is quite frequent that the prices are similar or even identical. But here prices, in fact, are different. American Express, 

which is a smaller company, has a higher merchant discount of 2.5 

percent. Discover has a lower merchant discount. 

The size of the merchant discounts, is related to the type of the 

card and with what happened—of the need to attract merchants, 

as compared to consumers. There are antitrust cases going on. 

Those cases do not involve American Express and Discover because 

they are single entities. 

Through historical accident, because Bank of America could not 

have multi-state banking, we ended up with the system that we 

have now. MasterCard and Visa have, in fact, moved to a system 

that now will look much more like American Express and Discover. 

Mr. SMITH OF TEXAS. Mr. Duncan, why do you think the interchange fees are too high? And you have been asked several times 

today about a solution, and I heard one about arbitration and that 

a bill has been introduced to, I gather, compel arbitration. I assume 

you are opposed to price controls, but what other answers are there 

out there if, in fact, you can show that the fees are too high? 

Mr. DUNCAN. Sure, let me start with just suggesting to you how 

fees are fixed. As Mr. Buhrmaster said in his testimony, and I 

think I referenced in my testimony, what happens is a group of big 

72

banks with Visa get together and they set the fee. They then take 

it back to the Visa, and Visa blesses it, and all of the banks then 

charge that fee. 

Mr. SMITH OF TEXAS. Just because they have gotten together 

doesn’t necessarily prove the fee is too high. Why is the fee too 

high? 

Mr. DUNCAN. The fee is too high because it is set the way a fee 

would be set by a monopolist. In any other market, as we see 

growth, as we see computerization, as we see improvements, prices 

go down. After all, this was originally a fee for processing a transaction, and now we see that only 13 percent of it goes to processing. 

Mr. SMITH OF TEXAS. And what would you propose as an alternative? 

Mr. DUNCAN. There is a couple of parts to that. First of all, because this system is governed by a privately regulated set of rules, 

the first thing we have to have is some transparency. We have to 

be able to see the rules of the game to know how you are going 

to fix this thing. 

Look back. A few years ago, we had Ma Bell, and you could get 

any phone you wanted as long as it was black, white or ivory, and 

you paid two dollars a minute for long-distance calls. The courts 

got involved, and there was tumult. Finally, Congress came around 

and said, ‘‘You know, this is a problem that we have to fix. We 

have to look at it, study it, and come up with a solution.’’

We have an analogous situation here. The courts are involved, 

but only Congress can come up with a nuanced response to make 

this work. It may be as simple, for example, as looking at the 

‘‘honor all cards’’ rule, the rule that says, ‘‘If I sign it to take this 

1 percent traditional card, I have got to take this 3 percent business rewards card,’’ and allowing a merchant to say, ‘‘No, I don’t 

want to take these business rewards cards or these high-flying 

extra cards.’’

Mr. SMITH OF TEXAS. Okay. 

Mr. Chairman, I would like to have an additional minute. And 

if granted, I am going to yield it to the gentleman from Florida, Mr. 

Keller. 

Mr. CONYERS. Very good. 

Mr. SMITH OF TEXAS. Thank you. 

Mr. KELLER. Thank you. 

Mr. Duncan, what is to keep Visa and MasterCard, since they 

have an 80 percent market share, for determining, ‘‘You know, instead of having 2 percent interchange fees, we are going to have 

3 percent or 4 percent’’? 

Mr. DUNCAN. Frankly, the only thing I think that stops that from 

happening is because they are monopolists, and monopolists will 

price maximize. It has been a number of years since economics, but 

there is a market-clearing competitive price, and there is a much 

higher price that monopolists charge if they can profit maximize. 

Mr. KELLER. Mr. Muris, would that be a good thing, if the interchange fees went up to 3 percent? 

Mr. MURIS. Well, if they had the power that Mr. Duncan says 

they have, obviously the fees wouldn’t be where they are now. But 

it is important to understand that——

73

Mr. KELLER. But isn’t your position ‘‘when interchange fees increase, cardholders benefit’’? 

Mr. MURIS. Yes, but interchange fees are set in this process, this 

balancing process. It is clear that one of things——

Mr. KELLER. So if the ATM fees go up, that is good for me? 

Mr. MURIS [continuing]. What happens with interchange is that 

cardholders received better cards. Most of us have four or five 

cards in our wallets, believe it or not. If interchange went down, 

like has happened in Australia, what happens is, annual fees become an issue. With annual fees, people would carry far fewer 

cards. 

You might believe that people are wrong to carry four or five 

cards. I personally don’t, but there is a direct relation between the 

size of the interchange fees and the quality of the cards. 

Mr. KELLER. Thank you. I think my time has expired. I yield 

back. 

Mr. MIERZWINSKI. Mr. Chairman, could I just add one quick comment on the Australia? I mean, the consumer groups would be 

happy to submit for the record that we disagree with the card associations’ interpretation of the Australia experience, and we think 

that actually, overall, consumers are paying lower fees, and there 

are more entrance in the market, and it is a much more competitive system. 

Mr. CONYERS. We would be pleased to accept any information in 

that regard. 

The Chair recognizes Chris Cannon. 

Mr. CANNON. Thank you, Mr. Chairman. I appreciate that. 

And let me pick up from where I was with Mr. Smith. You were 

talking about some focus groups you had done. Do you have anything that you can share with us, any written reports on those 

focus groups or anything that would indicate something we could 

look at as a Committee? 

Mr. SMITH. No, no, sir, I don’t here with me today. I could provide that with you in the future. 

Mr. CANNON. If something is done already, I would appreciate 

that. That would be interesting. 

Mr. SMITH. Yes, sir. 

Mr. CANNON. In that process, did you ask people what they 

thought fees currently are? 

Mr. SMITH. And I don’t recall exactly the exact line of questioning, because obviously I wasn’t doing the questioning, but the 

questions had to do with payment methods. Which payment methods do you prefer? Is it debit, credit, check, et cetera? And it kind 

of weaved back around to the question, you know, what fees do you 

think are associated? Do you think any fees are associated with 

these cards? And that is where we ascertained the information that 

most consumers do not think there are fees associated with cards. 

Mr. CANNON. Did you then take it beyond that to say globally 

how much profit is built into those transaction fees for banks? 

Mr. SMITH. No, sir, because we were very careful not to disclose 

things we are not supposed to, according to the rules. 

Mr. CANNON. Can you tell me about the rate you pay or the 

rates—for instance, does one size fit all or are there multiple rates 

that you end up paying as a merchant? 

74

Mr. SMITH. Well, actually, I have a rate sheet right in front of 

me here. We pay 64 different rates to credit card companies. I 

would be happy to share this. At this point, I am probably not allowed to. 

Mr. CANNON. Well, I ask unanimous consent that that be included in the record. 

Mr. CONYERS. Without objection. 

Mr. CANNON. Thank you. 

Mr. SMITH. I am not sure that I can do that in accordance and 

not be in violation of my Visa and MasterCard——

Mr. MURIS. It is public information. 

Mr. SMITH. I would be happy to supply you with that. But there 

are 64 different rates that are on this sheet. And if you look at 

MasterCard’s rate sheet, as I understand it—now, this is not just 

for our industry; this is for our stores—but theirs was 106 pages 

long for all of the industries that they do business with. 

Mr. CANNON. But this sheet reflects your fees? 

Mr. SMITH. Sixty-four different rates. 

Mr. CANNON. And they are different rates, and therefore, presumably, some ability to push people to use rates that are higher? 

Do you find that banks are—in other words, we have talked a lot 

about different kinds of cards. And some cards have extra fees because they are specialty cards, and a merchant ends up paying 

more, but do you find that there is pressure by banks in the system 

to encourage people to use cards that result in higher fees for you? 

Mr. SMITH. There is no question to that, sir, yes. 

Mr. CANNON. Do you push back on that at all? 

Mr. SMITH. There is no way we have the ability to push back. We 

have to take all cards. We can’t discriminate on any type of cards. 

And even if we could, with 64 different payment structures, I don’t 

know how that would be possible in a retail environment. 

Mr. CANNON. Given this policy, I appreciate that. 

There is one other—I have many questions, but one I want to direct to Mr. Muris. You talked about the benefit of the system and 

some of the robustness of it and how merchants have a choice—I 

think you mentioned Costco doesn’t take some cards. Costco, I 

think, is a little unique. 

But however you consider the market for merchants today, how 

do you deal with the online environment? What does the merchant 

do who is online, where a customer has a different set of choices? 

Is it not more important for someone online to have the ability to 

process a credit card than it is, say, a store down the street? 

Mr. MURIS. Absolutely. And I would submit that, without payment cards, we wouldn’t have the vibrant online economy that we 

have. And the key to the functioning of payment cards has been 

their ability to balance these two sides of the market. 

Interchange rates could be higher online, because the fraud possibilities are higher, but I think the Internet makes the case for 

payment cards, not the opposite. 

Mr. CANNON. Well, so my point here is not that it is enhanced—

I mean, I believe that it has. And Mr. Duncan earlier talked about 

profit, and I think actually profit is a wonderful motive. It gets people to do things they might never have thought of doing, like getting out and working. So there is nothing critical in this question. 

75

But the question more that I am asking is, is there a disproportionate bargaining position on the part of the credit card companies 

when they are dealing with people online? 

Mr. MURIS. In many ways, I don’t think so. PayPal and other 

people are trying to come up with different kinds of payment systems. Again, we have a variety of—we have four credit card payment systems. It is quite frequent. I don’t know how you much you 

purchase online, but when I purchase online, most of them seem 

to take all the major systems. 

Although there has been a tremendous benefit, there is competition in this business, and I think that competition acts like it acts 

otherwise, to protect the consumer. 

Mr. CANNON. I only buy things online in D.C., where I don’t 

think I have to pay sales tax on them. You have to remember everything you buy in Utah and declare that on your sales tax, another issue for one of the Subcommittees of this full Committee to 

deal with at another point in time. 

Mr. Chairman, I recognize my time is expired, and thank you, 

and yield back. 

Mr. CONYERS. Thank you very much. 

Mr. Darrell Issa? 

Mr. ISSA. Boy, it is hard to know where to begin. We are not the 

courts, and, Mr. Chairman, I respect the fact that we have certain 

limited jurisdiction. So let’s assume for the moment that it is the 

courts’ job to decide if you are a trust, if, in fact, Visa and 

MasterCard are operating as monopolies. 

But, Mr. Muris, I guess since you are the apologist for the credit 

card companies here today, to use a technical term I think we use 

from time to time here at the dais, why in the world within our 

powers shouldn’t we have a piece of legislation that says that, from 

a contractual standpoint, since it is very clear that credit cards 

have monopolistic power as a group, then why is it that it wouldn’t 

be appropriate for us to sponsor legislation, on a bipartisan basis, 

that would simply allow those taxes to be added, 64 different—and, 

by the way, Mr. Smith, I am assuming you will answer affirmatively that your stores could have a computer that would add the 

exact amount of those 64 different rates so that whatever card I 

chose, I got the effective tax rate back to me, as a pass-through, 

no profit, just a pass-through—why in the world shouldn’t we sponsor legislation that says that? 

And then, secondly, and probably even more importantly, why in 

the world should this Committee allow a gag rule to be in place 

that prevents the public from knowing what is being added to the 

cost of the product, particularly when a gallon of gasoline has more 

profit in it for your companies than it has for any of the people 

they are buying from? 

Mr. MURIS. Well, I am speaking—although I have done work for 

Visa, I am speaking, as I always do in front of Congress, for myself. 

I decided 40 years ago that I wanted to be active in public policy 

issues and speak my mind, and that is what I am doing today. 

Mr. ISSA. Oh, okay. So when your firm advertises that as a lobbyist organization, that you are the premiere one in Washington, 

that it has nothing to do with that? You are doing this on your own 

dime for free, not for a client? 

76

Mr. MURIS. No, what I am saying is that this is not my full-time 

job. I am a college professor, as well, and I am doing other things. 

I only speak in public and I only represent people in whose cases 

I believe. In fact, Discover came to me in 1990 in a case against 

Visa and wanted to hire me to work for them, and I said Visa was 

right. 

Mr. ISSA. Okay, well, in that case, I think I will switch to Mr. 

Buhrmaster. As a small banker—I will ask you the question—why 

in the world do you believe that you only have essentially two people you can deal with and both of them, Visa and MasterCard, 

guarantee you a profit, even though your various banks are on the 

back end, the smaller end, but they set the price high enough that 

the smallest of banks still make a profit on it? Why do you think 

that occurs? 

Mr. BUHRMASTER. Well, I don’t believe they set the price. I do believe that the price is set by the marketplace. When a merchant 

comes and sits down at my desk and says, ‘‘I am interested in this 

product,’’ chances are they spoke to someone else. And I disagree 

with Mr. Smith when he says there is no competition here, there 

is no negotiation. 

Mr. ISSA. Well, let me switch. I will switch, but I want you—just 

double check—I want you to have your banker’s hat on, okay? 

Mr. BUHRMASTER. Certainly. 

Mr. ISSA. If I came to you tomorrow with a product that cost 25 cents per $100, 0.25 percent as a transaction fee, and that is all 

you had to pay, and then you could price your amount on top of 

that for a merchant, let’s say another 0.25 percent or another 0.5 

percent, so that for 0.75 percent, instead of 2 percent or 2.5 percent, you could provide a merchant with this transaction, no frills, 

would you for a minute not take that 0.25 percent, add your 0.25 

percent or 0.50 percent, and undercut the existing competitors of 

Visa and MasterCard? If that was available today, is there any reason you wouldn’t take that? 

Mr. BUHRMASTER. When I look at a product I am buying—and 

that is one of my jobs at the bank; I examine new products—I want 

to know the same thing my customers ask when they walks in 

here: Where am I going to get the best service and the best price? 

If I made my decision solely based on the best price, I would 

probably not be in business, because I have gotten some great deals 

thrown in front of me that turn out pretty bad. Now, that said——

Mr. ISSA. Okay, well, let me rephrase that. 

Mr. BUHRMASTER. But, no, I know what you are saying. 

Mr. ISSA. Let me re-ask the question one more time, because the 

time is limited, and I think we have to get the basic question of: 

Is there an absence of an a-la-carte for a reason? If Visa or 

MasterCard offered you the transaction separate from all the other 

things that go in it, the 0.25 percent rate, which would be about 

what I guess is the 13 percent of the fees that are going on, just 

my arithmetic, if they offered that, would there be any reason in 

the world that you would not use that, at least with merchants who 

wanted it as a competitive advantage? 

Mr. BUHRMASTER. I want the best deal I can get for my bank and 

my customers, so if someone is offering me a better rate and I am 

used to their service, and I can verify their service, and I can make 

77

sure I am getting the value for my price, I would take it. Now, that 

said——

Mr. ISSA. I am assuming that, if that were offered by Mr. 

Buhrmaster, that you would take that rate of about half what you 

are paying and put the rest of it either into savings or, perhaps, 

eking out a profit. Is that roughly correct? 

Mr. SMITH. I think that would be fair to say. We would enjoy 

having a lower rate and competition to get there. 

Mr. ISSA. So it is the absence of competition and the absence of 

disclosure that we are dealing with here today within our jurisdiction? 

Mr. BUHRMASTER. I have to disagree with that. That is been said 

a number of times here, and we are talking about an absence of 

competition. There is not an absence of competition. As a merchant 

acquirer, there is not. 

I have people coming into my office—out of my 160 merchants, 

we have people that come in and say—I had a guy come in, and 

he showed me his business card. On the back of it, it says, ‘‘I can 

give you this rate.’’ Well, I say, ‘‘All right, what services are they 

offering?’’ There is competition. Every day, there are people in my 

merchant shops trying to offer them a better rate. 

I price the way I feel I can make a profit and I can deliver good 

service. I don’t want to do both. I don’t make a big profit on this. 

I deliver good service. 

Mr. ISSA. But Mr. Buhrmaster—and my time is up, and I don’t 

want to take too much of the indulgence of the Chairman, but since 

I am, oddly enough, the only member of a public company’s board, 

and my company does about $40 million of transactions a year, and 

I am the former CEO, with all due respect, I have been at the negotiation table on behalf of my company with the various banks. 

And it simply isn’t true. 

Yes, you can negotiate over 0.02 percent or so. You cannot negotiate beyond that. We are dealing here today, with the Chairman’s 

leadership, on the portion that is, in fact, the price-fixing portion. 

And I would hope that, in the future, that the kinds of hearings 

we have continue to expose the fact that there is an absence of 

competition and a gag rule in place in America today. 

And, Mr. Smith, thank you for your leadership and the rest of 

you that helped flesh this out. 

Thank you, Mr. Chairman, for your leadership. I yield back. 

Mr. CONYERS. I thank you so much. 

Mr. Chabot? 

Mr. CHABOT. Thank you, Mr. Chairman. 

I just have one final question that I would like to put to both 

sides. To the banks-credit card folks, obviously you have been on 

the receiving end of the more probing questions. And my question 

to you is: Are there any misimpressions that you have heard here, 

that the Committee may have received? Is there anything that you 

would like to clear up? Is there any other criticism that you have 

heard that you think is unwarranted? I would like to give you both 

a last shot to make your best case to us. 

And then, to the retailers, if you could comment as to why—oftentimes, a lot of us believe that you don’t necessarily want Congress getting involved in something that marketplaces can kind of 

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take care of things, but that is not always the case, and sometimes 

we do need to step in and regulation is appropriate. Would you tell 

us why this is an area that ought to be probed further and that 

we ought to look into and how we could be involved to the extent 

that we can be helpful and not screw up the marketplace out there, 

as Government is sometimes apt to do? 

And I don’t care who goes first. We can just go down the line, 

however you want to do it. Why don’t we go, Mr. Smith, if you 

would like to? And we will just go right down the line. And if you 

could keep your comment to perhaps a minute or so, because I have 

only got 5 minutes. 

Mr. SMITH. Well, thank you, Mr. Chabot. 

I think that the thing that we look at in our business is we are 

the purchasing agent for our consumers. It is our responsibility to 

make sure that we can bring food to the table of our consumers as 

inexpensively as we can with quality merchandise. The problem we 

have got, when you see a 2 percent fee for credit cards and a 1 percent profit margin, you must understand that there is a passthrough to the consumer. 

Our concern is, as it has gone up 117 percent, we don’t know 

where the end is. We have credit card fees that are going up faster 

than our health care, faster than any other expense that we have 

in our business. 

I don’t know that I have a solution for you here today. I wish I 

did. But I what I do think works and what I have experience with 

is being in a free market enterprise system, one where competition 

is readily available, and folks vie for your business each and every 

day. And I hope that is what we can work with this Committee to 

come up with. 

Mr. CHABOT. Thank you. 

Mr. Buhrmaster? 

Mr. BUHRMASTER. Well, I enjoyed the probing questions, and I 

wish you would have asked me more. I came here, and I enjoy asking the questions for you folks. 

I feel that we have missed something here. There is competition 

in this business. From where I sit, I sit at a desk, in a small bank, 

in a small town, in a small community, and I have my merchant 

customers bombarded with people coming in and offering them better deals. There is competition out there. 

The base price may be set, but that is what allows a bank like 

ourselves to be in the business. You know, we can compete with the 

Bank of Americas. We may add on what our cost is so that we can 

be competitive. But it is so important to note: There is competition 

out there. And I do lose customers, and I gain customers. 

Second is just don’t forget the small banks in this equation. You 

can’t forget that we are driving the economy of this country and 

that this is an important part of our driving the economy. We have 

to have these payment options for our people, for our consumers, 

and for our merchants and our small businesses. It is important. 

And if legislation is put forth that restricts our ability to compete 

with the large banks, you will lose the small banks in the payment 

acceptance arena, and it will be dominated by large players that 

traditionally have not looked out for the consumers the way small 

banks do. 

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Mr. CHABOT. Thank you. 

Mr. Mierzwinski? 

Mr. MIERZWINSKI. Thank you, Mr. Chabot. 

The first thing I would like to say is simply that the consumer 

groups care about all consumers, not only cardholders. And if cardholders represent 50 percent of the business of a store and the cost 

is 2 percent added on across all 100 percent of the store’s customers because of unfair interchange rates, well, then everybody is 

paying 1 percent more, regardless of how we pay, with a card or 

without a card. So that is the first issue out there. 

Second, in terms of the unfair practices, one thing that we 

haven’t pointed out is that the cheapest form of interchange is actually PIN debit. There are statistics out there and there are facts 

out there that show that many banks are now starting to impose 

a PIN debit fee on consumers to drive them to signature debit, 

which is the higher cost debit. And that is why you have all these 

rewards programs. They put the rewards programs on the signature debit only, just like on credit cards, because they want to drive 

you to that, because they make more money from the merchants. 

Rewards, by the way, we think are overrated, particularly on 

credit cards. Most people don’t redeem them. And if this is what 

we are paying for, it is a ridiculous system. 

Then, finally, you asked, what else should you be looking into? 

The final point of my testimony was that, in addition to this system 

of interchange being broken, we believe that the issuer system is 

an oligopoly and that there are bad practices that companies engage in, because of those anti-competitive practices at the issuer 

level, and we would encourage a second hearing just on issuer competition. 

Mr. CHABOT. Thank you. 

Mr. Muris? 

Mr. MURIS. Thank you very much. And let me submit for the 

record that I have heard a lot of facts—many more than I could 

talk about now—that I thought were wrong. Just let me make a 

few points. 

First of all, regarding rewards cards, I like my rewards. I don’t 

think it is the job of Government to tell people what kind of products they should take. 

Second, fees are not out of control. And let me submit for the 

record data I obtained from Visa involving supermarkets, which 

show that the increase in volume explains, virtually percentage 

point for percentage point, the increase in interchange that supermarkets have paid to Visa in the last 7 years. 

Next is, despite what we have heard, merchants can discount for 

cash. They can disclose all this information. They can steer. They 

can have people use debit. They can have people use Discover. 

There are lots of things they can do. 

Next, what we heard from both Mr. Smith and Mr. Duncan when 

they were asked for remedies shows that, if this were really an 

antitrust case, they wouldn’t be here. An antitrust case would simply end the price fix. By asking for a complicated AT&T break-up 

kind of remedy, that is clearly an implicit admission this is not the 

cartel case they claim. 

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Finally, consumers do know that merchants pay. In fact, twothirds of them know that merchants pay to use the cards. 

Thank you. 

Mr. CHABOT. Thank you. If we could get some follow-up on that, 

because there have been some discrepancy this afternoon from both 

sides. We would like to get—I think, I am sure we all would—just 

to verify it one way or the other. 

Mr. MURIS. Yes, sir. 

Mr. CHABOT. Thank you. 

Mr. Duncan? 

Mr. DUNCAN. Yes, first, I guess what I would like to say is that 

what we have here is a market failure. We don’t have a market. 

We have prices that are regulated privately and supported by a secret set of rules. So that is not a functioning market; that is not 

the definition of a market. 

Now, the courts—as Tim points out—the courts are very good at 

deciding liability, and they can determine damages. But if we are 

talking about fixing this, we are talking about prospective remedy, 

that is not something a court is very good at. So it is really the 

prerogative of Congress to come up with the kind of nuanced solutions we need to help correct an anti-competitive market. I would 

suggest that one of the first places we look is at these rules. 

Mr. CHABOT. Okay, thank you very much. 

Mr. Chairman, I want to thank you for having this hearing and 

just say that I think both the witnesses on both sides here were 

very, very good. And I think they had great presentations, handled 

the questions very well on both sides, so thank you to the panel. 

Mr. CONYERS. But there is a lot of conflicting testimony here, sir. 

Somebody is less correct than somebody else, which is our job to 

determine. 

Ric Keller? 

Mr. KELLER. Thank you, Mr. Chairman. 

And I want both sides to know that I have read everything you 

have had to say, I have listened to every word you have had to say, 

taken notes on everything you have had to say, and really hope we 

have given you a fair shake, both sides, and will continue to do 

that. 

Following up on what Chairman Conyers said, I am going to try 

to create order out of chaos just a little bit. I have found six factual 

inconsistencies between you—one side said one thing; one said the 

other—and one area of agreement. And I will go through that and 

see if we can at least get the agreement. 

The retailers say, ‘‘We just want to be able to see these Visa and 

MasterCard operating rules, and they are kept secret from us and 

the public.’’ Mr. Muris, on behalf of the credit card companies, 

banks, ‘‘No, we don’t keep them secret. They are right there on the 

Web site. Anybody can see it.’’

Retailers said, ‘‘We can’t advertise or offer cash discounts or 

debit card discounts; in fact, Visa threatened some California gas 

station for offering lower cash prices.’’ Mr. Muris said, ‘‘Not true. 

You can offer lower prices, cash discounts, offer debit card discounts, advertise it if you want.’’

The retailers said, ‘‘We don’t have the bargaining power to deal 

with these credit card companies. It is take-it-or-leave-it, and we 

81

have to take it, since they have got 80 percent market share, companies like MasterCard and Visa.’’ Mr. Muris says, ‘‘Not so. Costco 

cut a deal with American Express, using their bargaining power, 

and American Express typically had a higher merchant rate, 2.5 

percent, more than MasterCard and Visa, so just cut your deal.’’

Retailers say that, ‘‘When interchange fees increase, it hurts consumers and cardholders.’’ Mr. Muris says, ‘‘When interchange fee 

increase, cardholders benefit. Higher interchange fee revenues to 

issuing banks result in increased benefits to users of payment 

cards, such as increased rewards and lower fees. These benefits 

come not only in the form of air miles, but also include rebates.’’

Retailers say, ‘‘We don’t want price controls. We want competition.’’ Mr. Muris says, ‘‘Critics, including the merchants, want the 

Federal Government to impose price controls.’’

Mr. Smith, on behalf of the retailers, is the CEO of Food City 

and the president of food marketing, says the supermarkets are 

hurting. Mr. Muris pulls out a letter and says supermarkets are 

doing great. They are not hurting. 

Well, here is my one area of agreement that I have seen: It 

seems that people at least agree, pursuant to these operating 

agreements that Visa and MasterCard issue, if there is a company 

such as Mr. Smith’s company, Food City, and they agree to accept 

Visa, and someone comes along with one of these Visa premium 

cards, with lots of bells and whistles, like airline miles and rewards 

and rebates, and it has a much higher interchange rate, you have 

got to take it, just like the more basic one. And Mr. Muris hasn’t 

disputed that. 

And one of the solutions—in fact, the only solution I have heard 

today that Mr. Duncan has offered is maybe that should be 

changed, maybe you should have the freedom to turn down some 

of these big-ticket premium reward cards that are charging you 

very high interest rates. Is that essentially your idea, Mr. Duncan? 

Mr. DUNCAN. That would be a first step. 

Mr. KELLER. Mr. Muris, have I accurately laid this out, or am I 

mistaken? 

Mr. MURIS. Yes, what you have done is destroyed the value of 

Visa and MasterCard as a brand, because what that means——

Mr. KELLER. I didn’t know I was that powerful. [Laughter.] 

Mr. MURIS. Well, that is what your remedy would do, because 

what that means is—the value to me is I can take my Visa card 

and it will be honored anywhere. And what you are saying is, no, 

the merchant can pick and choose. So you really would hurt the 

value of the brand. 

Mr. KELLER. But you would agree with the statement—and I 

don’t want to quarrel with you; I just want to make sure I am getting my facts right—that, if someone enters into a Visa agreement, 

such as Food City, and you agree to take the Visa cards, you have 

got to take all the Visa cards, the premium ones and the basics? 

Is that right? 

Mr. MURIS. Absolutely. I think you are doing a superb job of 

summarizing. I was just saying the implications of what you want 

would have disastrous consequences. 

Mr. KELLER. Thank you, Mr. Chairman. I will yield back the balance of my time. 

82

Mr. CONYERS. My commendations to you, because that is precisely what we are going to have to do after this hearing, is what 

you have already initiated. I thank you very much, Ric. 

Steve Cohen, were you just passing through the Rayburn building, wandered in here, or do you have a purpose? 

Mr. COHEN. Mr. Chairman, I was going through the payphone return coin places to try to get some money to pay my credit card 

bill, and I hadn’t come up with enough yet, but I did stop by. 

Thank you, Mr. Chairman. 

I am interested in this issue, and I have had an interest in consumer issues for some long time. And I am afraid I am not as 

maybe up to speed as Mr. Keller and some of the others, having 

listened to the testimony. 

But one of the things that—and it is just shocking to see that 

these rates have continually gone up, and the United States is appearing to be the only country in which credit card interchange fees 

are increasing, and has far higher fees than almost any other industrialized country. And I guess that is—whose testimony is that 

from, or is that just the gospel? 

Mr. DUNCAN. That is the gospel. 

Mr. MURIS. Well, it is not true. You know, it is another fact I will 

dispute, but we could——

Mr. COHEN. Is it the gospel according to Ed? 

Mr. MIERZWINSKI. The statistics we have seen, Representative 

Cohen, are that the U.S. has the highest rates. The retailers and 

the consumer groups agree on that. 

Mr. COHEN. And, Mr. Muris, which countries have higher rates? 

Mr. MURIS. Well, I will submit for the record two pieces of evidence, one from Aite ́, which shows that what merchants pay is 

lower in the United States than most places; another from the European Union that shows what merchants pay in the United States 

for Visa is right in the middle of other countries. 

Mr. COHEN. But Visa is different. We may be talking about 

MasterCard. 

Mr. MURIS. Well, no, I believe Visa and MasterCard are very 

similar. 

Mr. COHEN. They are very similar. 

Mr. Chairman, may I ask a question? I may be confused. Wasn’t 

this about antitrust? 

Mr. CONYERS. Well, this is the Antitrust Task Force of the Judiciary Committee, yes. 

Mr. COHEN. So is this an admission that Visa and MasterCard 

are kind of doing something together? 

Mr. CONYERS. Well, no, wait a minute. We haven’t gone that far 

yet. 

Mr. COHEN. Okay, I am sorry. 

Mr. CHABOT. Would the gentleman yield? 

Mr. COHEN. Yes, sir. 

Mr. CHABOT. I thank the gentleman for yielding. 

Mr. Muris, if you have evidence to the contrary or there are studies out there, I would like to have that material. I think we all 

would, again. You know, otherwise, if there isn’t something, then 

I would tend to accept that. You know, if there is something that 

is inconsistent, then I would like to see it. 

83

Mr. MURIS. No, I will submit the information for the record, but 

the truth is, in competitive markets, firms tend to—and I believe 

it was Mr. Keller who pointed that out—when you walk into stores, 

close competitors have similar prices. That is what often happens 

in competition. 

Mr. CONYERS. Well, that is also possible price-fixing, too. 

Mr. MURIS. Sure, it is a possibility of price-fixing, monopoly, or 

competition. 

Mr. CHABOT. And I am talking specifically about whether the 

United States has the highest rates. 

Mr. MURIS. Oh, yes. 

Mr. CHABOT. That is what I was talking about. 

Mr. MURIS. Yes, and I have—and I will submit two different 

pieces of data for the record. 

Mr. CHABOT. Yes, I mean, I would be very interested in seeing 

it, but I haven’t seen it, other than what Mr. Cohen has referred 

to, so I am assuming that that is the case, unless I see something 

different. Then I would look at the source of that. 

Thank you. 

Mr. COHEN. Sure, that is on page three here of the consumer 

group testimony on credit card—let me ask this question. Mr. 

Muris, are you with a credit card company? 

Mr. MURIS. I am testifying today, as I always do—we had a little 

exchange about that—I am——

Mr. COHEN. I think I heard that one. You are a citizen, and you 

only come out for folks you like? I heard that. Between telephone 

booth places, I did hear a little bit of that. 

Mr. MURIS. I have spent 40 years doing this. I have had six jobs 

in the Federal Government. I have had a lot of other policy jobs. 

I only speak and work for people in whose cause I believe, and I 

am proud of that, sir. 

Mr. COHEN. Do you have any reason to know why the credit card 

companies continually send out all these requests for people to get 

credit cards? I live in a house for 19 years, and there is still soliciting the people who died before I moved in and saying, because of 

their good credit rating, they are entitled to get this card. They 

have been dead for a long time. 

Mr. MURIS. Sure, and it is one of the——

Mr. COHEN. They are debt-free. 

Mr. MURIS. It is one of the ways that people get credit cards. One 

of the things that I suspect you helped us with, when I was chairman of the Federal Trade Commission, we made it easier for people 

to opt out of those solicitations. It was not like—we did the National Do-Not-Call Registry when I was chairman, and Americans 

overwhelmingly signed up for that. Americas overwhelmingly 

don’t——

Mr. COHEN. But these people are dead. They can’t opt out. 

Mr. MURIS. But I am saying that, if you wanted to, sir, you can 

opt out. But like me, you probably don’t, because most people—it 

is very easy to sift through their mail. And, in fact, I have accepted 

credit cards based on the mail solicitations. But if I wanted to, I 

could opt out. 

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And thanks to you and the other Members of Congress, a few 

years ago, you made it easier for people to opt out, and I thought 

that was a good thing. 

Mr. COHEN. But the cost of sending that letter to make you opt 

out and then to make you opt out cost all this money that we then 

charge in fees. And then to make money, we have to charge more 

money even. 

Mr. MURIS. Sure, advertising and marketing——

Mr. COHEN. So why you can’t be more selective in who you pick, 

who really is somebody that deserves and has good credit? Isn’t 

there some way to—because it bothers me as a consumer, and it 

bothers me as somebody who invests, that is such wasteful spending. 

Mr. MURIS. Again, I would be glad to help you exercise your right 

to opt out. 

Mr. COHEN. I think we have a volunteer here. End of my 5 minutes, please. 

Yes, sir? 

Mr. BUHRMASTER. As a credit card issuer, everybody has a different way they do business. And I am speaking as a small bank, 

but there are other large banks that their way of doing business 

and getting credit cards into the hands of consumers is the mass 

mail. To my grandmother who passed away several years ago, we 

still get mailings for her, but that is the way they choose to pick 

their customers. 

Other banks, other issuers choose other ways. It is just in the 

business model. It has nothing to do with the interchange debate. 

It probably has more to do with the shrinking margins that the 

banks are experiencing because of the rate environment. They are 

looking for ways to find more ways to lend to people. 

The money they are making off of people with bad credit come 

from these interest rates that are high. So——

Mr. COHEN. Right. And, apparently, according to this information, there are nine billion unsolicited credit card offers sent just 

this last year, nine billion. Even in China, that is a lot of people. 

Mr. BUHRMASTER. But I get more requests for charitable donations than I do for credit cards. 

Mr. COHEN. That is different. 

Mr. BUHRMASTER. It is different. It is different. But it is what 

comes——

Mr. COHEN. And you are apparently quite wealthy and probably——

Mr. BUHRMASTER. I wish I were. 

Mr. COHEN. Thank you, sir. 

Mr. BUHRMASTER. Thank you. 

Mr. COHEN. Thank you, Mr. Chairman. 

Mr. CONYERS. Well, this has been a very conflicted set of testimonies we have received, but then that is what we are here for, 

isn’t it? 

I thank all of the witnesses. I know you will be submitting—if 

you keep your promises, we will be getting more statements to 

build up into this record than we usually normally receive. And we 

have 5 days—you may get questions from us, and we will get anVerDate 0ct 09 2002 13:55 Jun 11, 2008 Jkt 000000 PO 00000 Frm 00088 Fmt 6633 Sfmt 6601 H:\WORK\ATRUST1\071907\36785.000 HJUD1 PsN: 36785
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swers back from you. And then we will have concluded the first 

hearing. 

What is important is, what are we going to do in the second 

hearing, or maybe even the third? It has not escaped my notice, 

Mr. Keller, that solutions to this problem are pretty few and far between, so it is going to test the skills and competency of this Judiciary Committee a great deal. 

But you have got to start it, and you have opened up this testimony in a very fine way. We thank you very much. 

And the hearing is now adjourned. 

[Whereupon, at 4:16 p.m., the Task Force was adjourned.] 

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A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

PREPARED STATEMENT OF THE HONORABLE LAMAR SMITH, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF TEXAS, AND MEMBER, ANTITRUST TASK FORCE

Mr. Chairman, today we consider an issue that is vital to the American economy. 

America has gone through a radical transformation in the way it pays for its 

goods and services. Ten years ago, almost 80% of all financial transactions were 

made with checks or cash. Today, less than half of purchases are conducted this 

way. And three years from now, consumers will use credit and debit cards for over 

70% of all their purchases. 

Properly used, credit cards offer many benefits for consumers and businesses 

alike. For consumers, they offer fraud protection, payment flexibility, the ability to 

track purchases and airline miles. For merchants, they offer guaranteed, faster payment and the opportunity to expand businesses through Internet and phone sales. 

Some studies have shown that consumers who use credit or debit cards at the 

time of purchase are likely to spend more than they would otherwise. 

Of course, this growth has not come without its costs. Consumer groups have complained for years about credit card practices that they think are unfair or illegal. 

Merchants, too, have had their complaints. In 2005, the Second Circuit affirmed a 

settlement in which VISA and MasterCard paid $3 billion. The settlement arose 

from a case brought by a group of retailers who claimed that VISA and MasterCard 

had illegally tied the acceptance of their credit cards to their debit card offerings. 

This resulted, among other things, in the imposition of fees on the banks that 

issue credit cards that were higher than they would have been in a competitive market. 

Today, retailers continue to claim that VISA and MasterCard are charging these 

higher fees for the acceptance of their cards, and that these fees are ultimately 

passed on to consumers. A group of retailers has brought a series of federal antitrust suits challenging the way that VISA and MasterCard set these interchange 

fees and they are pending in the Eastern District of New York. 

At the same time, retailers complain that VISA and MasterCard do not make 

available to them all of the rules that govern their transactions. They cite examples 

of merchants that have been assessed fines by the credit cards for rules that they 

did not know existed. 

For their part, the credit card companies insist that they have provided all the 

relevant information to merchants. They also maintain that the setting of credit 

card interchange fees is a necessary part of their business that maximizes the number of consumers who are willing to carry their cards and the number of merchants 

who are willing to accept them. 

Retailers have raised some serious questions. For example, who sets the interchange fee, and how it is set? How much of the interchange fee is passed on to merchants and, ultimately, the American consumer? 

What are interchange fees used to finance? Who makes the rules the merchants 

must abide by, and who enforces those rules? Which of these rules have been made 

available to the merchants and which have not? And if those rules have not been 

made available, why have they not? 

As for the retailers, I would like to know what is the remedy that they would really like out of these hearings? What is the information that they feel that they are 

not getting from the credit card companies and why is that actually important to 

them? What are the benefits that they receive from the credit card payment system? 

Are those benefits outweighed by what they have to pay in interchange fees?

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PREPARED STATEMENT OF THE HONORABLE SHEILA JACKSON LEE, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF TEXAS, AND MEMBER, ANTITRUST TASK FORCE


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PREPARED STATEMENT OF THE HONORABLE STEVE COHEN, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF TENNESSEE, AND MEMBER, ANTITRUST TASK FORCE

Credit card interchange fees represent a hidden cost to consumers because merchants will pass on these fees to consumers. These fees may be all the more harmful 

to consumers because the major credit card companies may be colluding to fix the 

fees charged to merchants, thereby imposing higher costs on consumers than the 

market might otherwise. Such conduct, if in fact it were occurring, would constitute 

anticompetitive behavior in my view. I look forward to learning more about the 

issue from today’s witnesses. 

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LETTER FROM TIMOTHY J. MURIS, OF COUNSEL, O’MELVENY & MYERS LLP TO THE

HONORABLE JOHN CONYERS, JR., ENCLOSED WITH ATTACHMENTS


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1More than 70,000 stores are operated by NACS members. NACS members include forty-nine 

(49) of the fifty (50) largest companies in the industry, but seventy-three percent (73%) of members operate ten (10) or fewer stores. 

PREPARED STATEMENT OF THE NATIONAL ASSOCIATION OF

CONVENIENCE STORES (NACS) 

Chairman Conyers and Members of the Antitrust Task Force, I am Hank Armour, 

the President and Chief Executive Officer of the National Association of Convenience Stores (‘‘NACS’’). Prior to taking my current job, I owned and operated fiftynine retail facilities in Washington, California and Oregon. I am pleased to submit 

for the record this testimony on behalf of the NACS. 

Founded in 1961, NACS is an international trade association representing more 

than 2,200 retail and 1,800 supplier company members in the United States and 

abroad. NACS is the pre-eminent representative of the interests of convenience store 

operators. The convenience store industry in the United States, with over 145,000 

stores across the country,1 posted $569.4 billion in total sales in 2006, with $405.8 

billion in motor fuel sales. Overall, eighty-two percent (82%) of the motor fuels (gasoline and diesel fuel) sold in the United States is purchased at the more than 

114,000 convenience stores that sell fuel. And, to give some perspective on the 

issues being discussed today, the industry posted $4.8 billion in profits last year—

which includes both profits at the pump and inside the store—but paid $6.6 billion 

in credit and debit card fees on its transactions. The next time you stop for a fillup, keep in mind that more of the money you are paying goes to the card companies 

than the retailer selling you gasoline will get to keep. 

Last year was the first in which card fees exceeded profits industry-wide, and 

they did so by a large margin. These changes have made interchange fees the top 

issue for our industry. The rapid increase in fees is unjustifiable and unsustainable. 

We cannot thank the Task Force enough for agreeing to look into this issue and we 

look forward to working with you throughout your review. 

To raise awareness of the many problems caused by interchange fees and their 

impact on everyday consumers, NACS has worked with many in the retail industry 

to establish a broad collection of voices known the Merchants Payments Coalition 

(‘‘MPC’’ or the ‘‘Coalition’’). The Coalition’s member associations collectively represent about 2.7 million locations and 50 million employees. These merchant associations account for more than 60 percent of the non-automotive card based transaction volume in the United States. The MPC includes 22 trade associations representing many of the retailers in your districts—the very grocery stores, drug 

stores, restaurants and shops that you and your constituents frequent daily. The 

MPC represents a diverse group of interests who often disagree on many issues, but 

who have banded together to challenge the unfair and unjustifiable practices of Visa 

and MasterCard. The MPC is fighting for a more competitive and transparent card 

system that works better for consumers and merchants alike. 

There has not been nearly enough information and discussion about interchange 

fees in the past and we applaud the Task Force for its willingness to examine them. 

These fees have escalated to the point that they are now the third highest operating 

cost to my industry—behind only payroll and rent. Of the many types of fees 

charged by credit card companies, interchange fees are the most pernicious because 

they are arbitrary, excessive, are not disclosed to retailers or consumers, and ultimately, they drive up the cost of all products. This is a burden that is borne by both 

credit card users and non-users alike. And retailers have virtually no choice but to 

accept them, as Visa and MasterCard leverage their dominant market power to 

force them upon an unwitting public. 

The collective setting of interchange fees represents an ongoing antitrust violation 

by the two leading payment card associations, Visa and MasterCard. These antitrust violations cost merchants and their customers tens of billions of dollars annually. This system is anticompetitive in several ways. First, these fees have been 

fixed by banks that compete to issue payment cards to consumers or to sign up merchants to accept Visa and MasterCard cards. No matter which Visa or MasterCard 

member bank issued the card that is used to make a purchase or which Visa or 

MasterCard member bank signed up the merchant making the sale, the same uniform fixed interchange rates apply. This system also cements Visa’s and 

MasterCard’s substantial individual and joint market power. The higher the interchange fees charged by Visa or MasterCard, the more attractive that card system 

becomes to banks compared to other card systems. Thus, the member banks have 

every incentive collectively to ensure that the card system sets high interchange 

fees. 

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We hope that the following discussion provides the Committee with some insight 

into the opaque and costly world of interchange fees, so that it may better understand the challenges thrust upon our small businesses by Visa and MasterCard and 

the need for greater disclosure of interchange fees. 

INTRODUCTION TO INTERCHANGE FEES AND THEIR CURRENT USE

Interchange fees are the fees credit card companies and banks charge merchants 

every time a credit or debit card is used to pay for a purchase. The fee is a percentage of each transaction that typically varies with type of card, size of merchant and 

other factors—but it averages approximately 2 percent for credit card and signature 

debit transactions. Interchange fees are set by the collective action of MasterCard 

and Visa member banks (which include most banks in the United States) and are 

imposed on merchants by the banks to which merchants submit credit card transactions for payment. Merchants must then treat the interchange fee expense as a 

higher cost-of-doing-business. 

When a consumer buys an item with a Visa or MasterCard credit or debit card, 

the merchant does not receive full face value from the bank to which it submits the 

charge. The difference between the face value of the customer’s purchase and the 

amount the merchant actually receives is called the ‘‘merchant discount,’’ the vast 

majority of which is the interchange that is paid to the bank that issued the customer’s card. As these interchange fees increase and card use expands, merchants 

are naturally forced to pass these costs along to consumers in the form of higher 

prices for all products. 

The average consumer has no idea that this fee is imposed every time he or she 

makes a purchase with a Visa or MasterCard card. In this way, interchange acts 

as a hidden sales tax on U.S. commerce, raising both merchant costs and ultimately 

the price of goods and services sold to consumers. 

To make matters worse, interchange fees are not tailored to Visa’s and/or 

MasterCard’s cost of processing the transaction. While there may have been some 

reasonable basis for the size of these fees decades ago, the proliferation of card 

transactions has driven down per transaction costs. In fact, a bank consulting firm 

reported last year that the cost of processing transactions was only 13 percent of 

the interchange fees charged. As described in greater detail below, interchange fees 

are now an arbitrary revenue source on top of already significant interest fees, late 

fees, over-the-limit charges and other fees charged by Visa and MasterCard. How 

can Visa and MasterCard get away with this practice? To put it bluntly, it is because they have market power and exercise that power in ways that violate the 

antitrust laws. 

Interchange fees are set in secret by Visa and its member banks. MasterCard and 

its banks do the same. Visa member banks all agree to charge the same fees and 

this collusion (as well as the separate collusion engaged in by MasterCard member 

banks) is a massive antitrust violation. Not only that, Visa and MasterCard rules 

make it virtually impossible for merchants to disclose the fees to the public. The 

rules run more than a thousand pages, governing every detail of electronic transactions. Retailers must contractually agree to abide by all of these rules in order 

to accept Visa and MasterCard, but retailers do not get to see those rules. Visa and 

MasterCard make excerpts available, but that is not good enough as retailers often 

have problems with rules that are not covered by these excerpts. Visa now allows 

retailers to view the full set of rules only if they sign a non-disclosure agreement 

and only after they sign a contract agreeing to abide by the rules. 

PROBLEMS WITH INTERCHANGE FEES

1. Interchange fees are a product of dominant market power and retailers have no 

choice but to accept them 

Credit and debit card transactions are a large and growing part of retailers’ business. In the convenience store industry, approximately 65 percent of motor fuel sales 

are paid for with credit or debit cards, and when prices rise, retailers tell us this 

rate can reach 80 percent in many markets. In fact, across all industries in the 

United States, the number of electronic payments—most of which are credit and 

debit card payments—now exceeds the number of payments by check. The average 

U.S. consumer carries a limited amount of cash at any given time, and experience 

shows that when consumers want to buy something that costs more than about $20, 

the transaction is likely to go on a credit or debit card. In this environment, NACS 

members simply must accept credit and debit cards—if they do not, these merchants 

would quickly lose customers to nearby competitors that accept all forms of payment. 

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2 United States v. Visa U.S.A., Inc., 344 F.3d 229 (2d Cir. 2003). 

Visa and MasterCard dominate the card market. Accordingly, most of the buying 

public holds Visa- and/or MasterCard-branded cards, and the two companies enjoy 

greater than 80 percent market share in the electronic payment industry. Our judicial system has acknowledged the vast market power enjoyed, and scrupulously 

maintained, by Visa and MasterCard. In 2003, the Second Circuit Court of Appeals 

held in the U.S. Department of Justice’s case against Visa and MasterCard that the 

two card associations, both jointly and separately, had market power.2 This is consistent with other cases and with retailers’ experiences. 

Perhaps the ubiquity of Visa- and MasterCard-branded cards has something to do 

with the fact that U.S. consumers receive well over 5 billion mail solicitations for 

credit cards each year. That is more than 20 solicitations for every man, woman and 

child of all ages every year. And, frankly, exorbitant interchange fees are fueling 

the over-saturation of consumers by these direct solicitations. Regardless of the reason for the boom in cards and card usage, it is clear that cards, especially those 

issued by Visa and MasterCard, are so commonplace that retailers are effectively 

forced to accept them. 

Visa and MasterCard protect their market share with the complex web of rules 

alluded to above. Retailers are often prohibited by these rules from presenting proconsumer pricing solutions such as offering cash discounts to customers, even 

though they cannot prohibit cash discounts under the Truth in Lending Act. Recently in California, some retailers began to offer cash discounts for gasoline purchases. If a customer chose to purchase using cash, he would receive several cents 

off each gallon purchased. This discount was to incentivize consumers to pay with 

cash so that the retailers would save on the interchange fees and the savings could 

be passed along to consumers. Unfortunately for consumers, Visa unilaterally determined that such practices violated their rules and threatened to fine some retailers 

$5,000 per day for such ‘‘infractions.’’ Because Visa could not simply prohibit the 

discounts, it argued that these retailers could not call the higher price offered the 

‘‘credit’’ price. Visa suddenly decided that doing so turned these cash discounts into 

credit surcharges which Visa does not allow—even though this method had been 

used by gasoline retailers to describe cash discounts for decades. Instead, Visa directed retailers to call the higher price the ‘‘full’’ or ‘‘regular’’ price. Visa pushed 

these terms even though the state of California determined that the use of those 

terms for gasoline purchases would confuse consumers and break California law because full serve and regular fuel are often used to describe other aspects of gasoline 

pricing. Visa thereby presented retailers with a Catch-22 situation: either break 

Visa’s rules and face stiff fines or break California law and face its penalties. Of 

course, what Visa really wanted was for retailers to abandon the discounts so no 

one noticed the huge costs associated with credit cards. 

2. Interchange fees lead directly to higher costs for merchants and, ultimately, for consumers 

As discussed above, interchange fees act as a tax on the American consumer. 

When merchants incur fee after fee, ultimately they are forced to pass some of the 

cost to the consumer in the form of higher prices for goods and services. In fact, 

the average American family pays $331 in interchange and related fees every year. 

And that is true whether or not that family uses a single credit or debit card. Because these fees are hidden in the cost of virtually everything we buy, even cashpaying consumers ultimately pay for them. In the aggregate, retailers and their customers paid $36 billion in interchange 

fees last year. When all of the other fees on credit and debit transactions are included, the tab increases to over $40 billion. And this figure does not include the 

many other fees collected directly from consumers such as annual fees, late fees, interest, etc. According to a report by the Government Accountability Office, for every 

$100 in credit card purchases, credit card companies collect $2.50 in interchange 

and processing fees. 

Last year, in fact, convenience stores paid more fees for accepting cards than they 

made in profits. Card fees paid by the industry rose 22 percent last year so that 

the industry paid $6.6 billion while making $4.8 billion in profits. Think about that 

the next time you fill-up. Card fees are the second largest operating expense in our 

industry—behind only labor costs. If you are concerned about gas prices, these outof-control fees are the place to start. 

The statistics regarding the growth of interchange fees are astounding. In 2001, 

Visa, MasterCard and their issuing banks collected $16.6 billion in credit card interchange fees. They have now ballooned by 117 percent to $36 billion—more than all 

the late, over-the-limit and other fees we all know about combined. 

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The United States enjoys the highest volume of credit card transactions in the 

world (see Figure 1). Theoretically, this should lead to significant economies of scale 

and lower interchange rates. We also have the best technology for processing these 

transactions and we have very low, and decreasing, rates of fraud. Yet, somehow, 

U.S. rates are higher than corresponding rates in other countries. In the United 

Kingdom, interchange fees average 0.7 percent, and in Australia, they stand at 0.45 

percent—well below the 2 percent charged in America. Even more troubling, our 

rates are rising, while most other countries’ rates are flat or declining. Visa and 

MasterCard are putting the weight on their worldwide business on the backs of 

American consumers. About sixty percent of all of the interchange in the world is 

paid by American consumers and that is wrong. 

Not only have interchange fees been historically exorbitant, but there is little 

hope that the fees that are drowning America’s small businesses will recede any 

time soon. Visa and MasterCard compete by raising, not lowering, their interchange 

rates. When they raise their rates, Visa and MasterCard induce their bank members 

to issue more of their cards. Higher interchange rates mean those banks, in turn, 

get more money from transactions put on those cards. These practices create perverse incentives that actually reward fee increases, as normal competitive market 

dynamics are inverted and consumers are left footing the bill. 

For example, in May 1998, Visa announced that it would increase a debit card 

interchange fee by about 20 percent. The increase was to take effect in April 1999. 

In November 1998, however, MasterCard announced a 9 percent increase (also to 

take effect in April 1999) that was enough to keep its fee higher than Visa’s. In 

most competitive markets, Visa’s price increase would have presented an opportunity for MasterCard to hold or lower prices to gain market share—but apparently 

not when both card brands enjoy merchant acceptance of over 98 percent. In fact, 

those increases were just the start. In January 1999, Visa announced it would increase its fee by an additional 6 percent. Then MasterCard announced another increase five days later. All of these increases were made before the first rate increase 

even took effect. When the dust finally settled, Visa’s rates went up 26 percent and 

MasterCard’s went up 17 percent. Overall, these increases alone cost U.S. consumers an additional $300 million per year. 

Unfortunately, without healthy and competitive market forces, we lack the necessary checks and balances to prevent rates from rising to stratospheric levels. The 

shear market power of the credit card companies combined with the straitjacket of 

anti-competitive rules they maintain inhibits retailers from refusing to take cards 

in general or declining to take a card with higher interchange rates. And in a nontransparent market, these practices go unchallenged. 

3. Interchange fees and their impact are not disclosed to consumers 

It is not surprising, given the nature and cost of interchange fees, that Visa and 

MasterCard go to great lengths to ensure that consumers remain in the dark about 

these fees. The efforts of credit card companies to keep interchange hidden drives 

up costs. Without any price cues, it appears that credit card use is costless and consumers are deprived of the opportunity to choose lower cost options. It is in this 

shroud of darkness that Visa, MasterCard and their member banks collect literally 

billions of dollars from unwitting consumers. 

Furthermore, it is not just consumers who are left in the dark; Visa and 

MasterCard refuse to fully disclose their operating rules to retailers as well. The 

card associations have a complex matrix of interchange rates ranging from about 

5 cents plus 1.15% for each transaction to 15 cents plus 2.95% of the transaction. 

But it is hard for retailers, particularly small mom-and-pop stores, to figure out why 

they fall into a particular rate category. Plus, retailersare charged different rates 

within the course of the same business day. Corporate cards, rewards cards, fleet 

cards and others carry very high rates while basic cards can have lower rates. Other 

factors can change the rates as well. For example, if a card swipe doesn’t work and 

the retailer needs to call to get authorization, the transaction then falls into a different risk category and a different interchange rate is charged. And if the phone 

call doesn’t go through, then again, a higher rate is charged. 

MasterCard has put its rates on its website—and the document is 100 pages long. 

These rates are 100 pages long. Visa’s rates are also very confusing. Retailers simply are not given the clear, understandable and timely information they would need 

to accurately inform consumers about the rates being charged. And Visa and 

MasterCard make no effort to inform consumers—instead, as I noted, they actively 

try to keep the fees hidden in the overall prices of goods. 

As this Congress moves forward on this issue, it is imperative that transparency 

of interchange fees be improved. Without adequate disclosure, true competition is 

impossible and interchange fees and consumer prices will continue to climb upward. 

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3 A New Business Model for Card Payments, Diamond Management & Technology Consultants, 2006. 

4. Interchange fees are without justification and priced without regard to the cost of 

transactions 

The volume of electronic transactions has increased dramatically in recent years. 

Since 2001, debit card use has surged by more than 20 percent a year. Economies 

of scale, competition, plummeting computer costs, low interest rates and low inflation, however, are not driving down payment fees. In fact, the fees are up 117 percent just since 2001. 

Banks and card companies acknowledge the fees are not based solely on processing costs. In fact, the fees help subsidize marketing efforts to entice consumers 

to use more cards, to use them more frequently and to purchase goods and services 

in greater amounts. In fact, many of these marketing efforts are specifically designed to drive consumers to higher fee transactions. Solicitations for corporate and 

rewards cards are becoming more common and Visa in particular has aggressively 

promoted consumers signing for debit transactions. Using a signature rather than 

a PIN code on a debit transaction not only results in far higher interchange fees, 

but also is a far less secure method of transacting. Just last year, a bank industry 

consulting firm estimated that only 13 percent of the interchange fee covers processing costs, while 44 percent pays for rewards programs and the balance goes to 

marketing, advertising, services, profits and other items (see Figure 2).3

It is troubling that interchange fees continue to increase while they should be declining due to decreased costs. When evaluated in the context of their market power, 

these rates are nothing less than outrageous. 

CONCLUSION: ACTION IS NEEDED

Congress, the executive branch, and the courts have, at times, looked into the 

interchange pricing system. Meanwhile, interchange rates increased again in April 

of this year. Some of the new rates are now more than 3 percent when the percentage rate and fixed fee are both calculated. In addition to increasing rates, Visa and 

MasterCard are pushing more consumers into the higher-rate premium cards and 

away from lower-rate standard cards. 

When Visa and MasterCard act with the false imprimatur bestowed by duopolistic 

market power, we can expect that these activities will continue unabated. In other 

words, without immediate intervention, their exploitative pricing and policies will 

surely persist. NACS is pleased that this Task Force is taking an active role in examining an industry long in need of reform and increased disclosure. Hopefully, this 

hearing will be the first critical step toward leveling the playing field for the small 

business owners and consumers of America.

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ATTACHMENTS


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PREPARED STATEMENT OF THE NATIONAL GROCERS ASSOCIATION (NGA) 

The National Grocers Association (N.G.A.) greatly appreciates the opportunity to 

submit this statement for the record of this important hearing before the U.S. House 

of Representatives Committee on the Judiciary Antitrust Task Force. N.G.A. thanks 

Chairman Conyers and the Task Force for holding today’s hearing on interchange, 

a matter of great antitrust importance to consumers and the retail community. 

N.G.A. is the national trade association that represents exclusively the interests 

of independent, community-focused grocery retailers and wholesalers. An independent, community-focused retailer is a privately owned or controlled food retail 

company operating in a variety of formats. Most independent operators are serviced 

by wholesale distributors, while others may be partially or fully self-distributing. A 

few are publicly traded, but with controlling shares held by the family and others 

are employee owned. Independents are the true entrepreneurs of the grocery industry and are dedicated to their customers, associates, and communities. N.G.A. retail 

and wholesale members accounted for over $200 billion of U.S. grocery sales last 

year. N.G.A. is a founding member of the Merchants Payment Coalition that is 

made up of trade associations representing supermarkets, retailers, convenience 

stores, restaurants, drug stores, gas stations and other businesses that are concerned about increasing and unfair interchange fees charged by credit card companies and banks. 

An interchange fee, usually in the form of a percentage of the transaction, is 

charged to the merchant by the card issuing bank and the card association. N.G.A. 

believes that there are major antitrust problems with the current interchange fee 

system, causing profound harm to consumers and merchants. For the benefit of the 

American consumer, federal governmental agencies and members of Congress must 

exercise oversight of debit and credit card interchange fees and the lack of a competitive market. 

I. INTERCHANGE: A MARKET FAILURE THAT HARMS CONSUMERS AND MERCHANTS

Interchange fees charged by MasterCard and Visa, and the rules under which 

they are levied, are nothing more than a hidden tax on retail grocers and the consumers they serve, including customers using other payment methods who indirectly 

subsidize cardholders. Interchange fees are hidden from consumers by credit card 

companies, but consumers ultimately pay them because costs are passed along in 

the form of higher consumer prices. Visa and MasterCard rules require that the fees 

be collected from the merchants, not directly from the card users. These card-based 

fees are the single most profitable source of income for banks. These fees now exceed 

$36 billion annually (up over $10 billion from 2006 reports) with contracts that actually prohibit merchants from disclosing the cost of interchange fees to their customers who use the cards. 

In a competitive marketplace when costs go down, rates should fall. Interchange 

fees have increased precipitously even though fraud is down and transaction volume 

is up significantly. This is because debit and credit card systems and their interchange rates are a private, unregulated money system that has exceeded cash and 

checks as the favored means of paying for goods and services since 2004. The debit 

and credit card interchange rates of Visa, MasterCard and their member banks are 

established collusively by the competing banks that constitute the boards of directors of Visa and MasterCard. This is a clear violation of federal antitrust laws. As 

a result, interchange rates can be increased at will; they bear no relation to any 

legitimate charges that arguably should be imposed on merchants and consumers. 

The interchange system is a clear example of a market failure. No competitive 

forces exist to pressure the card associations to lower rates. Rather, competition 

raises interchange fees, as Visa and MasterCard compete for bank issuers by offering them higher and higher payouts from interchange fees. 

Few issues have received the attention of retail and wholesale grocers, as well as 

all other retail merchants, as that being given to the high and increasing cost of 

interchange that retailers must pay to Visa and MasterCard for accepting their 

debit and credit cards. The United States has the highest credit card interchange 

fees of any industrialized country, and interchange rates have continued to increase 

in the United States even while costs of processing and fraud have declined. In contrast, interchange rates internationally continue to decline dramatically. The international precedents for antitrust investigation and government intervention are persuasive and demand serious review and appropriate action by this Committee. 

A recent Morgan Stanley report found that the weighted average for Visa and 

MasterCard interchange had increased from 1.58 percent in 1998 to 1.75 percent in 

2004 (an increase of 10.8 percent) and is forecast to grow to 1.86 percent in 2010 

(an additional increase of 6.3 percent over 2004 and 17.7 percent since 1998). 

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The recent ‘‘Diamond Study’’ of interchange examined, among other issues, the 

costs presently being borne by consumers and merchants under the present interchange system. The study found that the largest single use of interchange paid directly by merchants and indirectly by consumers is cardholder rewards—a 45% slice 

of the interchange pie. There is no justification for this charge, but there is an explanation—the exercise of unbridled market power by VISA, MasterCard and their 

banks. On two levels, the charge is also unfair, first, because merchants cannot negotiate their rates, and they are forced to pay these rates to the issuing banks, without viable alternative options. The rewards programs are arrangements between the 

issuing banks and the cardholders. Second, the cardholders who receive the benefits 

are not the only ones who pay for them in the form of higher prices. All customers 

pay the same prices, regardless of how they pay, and those prices include 

the cost of interchange. So everyone pays for the rewards. This burden falls 

heaviest on the poorest consumers, who are least able to absorb the higher 

prices. Consumer rewards must no longer be part of the interchange rate. 

The next largest slice of the interchange pie is ‘‘other issuer costs’’ and profit, set 

at 35% by the Diamond Study. One estimate places more than half of this amount—

20%—on the cost of direct mail solicitation of new cardholders—more than six billion pieces of mail in 2005! All that was said about cardholder rewards can be repeated about direct mail solicitations as well as another 3% slice of the pie that Diamond refers to as ‘‘network branding expenses,’’ also known as advertising. So, bank 

solicitations and Visa and MasterCard advertising are roughly 23% of the pie. Add 

the 45% represented by cardholder rewards, and by any rational approach, 68% of 

today’s interchange fees should disappear. While not separately identified in the Diamond Study, part of the remaining 15% of other issuer costs is likely to include 

fraud and interest revenue foregone due to the cardholders’ interest free period. The 

interest is merely another cardholder benefit, which is not a proper charge to merchants and all consumers. Fraud losses have been disallowed in most of the countries that have acted on the interchange issue. In addition, the system in which the 

fraud is perpetrated is the system that Visa, MasterCard and the banks designed 

and created, a system that is ripe for picking, and they want merchants and consumers to bear the cost of their mistakes. 

The vast majority of grocers do not have the ability to overcome the market power 

of Visa and MasterCard in order to negotiate lower rates. The results of the recent 

settlement in 2003 of the Wal-Mart lawsuit against the credit card companies clearly illustrate the anticompetitive nature of the interchange system. Visa and 

MasterCard agreed to pay the plaintiff retailers more than $3 billion, but immediately increased credit card interchange rates to cover the cost of the settlement—

and then some. 

Except for the very largest merchants, efforts to negotiate lower interchange rates 

have been rejected, even when retailers have attempted to aggregate. The vast majority of merchants, therefore, have no control over this discriminatory cost of doing 

business, because it is set by a cartel. 

The issue here is about the need for competition, and when it does not exist, then 

solutions must be pursued to correct the unfairness and level the playing field. In 

November 2005 N.G.A., together with some of its members, Affiliated Foods Midwest, Coborn’s Inc., and D’Agostino’s Supermarkets, filed a class action suit against 

Visa, MasterCard and a number of banks, alleging the named defendants conspired 

to fix the interchange fees that are charged to retail grocers and ultimately consumers in violation of the Sherman Act. This action was consolidated in the U.S. 

District Court for the Eastern District of New York with over 47 other actions filed. 

One must ask why the United States lags behind other countries in addressing 

this 

important issue. Australia in 1998 passed its Payment Systems (Regulation) Act 

1998 after an investigation by the Australian Competition and Consumer Commission found against the collective fixing of interchange fees. Consequently, on August 

27, 2002, the Reserve Bank of Australia adopted a new cost-based approach to interchange fees and eliminated the no surcharge rule, which prevents retailers from directly charging consumers the cost of interchange when they pay by card. The purpose is to ensure that the setting of interchange fees in designated credit card systems is transparent and promotes efficiency and competition. In the Bank’s view, 

interchange fees in the credit card systems were not subject to the normal forces 

of competition which pushed fees up, not down. The Reserve Bank of Australia reported in August 2005 that, ‘‘Prior to the reforms, this fee averaged 0.95 percent 

of the amount spent; it now averages around 0.54 per cent.’’ The Reserve Bank of 

Australia also found, ‘‘In total, as a result of the Bank’s reforms, merchants’ 

costs of accepting credit and charge card payments were around $580 million lower than they would otherwise have been. Given the competitive naVerDate 0ct 09 2002 13:55 Jun 11, 2008 Jkt 000000 PO 00000 Frm 00142 Fmt 6601 Sfmt 6621 H:\WORK\ATRUST1\071907\36785.000 HJUD1 PsN: 36785
139

ture of Australian business, these cost savings are finding their way into 

lower prices for goods and services, or smaller price increases than would 

have otherwise have taken place.’’ On November 25, 2005, the Reserve Bank of 

Australia announced further amendments that became effective on July 1, 2006. 

Some observers predict rates will drop to .35 per cent. 

On September 6, 2005, the United Kingdom Office of Fair Trading (OFT) found 

that a collective agreement between members of MasterCard UK Members Forum 

(MMF), including most banks, setting the multi-lateral interchange fee paid on virtually all purchases using UK-issued MasterCard credit and debit cards between 

March 1, 2000, and November 18, 2004, restricted competition and infringed Article 

81 of the EC Treaty and the Chapter 1 prohibition of the Competition Act. It gave 

rise to a collective agreement on the level of the multilateral interchange fee and 

resulted in unjustified recovery of certain costs. 

The OFT found the inclusion of extraneous costs provided a large flow of revenue 

to card issuers and the incentive to induce customers to hold and use MasterCard 

cards, for example, through loyalty schemes, advertising and funding the interestfree period. The fee was passed on to the retailers by the merchant acquirers 

through higher merchant service charges. The OFT stated, ‘‘Consumers, including those who do not use MasterCard cards, ultimately picked up the cost 

for the higher interchange fee through higher retail prices.’’ Sir John Vickers, OFT Chairman, said, ‘‘This unduly high interchange fee was like a tax on 

UK consumers.’’

Although the OFT consented to the Competition Appeal Tribunal’s setting aside 

of the OFT’s September 2005 decision, the investigation will continue and will include Visa. OFT chief executive John Fingleton stated in June 2006: ‘‘We still believe that the interchange fee arrangements that are now in place could infringe 

competition law and are harmful to consumers, who pay higher prices as a result 

of these fees. Continuing to defend appeals against the original decision before the 

Competition Appeal Tribunal diverts us from dealing most effectively with the overall problem of interchange fees. Our resources are better spent in reaching decisions 

on MasterCard’s and Visa’s current interchange fee arrangements rather than continuing with these appeals that concern only MasterCard’s historic arrangements.’’

In September 2000, the European Commission challenged Visa’s anticompetitive 

multilateral interchange fee, and Visa agreed in 2002 to lower the weighted average 

fees in stages to 0.7 per cent in 2007. Numerous other countries, such as Sweden, 

Italy, Netherlands, Switzerland, Spain, Israel and Mexico have addressed the anticompetitive nature of interchange. 

Other countries have addressed and reduced anticompetitive interchange fees, 

and now it is time for Congress and federal agencies to do the same. 

The current interchange system is inherently flawed and presents gross inequities 

for both retailers and consumers. Transparency is a must. All parties involved, especially consumers and merchants, should be made aware of the interchange fees 

charged to merchants, and ultimately consumers. The consumer has a right to know 

how interchange fees affect the prices of goods and services from merchants. Retailers are charged increased interchange fees to cover the incentives given to consumers to use the cards carrying the highest interchange rates. Those incentives by 

any objective standard should not be part of every consumer’s grocery bill; they 

should be absorbed by Visa, MasterCard and their card-issuing banks, which reap 

the majority of the huge financial benefits. It is time to end this ‘‘hidden tax’’ on 

merchants and consumers, including customers who pay by cash or check and thereby subsidize cardholders. 

The present system has another major antitrust flaw in addition to interchange 

rates: anticompetitive card association rules and procedures. For example, imagine 

yourself as a retailer who wishes to accept Visa and MasterCard as a means of payment by your customers. You sign merchant agreements in which you agree to abide 

by all of these associations’ rules, but a wall of secrecy and nondisclosure hides 

them from retailers. Those rules must end. 

II. COLLUSIVE SETTING OF INTERCHANGE FEES AND OPERATING RULES VIOLATE

ANTITRUST LAWS

In the Department of Justice case against Visa and MasterCard, the U.S. Court 

of Appeals for the Second Circuit found that when Visa and MasterCard pass rules, 

that it is the collective action of a cartel of banks that compete to issue cards or 

sign up merchants to accept Visa and MasterCard U.S. v. Visa U.S.A., Inc., 2003 

WL 22138519 (2d Cir. Sept. 17, 2003). It follows that the setting of interchange 

rates by those same Visa and MasterCard banks also work as a cartel in the setting 

of interchange fees and violates Section 1 of the Sherman Act. The existing system 

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eliminates any incentive for card issuing banks to lower interchange fees in response to the demands of the merchant community, consumers and other participants in the marketplace. 

Visa’s and MasterCard’s complex system of rules amplify the power of this cartel 

to maintain supra-competitive pricing by restricting merchants’ ability to disclose 

fees to consumers or charge cardholders a different price based on differences in 

interchange fees for various cards. For example one rule requires merchants to accept all Visa and MasterCard credit cards despite the fact that interchange rates 

vary by as much as 100% based on the type of card (Platinum Plus(r), Visa Signature(r), corporate, small business etc.). The sad consequence of this system is that 

all consumers, regardless of form of payment, end up subsidizing the rewards of select cardholders. This type of cartel rate setting and rule making are clearly in violations of the Sherman Act. 

III. CONCLUSION

N.G.A. strongly believes that action by Congress and federal agencies is needed 

to end the anticompetitive and illegal price fixing and discriminatory establishment 

of interchange rates and card association rules. Interchange fees should be set by 

competitive forces, not by collusion. In addition, anticompetitive rules which harm 

merchants and consumers and maintain the market power of card associations must 

be ended, and retailers must be informed in advance of the rules to which they will 

be subjected. 

N.G.A. applauds the Committee for holding this important hearing and urges 

Congress to continue to investigate and correct the unfairness of the current interchange system. 

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LETTER FROM JOHN GAY, SENIOR VICE PRESIDENT, GOVERNMENT AFFAIRS & PUBLIC

POLICY, NATIONAL RESTAURANT ASSOCIATION, TO CHAIRMAN CONYERS AND RANKING MEMBER CHABOT

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LETTER FROM G. KENDRICK MACDOWELL, GENERAL COUNSEL AND DIRECTOR OF GOVERNMENT AFFAIRS, NATIONAL ASSOCIATION OF THEATRE OWNERS (NATO), TO

CHAIRMAN CONYERS AND RANKING MEMBER CHABOT


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143

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LETTER FROM RANDY SCHENAUER, CHAIRMAN, GOVERNMENT RELATIONS COMMITTEE, 

SOCIETY OF AMERICAN FLORISTS (SAF), TO CHAIRMAN CONYERS AND RANKING

MEMBER CHABOT

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LETTER FROM BRIAN E. CARTIER, CAE, CHIEF EXECUTIVE, NATIONAL ASSOCIATION OF

COLLEGE STORES (NACS), TO CHAIRMAN CONYERS AND RANKING MEMBER CHABOT


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146

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LETTER FROM LISA J. MULLINGS, PRESIDENT AND C.E.O., NATSO, INC., TO

CHAIRMAN CONYERS AND RANKING MEMBER CHABOT


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LETTER FROM DARRELL K. SMITH, PRESIDENT, NATIONAL ASSOCIATION OF SHELL

MARKETERS (NASM), TO CHAIRMAN CONYERS AND RANKING MEMBER CHABOT

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LETTER FROM HEIDI M. DAVIDSON, VICE PRESIDENT, GLOBAL PUBLIC POLICY, 

MASTERCARD WORLDWIDE, TO CHAIRMAN CONYERS, WITH ENCLOSED NEWS RELEASES


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LETTER FROM THE PETROLEUM MARKETERS ASSOCIATION OF AMERICA (PMAA) TO

CHAIRMAN CONYERS AND RANKING MEMBER CHABOT

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