THE LAW AND ECONOMICS OF 

INTERCHANGE FEES 

HEARING 

BEFORE THE 

SUBCOMMITTEE ON COMMERCE, TRADE, 

AND CONSUMER PROTECTION 

OF THE 

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED NINTH CONGRESS 

SECOND SESSION 

FEBRUARY 15, 2006 

Serial No. 109-61 

Printed for the use of the Committee on Energy and Commerce 

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26-994PDF 
COMMITTEE ON ENERGY AND COMMERCE 

JOE BARTON, Texas, Chairman 

RALPH M. HALL, Texas 

MICHAEL BILIRAKIS, Florida 

 Vice Chairman 

FRED UPTON, Michigan 

CLIFF STEARNS, Florida 

PAUL E. GILLMOR, Ohio 

NATHAN DEAL, Georgia 

ED WHITFIELD, Kentucky 

CHARLIE NORWOOD, Georgia 

BARBARA CUBIN, Wyoming 

JOHN SHIMKUS, Illinois 

HEATHER WILSON, New Mexico 

JOHN B. SHADEGG, Arizona 

CHARLES W. “CHIP” PICKERING, Mississippi 

 Vice Chairman

VITO FOSSELLA, New York 

ROY BLUNT, Missouri

STEVE BUYER, Indiana 

GEORGE RADANOVICH, California 

CHARLES F. BASS, New Hampshire 

JOSEPH R. PITTS, Pennsylvania 

MARY BONO, California 

GREG WALDEN, Oregon 

LEE TERRY, Nebraska 

MIKE FERGUSON, New Jersey 

MIKE ROGERS, Michigan 

C.L. “BUTCH” OTTER, Idaho 

SUE MYRICK, North Carolina 

JOHN SULLIVAN, Oklahoma 

TIM MURPHY, Pennsylvania 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

JOHN D. DINGELL, Michigan 

 Ranking Member 

HENRY A. WAXMAN, California 

EDWARD J. MARKEY, Massachusetts 

RICK BOUCHER, Virginia 

EDOLPHUS TOWNS, New York 

FRANK PALLONE, JR., New Jersey 

SHERROD BROWN, Ohio 

BART GORDON, Tennessee 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

BART STUPAK, Michigan 

ELIOT L. ENGEL, New York 

ALBERT R. WYNN, Maryland 

GENE GREEN, Texas 

TED STRICKLAND, Ohio 

DIANA DEGETTE, Colorado 

LOIS CAPPS, California 

MIKE DOYLE, Pennsylvania 

TOM ALLEN, Maine 

JIM DAVIS, Florida 

JAN SCHAKOWSKY, Illinois 

HILDA L. SOLIS, California 

CHARLES A. GONZALEZ, Texas 

JAY INSLEE, Washington 

TAMMY BALDWIN, Wisconsin 

MIKE ROSS, Arkansas 

BUD ALBRIGHT, Staff Director 

DAVID CAVICKE, General Counsel

REID P. F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON COMMERCE, TRADE, AND CONSUMER PROTECTION 

CLIFF STEARNS, Florida, Chairman 

FRED UPTON, Michigan 

NATHAN DEAL, Georgia 

BARBARA CUBIN, Wyoming 

GEORGE RADANOVICH, California 

CHARLES F. BASS, New Hampshire 

JOSEPH R. PITTS, Pennsylvania 

MARY BONO, California 

LEE TERRY, Nebraska 

MIKE FERGUSON, New Jersey 

MIKE ROGERS, Michigan 

C.L. “BUTCH” OTTER, Idaho 

SUE MYRICK, North Carolina 

TIM MURPHY, Pennsylvania 

MARSHA BLACKBURN, Tennessee 

JOE BARTON, Texas 

 (EX OFFICIO)

JAN SCHAKOWSKY, Illinois 

 Ranking Member 

MIKE ROSS, Arkansas 

EDWARD J. MARKEY, Massachusetts 

EDOLPHUS TOWNS, New York 

SHERROD BROWN, Ohio 

BOBBY L. RUSH, Illinois 

GENE GREEN, Texas 

TED STRICKLAND, Ohio 

DIANA DEGETTE, Colorado 

JIM DAVIS, Florida 

CHARLES A. GONZALEZ, Texas 

TAMMY BALDWIN, Wisconsin 

JOHN D. DINGELL, Michigan 

 (EX OFFICIO) 

(II)
CONTENTS 

Page 

Testimony of: 

Muris, Hon. Timothy J., Of Counsel, O’Melveny & Myers LLP, on behalf of The 

Electronic Payments Coalition ..................................................................................... 13 

Armour, Henry, President and Chief Executive Officer, National Association of 

Convenience Stores ....................................................................................................... 41 

Kerrigan, Karen, President and Chief Executive Officer, Small Business and 

Entrepreneurship Council .............................................................................................. 48 

Mierzwinski, Edward, Consumer Program Director, U.S. Public Interest Research 

Group ............................................................................................................................. 53 

Additional material submitted for the record: 

Cendant Car Rental Group, Inc., Dollar Thrifty Automotive Group, Inc., Enterprise 

Rent A Car Company, prepared statement of ................................................................ 89 

Muris, Hon. Timothy J., Of Counsel, O’Melveny & Myers LLP, on behalf of The 

Electronic Payments Coalition, response for the record................................................ 96 

Kerrigan, Karen, President and Chief Executive Officer, Small Business and 

Entrepreneurship Council, response for the record ....................................................... 100 

Armour, Henry, President and Chief Executive Officer, National Association of 

Convenience Stores, response for the record................................................................. 104 

Mierzwinski, Edward, Consumer Program Director, U.S. Public Interest Research 

Group, response for the record....................................................................................... 106 

Molinari, Hon. Susan, Chairman, Americans for Consumer Education and 

Competition, prepared statement of............................................................................... 109 

(III) 

(1) 

THE LAW AND ECONOMICS OF 

INTERCHANGE FEES 

WEDNESDAY, FEBRUARY 15, 2006 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON ENERGY AND COMMERCE, 

SUBCOMMITTEE ON COMMERCE, TRADE,

AND CONSUMER PROTECTION, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 10:03 a.m., in Room 

2123 of the Rayburn House Office Building, Hon. Cliff Stearns 

[chairman] presiding. 

 Members present: Representatives Stearns, Deal, Radanovich, Bass, 

Terry, Ferguson, Rogers, Blackburn, Schakowsky, Towns, Green, and 

Sullivan. 

 Staff present: Will Carty, Professional Staff Member; Chris Leahy, 

Policy Coordinator; David Cavicke, General Counsel; Brian 

McCullough, Professional Staff Member; David Vogel, Minority 

Research Assistant; Consuela Washington, Minority Counsel; Bruce 

Harris, Minority Counsel; and Billy Harvard, Legislative Clerk. 

MR. STEARNS. Good morning, everybody. I think everybody in this 

room probably has a credit card, so that is a given here as we start. 

Surveys show that typically, every adult in the United States carries at 

least one or two credit cards. In the U.S. alone, credit cards, ATM cards 

and debit cards account for almost 42 billion transactions’ worth, almost 

$3 trillion in the year 2004. And for those who do not have a credit card, 

you have either shown great financial discipline and you are paying with 

cash, or perhaps you just have this love of the money and you want to 

use it rather than put yourself at risk with some kind of credit card; you 

might not pay the bill and have to pay an interest fee on your balance. 

But everywhere we go, electronic transaction is commonplace, now 

outpacing check transactions. I think it is safe to assume, very few 

consumers understand or are even aware of electronic payments in a 

network; the transaction involved or of course, the related fees that go 

with these transaction. So the focus of today’s hearing will be just on 

that. 

 People seem to like the convenience of paying by credit card, in 

many cases gathering more reward miles on airlines and other things; 

enjoy the membership that for many has its privileges; the convenience 

of having credit available, accepted almost everywhere frequently trumps 
2

any concern about fee structure. It is really quite a miracle that you can 

go anywhere in the world and use these credit cards, particularly, how 

those structures actually work are found in the obscure fine print that 

either the business owners or the consumers have to sign and they are 

just not aware of the obscure law review articles that exist on these 

different issues. The fees that help fund this convenience for consumers 

are known as interchange fees. Simply put, interchange fees are fees that 

merchants pay for access to the extensive global electronic payment 

infrastructure that has been built up over the last few decades. 

 Interchange fees are calculated as a percentage of a purchased 

transaction that banks, in turn, collect from merchants participating in the 

electronic payment network. Having owned a small business and 

operated motels and restaurants, I am well aware of the percentage they 

charge and different credit cards charge different fees, so there is a lot of 

incentive to use one over the other, if you can. This fee, along with any 

fees associated with a merchant’s bank, which is called the acquire bank, 

are also known as a merchant’s discount. Once a merchant’s discount is 

deducted, the balance, of course, is paid to the merchant. 

 My colleagues, in an efficient market, these interchange fees should 

represent the cost of participating in the electronic payment system, as 

well as other factors like the premium and cost savings achieved from 

not having to keep a large amount of cash on hand. The interchange fee 

is part of the terms of the credit card agreement made with a merchant. 

Because it is a percentage, the size of the interchange fee increases, 

obviously, with the amount of transaction. Therefore as we saw in the 

aftermath of the hurricanes last year, if a merchant charges his customers 

more, the associated increasing interchange fee will correspond to the 

price increase. This becomes a bit more complicated when a merchant 

makes a certain margin based on the current cost of a bulk commodity, 

like gasoline, and the interchange fee starts to eat into the margin when 

the cost of that product goes up. This might not be true in some 

businesses, but in others, particularly in the gasoline industry, it is true. 

This is basic economics and, at least in theory, the terms associated with 

this scenario should be transparent and agreed to freely by everybody. 

 Now, with that in mind, the committee’s focus, in my opinion, 

shouldn’t be on what parties particularly agree to regarding these fees, 

although we can talk about it. It should be on ensuring that the market is 

given the freedom to function properly and efficiently, and efficiently 

distribute cost and benefits. As we have seen during the oil crisis in the 

1970s, with the gas lines and rationing, imposing price or fee caps would 

inevitably lead to shortages, more cost, and certain inconvenience to 

consumers. I think our examination of this issue should, first of all, start 

with a better understanding of the anti-trust and anti-competitive 
3

concerns raised to determine if we are dealing with a system that 

involves collusion and any competitive market power, or one that 

involves transparency and choice. 

 I must say that I have not seen strong evidence that the electronic 

payment system is suffering from market failure. In fact, the system 

appears to be working and consumers seem to like access to low cost 

credit to fund their purchases. But a healthy free market also assumes 

the players are playing fair and the choice is plentiful. Now, some 

contend that this is not the case with interchange fees because, in part, as 

electronic payments grow, cost should come down. They point to data 

showing that interchange fees have actually increased, not decreased, as 

economies of scale would predict. So this will be a question we would 

like an answer on from our panel. 

 Others charge that big credit card companies have monopolistic 

power and can strong-arm merchants into accepting their terms, and that 

is another question that we could explore. On the other hand, those 

contentions are countered with the fact that these cost increases are due 

to the risks associated with the growing percentage of the U.S. 

population that has access to and is taking advantage of cheap credit. So 

we have talked on both sides here to try and put in perspective what the 

questions are and what we would like to explore, because I think when 

we talked about it, we are not sure who is right and there is litigation, 

obviously, in the courts on this. 

 I look forward to hearing the elements of each case from our panel of 

experts today so that we all can draw better conclusions. I would like to 

thank everyone for joining, especially the former FTC Chairman, Tim 

Muris. It is nice to see him again. The committee appreciates the 

panel’s testimony today and its assistance in helping us learn more about 

these important issues and with that, the Ranking Member, Ms. 

Schakowsky. 

 [The prepared statement of Hon. Cliff Stearns follows:] 

PREPARED STATEMENT OF HON. CLIFF STEARNS, CHAIRMAN, SUBCOMMITTEE ON 

COMMERCE, TRADE, AND CONSUMER PROTECTION

Good Morning. I’d bet that everyone in this hearing room today has a credit or debit 

card. Surveys show that a typical adult in the U.S. carries several credit cards. In the 

U.S. alone, credit cards, ATM cards and debit cards accounted for almost 42 billion 

transactions worth almost $3 trillion in 2004. And for those who don’t have plastic, you 

are either showing great financial discipline or maybe you just love the feel of crisp 

dollar bills in your pocket. 

Although electronic payment is now commonplace – now outpacing check 

transactions - I think it’s safe to assume very few consumers understand or are even 

aware of the electronic payments network, the transactions involved, or the related fees - 

the focus of today’s hearing. People just seem to like the convenience of paying by credit 

card, gathering more reward miles, and enjoying membership that, for many, does have 
4

its privileges. The convenience of having credit available and accepted almost 

everywhere frequently trumps any concern about fee structures, particularly when how 

those structures actually work are found in the obscure fine print, or in just as obscure 

law review articles. 

The fees that help fund this convenience for consumers are known as “interchange 

fees.” Simply put, interchange fees are fees that merchants pay for access to the 

extensive, global electronic payments infrastructure that has been built up over the last 

few decades. Interchange fees are calculated as a percentage of a purchase transaction 

that banks, in turn, collect from merchants participating in the electronic payments 

network. This fee along with any fees associated with the merchant’s bank (the 

“acquirer” bank) are also known as the “merchant discount.” Once the merchants 

discount is deducted, the balance is paid to the merchant. 

In an efficient market, these interchange fees should represent the costs of 

participating in the electronic payments system as well as other factors like the premium 

and cost savings achieved from not having to keep large amounts of cash on hand. The 

interchange fee is part of the terms of the credit card agreement made with the merchant. 

Because it is a percentage, the size of the interchange fee increases with the amount of 

the transaction. Therefore, as we saw in the aftermath of the Hurricanes last year, if a 

merchant charges his customers more, the associated increase in the interchange fee will 

correspond to the price increase. This becomes a bit more complicated when a merchant 

makes a certain margin based on the current cost of a bulk commodity, like gasoline, and 

the interchange fee starts to eat into that margin when the costs of that product go up. 

This is basic economics and, at least in theory, the terms associated with this scenario 

should be transparent and agreed to freely. 

With that in mind, the Committee’s focus, in my opinion, shouldn’t be on what 

parties contractually agree to regarding fees, it should be on ensuring that the market is 

given the freedom to function properly and efficiently distribute costs and benefits. As 

we have seen during the oil crisis in the 1970s with its gas lines and rationing, imposing 

price or fee caps will inevitably lead to shortages, more costs, and certain inconvenience 

to consumers. Therefore, I think our examination of this issue should start with a better 

understanding of the antitrust and anti-competitive concerns raised to determine if we are 

dealing with a system that involves collusion and anti-competitive market power or one 

that involves transparency and choice. 

I must say that I have not seen strong evidence that the electronic payments system 

is suffering from market failure; in fact, the system appears to be thriving and consumers 

seem to like access to low cost credit to fund purchases. But a healthy free market also 

assumes the players are playing fair and choice is plentiful. Some contend that is not the 

case with interchange fees because, in part, as electronic payments grow, costs should 

come down. They point to data showing that interchange fees have actually increased not 

decreased, as economies of scale would predict. Others charge that big credit card 

companies have monopolistic power and can strong arm merchants into accepting their 

terms. On the other hand, those contentions are countered with the fact that these cost 

increases are due to the risks associated with the growing percentage of the U.S. 

population that has access to and is taking advantage of cheap credit. I’m not entirely 

sure who’s right, and I look forward to hearing the elements of each case from our panel 

of experts today so we can better draw our own conclusions. 

Again I’d like to thank everyone for joining us today, especially former FTC 

Chairman Tim Muris. The Committee appreciates the panel’s testimony today and its 

assistance in helping us learn more about this important issue. 

Thank you. 
5

 MS. SCHAKOWSKY. Thank you, Chairman Stearns, for holding 

today’s hearing on interchange fees, the charges that retailers pay the 

banks for consumers using debit and credit cards to make purchases. I 

appreciate the opportunity to learn more about this issue and to explore 

whether consumers, and in this case, I include the retailers in that, are 

being unfairly burdened by high credit card interchange fees. We are 

definitely entering the cashless society. The year 2003 marked the first 

time ever that businesses and consumers made more payments 

electronically than by check. Today, for every one payment in cash there 

are two made with bank cards. For merchants, banks and consumers, a 

swipe of the card is the way to go. 

 What most consumers don’t realize is that each time a card is swiped 

an interchange fee is charged to the retailer. The interchange fee, a 

percentage of the total purchase, varies on whether a debit or credit card 

is used, the type of business at which the purchase is made, whether the 

business is big or small and whether the card offers bonus programs like 

frequent flyer miles. Although the varying fee is meant to mitigate the 

risk to the banks, it is not linked to the cost for Visa or MasterCard or the 

issuing banks for processing transactions. I am concerned that merchants 

offset the interchange fees they are charged by the credit card companies 

by raising the prices consumers have to pay for the goods on the shelves. 

The credit card industry also benefits from those higher prices because 

transaction fees are a percentage of product prices, so the more a product 

costs, the more money the banks make through fees and the transaction 

fee is based on the product price after tax. So in effect, consumers are 

charged a credit card tax because their costs come on top of the true 

product cost and sales taxes. 

 Consumers who spend and contribute to the economy should not be 

punished with higher fees. Americans are already struggling to contend 

with out of control energy and prescription drug prices and there is an 

article that was in the Washington Post after Katrina that said as the price 

of gasoline rides the storm tides of two hurricanes, one group is crying 

all the way to the bank. Americans, they should not have to empty their 

bank accounts just to fill their shopping carts or fill up their cars. We 

should be looking for ways to help working families get relief rather than 

enabling an industry that reaps billions in profits every year. 

 Considering that the retailers are also responsible for paying 

interchange fees on the local, state and Federal taxes of every card 

transaction on top of the purchase price, I think we are also seeing a 

credit card tax on retailers. Furthermore, most merchants, excepting a 

few big box stores like Wal-Mart, cannot simply negotiate interchange 

fees. There is nothing to stop the banks from setting whatever rate they 

choose. If the stores want to accept debit and credit cards, they have to 
6

accept the fees the card issuers set. It is estimated by the National 

Association of Chain Drug Stores that the interchange fee is the third 

largest expense for those stores after rent and labor. Because we see so 

many small businesses struggling to get by, we need to ask tough 

questions about whether these fees, which are completely unregulated, 

are putting an undue burden on the corner store. 

 The interchange fee is a golden goose for the credit card industry. 

Fifteen percent of issuing banks’ profits come from the interchange fees, 

alone. Banks collected an estimated $30 billion in interchange fees last 

year, partially from switching consumers to more expensive cards like 

the ones loaded with perks that also carry more expensive rates for 

merchants. Currently, the merchants are fighting back. There are at least 

47 lawsuits in the United States, many of which have been consolidated 

into one large suit concerning interchange fees. The suits charge a 

number of banks and Visa and MasterCard with engaging in collusive 

practices and setting the interchange fees at super-competitive practices. 

 Whatever the courts decide, I think it is our subcommittee’s 

responsibility to make sure that consumers are not saddled with higher 

prices and that the slim profit margins of small businesses are not eaten 

up by interchange fees. Again, I am glad we are here today to learn more 

about interchange fees and I look forward to hearing our witnesses. 

Thank you. 

 [The prepared statement of Hon. Jan Schakowsky follows:] 

PREPARED STATEMENT OF HON. JAN SCHAKOWSKY, A REPRESENTATIVE IN CONGRESS FROM 

THE STATE OF ILLINOIS

 Thank you Chairman Stearns, for holding today’s hearing on interchange fees, the 

charges that retailers pay to banks for consumers using debit and credit cards to make 

purchases. I appreciate the opportunity to learn more about this issue, and to explore 

whether consumers, including retailers, are unfairly burdened by interchange fees. 

We are entering into a “cashless” society. The year 2003 marked the first time ever 

that businesses and consumers made more payments electronically than by check. 

Today, for every one payment in cash, there are two made with bank cards. For 

merchants, banks, and consumers, a swipe of the card is the way to go. 

What most consumers don’t realize is that each time a card is swiped, an interchange 

fee is charged to the retailer. The interchange fee, a percentage of the total purchase, 

varies on whether a debit or credit card is used, the type of business at which the purchase 

is made, whether the business is big or small, and whether the card offers bonus programs 

– like frequent flier miles. Although the varying fee is meant to mitigate the risk to the 

banks, it is not linked to the cost for Visa or MasterCard – or the issuing banks – for 

processing transactions. 

I’m concerned that merchants offset the interchange fees they are charged by the 

credit card companies by raising the prices consumers have to pay for the goods on the 

shelves. The credit card industry also benefits from those higher prices because 

transaction fees are a percentage of product prices. So, the more a product costs, the 

more money the banks make through the fees. And, the transaction fee is based on the 

product price– after tax. So, in effect, consumers are charged a Credit Card tax because 
7

their costs come on top of their true product cost and sales taxes. Consumers who spend 

and contribute to the economy should not be punished with higher fees. Americans are 

already struggling to contend with out-of-control energy and prescription drug prices. 

They should not have to empty their bank accounts just to fill their shopping carts or fill 

up their cars. We should be looking for ways to help working families get relief rather 

than enabling an industry that reaps billions in profits every year. 

Considering that the retailers are also responsible for paying interchange fees on the 

local, state, and federal taxes of every card transaction – on top of the purchase price, I 

think we are also seeing a Credit Card Tax on retailers. Furthermore, most merchants, 

excepting a few big box stores like Wal-Mart, cannot simply negotiate interchange fees. 

There is nothing to stop the banks from setting whatever rate they choose. If stores want 

to accept debit and credit cards, they have to accept the fees the card issuers set. It is 

estimated by the National Association of Chain Drug Stores that the interchange fee is the 

third largest expense for those stores after rent and labor. Because we see so many small 

businesses struggling to get by, we need to ask tough questions about whether these fees, 

which are completely unregulated, are putting an undo burden on the corner store. 

The interchange fee is a golden goose for the credit card industry. Fifteen percent of 

its profits come from interchange fees alone. Banks collected an estimated $30 billion in 

interchange fees last year – partially from switching consumers to more expensive cards, 

like the ones loaded with perks that also carry more expensive rates for merchants. 

Currently, the merchants are fighting back. There are at least 47 lawsuits in the 

United States, many of which have been consolidated into one large suit, concerning 

interchange fees. The suits charge a number of banks and Visa and MasterCard with 

engaging collusive practices and setting the interchange fees at supra-competitive 

practices. Whatever the courts decide, I think it is our Subcommittee’s responsibility to 

make sure that consumers are not saddled with higher prices and that the slim profit 

margins of small businesses are not eaten up by interchange fees. 

Again, I am glad we are here today to learn more about interchange fees. I look 

forward to hearing from our witnesses. Thank you. 

MR. STEARNS. I thank the gentle lady. Mr. Sullivan, who is not on 

the committee, would be able to speak by unanimous consent agreement. 

Before I do that, I will go to the members first. Mr. Towns, for opening 

statement. 

 MR. TOWNS. Thank you very much, Mr. Chairman. I want to thank 

you for holding this hearing on the Law and Economics of Interchange 

Fees. I believe this hearing will help the public to better understand what 

these fees are, how payment systems are structured and how they affect 

consumers, small businesses and others. Last year this committee visited 

this issue during debate on the Gasoline for America’s Security Act. At 

that time, we directed the Federal Trade Commission to study the role 

and overall cost of credit cards interchange rates on gasoline and diesel 

fuel retail prices. 

 As you know, Mr. Chairman, the very thought of conducting a study 

has prompted a considerable amount of attention from both the retail 

community and the banking industry, each representing a different 

position. The retail community says that interchange rates are too high, 

especially when compared to other nations; that competitors in the 

banking industry collectively fix prices in violation of the anti-trust laws 
8

and that the credit card system operates under a veil of secrecy with 

regards to their operating rules. The banking community claims that the 

system works just fine and the reform in other countries have not 

worked. 

 I hope this hearing will provide an opportunity for both sides to 

express their views on the issue. Only through full transparency can we 

truly determine if consumers are being treated fairly in this market. So 

again, Mr. Chairman, and also the Ranking Member, I really appreciate 

you holding this hearing. I think it is a very, very important hearing and 

I look forward to hearing from our witnesses. On that note, I yield back. 

 MR. STEARNS. I thank the gentleman. Is there a nanimous consent 

agreement that Mr. Sullivan would be able to have an opening statement? 

Sure. 

 MR. SULLIVAN. I ask unanimous consent. 

 MR. STEARNS. So ordered. 

 MR. SULLIVAN. Thank you, Mr. Chairman, and Chairman Stearns, I 

appreciate you holding this hearing. I think it is very important and this 

issue actually came to light when we were on the full committee and I, 

along with some others, offered an amendment to the Gasoline for 

America’s Security Act directing the FTC to investigate the role of 

overall cost of credit card interchange rates on gasoline and diesel fuel 

retail prices. Since then, we have looked at it further and I think that the 

backbone of our economy today, 85 percent of the people that work in 

America work for, own or operate medium to small businesses and they 

are the ones that are affected by this. I am not saying that there is 

anything bad going on here, but I think it is very important that we get to 

shine the light of day on this process and get to see exactly what is going 

on. So I would like to thank our panelists for being here and I look 

forward to your testimony and I want to thank again the Chairman. He 

said he would do this and he did it and I thank you for that. I yield back. 

[Additional statements submitted for the record follow:] 

PREPARED STATEMENT OF HON. JOE BARTON, CHAIRMAN, COMMITTEE ON ENERGY AND 

COMMERCE

 Good morning. I’d like to thank our distinguished panel for coming in this morning 

to talk about interchange fees. And I’d like to welcome former FTC Chairman Tim 

Muris back to the Committee and thank him for bringing his expertise to our discussion. 

 The purpose of this hearing is to explore how the “interchange fees” associated with 

payment cards affect consumers, small businesses, and the general economy. 

 Merchants in the U.S. began providing credit to customers in card form as early as 

the beginning of the 1900s, and in the 50s and 60s Diners Club and the American Express 

became the first widely used travel and entertainment cards. Nowadays, there are very 

few of us who don’t have a Visa, a Mastercard, or both in our wallets. Payment cards—

whether they’re credit or debit cards—have become extremely important to commerce, 
9

and this has been to the benefit of the average consumer, the corner hardware store, and 

the global retailer. 

 Here’s how the system works: If I buy a case Diet Dr. Pepper for 10 dollars and pay 

with a credit card, both my bank and the store’s bank pay the credit card company a small 

fee for use of its network to make the transaction. These fees are usually a percentage of 

the purchase. 

 After Hurricane Katrina, the price of gasoline rose dramatically, responding to shortterm market forces. Retail consumers now had to pay more than $3 for the same gallon 

of gasoline they had been buying for $2 or less. Even though the amount of gasoline 

purchased did not change, the proceeds from credit card transactions went way up. Some 

gasoline retailers told us in a post-Katrina hearing that these extra fees contributed partly 

to higher gasoline prices—a vicious circle that penalized the consumer. We do seem to 

need a sensible agreement during the next problem like Katrina, so that Congress does 

not have to come up with some solution likely to be clumsy. 

 Soaring gasoline prices in the aftermath of a killer hurricane is abnormal in the 

extreme, however. Congress and this Committee have an essential role to play in 

protecting consumers during normal times from abusive or unfair practices, and I want to 

hear more of what everybody thinks about the impact of these fees in everyday 

commerce. 

 I am pleased to have witnesses representing different opinions on the economics of 

Interchange fees and their impact on commerce. I am interested to learn why any 

disagreements cannot be resolved contractually or by the marketplace, given current 

laws. 

 Thank you, and I look forward to the testimony. I yield back the balance of my time. 

PREPARED STATEMENT OF HON. MARY BONO, A REPRESENTATIVE IN CONGRESS FROM THE 

STATE OF CALIFORNIA

Chairman Barton, Chairman Stearns, Ranking Member Dingell, and Ranking 

Member Schakowsky, thank you and good morning. I would also like to extend a warm 

welcome to the distinguished panel as well. 

As we all of know, credit and debit cards have become a significant form of 

payment in the United States. Whether someone is purchasing a meal or filling up the 

tank of their automobile with gasoline, the credit card is usually in hand, adding 

efficiency and security to the payment process. I use the phrase payment process, 

because it is in fact a process that is more complex than handing over a twenty dollar bill 

and waiting for change. 

Paying with credit cards and other card payment products involves more than a 

consumer and a merchant. It is a complex coordination of different parties, which 

includes consumers, merchants, and often times multiple financial institutions. 

Within this complex web of transactions are interchange fees. Recently, questions 

have been raised surrounding the necessity and level of such interchange fees. For 

instance, what is the consumer getting for this fee and is the process for determining 

interchange fees transparent? And if not, what are the reasons for confidentiality? 

Over the last few years, with the increased focus on the privacy and the protection of 

consumer information, I applaud the credit card industry’s commitment to decreasing the 

risk of fraud and the measures the industry has taken to reduce personal information and 

identity theft. 

 As I have previously stated, this issue involves a highly complex and technical 

aspect of the credit card industry. It is important to remember during this discussion that 

these fees were not established on a whim. They are there to cover the cost associated 

with doing business in a complex system. However, complexity alone does not justify 
10

placing unnecessarily high expenses on consumers. Today’s hearing will help us better 

understand this process and I am looking forward to listening to all sides of the 

discussion about the necessity of such fees. 

Moreover, because of the current robustness of our economy and the added power 

cards give to consumers it seems like any move towards regulation should be met with 

the strictness of scrutiny. 

 With that said, I look forward to hearing the panel’s thoughts on interchange fees, 

the global trends surrounding interchange fees, and what the future holds for interchange 

fees in the United States. 

PREPARED STATEMENT OF HON. MIKE FERGUSON, A REPRESENTATIVE IN CONGRESS FROM 

THE STATE OF NEW JERSEY

• Thank you, Mr. Chairman, for holding this hearing on interchange fees, the structure 

of payment systems and how they both affect the marketplace, merchants and 

consumers. 

• Our economy is dynamic. Consumers enjoy a wide variety of choices in what to 

buy and also choices in how to pay for those goods and services. 

• Ever increasingly, consumers choose to pay with credit cards and have the payment 

made electronically. 

• They enjoy the convenience most of all, but they are also enticed by many other 

benefits such as loyalty and rewards programs through the card issuer. 

• I believe in free, unfettered markets. I also believe that consumers will flock toward 

methods of payment that are more convenient and beneficial to them. 

• It seems like the statistics point toward electronic payment being recognized by 

consumers as the most convenient and beneficial way to purchase goods and 

services. In 2003, businesses and consumers made more payments by electronic 

methods than by check for the first time. 

• And as a believer in free markets, I am reluctant to even enter into a discussion that 

begins and ends with setting price controls – and would be equally as reluctant to 

discourage consumers to use a method of payment that they have selected as the 

most convenient option. 

• That said, I think that merchants, many of them small businesspeople, have rights in 

this equation as well. 

• They need the system to be fair, and they need the cost of participating in credit card 

system to not be overly burdensome. 

• I look forward to hearing from the panelists today. Thank you, Mr. Chairman. 

 MR. STEARNS. I thank the gentleman. The gentleman from Georgia. 

There is no one else with opening statements, so we will welcome the 

panel here. The Honorable Tim Muris of Counsel of O’Melveny and 

Myers on behalf of The Electronic Payments Coalition; Mr. Armour, 

President and CEO of National Association of Convenience Stores, and 

we welcome you; Ms. Karen Kerrigan, President and Chief Executive 

Officer, Small Business and Entrepreneurship Council; and Mr. Edward 

Mierzwinski, Consumer Program Director, U.S. Public Interest Research 

Group. I welcome all of you and we will start with you, Mr. Muris. 

How are you? Good. 
11

STATEMENTS OF THE HONORABLE TIMOTHY J. MURIS, OF 

COUNSEL, O’MELVENY & MYERS, LLP, ON BEHALF OF 

THE ELECTRONIC PAYMENTS COALITION; HENRY 

ARMOUR, PRESIDENT AND CHIEF EXECUTIVE 

OFFICER, NATIONAL ASSOCIATION OF CONVENIENCE 

STORES; KAREN KERRIGAN, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, SMALL BUSINESS AND 

ENTREPRENEURSHIP COUNCIL; AND EDWARD 

MIERZWINSKI, CONSUMER PROGRAM DIRECTOR, U.S. 

PUBLIC INTEREST RESEARCH GROUP 

MR. MURIS. Thank you very much, Mr. Chairman. It is indeed a 

pleasure to be back in front of this committee. This was the first 

committee that I testified before when I was Chairman and this 

committee, on both sides of the aisle, was always a great supporter of our 

work at the Federal Trade Commission. Let me make just a few points. 

First, we are here primarily because of efforts to cap the rates that 

merchants pay for the payment card networks. Such caps will inevitably 

increase card prices to consumers. The merchants’ efforts to regulate 

prices, therefore, pose a direct threat to the American consumer. If 

consumers understood the threat that the merchants’ campaign poses to 

the plastic in their wallets, I suspect that we would see nothing less than 

a 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. 

 My second point is that payment cards benefit both consumers and 

merchants. Electronic payments rank with the cell phone, micro chip 

and personal computer as one of the last century’s great innovations. 

The simplicity of pulling a card from your wallet or purse, however, 

belies an extraordinarily complex technological infrastructure that 

supports these transactions and that literally cost billions of dollars to 

create and allow the transactions to occur securely, reliably and 

efficiently. 

 Third, a fixed interchange fee is essential. Economists classify 

payment systems as two-sided products, which means to succeed, the 

product has to appeal to two distinct sets of consumers and the value of 

the system to one group is largely a function of its attractiveness to the 

other. Normally, the side with attractive low-cost substitutes gets the 

better deal. Consider the newspaper that you read this morning. Readers 

pay little or nothing to enjoy their paper. Instead, the publishers collect 

the vast bulk of their revenue from advertisers. If the paper had to 

charge readers a price based solely on the cost of providing the paper to 
12

them, it would likely fail to get enough readers or advertisers. Without 

enough readers, there will not be enough advertisers for the paper to 

succeed financially. 

 Let me then address the role of the interchange fee. Within the Visa 

and MasterCard networks, as the Chairman was explaining, issuing 

banks provide cards to customers and acquirers process the payment card 

transactions. When a customer uses a card, the merchant transfers the 

billing information to the acquirer, which transfers it to the issuer. The 

issuer pays the acquirer the amount of the transaction less the 

interchange fee and another fee and posts the transaction to the 

customer’s account. The acquirer then credits the amount charged to the 

merchant’s account less the interchange fee plus a fee for the acquirer. 

 Now, this is very important; Visa first adopted an interchange fee, 

and MasterCard quickly followed, in 1970. This was in 1970, well 

before these credit cards had much penetration and anybody could claim 

they had market power. The set fee reduces the transaction cost of 

negotiating separate interchange fees between thousands of acquirers and 

issuers and moreover, for Visa and MasterCard to exceed as brands, the 

merchants have to honor cards from each of the thousands of issuers. A 

system-wide fee avoids the cost of a hold-up that could occur in that 

situation. Without the set fee, individual issuers could demand higher 

interchange fees if there were bilateral negotiations every time a card 

transaction was presented. And because of the need to honor all the 

cards, acquirers could not respond by refusing to accept cards from 

certain issuers. Again, this was in place decades ago, long before the 

significant penetration we have of electronic payments today. 

 Against this background, it is clear that the interchange fee price 

fixing litigation threatens the viability of payment cards as they exist 

today. The normal antitrust remedy for these 47 suits which allege price 

fixing, that allege a conspiracy and restraint of trade, the normal antitrust 

remedy would be, if found liable, would be to end the alleged price fix. 

That is, there could be no setting of interchange fees. The merchants 

who support these cases cannot possibly want the ending of interchange 

fees being fixed because it would harm consumers and for the reasons I 

discussed above, threaten the very existence of Visa and MasterCard. 

Instead, what they want is the government, the Congress, or the courts, to 

fix prices for the industry, but at a lower level. Yet, how could a Federal 

court mandate a reduction in interchange fees to a level deemed 

reasonable as a remedy to a price fixing claim? 

 One of the Antitrust’s most fundamental maxims is that the market, 

not government, should set prices. Indeed, reasonableness is never a 

defense to a price fixing violation. Ordering a fixed interchange fee 

would run directly counter to these principles. Now, to conclude, I 
13

would say that the plaintiffs’ lawyers and their merchant clients probably 

assume they will be able to extort a settlement. By the time these claims 

approach trial, the plaintiffs’ stated damage could easily approach $1 

trillion after troubling. They will argue for a pragmatic solution to the 

problem and they are betting that with your help they will succeed. 

Because American consumers would lose as a result of price controls in 

this industry, I urge you to refrain from such a drastic step. Thank you 

again, Mr. Chairman, for inviting me. 

 [The prepared statement of Timothy J. Muris follows:] 

PREPARED STATEMENT OF HON. TIMOTHY J. MURIS, OF COUNSEL, O’MELVENY & MEYERS 

LLP, ON BEHALF OF THE ELECTRONICS PAYMENTS COALATION

 Chairman Stearns, Ranking Member Schakowsky, and Members of the 

subcommittee, my name is Timothy J. Muris. I am George Mason University Foundation 

Professor of Law and former Chairman of the Federal Trade Commission. Although I 

am here today at the request of the Electronic Payments Coalition, a coalition of card 

networks as well as large and community banks and thrifts,1

 my views on the “Law and 

Economics of Interchange” are my own. I want to thank the subcommittee for giving me 

the opportunity to discuss this important subject. 

I. Why Are We Here? 

 A group of merchants, plaintiffs’ lawyers, and trade associations want some arm of 

the Federal government to cap the rates that merchants pay for access to the electronic 

payment infrastructure that the payment card networks and thousands of other financial 

institutions have built over the past fifty years. The inevitable consequence of allowing 

the merchants to cap the prices they must pay to accept payment cards will be to increase 

the price that consumers pay for their cards. The merchants’ efforts to regulate prices, 

therefore, pose a direct threat to the American consumer. If consumers understood the 

threat that the merchants’ campaign poses to the plastic in their wallets, I suspect that we 

would see nothing less than a revolt. 

 I have witnessed the full fury of the aroused American consumer. While chairman 

of the Federal Trade Commission, I led the agency in riding a wave of public resentment 

to create the National Do Not Call Registry. I suspect that many Americans feel as 

strongly about their plastic as they do about their dinner hour. 

To explain why the actions of the critics of payment cards threaten their very existence, 

the remainder to this testimony makes four points: 

• Electronic payments produce enormous benefits for consumers and merchants alike; 

• A fixed interchange fee is essential to the existence of the electronic payment card 

market; 

• As the recent experience in Australia demonstrates, federal, state, and local 

governments restructuring should not seek to regulate the price of interchange, and; 

• The current interchange fee price fixing litigation threatens the viability of the 

electronic payment card system as it exists today. 

II. Electronic Payments Produce Enormous Benefits. 

 

1

 The full list of members of the Electronic Payment Coalition is attached to this testimony as 

Exhibit A.
14

 As I have written elsewhere, electronic payments rank with the cellphone, 

microchip, and personal computer as one of the great innovations of the twentieth 

century.2 The simplicity of pulling a card from a wallet or purse belies the 

extraordinarily complex technological infrastructure that supports electronic transactions, 

connecting merchants, consumers, and financial institutions securely, reliably and 

efficiently. 

 The merchant campaign to impose price controls on the industry rests on a 

fundamental misconception. In supporting price controls, some claim that payment cards 

are overused relative to other payment methods. Cash, checks, and other forms of 

electronic payment may be cheaper for some merchants on some transactions than the 

services offered by Visa, MasterCard, American Express, and their financial institution 

partners. But they are not cheaper for society as a whole when the full benefits and costs 

of payment cards are considered. Electronic payments offer benefits to consumers and 

merchants that other forms of payment, particularly paper-based ones, cannot match. 

 Payment cards allow consumers to manage their money better by making it possible 

to anticipate, plan, and match their obligations to their available funds. Most households 

receive income in regular increments, biweekly or monthly paychecks, for instance, yet 

make purchases continually. Payment cards allow consumers to combine their bills into a 

single monthly payment card obligation. Payment cards also allow consumers to smooth 

out unexpected expenditures, such as car repairs or family emergencies, instead of 

holding sufficient reserves to cover such costs. Some commentators have estimated that 

the benefit to consumers of not having to set aside such reserves (and thereby earning 

interest on that money) is substantial, one that alone exceeds the cost of the annual fee on 

those cards that have them. 

 Electronic payments are also flexible enough to be used in almost any environment, 

facilitating transactions that otherwise would not be possible. Consider the symbiotic 

relationship between internet commerce and electronic payments. During 2002, 

Americans bought $43 billion worth of retail goods over the Internet, comprising 1.3% of 

all retail sales. By 2004, this figure had grown to over $100 billion. In the United States, 

95% of internet purchases are made with payment cards. The development of ecommerce would have been stifled without consumer confidence in the security and 

usefulness of these cards. By increasing shopping convenience and permitting greater ecommerce, the widespread use of payment cards has helped enable the creation and 

expansion of new businesses in the economy, especially small and niche-focused firms 

that could not survive in traditional brick-and-mortar environments. 

 The campaign against the electronic payment industry also rests, at least implicitly, 

on the argument that consumers (and society as a whole) have suffered because of the 

easy access that payment cards provide to revolving credit. This claim is also misguided. 

From colonial times to the mid-twentieth century, bank credit was essentially limited to 

the economic and social elite. The vast majority of U.S. households had no access to 

bank credit. As a result, they were forced to borrow money from family or friends or 

unlicensed lenders such as pawn brokers and loan sharks. 

 Today, most adult Americans can obtain a revolving line of credit from a financial 

institution issuing a Visa, MasterCard, American Express or Discover card. In fact, more 

people have credit cards in their wallets than voted in either of the most recent 

presidential elections. Even many of the poorest households in the United States have 

participated in the consumer credit revolution. By the end of 2001, 38 percent of 

households in the lowest income quintile had acquired a credit card. 

 

2

 See, e.g., Timothy J. Muris, Payment Card Regulation and The(Mis)Applicaton of the 

Economics of Two-Sided Markets, 2005 COLUMBIA BUS. L. REV. 515 (2005) (Exhibit B). For the 

Committee’s convenience, I also attach an op-ed piece that I published in the Wall Street Journal last 

year. (Exhibit C) 
15

 Credit cards can be a superior form of credit for some consumers. Too often, those 

who scoff at this use of plastic do not need credit or are wealthier individuals with better 

credit options than many Americans. Compared to home-equity loans, for example, 

credit cards do not require that one own a home or that one further mortgage the home 

that he owns. Credit cards are clearly superior to and less expensive than traditional 

forms of credit such as pawnshops, payday lenders, and borrowing money from family 

and friends. In the last quarter of 2005, the average annual percentage rate on a credit 

card account was 12.36 percent.3

 Furthermore, personal-finance company loans can be 

more expensive and have much higher initiation fees than do payment cards. 

 The argument that credit-card debt is overused is simply misplaced. The use of 

revolving credit reflects almost entirely an offsetting decline in installment credit, such as 

from personal-finance companies and retail stores. From 1970-1995, installment credit 

fell steadily, offsetting the rise in revolving credit. Since 1995, revolving credit as a 

percentage of disposable personal income has been largely constant. 

 In addition to the benefits that consumers enjoy from the electronic payment 

infrastructure, merchants enjoy benefits as well. Merchants directly benefit from the 

faster throughput and enhanced record keeping features of electronic payments. 

Merchants also benefit from payment guarantees that have enabled financial institutions 

to assume the risk of non-payment and fraud from paper-based forms of payment. 

Merchants, particularly boutique merchants, benefit from the separation of the extension 

of credit from the retail transaction made possible by electronic payments. The system 

built by MasterCard, Visa, American Express, and others enables merchants to 

concentrate on delivering more and more unique goods to consumers and financial 

institutions to specialize in evaluating consumers’ capacity to repay and reducing the 

costs associated with collection. Indeed, the benefit of all-purpose credit cards is 

demonstrated by the fact that many merchants have discontinued their own, proprietary 

cards. 

III. Interchange, Merchant Fees, and Two-Sided Markets. 

 The merchants’ core argument for additional regulation reduces to the claim that the 

payment networks charge merchants too much and provide them too little. When they 

present this argument in court, they dress it up, insisting that Visa and MasterCard 

provide a forum in which banks conspire to raise the price that merchants pay for 

payment. To understand why these theories are fundamentally flawed, and therefore why 

Congress and the Courts should not intervene in this industry, it is critical to understand 

the basic economics of payment cards. 

 Economists classify payment systems as two-sided products. To exist, a two-sided 

product must appeal to two distinct sets of customers, and the value of the system to one 

group of customers is largely a function of its attractiveness to another group of 

customers. This characteristic drives pricing strategy for all two-sided products, 

including payment systems. Normally, the side with attractive low cost substitutes gets 

the better deal. This is not a matter of fairness or cost recovery. It is simply the way that 

the supplier of the two-sided product maximizes the appeal and use of the product to both 

groups of customers. 

 Newspapers employ such a pricing strategy. Readers of newspapers pay little or 

nothing to enjoy the benefits. Instead, publishers collect the vast bulk (or all) of their 

revenue from advertisers. If a newspaper has to charge readers a price based solely on 

the direct marginal cost of providing the paper to them, it would likely fail to attract 

sufficient participation from either readers or advertisers. Most readers have many other 

sources of news and entertainment available at prices likely below the marginal cost of 

 

3

 See Federal Reserve Statistical Release G.19, Consumer Credit (Feb. 7, 2006), available at

http://www.federalreserve.gov/releases/g19/current/default.htm. 
16

supplying them with a newspaper. Without enough readers, there will not be enough 

advertisers for the paper to succeed financially. 

 Payment systems have followed a similar pricing strategy since their inception. 

When Diner’s Club introduced its charge card in the 1950s, it needed terms that would 

provide consumers with a reason to use its new payment system instead of cheaply 

available substitutes—cash, check, and traveler’s checks. Diners Club settled on a 

pricing strategy that featured a relatively modest annual fee, no per transaction charge, 

and a 30-day grace period. Although merchants received substantial benefit in the form 

of a payment guarantee, they paid a seemingly higher price. They accepted transactions 

made with Diner’s Club cards at 4 - 5% discount of face value. 

 American Express and Discover continue to follow this model. Like Diner’s Club 

in the 1950s, they price directly to both cardholders and merchants. They have settled on 

a pricing strategy that directs substantial value to cardholders (e.g., cash-back, rewards, a 

grace period, and low revolving rates) at low or no explicit price and that charges 

merchants a discount on all transactions. 

 The origin of Visa and MasterCard is somewhat more complex. Figure One 

(Exhibit D in the Appendix) explains the four parties involved in a transaction that uses a 

MasterCard or Visa payment card. Within the Visa and MasterCard networks, “issuing” 

banks provide cards to customers and “acquirers” process payment card transactions for 

merchants. When a customer uses a card, the merchant transfers the billing information 

to the acquirer, which transfers the billing request to the bank issuer. The issuer pays the 

acquirer less the interchange fee, set by Visa and MasterCard, and posts the transaction to 

the customer’s account. The acquirer then credits the amount charged to the merchant’s 

account, less the interchange amount plus an additional fee. Thus, for Visa and 

MasterCard, interchange fees help perform the same balancing function as the direct 

payment from merchants to American Express, Discover, and Diner’s Club. 

 In 1970, Visa first adopted a fixed interchange fee. A set fee reduces the transaction 

costs of negotiating separate interchange fees between acquirers and issuers and 

eliminates the difficulties that issuers had faced in monitoring the merchant discounts set 

by individual acquirers. Moreover, for Visa to succeed as a “brand,” merchants need to 

honor cards from each of the thousands of issuers. A systemwide fee, set by Visa, avoids 

the costs of the resulting “hold up” problem that would exist if merchants have to accept 

cards from every Visa issuer. Without a set fee, individual issuers could demand higher 

interchange fees in any bi-lateral negotiation. Because of the need to honor all cards, 

acquires could not respond by refusing to accept cards from certain issuers. 

 Because they are currently joint ventures of banks across the country, MasterCard 

and Visa are subject to alleged conspiracy charges simply based on their structures. Visa 

and MasterCard exist as joint ventures in part because old anti-branching laws prevented 

banks from operating across state lines. When Bank of America began to franchise its 

card brand in 1966, the banking regulations prohibiting interstate banking prevented it 

from expanding beyond its home state of California. 

 In short, the essential interchange structure, comprising a merchant discount that 

provided revenues for the acquirer bank and included the interchange fee, was in place 

from almost the very beginning, long before Visa and MasterCard possibly had any 

market power. The early emergence of the interchange fee and its continued presence in 

the payment card industry testify to the inherent logic of interchange fees in equilibrating 

the two sides of the market, and not, as critics contend, to harm consumers. 

 Another important aspect of the interchange fee involves the intense competition 

among issuers. Consumers have many choices among payment cards, not just the 

different “brands” (MasterCard, Visa, etc.), but also among the numerous banks issuing 

MasterCard, Visa, and now American Express. No issuer has market power, and issuers 

respond to increases in interchange fees by enhancing card benefits to consumers. 
17

IV. There’s Nothing Broken About The Electronic Payments Industry: Do Not 

Seek To Control Its Pricing. 

“Subsidies” are common in our complex economy. For example, Adobe gives away 

its popular Acrobat software to document recipients to increase the sales of its software to 

document senders. Likewise, consumers receive free refills on drinks in restaurants, free 

parking at shopping malls, goods below cost in supermarkets (via loss leaders), relatively 

inexpensive newspapers because advertisers pay most of the costs. To bring buyers and 

sellers together through such intermediaries as newspapers, shopping malls, and dating 

clubs, one side frequently receives inducements to participate. These inducements help 

maximize the joint value of the ultimate transaction for the parties. Rather than an 

inefficient “subsidy,” these inducements are the lubricant necessary to make the 

economic machine work at its best. 

 The cross-subsidy within the pricing model of the electronic payments industry is no 

different. Consumers play a more active role in making a choice between payment forms 

at the point of sale than merchants. As a result, explicit benefits flow in their direction. 

But like “free” refills, deliveries, and toasters, any “subsidy” from merchants to 

consumers does not raise the sort of issue that the antitrust laws exist to correct. Nor 

should Congress or the Courts step in to regulate the price of payment in the United 

States as a few foreign governments have done. In fact, the outcome of rate regulation in 

Australia shows clearly why federal, state and local governments in this country should 

not regulate the price of payment and what might happen if they do. 

 The Reserve Bank of Australia announced an interchange rate formula for the bank 

owned systems, Visa, MasterCard, and Bankcard. In October 2003, the RBA’s 

interchange rate regulation went into effect, cutting Bankcard’s, MasterCard’s and Visa’s 

interchange rates on credit card transactions from approximately 95 to 55 basis points. 

 Although the effects of the RBA’s restructuring of the payment card industry will 

play out for many years, the regulatory regime has already had significant effects. 

Cardholders have borne the brunt of the RBA’s regulation. Since the imposition of the 

rate caps, credit card fees have increased substantially. In a paper discussed at a recent 

academic conference hosted by the New York Federal Reserve, economists Howard 

Chang , David Evans, and Daniel D. Garcia Swartz, analyzing Visa credit card data, 

estimated that Australia cardholders had seen their annual fees and finance charges 

increase by AU$148 million.4

 Chang, Evans and Swartz also reported that rewards 

programs were cut following the RBA regulation. 

V. The Antitrust Cases. 

 There are now 47 merchant lawsuits challenging interchange that have been 

consolidated into a single proceeding in the District Court for Eastern District of New 

York. The plaintiffs’ lawyers and the relatively few merchants they have attracted as 

clients allege that the setting of interchange fees is a conspiracy in restraint of trade. The 

normal antitrust remedy in this situation would be to end the allegedly fixed price. The 

networks then would no longer set interchange fees. But the plaintiffs and, more 

importantly, merchants as a whole cannot possibly want that relief. It would, for the 

reasons explained above, harm consumers and threaten the existence of Visa and 

MasterCard as we know them. Instead, the plaintiffs want the judge to himself fix prices 

for the industry, but do so at a lower level. 

 Yet, how could a federal judge mandate price fixing (a reduction in interchange fees 

to a level deemed “reasonable”) as a remedy to a price fixing claim? One of antitrust’s 

 

4

 Howard H. Chang, David S. Evans, Daniel D. Garcia Swartz, An Assessment of the Reserve 

Bank of Australia’s Interchange Fee Regulation, The Federal Reserve Bank of New York 

Conference: Antitrust Activity in Card-Based Payment Systems: Causes and Consequences (Sept. 

15-16, 2005). 
18

most fundamental maxims is that the market, not government, should set prices. Indeed, 

“reasonableness” is never a defense to a price fixing violation. An order to set 

interchange at a reduced rate, however it was ultimately justified, would run directly 

counter to these core principles of antitrust. And, as we know from Australia, such an 

order would have only one certain effect—consumers would pay higher prices for access 

to electronic payments. 

 If these cases are litigated on the merits, the plaintiffs should lose. As an initial 

matter, unlike a true price-fixing case,5

 the purpose of the interchange fee is actually to 

increase output. The current system of interchange fees are a necessary part of an 

industry that provides enormous benefits to consumers. Nevertheless, the plaintiffs’ 

lawyers and their merchant clients probably assume that these cases will never have to 

litigate these cases on the merits believing, instead, that they will be able to extort a 

settlement. By the time these claims approach trial, the plaintiffs’ stated damage theory 

could easily approach $1 trillion after trebling. They will argue for a “pragmatic” 

solution to the problem, and they are betting that, with your help, they’ll be able to 

succeed. Because American consumers would lose as a result of price controls in the 

industry, I urge you to refrain from such a drastic step. 

 Mr. Chairman and members of the Committee, that concludes my testimony. Thank 

you again for inviting me, and I will be happy to respond to questions. 

 

5

 See, e.g., Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1, 19-20 

(1979) (in assessing a price fixing claim, “[the] inquiry must focus on whether the effect and . . . 

purpose of the practice are to threaten the proper operation of our predominantly free-market 

economy -- that is, whether the practice facially appears to be one that would always or almost 

always tend to restrict competition and decrease output”).
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23
24
25
26
27
28
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31
32
33
34
35
36
37
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39

 MR. STEARNS. Thank you. Mr. Armour. 

MR. ARMOUR. Good morning, Mr. Chairman. My name is Hank 

Armour and I am President and Chief Executive Officer, National 

Association of Convenience Stores. Prior to taking my current job, I 

owned and operated 59 retail facilities in Washington State, Oregon, and 

California. 

 MR. STEARNS. I don’t know if your microphone is on, and just put it 

close to you, if you could. 

 MR. ARMOUR. Thank you. I appreciate that. 
40

 MR. STEARNS. We should have told you that, so it is not your fault. 

I should have told you so. 

 MR. ARMOUR. You never know where you have friends. 

 MR. STEARNS. But the value is, if you want to speak to your 

colleague, you can shut it off, too. Okay. 

 MR. ARMOUR. The International Trade Association representing the 

convenience store industry. The industry, as a whole, includes about 

140,000 stores in the United States, sells over 70 percent of the country’s 

retail motor fuels and employs about a million and a half workers across 

the nation. It is truly an industry of small businesses. Sixty percent of 

convenience stores are owned and operated by one-store operators. I 

would like to start by thanking you, Mr. Chairman, and the members of 

this subcommittee for holding a hearing on this topic. 

 In September we testified before the full committee regarding 

gasoline prices and the increasing amount of money that credit card 

companies are receiving from every gasoline purchase. Chairman 

Barton, in particular, expressed surprise at the magnitude of the fees 

being charged. Let me give you four points this morning establishing the 

problems with the interchange fees market. Point number one, retailers 

have no choice. Credit and debit transactions are a large and growing 

part of retailers’ business. In the convenience store industry, about 60 

percent of motor fuel sales are paid for with credit and debit cards and it 

is rising. 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 checks. Plastic transactions have simply 

become the most predominant method of payment. As a practical matter, 

my members have absolutely no choice but to take credit and debit cards. 

 Point number two, card associations drive up fees and keep them and 

their rules secret. The card association sets interchange rates for all of 

their member banks and all of those member banks must agree to charge 

the same rates. Of course, the boards of the card associations that make 

those decisions are made up of member banks. So this is nothing more 

than price fixing. Just to give you a sense of the magnitudes of the fees 

that we are talking about, we and our customers pay more than $27 

billion in interchange fees each year in this country and this figure 

doesn’t include the many other fees collected directly from consumers, 

such as annual fees, late fees, interest, and the like. Even more 

problematic is the length to which the credit card companies go to assure 

that consumers remain in the dark about these fees. 

 Another major problem is that Visa and MasterCard compete by 

raising, not lowering, their interchange fees. When they raise their rates, 

they compete to get their bank members to issue more of their cards. 

Higher interchange rates means those banks, in turn, get more money 
41

from transactions put on those cards. And it is not just consumers who 

are left in the dark. Visa and MasterCard refuse to fully disclose their 

operating rules to retailers. It is outrageous that they make retailers agree 

to abide by all of their operating rules in order to be able to accept their 

cards, yet they won’t let retailers see those rules. 

 Point number three. These fees are bad for consumers. Not only is 

this a big concern for us, as retailers, but the current situation is 

tremendously unfair to consumers. Because these fees are hidden in the 

cost of virtually everything we buy, even cash paying customers 

ultimately pay for them. This results in a nasty, regressive charge. 

People who get the fewest benefits from credit cards subsidize those who 

get the most benefits. 

 And finally, point number four. The United States pays far more 

than its share of credit card fees. U.S. consumers are, in effect, 

subsidizing credit card company operations around the world. This 

chart, over to my left, your right, shows just how bad the situation is. 

We have the highest volume of transactions, the best technology and 

very low and decreasing rates of fraud. Our interchange rates ought to be 

the lowest in the world, not among the highest. Thank you, Mr. 

Chairman and committee members. This has been a brief overview of a 

very serious problem. I look forward to working with the members of 

this committee and the entire Congress to find solutions to this problem 

and I welcome your questions. 

 [The prepared statement of Henry Armour follows:] 

PREPARED STATEMENT OF HENRY ARMOUR, PRESIDENT AND CHIEF EXECUTIVE OFFICER,

NATIONAL ASSOCIATION OF CONVENIENCE STORES

Good morning, Mr. Chairman. My name is Hank Armour, and I am President and 

Chief Executive Officer of the National Association of Convenience Stores (NACS). 

Prior to taking my current job, I owned and operated fifty-nine retail facilities in 

Washington State, California and Oregon. 

NACS is an international trade association representing the convenience store 

industry. The industry as a whole includes about 140,000 stores in the United States and 

employs about 1.5 million workers across the nation. It is truly an industry of small 

businesses; 60 percent of convenience stores are owned by one-store operators. 

I would like to start by thanking you, Mr. Chairman, and the Members of this 

Subcommittee for holding a hearing on this topic. Credit card interchange fees 

dramatically impact consumers and are a top priority for the convenience store industry – 

and for merchants across many industries. These fees have actually been of concern for a 

number of years and have now escalated to the point that they are the third highest 

operating cost to my industry – behind only payroll and rent. In September, we testified 

before the full Committee regarding gasoline prices and the increasing amount of money 

that credit card companies are taking out of every gasoline purchase. Chairman Barton in 

particular expressed surprise at the magnitude of the fees being charged. The Committee 

followed up by asking for a study of this issue. While the credit card companies opposed 

that study, we think these efforts and this hearing are important steps toward informing 

the Congress and the public about these interchange fees. There has not been nearly 
42

enough information and discussion about these fees in the past and we applaud you for 

your willingness to examine them. 

One of the reasons these fees are such a concern for my industry is that they are bad 

for our customers. Most consumers have no idea that they pay these fees which are 

hidden in the price of virtually everything they buy. Consumers search for low prices and 

hidden fees simply drive up the cost they must pay. This is particularly true in our 

industry. Gasoline prices are posted on the street and you would be amazed at what 

people will do – making U turns on busy streets and driving far out of their way – just to 

save a couple of cents on a gallon of gas. Well, right now credit card companies charge 

about 5 cents in interchange on a gallon of gas. I know from experience that that is a big 

number to our customers. Our concerns here are similar to our concerns about excise 

and sales taxes – but at least those taxes are publicly debated and our customers can vote 

based on their views about their relative costs and benefits. Credit card companies work 

hard to keep their fees hidden and even if our customers knew about them, they can’t 

vote on them. 

Because interchange fees have become such a large and unfair cost to our industry 

and our customers, we helped establish a broad coalition – the Merchant’s Payments 

Coalition (or MPC) – to try to deal with this problem. The MPC includes 22 trade 

associations representing many of the retailers in your districts – grocery stores, drug 

stores, restaurants, bowling alleys and more. This is a very diverse group with members 

that do not always agree, but we have been drawn together because the costs of 

interchange fees affect all of us and our customers dramatically. 

Interchange fees are levied in a market that is absolutely broken. The problems are 

so severe and numerous that NACS and a number of other trade associations and retailers 

are parties to more than 50 lawsuits that have been filed against the card associations and 

member banks for their violations of the antitrust laws in setting these fees. In fact, the 

United States Department of Defense has recently filed a claim for $100 million in a 

lawsuit that settled a couple of years ago based on related antitrust violations by the credit 

card companies for damages incurred when accepting credit card payments. 

We only turned to litigation as a last resort, and contrary to what you might hear 

from the credit card companies or their surrogates, a great many concerned retailers and 

members of the MPC have not decided to take this issue to the courts. With that said, let 

me assure you that my purpose today is not to debate the merits of that litigation. 

Instead, I simply want to give the Committee some sense of the problems we face and the 

ways in which this market is broken. 

With that in mind, there are four points illustrating the problems with the 

interchange fees market that I would like to cover in my remarks today. First, because of 

the market power of the card associations, retailers have no choice about whether they 

accept cards. Second, the card associations exploit their market power by driving up fees 

and by veiling these fees and their rules in secrecy. Third, these fees are bad for 

consumers – particularly some middle and many lower income consumers who do not 

have easy access to credit and debit cards. And fourth, consumers in the United States 

pay much more for interchange than other comparable countries. 

1. Retailers Have No Choice 

Credit and debit card transactions are a large and growing part of retailers’ business. 

In the convenience store industry, around 60 percent of motor fuel sales are paid for with 

credit or debit cards. Across all industries in the United States, in fact, the number of 

electronic payments – most of which are credit and debit card payments – now exceeds 

the number of payments by check. Plastic transactions have simply become the most 

predominant method of payment. My members have to take credit and debit cards. 

And most of the cards in the United States are from Visa and MasterCard. As 

recently as 2003, the Second Circuit Court of Appeals held in the U.S. Department of 
43

Justice’s case against Visa and Mastercard that the two card associations – both jointly 

and separately – had market power. This is consistent with other cases and with retailers’ 

experience. 

The average U.S. consumer carries a limited amount of cash at any given time. 

Consumers also have an average of 9 credit cards. So, what happens? When consumers 

want to buy something that costs more than about $20 – like filling up their tanks with 

gasoline which cost about $23 last year – that transaction is likely to go on a credit or 

debit card. This has played out in the gasoline retailing business. As gasoline prices 

increased and the cost of the average fill-up went above $20 or so, card usage rose 

dramatically. 

Maybe this is because 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 that doesn’t even count the phone calls. Many of us 

have anecdotal stories of minor children, deceased individuals and even family pets 

receiving those mailings – sometimes with promises of large preapproved credit lines. 

But whatever the reason for the boom in cards and card usage, it is clear that cards – 

particularly from Visa and MasterCard – are so ubiquitous that most retailers simply have 

to take them. 

2. Card Associations Drive Up Fees and Keep them and their Rules Secret 

The card associations set interchange rates for all of their member banks – and all of 

those member banks must agree to charge the same rates. Of course, the boards of the 

card associations that make those decisions are made up of member banks so this is 

nothing more than price-fixing. The fact that they get away with it amazes me, but the 

courts will decide whether their questionable legal basis for this practice is still valid. 

Just to give you a sense of the magnitude of the fees we are talking about, we and 

our customers pay more than $27 billion in interchange fees each year in this country. 

When all of the other fees on credit and debit transactions are included, the tab increases 

to over $39 billion. And this figure does not include the many other fees collected 

directly from consumers such as annual fees, late fees, interest and the like. 

We calculate that an average convenience store paid about $31,000 in interchange 

fees in 2004. That same store only made $36,000 in pre-tax profits in 2004. The fact 

that our members on average are paying almost as much to the credit card companies 

each year as they are making before they pay Uncle Sam gives you a sense of just how 

broken this market is. 

Even more problematic is the lengths to which the credit card companies go to 

assure that consumers remain in the dark about these fees. This system is so complex it 

makes your phone bill seem easy to understand. But at least somebody tries to tell you 

about all of the fees that are tacked onto your phone bill every month. You don’t even 

get that privilege with your credit card purchases. 

Retailers are told by their banks that the rules prohibit them from telling consumers 

about the interchange fees charged for different transactions and about the operating 

rules. This conspiracy enforced by the credit card companies to keep information from 

consumers is a key element of the problems in this market. How can consumers possibly 

decide what is in their interest if the credit card companies keep this information secret? 

Another major part of the problem is that Visa and MasterCard compete by raising – 

not lowering – their interchange rates. When they raise their rates they compete to get 

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. There is not a 

sufficient check against those rising rates because the market power of the credit card 

companies inhibits retailers from refusing to take a card with higher interchange rates and 

because consumers – who ultimately pay the fees – do not have good information about 

the charges. 
44

Retailers are not given a comprehensible disclosure of the rates they are charged. 

The card associations have a complex matrix of interchange rates. These rates range 

from about 5 cents plus 1.15% for each transaction to 10 cents plus 2.7% 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 based on their supposed fraud risk and the 

like. Plus, a retailer may be charged different rates within the course of the same 

business day. If, for example, 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 (such as in the posthurricane situation) then a higher rate is charged. 

It’s not just consumers who are left in the dark; Visa and MasterCard refuse to fully 

disclose their operating rules to retailers. MasterCard has at least put a summary of its 

rules on its Website. But a summary is not the same thing as the complete set of rules – 

and the summary alone is more than 300 pages. It is remarkable that they make retailers 

agree to abide by all of their operating rules in order to be able to accept their cards, yet 

they won’t let retailers see those rules. I find the lack of transparency by Visa and 

MasterCard to be outrageous. 

One classic example of the way that Visa and MasterCard compete to drive up 

interchange occurred in 1998 through 1999. In May 1998, Visa announced that it would 

increase its offline debit 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 it would have been a chance for MasterCard to hold 

or lower prices to gain market share – but the reality is just the opposite 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. 

3. These Fees Are Bad for Consumers 

Not only is this a big concern for us as retailers, but the current situation is 

tremendously unfair to consumers. Ultimately, consumers pay for all of this. 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 cash-paying consumers 

ultimately pay for them. 

There are many particularly glaring examples of situations in which people have no 

choice but to accept credit and debit card payments even though the fees that are charged 

do not make sense or are directly contrary to the public policy that most people would 

support. 

One example which has been of great concern to the retail community is what 

happens in the wake of hurricanes and other disasters. Retailers often go to great lengths 

to open their doors following disasters so that people in the affected area can get the basic 

goods that they need to survive. That was never more evident than in 2005. Not only the 

Gulf but parts of the State of Florida were hit with devastating hurricanes last year. In 

these areas, many retailers had to operate without (or with sporadic) electricity and phone 

service. The cruel and sobering reality for these retailers and their customers was that the 

credit card companies charged them among the highest interchange rates for their efforts 

because without electricity or phone service retailers could not swipe cards or call to get 

preauthorization before completing a transaction. Instead, they sometimes used the old 

fashioned method of running the card and a receipt with a carbon copy through a machine 
45

and getting a signature. But without a preauthorization the retailers – and, ultimately, the 

consumers who were hit so hard by the hurricanes – had to pay the exorbitant, higher 

rates because of the supposed risk of fraud – almost 60% more than the standard rate of 

1.89% of the sale. 

This results in a nasty, regressive charge. In short, people who get the fewest 

benefits from credit cards subsidize those who get the most benefits. This hidden 

regressive tax levied by an unregulated private monopoly should not be ignored. 

Consumers with fewer resources whose credit does not allow them to have credit cards or 

do not have debit cards pay this fee like everyone else – as do consumers with credit 

cards who pay high interest rates, annual fees and have no rewards or miles programs. 

And this is the vast majority of consumers. 

One of the reasons this problem is so pernicious is that it is hidden. ATM fees are a 

good point of comparison. How much do we pay each year in ATM fees? About $4 

billion. Interchange fees are almost 7 times as much – and when other, related fees are 

included the difference is far more than that. Why isn’t there more of an outcry about 

interchange fees? Because while consumers see every ATM fee they pay and have some 

ability to choose an ATM that carries a smaller surcharge, the credit card companies go to 

great lengths to try to ensure that interchange fees remain hidden. 

The credit card companies are often quick to point to rewards programs and airline 

miles as benefits to consumers. But those rewards don’t look very good when you 

understand that consumers pay for each dollar of rewards with several dollars in 

interchange fees. It is also important to keep in mind that most credit cards do not come 

with rewards programs. Convenience store customers, in fact, only use a card that earns 

rewards for about 1 out of 7 transactions. And what about the annual fees, interest 

payments, late fees and multiple other charges that credit card holders must pay directly? 

Just more monopoly profits for the credit card companies who get consumers coming and 

going – and then they have the gall to tell their customers how great it is they get a few 

airline miles or rewards points for all of the extra money they have been charged. As you 

watch the credit card ads during the Olympics this week, make sure to enjoy them. You 

are paying dearly for them. 

4. The United States Pays Far More than its Share of Interchange Fees 

U.S. consumers are, in effect, subsidizing credit card company operations around the 

world. Interchange rates are far higher here than they are in comparable countries. They 

are also higher here than in several countries that we wouldn’t even think of as remotely 

comparable in this area. You can take a look at the chart showing interchange in 

different countries to get a sense of just how bad this comparison is for us. And bear in 

mind that this chart was prepared before last year’s dramatic effective increase in fees. 

We have the highest volume of transactions, which 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 U.S. rates 

are higher than in other countries and they are rising – while the rates in most other 

countries are flat or declining. Our interchange rates ought to be the lowest in the world. 

It is one thing for us to pay about double the rate paid in places like Great Britain, 

the European Union and Australia. The credit card companies will spend a lot of time 

complaining about the regulatory systems in those places. Of course, they typically don’t 

mention that the rates were far higher here than in any of those places even before their 

regulators took action. But how can anyone think it makes sense for us to pay higher 

interchange rates than people in Malaysia, Greece and Brazil? Does the United States 

really have a riskier and costlier credit system than those countries? 

The answer is that we don’t, but because of their market power the credit card 

companies can get away with charging more here – so they do. It is that simple. 
46

* * * 

All of this is just a small part of the explanation of how the market for interchange 

fees in the United States is broken. Something must be done to fix it. I look forward to 

working with the Members of this Committee and the entire Congress to find the right 

solutions to this problem and I welcome your questions. 

 MR. STEARNS. I thank the gentleman. Ms. Kerrigan. And you’ve 

got your mike on, okay. 

 MS. KERRIGAN. I do. 

 MR. STEARNS. Okay. 

MS. KERRIGAN. I am all set. Thank you very much. Chairman 

Stearns, Ranking Member Schakowsky and members of the 

subcommittee, I appreciate the opportunity to join you today to discuss 

the issue of interchange fees. Again, my name is Karen Kerrigan. I am 

President and CEO of the Small Business and Entrepreneurship Council. 

We are a nonprofit, nonpartisan, small business advocacy organization 

based here in the nation’s capital with 70,000 members nationwide. For 

more than a decade, we have regularly expressed to Members of 

Congress, whether that be through our letters, our meetings with you, 

special reports, issue briefs or in hearings such as this one today, our 

concerns about the unintended consequences of legislation or regulatory 

initiatives that are proposed or advanced in response to, or with the aim 

of correcting inequities in the marketplace. 
47

 Small businesses have certainly experienced the fallout of many 

good intentions gone awry. In the areas of healthcare and taxation, to 

name two areas among many, we can point to a series of initiatives 

where government has intervened, resulting in costly burdens, inequities 

or new barriers limiting growth or entrepreneurial opportunities for small 

firms. In some, we are very cautious and circumspect about solutions 

that call upon government or the courts to intervene in the workings of 

the marketplace. And it is within this context and that experience that we 

approach the issue of interchange fees and more specifically, placing 

controls on such fees. 

 Our members do not like paying interchange fees, which is how they 

also feel about many, many other business costs. However, they 

recognize the benefits of electronic payment cards, and I have outlined 

those in my written testimony, benefits that have led to increased sales 

and increased business efficiencies. Many small businesses are, of 

course, succeeding; many members of my organization who do not 

currently use electronic payment cards, and that is the beauty of the 

system. If something does not work for you or your customers, if it is 

deemed too expensive you can simply opt out. But of course, even 

businesses and small businesses that may not take electronic payments 

have a stake in the stability and security of this sophisticated and 

important system. After all, small business owners use credit cards, 

either personally or to pay expenses or finance their businesses. No one 

can disagree that all parties have a major stake in its ongoing success, its 

efficiency and development. 

 And that is one of our key concerns, that government intervention or 

price controls would greatly reduce incentives to invest and innovate, 

which will not bode well for the enhancement, the expansion and the 

maintenance of a complex payment system, one that needs to become 

even better, given the growth of and the opportunities presented by the 

global economy. Along that same thought-line, regulation or court 

ordered remedies only hurt the environment for future competition, that 

is, a regulatory framework that may be established to deal with 

interchange fees may prevent the better mouse trap, if you will, from 

being developed; a system, a tool or an idea that could lower costs and 

provide better and more innovative services for small business owners 

and all consumers. 

 We and lawmakers have been strongly encouraged to look abroad to 

see how other nations are regulating interchange and are urged to 

emulate such models here in the U.S., but from what we see with respect 

to results in trends of fee setting by government in such countries, the 

law of unintended consequences is taking hold. Credit card holders are 

facing higher costs and getting fewer benefits. There has been a shift to 
48

credit cards that cost merchants more, not less, and this dislocation is 

begetting additional regulatory initiatives because the outcome is not 

what the authorities had planned or had desired. 

 Profits incentivize companies and if those are taken away, the 

incentive to widely market credit or payment cards are diminished. Or if 

card holders are faced with added costs or fewer benefits, that means a 

reduction in the use of cards. This is not a positive development for 

small merchants. In the end, we are concerned that both consumers and 

small businesses will pay a price for government intervention. Litigation 

raises costs for everybody and sets a precedent that will spread. When 

government or the courts set prices, service inevitably suffers, including, 

in this case, fewer cards issued, consumer rewards reduced and fees 

increased. Thank you. I look forward to your questions in our dialogue 

on this important issue. 

 [The prepared statement of Karen Kerrigan follows:] 

PREPARED STATEMENT OF KAREN KERRIGAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER,

SMALL BUSINESS AND ENTREPRENEURSHIP COUNCIL

Chairman Stearns, Ranking Member Schakowsky and Members of the 

subcommittee, I appreciate the opportunity to join you today to discuss the issue of 

interchange fees. My name is Karen Kerrigan, and I am President & CEO of the Small 

Business & Entrepreneurship Council (SBE Council), a nonprofit advocacy organization 

based in the nation’s capital. 

Caution on Price Controls as a Solution

The SBE Council is dedicated to supporting policies and solutions that encourage 

entrepreneurship, small business growth, innovation and the vitality of the U.S. economy. 

As you are well aware, government or regulatory intervention often carries the possibility 

of unintended consequences. Small firms have experienced such fallout with respect to 

policy implementation in the areas of health care and taxation, to name two areas among 

many, which have imposed new burdens, generated inequities or constructed artificial 

barriers limiting growth opportunities. 

That is why the SBE Council remains cautious and circumspect of solutions that call 

upon government to intervene in the workings of the marketplace. It is with that 

backdrop that we approach the issue of interchange fees and the call for price controls on 

such fees. 

Do small business owners and SBE Council members like paying interchange fees? 

Of course not. They would much prefer that these costs were lower or non-existent, 

similar to other external costs such as electricity and rent. At the same time that they may 

bemoan paying these fees, most SBE Council members, as well as various small business 

owners who have sent us comments on this issue, recognize that government regulation – 

whether directly, or through litigation -- has the potential to cause dislocation in a system 

that has generally served them well. 

Acknowledging the Benefits of the Electronic Card Payments System 

Those prescribing price controls on interchange fees, I believe, have been remiss in 

not acknowledging the benefits that electronic payments (credit cards and other forms) 

have provided. For small firms, these benefits are numerous, including: 
49

● Access to consumer purchasing power – increased sales. 

● Rapid and certain payment. 

● Reduced costs and headaches in dealing with bounced checks. 

● Reduced worries and losses with respect to theft issues. 

● Enabler of internet commerce – undeniably a boon to e-commerce start-ups, and 

“store-front expansion” for existing firms in penetrating new markets. 

● Costs associated with billing, collections, and taking credits risks are circumvented. 

● A compliment to the mix of other payment choices like checks and cash – increased 

choices for consumers. 

● Improved efficiency. 

The value that payment cards bring to each business owner varies depending upon his 

or her business, industry or situation. And, of course, if it is perceived or believed that 

electronic payment cards are not beneficial, business owners can simply refuse to take 

payment in this form. Many small businesses are succeeding without utilizing payment 

cards. 

Government or Legal Intervention Will Have Consequences: Small Businesses 

Express Concern

No one can disagree that small businesses, like all parties, have a major stake in the 

ongoing success, efficiency and development of the electronic payments system. Of 

course, it makes sense that retailers wish to reduce costs. However, as with other price 

control schemes that have been attempted in the past, incentives to invest and innovate 

are greatly diminished, which would not bode well for the enhancement, expansion, and 

maintenance of an extraordinarily complex payments system. 

In addition, if incentives to widely market credit or payment cards are diminished, or 

if cardholders are faced with added costs or fewer benefits, that means a reduction in the 

use of cards. This will not be a positive development for small business owners either. 

With respect to the SBE Council’s concern over the unintended consequences of 

government intervention, or court-ordered solutions, that aim to set interchange fees, 

small firms throughout the nation share our apprehension as well. While, certainly, there 

are small businesses that would welcome intervention in this area (as long government or 

the courts do not tell them how to set prices, or run their businesses), others are more 

wary of such action. Here are just a few examples of the communications the SBE 

Council has received regarding this contentious issue: 

Electronic Payments Fueled e-Commerce, Free Enterprise System Works Fine 

“It’s undeniable that the electronic payments made possible by credit cards have 

revolutionized retail sales. Without them, the incredible boom in e-commerce would 

almost certainly never have happened. Interchange fees are necessary to fund the 

expansion of electronic payments into new merchant venues, as well as the development 

of new products that will help buyers and sellers alike. Merchants derive many benefits 

from accepting credit cards – more customers, more sales and fewer hassles connected 

with getting paid. Credit cards are a perfect example of the free enterprise system at 

work, and we shouldn’t bother it while it’s working.” 

Larry Romero, Target Strategies, LLC, South Bend, IN 

Courtroom or Boardroom? 

“My company, Visionary Sports, operates on-line and we require payment by credit card. 

The system we have now works pretty well and is too valuable to our nation’s business 

community to tinker with. If a company feels like the interchange fee is too high, they 

can always stop accepting the cards (although I doubt many of them would want to). No 

one is forcing me to accept credit cards. I just think it’s the easiest and most cost effective 
50

way for my company to conduct business. If I change my mind at some point I’ll simply 

stop accepting them, I won’t need a judge to make that decision for me. The government 

does set prices in some countries, but America isn’t one of them and I hope it never will 

be. This is a poorly thought out plan that could start us down the road to a time when 

prices will be negotiated in the courtroom instead of the conference room. I don’t think 

any of us want to go there.” 

Rodney Grubbs, Visionary Sports, Brookville, IN 

We Can Handle Pricing Issues 

“Do I wish the fees were lower? Oh sure, the same as I wish my electric bill was smaller. 

But I understand that businesses need to charge for their services and I’m okay with that. 

As you can imagine, payment is a serious issue for us and we have found credit cards to 

be an extremely useful tool. With credit cards we’re assured of payment, never have to 

deal with collection agencies and don’t even have to generate an invoice. The fees 

charged by the credit card companies are worth the advantages we gain from their use. 

One of the things that make this country great is the chance everyone has to make their 

own decisions and run their affairs as they see fit. I hope the courts remember that and 

leave pricing issues up to the business community. We can handle it.” 

Peter Gavin, Polylok, Wallingford, CT 

No One is Forcing Us to Take Credit or Payments Card: We Can Make Own Decisions 

“My family has operated the Adams Pecan Company in Union Springs for over 60 years. 

I’m the third generation in the business and there’s a fourth right behind me. These days 

our Alabama pecans are sold across the United States through our website. If the federal 

government sets an arbitrary limit on the fees card companies can charge, I fear it may 

make them less interested in promoting the use of their cards to new and existing 

customers. Fees are part of their profit structure and they need to make a profit to stay in 

business. Just as I am free to set what I think is a reasonable price for our pecans, credit 

card companies should be able to set their own prices too. That’s the way we do business 

in America. No one is making us deal with the card companies. We can make our own 

decisions.” 

Kim Adams Graham, Adams Pecan, LLC, Union Springs, AL

Lawyers Win, We Lose 

 “There’s no reason for the courts to get involved in credit card interchange fees. The 

only time the legal system should get involved in pricing is when a monopoly exists in a 

particular market. That’s not a problem in the credit card business; not only are there 

several card companies there are also other ways to get paid including debit cards, checks 

and cash. Retailers get a lot of benefit from accepting credit cards and forcing the card 

companies into court over fees seems pretty short-sighted. If the card companies aren’t 

allowed to make a reasonable profit they’ll probably cut back on incentive programs and 

usage rewards that help generate sales. These lawsuits – like so much litigation – will 

end up making a lot of money for the attorneys involved and not accomplishing much 

else.” 

Ernie Del Giudice, MINUTEMAN PRESS, East Haven, CT 

Conclusion

As with a wide range of legislation or regulatory initiatives that Congress, regulatory 

agencies, and state and local officials will consider this year and beyond, the SBE 

Council will continue to implore that the “first do no harm” precept be followed. 

Particularly within the context of enabling our businesses, and those who support them, 

to be more competitive in a global economy, intervening in an area where there is no 

market failure is indeed “pretty short-sighted.” 
51

In the end, the SBE Council is very concerned that both consumers and small 

businesses will pay a price for government intervention. Litigation raises costs for 

everybody, and sets a precedent that will spread. When government, or the courts, sets 

prices, service inevitably suffers, including, in this case, fewer cards issued, consumer 

rewards reduced, and fees increased. 

As SBE Council Raymond J. Keating wrote in a recent piece on interchange fees: 

“Fundamental economics must be kept in mind regarding interchange fees. Profits made 

by credit card companies encourage them to market, expand cardholders and merchants 

in the network, and accept credit risks, which in turn benefit both consumers and 

businesses. As with other businesses, credit card companies and banks have every 

incentive to get the price right for their services so as to maximize their profits. Set 

interchange fees to high and businesses will not accept the cards; set them too low and 

fewer cards are issued. Those prices and profits act as signals in the marketplace to spur 

competition and innovation.” 

From the SBE Council’s perspective, the market has worked extraordinarily well in 

developing and sustaining a complex and secure payment system that everyone is 

benefiting from. Government intervention has generally proven to be costly and filled 

with unintended consequences, and therefore we are wary of efforts to impose an extreme 

measure such as price controls on a system that has created significant benefits for small 

businesses and their customer base. 

I look forward to your questions and our dialog on this important issue. Thank you 

Chairman Stearns, Ranking Member Schakowsky and members of the subcommittee for 

the opportunity to appear before you today. 

MR. STEARNS. Mr. Mierzwinski. 

MR. MIERZWINSKI. Thank you, Chairman Stearns, for the 

opportunity to testify. Representative Schakowsky, members of the 

committee, I am Ed Mierzwinski. I am Consumer Program Director for 

the U.S. Public Interest Research Group, a nonprofit consumer advocacy 

organization representing the state PIRGs around the country and I am 

also speaking today on behalf of The Consumer Federation of America, 

one of the nation’s largest consumer groups. 

 We are here today to talk about whether interchange fees are fair and 

whether bank practices, in imposing those interchange fees, are the result 

of unfair market power. I want to stress that I think it is a critical hearing 

that the committee is holding. It is an important oversight function, that 

you are looking under a rock that I don’t think the banks want you to 

look under, quite frankly. The banks have kept this rock down on the 

ground. The courts have looked at it; so has the Justice Department, by 

the way. They have looked at bank practices and the practices of their 

associations and I think it is important that the Congress is also looking 

at those practices, so we commend the committee for this important 

inquiry. 

 I want to make three basic points about interchange and about why 

consumer groups are here today to commend you for the hearing. First, 

all consumers, even those who pay with cash pay more at the store and 

more at the pump because the interchange fees that merchants pay banks 

are passed on to all customers. Some of those cash customers maybe 
52

can’t even afford bank accounts because of some of the other unfair 

practices that banks have that leave 10 to 12 million American families 

unbanked and I personally don’t think that Joe Cash Customer, who can’t 

afford a bank account, should be paying for Jane Frequent Flyer’s miles 

and that is what is happening, you could argue, with the way that these 

interchange fees are working. 

 Second, the success of the banks’ legally suspect practices has given 

them tremendous market power. I don’t think you can look only at the 

issue of whether or not we need price controls. You need to look at the 

broader issue of how banks have rolled out their credit card systems 

through their Visa and MasterCard associations; how they have looked at 

expanding the use of interchange from credit cards to debit cards, as 

well; how they have looked at trying to convince consumers to switch 

from cash transactions to credit transactions and how, as Mr. Armour has 

pointed out, they have forced merchants to take on these cards, and I 

encourage you to take a look at the issues in the Justice case and in the 

merchants’ cases, as well as looking solely at the narrow issue of fixed 

interchange. 

 Third, the banks engage in a variety of deceptive practices to drive 

consumers to higher cost forms of payment. For example, many banks 

surcharge PIN debit transactions, even though those are safer 

transactions, less costly transactions, and have a lower opportunity for 

fraud. What we have seen is the banks trying to push consumers to 

signature debit, which is controlled largely by the big banks’ national 

associations, as opposed to lower cost, less risky PIN debit, which has 

been controlled through smaller regional associations, primarily, over the 

years. 

 The other points I want to make are just to describe some of the 

banks’ strategies to increase interchange fee income. Again, as I spoke 

earlier, they want to switch consumer behavior from PIN to signature and 

we have a study on our website of the New York PIRG that describes 

how banks charge you a fee if you use PIN debit in order to encourage 

you to go to signature debit. Banks frequently put on your bill--or 

excuse me, your monthly account statement that the merchant imposed a 

surcharge; in reality, it was a bank fee, not a merchant fee. They simply 

say well, it was imposed at this terminal, trying to infer that it was the 

merchant who imposed the fee, rather than the bank. 

 Second, the banks are definitely trying to switch consumer behavior 

from cash to plastic. They are encouraging us, through the use of 

rewards cards and other incentives, to not use cash anymore, but to use 

these cards which ultimately cost merchants more and may cause 

merchants to raise their prices for all consumers. 
53

 Third, as Mr. Armour has pointed out, they want to switch merchant 

behavior with unfair practices. That was essentially the gist of the socalled Wal-Mart lawsuit and the “Honor All Cards” rule forcing 

merchants to accept signature debit even when they didn’t want to. 

 And finally, the banks are like the Godfather. The banks make offers 

the merchants can’t refuse. They use contractual terms and market 

power to keep merchant interchange fees high and they force merchants 

to pay even higher fees when the customer uses a rewards card, even 

though the merchant has no idea that I am using a rewards card. 

 We make three recommendations in our testimony, PIRG and CFA. 

First, we urge you to call on both GAO and the Federal Reserve to do 

studies. Why two studies? I would like one study to be independent of 

the financial industry and the financial industry’s general viewpoints, and 

I think the Fed is an independent agency, but it is a financial regulator, so 

do one at the GAO, as well. 

 Second, after you take a look at the results of those studies, consider 

regulations; consider all sorts of regulations, not just so-called price 

controls. That is not what we are here specifically to say. And finally, I 

do point out in my testimony that there are disparities in the consumer 

fraud protections; when you use a credit card, you have strong 

protections against fraud under the Truth in Lending Act. When you use 

a debit card, you have more modest legal protections under the so-called 

Electronic Funds Transfer Act. There is a growing market for payroll 

cards, gift cards and other cards. Sometimes those cards give you the 

weaker protections of the EFTA; sometimes you have no protections. 

And I believe that because some of these cards are issued by nonfinancial institutions, that your committee has jurisdiction. Thank you 

very much. 

 [The prepared statement of Edward Mierzwinski follows:] 

PREPARED STATEMENT OF EDWARD MIERZWINSKI, CONSUMER PROGRAM DIRECTOR, U.S.

PUBLIC INTEREST RESEARCH GROUP

Chairman Stearns, Representative Schakowsky and members of the committee: 

My name is Edmund Mierzwinski. I am Consumer Program Director of the U.S. 

Public Interest Research Group, which serves as the federal advocacy office of the 

National Association of State PIRGs, which are non-profit, non-partisan public interest 

advocacy organizations active around the country. My testimony today is also on behalf 

of the Consumer Federation of America. Founded in 1968, CFA is an association of some 

300 nonprofit consumer and cooperative organizations from throughout the nation with a 

combined membership exceeding 50 million people. 

Summary 

Skyrocketing bank fee income reported last summer was not due to any new or 

greater sophistication or marketing innovations on the part of bank executives. Rather, it 

was simply due to the spike in gasoline prices, which provided banks with massive 
54

returns on their long-term strategy to use legally questionable market power and anticompetitive practices to collect billions of dollars in excessive “interchange” fees from 

merchants accepting credit or debit cards.1 Because many consumers, and perhaps even 

more consumers as gas prices skyrocketed, used credit or debit cards at the pump, bank 

income from fees imposed on merchants simply spiked. 

Some time ago I saw an industry newspaper ad for a bank conference. The event’s 

title was “Fee Income: The Holy Grail.” They weren’t kidding. As Margaret Pressler 

detailed in the Washington Post2

 in September: 

“So a year ago, when gas prices averaged $1.87, banks involved in credit card 

processing made about $12.5 million a day on fees. Now, with prices averaging 

$2.75 nationally, the credit card companies are raking in $18.4 million a day. That 

is $183 million more a month, or nearly $2.2 billion dollars on an annual basis in 

extra money paid to the nation’s banking giants just because of rising gasoline 

prices.” 

Many merchants, particularly small businesses, assert that these bank fees – known 

as interchange fees and averaging as much as 1.6% or more of each transaction on a 

credit or debit card -- are among their highest costs of doing business (more than rent, 

salaries or utilities), are unfair and non-negotiable and raise the costs of goods for all 

consumers, not just those who use credit cards. Many of the estimated 10-12 million 

consumers who do not have credit or debit cards are unbanked due to the high costs of 

maintaining a bank account, yet these lower-income Americans are also paying more at 

the store and more at the pump due to high interchange fees. 

We cannot stress three points enough. First, all consumers, even those who pay 

with cash, pay more at the store because the interchange fees that merchants pay 

banks are passed on to all customers.3

 

Second, the success of the banks’ legally suspect practices has given them 

tremendous market power. In anti-trust terms this allows them to dictate the terms of 

trade: Merchants have no choice but to accept Visa and Mastercard products on the 

sellers’ terms. Otherwise, they will lose customers and sales. 

Third, the banks engage in a variety of deceptive practices to drive consumers 

to higher cost forms of payment. For example, many banks surcharge PIN-debit 

transactions even though those are safer, less costly, and have a far lower opportunity for 

fraud than signature-debit transactions. They engage in these tactics to maximize their 

interchange fee revenue. 

Further, numerous studies have shown that interchange fees, averaging between 1.5-

2% of purchase prices in the United States market, are much higher than interchange fees 

in other countries. Yet as the head of one retail association has pointed out: 

 

1

 Your debit and credit card purchases are processed through the retailer’s bank and the bank that 

issued you the card. The issuing bank charges the retailer’s bank a fee to process the transaction. 

The retailer’s bank then adds its own fee for processing the transaction and passes on both of these 

fees to the merchant as the “interchange fee.” 

2

 See “Card Companies Are Filling Up At the Station,” By Margaret Webb Pressler, Washington 

Post 25 September 2005; Page F01 http://www.washingtonpost.com/wpdyn/content/article/2005/09/24/AR2005092400255.html, last visited 14 February 2005. 3

 And of course, while these interchange fees are hidden fees that consumers pay, consumers directly 

pay many other unfair credit card and bank fees and high interest charges imposed by credit card 

companies and banks. See testimonies of Edmund Mierzwinski, U.S. PIRG, Travis Plunkett, 

Consumer Federation of America and Linda Sherry, Consumer Action, at hearing of the U.S. Senate 

Banking Committee on unfair credit card practices, 17 May 2005 available at 

http://banking.senate.gov Also see the PIRG websites http://www.truthaboutcredit.org and 

http://www.stopatmfees.com 
55

We pay the highest fees in spite of the fact that our costs are the lowest. We have 

the greatest economies of scale, we have the lowest interest rates, and our fraud and 

bankruptcy liability has just been sharply limited. Yet the fees are being driven 

relentlessly higher.4

Hypothetically, if a U.S. merchant paid 2% in interchange fees and 50% of its 

customers paid with plastic, then, its costs, which must be recovered across all customers, 

have increased an average of 1%.5

 In retail, 1% is a big number. In effect, interchange is 

a hidden sales tax on all consumers. 

So, we agree with merchants’ concerns and commend the committee for its inquiry. 

We hope that the committee and the Congress will continue the investigations you have 

begun today of the impact on the economy of potentially anti-competitive bank practices 

that make prices higher for all Americans and may limit competition and entry in 

payment system networks. 

It is encouraging that the Congress is today joining the courts, which are considering 

a variety of merchant class actions6

 and even the U.S. Department of Justice,7 which has 

been involved since 1998 in litigation into whether bank payment card and network 

governance, membership and ownership practices are fair and in compliance with the 

antitrust and other consumer laws.8

 One major merchant class action involving signature 

debit cards has already settled9

 for an estimated $3.3 billion in compensatory relief.10

 

4

 Tim Hammonds, President, Food Marketing Institute, “Interchange Fees,” speech of 24 January 

2006 available from author. 

5

 While this is intended merely as an example, we have no seen no study that suggests any of these 

costs of business are merely absorbed by the business. Of course, some of the costs of accepting 

plastic offset other costs of accepting cash or checks. See November 2004, Federal Reserve Board, 

Report to the Congress on Disclosure of Point-of-Sale Debit Card Fees, pages 9-11 for a discussion 

of costs for various payment types. See http://www.federalreserve.gov/-

boarddocs/rptcongress/posdebit2004.pdf (last visited 14 February 2006). 6

 “Four major merchant associations have filed an antitrust, class-action lawsuit against most of the 

major credit card issuers in the United States over allegations of collusive behavior regarding 

interchange fees.” See Retail group sues MasterCard, Visa, 4 October 2005, ATM Marketplace, 

http://www.atmmarketplace.com/news_story.htm?i=24148 last visited 14 Feb 2006. Those 

Associations include the National Association of Convenience Stores, the National Community 

Pharmacists Association, the National Grocers Association, The American Booksellers Association, 

the National Assocition of Chain Drug Stores, the Minnesota Grocers Association, and the National 

Cooperative Grocers Association. 

7

 In a 1998 complaint, the U.S. challenged the interrelationships, governance structure and 

exclusionary rules between and among the VISA and Mastercard associations and the banks that 

own them as violations of the Sherman Antitrust Act. In 2003, the Second Circuit upheld a 2001 

district court ruling in favor of the government’s position that the exclusionary practices of the 

associations (essentially designed to prohibited entry by American Express or Discover into their 

payment networks) were illegal. See the DOJ’s page containing documents relating to the United 

States vs. VISA U.S.A. Inc., VISA International Corp., 

MasterCard International Inc. litigation. http://www.usdoj.gov/atr/cases/indx57.htm(last visited 12 

Feb 2006). 

8

 It is also important to understand that while the banks may attempt to confuse the issue by claiming 

that 6,000 supposedly vigorously competing banks offer card choices, that particular comparison is 

irrelevant. The market under discussion is the market for network payment systems. Visa and 

Mastercard are the dominant national payment systems and there are only two others (American 

Express and Discover). Visa and Mastercard are alleged to have conspired together to keep prices 

high. Merchants generally have no choice in the marketplace that has developed; they must accept 

the two cards at the card associations’ dictated terms. 

9

 “In the Action, Plaintiffs claimed, among other things, that Visa and MasterCard, individually, and 

in conspiracy with each other and with their member banks, have violated the federal antitrust laws 

by forcing merchants who accept Visa and/or MasterCard-branded credit cards for payment also to 
56

The important questions being raised in these cases concern whether the practices of 

the banks and their associations, VISA and Mastercard, have been purposely designed 

and implemented to assert market power, limit entry by potential competitors and fix 

prices for users, both consumers and merchants, at unfair or illegal levels. Interchange 

practices are only one element, but an important one, of the various investigations, 

lawsuits and inquiries. 

How Interchange Fees Work 

Banks collect interchange fees when merchants accept credit and debit cards. Credit 

card transactions are signature-based (off-line) and switched only through the national 

VISA or Mastercard payment network systems. Debit cards are enhanced ATM cards 

with VISA or Mastercard brands on them and can be used not only in ATM machines, 

but also can used in either on-line (PIN-based) or off-line (signature-based) transactions 

in-person at a store or over the phone or on the Internet, just like a credit card. Because 

debit cards withdraw money from the consumer’s own deposit (savings or checking) 

account, merchants have argued, successfully, that the transactions do not involve a loan, 

and therefore that fees should be lower due to the lack of credit risk. Nevertheless, fees 

for signature debit – as much as 1.6% or more of the purchase -- are higher than for PINdebit, and reflect a large part of the dispute before you today. 

According to the Federal Reserve, “the interchange fees set by Visa and MasterCard 

for signature debit have been substantially higher than those set by the regional POS 

networks for PIN debit.” The Board goes on to explain: 

Whereas the prices of PIN debit are capped at fixed levels, those of signature debit 

and credit increase with the purchase amount. For the average debit purchase 

amount (about $40), a signature debit transaction generates an interchange fee of 

about $0.57; for PIN-based networks, the fee is $0.34. The difference between the 

fees is even more substantial for purchases of $80, the amount of a typical credit 

transaction. For a purchase of this amount, the signature debit rate is about $0.99, 

more than twice the PIN debit rate of $0.44. The fees for signature debit and PIN 

debit are less than those for credit ($0.72 and $1.33 for the two purchase 

amounts).11

 For every $100 purchased on either signature debit or credit, the merchant only 

receives approximately $98.40. 

Bank strategies to increase interchange fee income have involved several tactics: 

1) Switch consumer behavior from PIN to signature: Banks seek to grow the market 

for signature debit by offering incentives (rewards) to consumers for off-line 

 accept Visa and/or MasterCard-branded debit cards for payment, and by conspiring and attempting 

to monopolize a market for general purpose point of sale debit cards. Plaintiffs claimed that 

Defendants' actions have caused merchants to pay excessive fees on Visa and MasterCard signature 

debit and credit transactions and on on-line PIN debit transactions, and have injured competition, 

merchants and consumers.” See Wal-Mart et al vs. Visa and Mastercard. 

10 The case has also resulted in elimination of the so-called “honor-all-cards” rules of the 

associations. See Merchant Advisory on Final Approval and Payout of Settlement of Visa 

Check/MasterMoney Antitrust Litigation, Law Firm of Constantine Cannon, 29 June 2005, available 

at http://www.inrevisacheckmastermoneyantitrustlitigation.com/6_29_05.pdf (last visited 14 

February 2005). 

11 November 2004, Federal Reserve Board, Report to the Congress on Disclosure of Point-of-Sale 

Debit Card Fees, page 11 See http://www.federalreserve.gov/boarddocs/rptcongress/-

posdebit2004.pdf (last visited 14 February 2006). 
57

transactions but punishments (surcharges) for PIN-based transactions.12 Banks 

frequently create the impression that the merchants are assessing these surcharges 

through deceptive billing practices. 

2) Switch consumer behavior from cash to plastic: Similarly, banks use Rewards 

Cards with cash-back, miles or other incentives to convince consumers to switch 

from cash transactions to plastic transactions, further increasing fee income. 

3) Switch merchant behavior with unfair practices: Banks force merchants to accept 

signature debit (e.g., not merely lower-cost PIN-debit) through anti-competitive 

contractual terms such as the so-called “Honor All Cards” rule successfully 

challenged in the Wal-Mart case. 

4) Make offers the merchants can’t refuse: Like the Godfather, the banks make 

offers “you can’t refuse.” They use contractual terms and market power to keep 

merchant interchange fees high. Further, they force merchants to pay even higher 

fees when customers offer to pay with Rewards cards (of course, the merchant 

doesn’t even know it is a Rewards card) so that the merchant, and the rest of us who 

shop at that store, actually pay for the cost of the consumer’s miles offered by the 

bank. 

One of the most important elements of the rapid growth in fees is the growing use of 

plastic as a substitute for cash. According to the Federal Reserve13: 

In 2003, consumers in the United States conducted more transactions with debit 

cards than with credit cards for the first time in history. In 2004, consumers in the 

United States will conduct an estimated 18.6 billion debit card transactions at the 

point of sale, an amount that accounts for roughly 53 percent of all card-based 

purchase transactions. Consumers will secure roughly 11.8 billion debit transactions 

with a signature and the remaining 6.8 billion with a PIN. 

A separate Federal Reserve study14 analyzes the rapid growth in electronic payments 

and the decline in the use of checks and cash: 

Electronic payments grew rapidly between 2000 and 2003. There were 13.8 billion 

more electronic payments in 2003 than in 2000.7 During the same time period, 

checks paid declined 5.2 billion, suggesting that some check payments were 

replaced by electronic payments. Electronic payments are also likely replacing 

some cash payments or reflecting general increases in payment activity. 

Further, perversely and paradoxically, the incentives, such as higher fees, that the 

two associations offer their member banks to market their particular card result in reverse 

competition, where prices go up, not true competition where prices decline. 

 

12 As an example of the fee punishments, see “Pricey Plastic: A NYPIRG Survey of Plastic Card 

Fees,” at http://www.nypirg.org/Consumer/cards/ (last visited 12 Feb 2006). The 2004 survey 

reported that 89% of the banks surveyed assess a debit card POS fee for PIN-based transactions. The 

average fee assessed is 70¢. The fees ranged from 10¢ to $1.50. Also see Federal Reserve Board, 

Report to the Congress on Disclosure of Point-of-Sale Debit Card Fees (citation above). 13 November 2004, Federal Reserve Board, Report to the Congress on Disclosure of Point-of-Sale 

Debit Card Fees, page 4, See http://www.federalreserve.gov/boarddocs/rptcongress/-

posdebit2004.pdf (last visited 14 February 2006). 

14 The 2004 Federal Reserve Payments Study, 15 December 2004, available at 

http://www.frbservices.org/Retail/pdf/2004PaymentResearchReport.pdf (last visited 14 February 

2006). 
58

Interchange Fees Are Hidden, But Consumers Pay Other Fees Directly 

Banks, especially bigger banks, have long had a policy of raising fees, inventing 

new fees and making it harder to avoid fees. A series of PIRG studies has further 

documented that big banks charge higher fees than smaller institutions.15 Analysts 

estimate that banks impose as many as two hundred different fees on consumers and 

small business customers. Many of these are nuisance fees, such as the fee for 

unknowingly depositing someone else’s check that bounces, or even for seeking to 

withdraw more than your daily ATM limit, even if you have the money in your account. 

Who knew? 

A few of these consumer fees drive vast amounts of bank income, among them the 

ATM surcharge of $1.50-$2.00 (imposed on non-customers even though that ATM 

owner also receives a share of the $1.50-$2.00 “foreign” fee the customer pays his or her 

own bank), the $30-$35 so-called bounce-protection fee imposed as a “service” in lieu of 

actually “bouncing” your check and, finally, the $29-$39 credit card over-the-limit and 

late payment fees. Most studies estimate that each of these few fees drives billions, or 

tens of billions, of dollars of fee income annually. 

While consumers, policymakers and the press are well-aware of how banks have 

nickel-and-dimed consumers with this wide and growing variety of fees for virtually 

every service that they provide except, so far, for breathing the air in the bank, many 

policymakers have been unaware of the stream of income derived from fees imposed on 

merchants for accepting credit and debit cards. Nor is the public generally aware that 

some of this growing stream of income may be obtained through anti-competitive 

practices. 

Conclusion 

As consumer advocates, we are gravely concerned about the fairness and legality of 

bank schemes to increase credit and debit card fee income, especially because an 

underlying bank goal is also to encourage greater consumer use of plastic payments. As 

more consumers pay with plastic instead of cash, due to bank incentives such as rewards 

cards, but merchant fee income is buoyed by potentially anti-competitive practices, all 

consumers will pay more than we should at the pump, and more than we should at the 

department store, even those of us who still pay with cash. This is especially troubling as 

a matter of public policy due to the estimated 10-12 million unbanked American families 

forced to absorb these higher costs even though they pay with cash. 

Here’s a complaint I received via email: I own a small gas/convenience store in 

WA state. Recently a customer “told” me to process her debit as a credit since she 

got a small fee back from her U S Bank debit card. Now, I know how high the fees 

are for me to process her card as a debit and how much higher as a credit. And yet, 

I am not allowed to charge a processing fee. In other words, the dollar fountain 

drink costs me money instead of making the few cents I would normally make, 

since the consumer is making an offer to pay. Yes, I can refuse service, but I don’t 

understand what is going on here-when is the merchant allowed to make any kind of 

profit at all with the use of credit/debit cards? 

Is this small retailer a dinosaur whose store should die or is he a victim of predatory 

practices of his credit card payments systems suppliers? We believe the latter – and 

further that all consumers pay too much due to excessive interchange fees. We offer the 

following recommendations. 

 

15 See the PIRG website http://www.stopatmfees.com 
59

Recommendations 

1) Congress should require separate Federal Reserve and Government Account 

Office (GAO) studies of the impact of interchange on the U.S. economy, including a 

review of interchange practices in other countries, a review of the need for greater 

disclosure and the need for further regulation of or prohibition of certain practices of 

bank payment networks. 

2) Based on the results of the studies, Congress should consider regulating 

interchange fees, especially debit card interchange fees. Regulation of the monetary 

supply is a traditional role of government and as plastic becomes the dominant form of 

tender, Congress should assure that the market is unencumbered by anticompetitive or 

deceptive practices. 

3) A concomitant problem we also encourage the Congress to examine is the 

difference in legal protections for consumers, depending on which sort of plastic they 

use. Consumers are largely unaware that while their legal rights against fraud are strong 

when they use a credit card, these rights by law are substantially less so when they use a 

debit card and non-existent when they use certain other stored value cards, including gift 

cards.16 Since some of these cards are not issued by financial institutions they likely come 

under committee jurisdiction. Further, as we know from the committee’s inquiry into data 

breaches, many of the serious breach notifications being made under California’s and 

now other states’ security breach notification laws involve risks to debit card account 

numbers. 

Thank you for the opportunity to provide our views. 

MR. STEARNS. I thank you. Let me start you with a question here. 

You state that people without credit cards are paying more at the stores 

and more at the pump because of these interchange fees? 

 MR. MIERZWINSKI. Well, that would be my beliefs and here is how I 

would characterize it. To make the math easier, if you have a 2 percent 

interchange fee and 50 percent of customers are using plastic, that raises 

the store’s costs by 1 percent across all their customers. The store has to 

either absorb those costs or recover them by increasing its prices. I don’t 

see any other choices. 

 MR. STEARNS. When I was in my small business, if a person paid 

cash, I usually gave them a discount. I encouraged that in some way or 

the other if we were in a situation where I might give them a discount 

and so don’t the merchants have the ability just to charge less by giving a 

discount for cash? 

 MR. MIERZWINSKI. I would ask if you would ask the other witnesses 

for their views on this particular issue, as well, but I am not sure that the 

banks’ contracts allow a merchant to charge more for credit cards. 

 MR. STEARNS. Well, it is done all the time. I think you need to put 

your mike on. 

 MR. ARMOUR. I think it is a great question. 

 MR. STEARNS. Right. 

 

16 We and other consumer organizations including Consumers Union discuss many of these 

disparities and related issues in comments to the Federal Reserve Board here 

http://www.naca.net/FDICLetterNov05.pdf and http://www.federalreserve.gov/SECRS/2005/-

September/20050929/R-1210/R-1210_122_1.pdf and 
60

 MR. ARMOUR. If you look at gasoline right now, gasoline is almost 

all prepaid right now because of the high price of gasoline, the instance 

of gas theft and so forth, most retailers have gone to either pay at the 

pump or you have to go inside and prepay it. I think there is without 

question value, nobody is disputing that there is convenience value to a 

credit card, at all. By giving cash discounts, you are decreasing the 

convenience to a consumer who now has to go in and out of the store to 

buy their gasoline rather than simply paying at the pump. Furthermore, 

when you are making in-store payments, most State and local regulatory 

environments require you to post both the cash price and the credit card 

price, so if you have 3,500 items in your store, that means on every 

single one of those items you are going to have to be showing the credit 

price and the cash price, which I think you would agree, is a huge 

burden. It is not something that you can just say we will take 10 percent 

off. 

 MR. STEARNS. Mr. Armour, this wasn’t clear to me, that we all 

understand there are antitrust cases before the courts. Just briefly tell me 

what relief your members are asking. What is the solution, what relief 

are your members asking, because Mr. Muris has mentioned that this is a 

possibility of a trillion dollar and he has used some strong language in 

terms of so forth and so on, extortion is the word he used and just-- 

 MR. ARMOUR. That is a rather strong word there. 

 MR. STEARNS. I thought it was a rather strong word, but let me ask 

you what are the reliefs, just briefly. 

 MR. ARMOUR. Quite simply, to stop the anti-competitive behavior 

of price fixing that is going on today. 

 MR. STEARNS. Okay. 

 MR. ARMOUR. We have not advocated a new system. 

 MR. STEARNS. So are you asking for damages? 

 MR. ARMOUR. Absolutely. 

 MR. STEARNS. What you are saying is that you just think there is 

collusion here and monopoly practices is what you want to stop? 

 MR. ARMOUR. That is correct. 

 MR. STEARNS. Right, okay. Mr. Muris, I looked at that graph over 

there. I don’t know where it went. It was just up a moment ago. But 

Mr. Armour makes a case that in Australia the international interchange 

fees are the lowest in the world and yet in the United States, they are the 

highest. And so when you look at that graph, would you agree that that 

graph accurately portrays what has happened here because if that is 

statistically correct, then the United States and its consumers are paying 

the highest interchange discount rates in the world and Australia is 

paying less and that would sort of buttress the case for Mr. Armour. 
61

 MR. MURIS. Let me respond to that and if I could, and also respond 

to the extortion point. 

 MR. STEARNS. Okay. 

 MR. MURIS. Let me submit, for the record, a study by IEK, which is 

an industry analyst group, which shows that of the 15 countries, that only 

two have merchant discounts, what the merchant pays, what you paid 

when you were in your small business. Only two countries have smaller 

merchant discounts of the 15 than the United States. Australia, 

interestingly, engaged in price regulation and they lowered interchange 

fees and the result was that consumers ended up paying more. 

Consumers paid more fees, consumers paid both the annual fees and 

otherwise. The reason I made the point-- 

 MR. STEARNS. Just let me ask a question. You are saying that in 

Australia, that the state legislature stepped in or the Federal legislation 

stepped in? 

 MR. MURIS. It was the equivalent of the Federal Reserve. 

 MR. STEARNS. Okay, the Federal Reserve stepped in and did pretty 

much what Mr. Armour wants done? 

 MR. MURIS. What Mr. Armour suggested that he wants done is to--

although, I think he might not fully understand how it works, if you end 

the price with the alleged price fix-- 

 MR. STEARNS. Right. 

 MR. MURIS. --and you end the setting of interchange fees, the 

MasterCard and Visa systems could not work the way they work now, at 

all. 

 MR. STEARNS. But they are working in Australia, aren’t they? 

 MR. MURIS. Well, they haven’t ended the set fees. They just set a 

lower fee. 

 MR. STEARNS. But wouldn’t you admit, though, that if the Federal 

Reserve in Australia stepped in and did this, that the fees did come 

down? 

 MR. MURIS. Oh sure, because what they said is we won’t let the 

market work. We will impose price controls and the effect of the price 

controls is inevitable and that effect was that the consumers ended up 

paying more for their cards. 

 MR. STEARNS. I understand that, but they would argue that the price 

controls is not what they did. 

 MR. MURIS. Well, no. No, I think they would agree that it was a 

price control. What happened is the government said here is what the 

price is. 

 MR. STEARNS. Okay. 

 MR. MURIS. That sounds like a price control-- 
62

 MR. STEARNS. So you are saying you agree with the graph, but the 

graph is stilted because the federal government in Australia-- 

 MR. MURIS. No, no. I am saying that the relevant question is how 

much do merchants pay for their cards and that the statistics that I want 

to put in the record show that of the 15 countries surveyed, in only two 

countries did merchants pay less than they pay in the United States. 

 MR. STEARNS. Okay. 

 MR. MURIS. Now, can I address the extortion point? 

 MR. STEARNS. Yes, sure. 

 MR. MURIS. Yes, I think it is a strong word, but I think it is 

appropriate. We have a system in the United States where the plaintiff 

lawyers frequently file class actions and if the class is certified and the 

alleged potential damages are high enough, then it is only a very 

imprudent businessman who won’t settle. These are very odd lawsuits 

because the lawsuits seek a remedy that the merchants can’t possibly 

want. They seek an end to the price fixing and what the merchants want 

instead is a price fix, but a fix at a lower amount. That is not something 

that antitrust courts do, but they are betting, they being the plaintiffs and 

these merchants, they are betting on the fact that the potential damages 

will be so high that someone will step in to save credit cards because 

they understand that credit cards are a good thing. They just 

understandably don’t want to pay as much as they pay now. 

 MR. STEARNS. So you still stand by your word extortion? 

 MR. MURIS. Oh, absolutely. 

 MR. STEARNS. Okay. Mr. Armour, I am going to ask you a tough 

question here that maybe Mr. Muris would like to have asked you. You 

don’t necessarily have to answer this, but just to put it on the record, he 

mentioned the damages could be $1 trillion for the law firm that is going 

to take this and I understand that the law firm that is taking this on for 

you folks is doing it on a contingent fee basis. Is that true? 

 MR. ARMOUR. It is true. 

 MR. STEARNS. Do you want to tell us what the contingent fee 

amount is charged by this law firm in representing you in the antitrust 

case? 

 MR. ARMOUR. First of all, I am not sure it is appropriate for me--the 

agreement that I have with our-- 

 MR. STEARNS. I have given you an opportunity to decline, too, 

because I told you in the beginning you don’t have to answer this. 

Chairman Muris has made a pretty strong statement about this and I 

think, in light of the fact that the law firm that is leading this is getting 

contingent fee, it is probably quite a bit and Mr. Chairman has said it is 

going to be a trillion dollars, so it is a high incentive. We all have just 
63

been through the tobacco litigation, so we know what that is about and I 

guess-- 

 MR. ARMOUR. Let me, perhaps, respond-- 

 MR. STEARNS. Right. 

 MR. ARMOUR. --to the extortion charge. 

 MR. STEARNS. Okay. 

 MR. ARMOUR. I wouldn’t characterize it that way, but let me talk 

about transparency. Visa and MasterCard, as I said in my testimony, 

requires retailers to sign merchant agreements. They refuse to fully 

disclose what the operating rules are, and when you ask them, they say 

no, we are not going to give you the full rules and as Ms. Kerrigan over 

here said, that the response is if you don’t sign, you don’t have to take 

our credit cards. And yet, I think in your introduction, it is quite 

apparent that plastic is the predominant method of payment in the United 

States today, so you are left really being extorted by Visa and 

MasterCard of having to sign, being forced to sign, an agreement or to 

give up the bulk of the transactions that take place in the United States 

today. So I would, just to balance the argument on who is extorting 

whom-- 

 MR. STEARNS. So now you are using the word extortion on the other 

hand. Okay, my time is expired. We could go on, and I didn’t mean to 

inflame it, but I think the issue is pretty important because there is quite a 

bit at stake here. Ms. Schakowsky. 

 MS. SCHAKOWSKY. Well, let me begin where you left off. You 

maybe have been reluctant to use the word extort, but hearing the take it 

or leave it attitude, really, of the credit card companies, I would say that 

if what is good for the goose is good for the gander and I would certainly 

say, in my opinion, that that is even a more coercive kind of extortion, 

particularly since the terms of those agreements, and I want to talk more 

about it. Mr. Muris, how long ago did you leave the FTC? 

 MR. MURIS. Eighteen months. 

 MS. SCHAKOWSKY. Eighteen months. You know, when someone 

who is, and that is me, has been a consumer advocate all my life, I just 

have to tell you there is something that feels not quite right about to me 

when someone who has been the chief champion for consumer rights, in 

my view, that is how I see the FTC, is now before the same committee 

and representing the Electronic Payments Coalition. I know that is just 

me, but I just wanted to say that. 

 MR. MURIS. Can I respond? 

 MS. SCHAKOWSKY. Actually, it was just a comment. You put in 

your testimony that in supporting price controls some claim that payment 

cards are overused relative to other payment methods and that that is the 

fundamental misconception, and I would say that is not what we are 
64

talking about. In fact, that is not at all what we are talking about. What 

we are talking about is more what Mr. Mierzwinski said is whether the 

interchange fees are fair and Ms. Kerrigan, you did the same thing, 

justifying the use of credit cards. We all love our credit cards. We all 

use our credit cards. It is not about that. 

 That is not the fundamental misconception and to sort of argue that--

and also, the other part that sort of bothers me, a comment, also, is that 

you are telling us what is in the interest of consumers. I would rather 

hear from consumers about that. You are representing the interests of the 

Electronic Payments Coalition, fine. You should represent those 

interests, but not tell consumers, and in this case, also, the merchants, 

themselves, what is in their best interest. Clearly, your association is 

benefiting. I wanted to ask you if you have ever seen one of these 

operating agreements and if you could supply a copy of one of those to 

this committee? 

 MR. MURIS. Can I respond to your general points? When I was 17 

years old I decided I wanted to be involved in public policy. I have had 

six jobs in the Federal government. I spent the rest of my life going in 

and out of the academic world and doing consulting. I am here on the 

normal basis that I am here that I say what I think and what I believe and 

I believe that consumers would be hurt by price controls. When you 

mention take it or leave it, when you go to McDonalds it is take it or 

leave it. I mean, you know, we have a world where when you deal with 

large institutions, you can’t negotiate the individual price of your meal at 

McDonalds. 

 MS. SCHAKOWSKY. That is totally denying the reality of the 

marketplace right now, I think, where people use their credit cards. It is 

very different than whether I choose to go to McDonalds or someplace 

else. Right now, that is just what our society is about and forcing 

agreements, particularly--and I would really appreciate it if you dance 

with that. I am limited in time. Have you seen these operating 

agreements and can we get a copy of them? 

 MR. MURIS. I have seen various agreements. The point of 

transparency, which, as I take it, is the point that you are addressing, Mr. 

Armour’s members have, they don’t have a contract with Visa, they have 

a contract with their merchant bank. That contract is fully disclosed, the 

price is fully disclosed. If they want to see Visa’s terms and 

MasterCard’s terms, they, in fact, put them on their website. I do 

believe, however, that what the real issue here is Mr. Armour’s business 

and his members used to be a cash business and indeed, they made 

significant amounts of money out of ATMs in their stores, but what has 

happened is, as you mentioned, is consumers now, many would prefer to 

pay with credit cards. 
65

 MS. SCHAKOWSKY. Could I just ask Mr. Armour to respond to this 

transparency argument that you are making? 

 MR. ARMOUR. To the best of my knowledge, MasterCard, but not 

Visa, has a 300-page summary of what their operating rules are. The 

summary is 300 pages. I am led to believe that the rules, themselves, are 

1,200 pages long and none of our members have been able to get a copy 

of the 1,200 page operating rules after requesting them. 

 MS. SCHAKOWSKY. Can we get them? 

 MR. MURIS. Their contract is with their merchant bank. It is a 

competitive contract for merchant banks. If they don’t like that contract 

with the merchant bank, they can ask for another merchant bank. There 

are numerous merchant banks. 

 MS. SCHAKOWSKY. Is that the case, Mr. Armour? That you can just 

ask for-- 

 MR. MURIS. Just as when you--if I could be allowed to finish? 

Could I be allowed to finish, Mr. Chairman? 

 MS. SCHAKOWSKY. Well, you have made a statement. Let me ask 

him to respond to that. 

 MR. MURIS. Well, I was trying to answer a question, but I will defer 

to the Chairman’s wishes. 

 MR. STEARNS. Well, Mr. Chairman, what I generally do is let 

Members interrupt, do what they want. 

 MR. MURIS. That is fine. 

 MR. STEARNS. Because these Members that work very hard, they 

represent the constituents. I don’t represent her constituents, she doesn’t 

represent mine. 

 MS. SCHAKOWSKY. And I am happy to come back to you and let 

you finish. 

 MR. MURIS. I appreciate it. Thank you. 

 MS. SCHAKOWSKY. You made a statement about what merchants 

can do and they can tell their merchant bank to, you know, that they want 

another one. 

 MR. MURIS. My statement was that it is a competitive market for 

merchant banks. 

 MR. ARMOUR. But Visa and MasterCard interchange is not the 

merchant bank. I mean, you can go from U.S. Bank as your merchant 

bank and ask for Visa and MasterCard rules; they will say no. You can 

then go to Wells Fargo and ask for them. No member of ours, and I 

assure you, we have had hundreds of members ask for the full operating 

rules from Visa and MasterCard. 

 MS. SCHAKOWSKY. Can you get a better deal from a different bank? 

 MR. MURIS. On processing you certainly can, but not on the 

interchange, because as I said in my testimony, the card associations’ 
66

members are the banks and the rules of those require every merchant 

bank to charge the same interchange fee. But if you are talking about 

transparency on the issue, we are confusing a couple issues here. The 

interchange fee is disclosed, it is simple. It is disclosed. I think it is 

necessary to-- 

 MS. SCHAKOWSKY. Well, the fee is disclosed, but is the-- 

 MR. MURIS. The operating rules, I believe, are available. I am not 

speaking here today for individual merchant banks or individual Visa 

contracts. We have different kinds of payment cards. We have 

proprietary systems, American Express and Discover, and they don’t use 

an interchange fee because they don’t have merchant banks and 

acquirers. They just charge a merchant discount. 

 MS. SCHAKOWSKY. And we are talking about interchange. 

 MR. MURIS. But that merchant discount is what the merchant pays 

and that merchant discount is take it or leave it, as well. The reason that 

we have interchange fees is we have a historical accident. When 

MasterCard and Visa started, when the Bank of America in California 

started Visa, it couldn’t have branches outside of California, so they had 

to have franchising. It was that historical accident that caused this 

system, a different system than the proprietary cards, American Express 

and Discover, use. 

 MS. SCHAKOWSKY. But I think we have a dispute about a fact here, 

whether or not information is available and-- 

 MR. ARMOUR. I mean, I would urge you, and I wish you much 

better luck than our association and our members have in obtaining the 

operating rules, the full operating rules of Visa and MasterCard. 

 MS. SCHAKOWSKY. Can you help us with that, Mr. Muris? 

 MR. MURIS. I would be glad to go back and ask them, but if the 

hearing is about interchange and the complaint is about interchange-- 

 MR. STEARNS. Your mike just went off. 

 MR. MURIS. I am sorry. There is no transparency issue on 

interchange. If that is what the issue is, they know what they are going 

to charge. 

 MS. SCHAKOWSKY. What the fee is. 

 MR. MURIS. Sure. 

 MS. SCHAKOWSKY. They don’t know the operating rules. Well, 

okay. 

 MR. ARMOUR. A quick point. Interchange is more than just the fees. 

It is the operating rules around this. 

 MS. SCHAKOWSKY. Right. I just want, Ms. Kerrigan, I was a little 

bit surprised by, as a small business and entrepreneurial council, could I 

get a list of the members of your council? You have member 

organizations, right? 
67

 MS. KERRIGAN. Yes, we have 70,000 members nationwide. 

 MS. SCHAKOWSKY. Okay. Are the same people that Mr. Armour 

represents part of your organization? 

 MS. KERRIGAN. Our organization is more broad-based in terms of 

its membership. We don’t have any of the large retail operations. We 

don’t have the concentration of, you know, the retail or franchising. 

 MS. SCHAKOWSKY. Are members of the Electronic Payments 

Coalition members of your organization? 

 MS. KERRIGAN. I don’t know who the members of the Electronic 

Payments Coalition are. I didn’t even know there was one until this 

hearing. 

 MS. SCHAKOWSKY. I have so many questions, but I guess my time 

is up. 

 MR. STEARNS. I thank the gentle lady. We are going to go next to 

Mr. Deal. 

 MR. DEAL. Thank you, Mr. Chairman. Walk through some of these 

terms you have used because I am not necessarily following everything 

that you have used terms for. As I understand it, this hearing is primarily 

looking at interchange fees, but Mr. Armour says that knowing what the 

interchange fees are is not enough unless you know what the operating 

rules are. Now, the interchange fees are they, Mr. Muris, are they just a 

set, standard fee that is charged regardless of who is doing business in 

that regard? 

 MR. MURIS. There are, as I understand it, there are a wide variety of 

interchange fees charged, but because Visa and you know, depending on 

the type of transaction, depending, you know, some retailers have been 

able to negotiate different fees than others, but because there are 

thousands of issuers of Visa and MasterCard, they set the interchange fee 

for each issuer and because of the nature of this-- 

 MR. DEAL. Who is they? 

 MR. MURIS. Who is they, I am sorry. Visa and MasterCard, 

themselves. Visa and MasterCard are joint ventures of banks, but they 

have various rules and they set the fees. The consumer--your card is not 

from any of our cards here if you have a Visa or a MasterCard are not 

from the Visa association. They are from an individual bank, an 

individual issuer. 

 MR. DEAL. So Mr. Armour, if you know what the fees are, what 

does the operating rules tell you or are disclosed to you that you don’t 

already know? 

 MR. ARMOUR. Well, let me first say, great question. Let me give 

you an example that has come up with the tremendous increase in the 

price of gasoline. When you sign a merchant agreement, it is typically 

two pages, and there are some rules that they tell you about. You can’t 
68

surcharge for credit, you can’t set a minimum amount that a consumer 

has to buy to use a card and you can’t set a maximum amount. Now, 

there are thousands more rules, one of which is called Error Code 96 that 

is not disclosed to you and what that rule is, is with respect to gasoline, 

this is to the best of my knowledge, what many of our members have told 

me, with respect to gasoline, if you accept a credit card charge more than 

$50, Error 96 allows Visa and MasterCard not to pay the merchant for 

that charge. 

 Now, they don’t disclose that to you, but I have many members who 

have had what is called charge backs, Visa and MasterCard see a 

gasoline purchase on a credit card for more than $50 and refuse to pay 

the merchant for that purchase even though the consumer has paid their 

bank for that charge. Now, understand the conundrum that the retailer is 

in. A retailer, by the rules, can’t restrict the purchase to $50. That is 

against one rule, specifically. On the other hand, there is another rule 

that says with respect to gasoline, Visa and MasterCard reserves the right 

not to pay you if it is over $50, so what is a retailer to do? So when you 

ask about interchange and interchange fee, there are the fees, but as you 

can see, the operating rules has a huge impact on the actual cost of 

accepting Visa and MasterCard and so forth, in general. I mean, that is 

just one example and you are not, that Error 96 is not disclosed to you. 

You find out when it happens. 

 MR. DEAL. Mr. Mierzwinski, would you like to comment on that, as 

well? And also, if you do, and I would ask you, if we used the 

terminology of merchant discounts and as I understand it, with the 

merchant discounts, those are through cards such as American Express 

and Discover, which you have made some allusions to about the cost 

being shifted to other consumers where you are having benefits that are 

being paid outside or simply for the use of the card. 

 MR. MIERZWINSKI. Well, first of all, Representative Deal, my 

reference in my testimony to American Express and Discover had to do 

with some of the other litigation over the practices of Visa and 

MasterCard associations and whether or not they kept them out of their 

payment systems. In terms of their particular payment systems, the socalled merchant discount is another term that is used for interchange. 

The interchange may average something like 1.6 percent or more, so the 

merchants sometimes refer to, in the industry trade papers, sometimes 

refer to that since the merchant only gets $98.40 out of every $100, that 

that is a merchant discount, but it comprises the interchange fees paid to 

the acquiring banks, the network, and to the other members of the 

system. 

 I would point out, in terms of the ability of the members of the 

merchant class, the merchants, to obtain information about their 
69

contracts, I think it is shocking that the banks won’t give the information 

but then, again, the information they give consumers about our contracts, 

in fact, they do tell us, in our contract, what the rules are and the rules in 

our contracts to have a credit card say that if we want to change the rules, 

we can change them at any time for any reason including no reason, so I 

would be interested to see the operating contract that the merchants are 

subject to, to see whether it is the same rules that the banks have for 

consumers, which is take it or leave it. If you want a credit card, you 

have got to agree that we can change the rules at any time, even for no 

reason. 

 MR. DEAL. So you are saying, in effect, then, that the take it or leave 

it proposition is being put on the merchants. Ms. Kerrigan, do you agree 

with that? I mean, there is no negotiation about it, is there? 

 MS. KERRIGAN. No, you agree to certain terms and certain 

conditions if you take the card. It is like any other type of, you know, 

business deal that you may have. I mean, you do accept those conditions 

when you take the card. 

 MR. DEAL. And is there anybody else out there that would break this 

monopolistic climate to come in and say hey, you don’t have to take 

theirs because you can’t negotiate. I have got a better deal for you. Is 

that out there? 

 MR. MURIS. Well, I’m sorry. 

 MS. KERRIGAN. Well, I represent, you know, that is coming. In 

effect, that some way, shape or form, that small business owners and 

small merchants will be able to aggregate and collectively utilize, as a 

group, their transactions to negotiate better prices. 

 MR. DEAL. Have they been able to do that yet? 

 MS. KERRIGAN. No, that mouse trap has not been built, yet. But 

certainly there is the migration to debit cards, which are lower, you 

know, in terms of cost and merchants are not powerless. It is going to 

take time, obviously, to educate the consumers about debit cards and 

pushing them in that direction. It is cheaper. But from our perspective, 

we do not want the outcome of what occurred, and this goes back to our 

conversation on Australia, on what has happened there with respect to 

new costs that are being imposed on consumers and shifting to more 

expensive cards, the shifting of more expensive cards for merchants and 

business owners, the shifting to American Express, for example, and 

Discover. I mean, these cards cost more for small businesses, not less, so 

there has been some unintended consequences in the Australian model 

that I think we really need to look at before we go doing anything here. 

 MR. DEAL. So the merchant discount in those cases is greater than 

the aggregate cost, including the interchange fees on the other 

Visa/MasterCard approach? Is that what you are saying? I thought they 
70

were the other way around. I thought that the merchant discounts were 

actually a lower cost item for the merchant overall than signing one of 

the contracts that had the interchange fees in the traditional sense. Am I 

wrong? 

 MS. KERRIGAN. Well, American Express is, with respect to the 

merchant discount, is a higher cost than the combined of the other two. 

 MR. DEAL. I have been told it is generally a two percent charge to 

the merchant. Is that a ballpark figure, correct? 

 MR. ARMOUR. Well, a bigger magnitude. 

 MR. MURIS. Well, it varies significantly in this response to your 

point about monopolistic practices. I don’t know what Wal-Mart and 

Target pay, but I am willing to bet that it is a lower amount than others 

pay. If you look at Costco, for example, you can’t use your MasterCard 

or Visa credit card, but they have an arrangement with American 

Express. I don’t know the terms. I would be very surprised. American 

Express is generally the highest merchant discount. I would be very 

surprised if it is not a special arrangement with Costco. These sorts of 

arrangements work throughout the economy and as Chairman Stearns 

pointed out, any merchant can discount for cash. Gas stations used to 

discount for cash. That was common 25 years ago. They don’t do it, but 

the reason they don’t do it is not because of Visa and MasterCard, it is 

because of consumers. We have a consumer driven economy and that is 

what happened to discounts for cash at gas stations. 

 MR. ARMOUR. There wasn’t pay at the pump 25 years ago and Mr. 

Muris is quite correct. There is value to credit cards. 

 MR. DEAL. I am still mad about the last time I tried to fill up my 

pickup truck. They wouldn’t let me just simply pump it in the middle of 

the day and go inside and pay cash, as I normally do, that I either had to 

use the credit card or I had to go pay in advance. I thought to myself 

well, I don’t know how much it is going to take to fill my truck up, but I 

have to guess at it one way or the other and generally, you are going to 

guess on the low side because you don’t want to go back in and ask for 

an exchange so you are actually selling less gas that way. 

 MR. ARMOUR. That is true. 

 MR. MURIS. Sure, but I don’t think that was because of the payment 

cards, I think it was because unfortunately, some people would fill their 

tanks and drive off. 

 MR. DEAL. Agreed. That is the source of that problem. 

 MR. MURIS. Right. 

 MR. DEAL. Well, I don’t know if we will have another round or not, 

but I have some other questions, if we get to it. 

 MR. STEARNS. We might, then. We might do that. Let me continue. 

Mr. Ferguson. 
71

 MR. FERGUSON. Thank you, Mr. Chairman. Thanks for holding this 

hearing. Our economy is dynamic and consumers currently enjoy a wide 

variety of choices on what to buy and also choices on how to pay for 

things, and the more that consumers choose to pay with credit cards, 

more and more people are choosing to use credit cards and those 

payments are made electronically. They enjoy convenience. I know I 

for one use my credit card all the time. I don’t have a pickup truck that I 

fill up at the gas station because we wouldn’t be able to fit our four little 

kids in a pickup truck; we have a minivan, and when I go to the gas 

station with four little ones in the back, I want to get in and out of that 

gas station as quick as I can, so I use a credit card and I use it everywhere 

because it is fast and it is convenient and, you know, I have a concern 

like any consumer would if we are paying high fees for that convenience, 

but I also believe in markets and I think information is good, 

transparency is good. They both help markets to work and they help 

markets to work better. 

 And I am just interested to hear from Mr. Muris or Mr. Armour or 

both of you. I am thinking about, you know, in a free market rate system 

where the costs of using a credit card were more transparent and more 

obvious to the consumers who use them. I am not as interested, in fact, I 

am very suspicious of government telling industry what prices they can 

charge. I think price controls tend to be a very bad thing. But I think 

information and transparency are a very good thing because it empowers 

a consumer to make decisions that they believe are best for them. 

 I haven’t heard it discussed today, specifically, but has there been 

discussion of, you know, retailer--we have heard a lot about the contracts 

and extortion and everything else, but is there anything that would keep a 

merchant from simply, on every receipt that is printed out of a machine, 

just providing information to the customer that says some percent, I don’t 

even know if you would attach a number to it, but some portion of the 

product you just bought is a little bit more expensive because we offer 

the convenience of you being able to use a credit card. Now, for me, I 

don’t know if that would change my behavior, but for some folks it 

might and frankly, for the credit card companies, it might change their 

behavior, so I would like you both to address it. Mr. Armour, why don’t 

you go first? 

 MR. ARMOUR. Congressman, yes, there is something to prevent that 

and that is the operating rules prevent retailers from disclosing to 

consumers the fees that they are paying. 

 MR. FERGUSON. What if you don’t attach a number to it? What if 

you make a general statement; I am just sort of spit balling here, I don’t 

know. But what if on every receipt that was printed out, every time I got 

my receipt out of the gas station or the supermarket or anywhere else that 
72

I use my credit card, on that receipt was printed, just a little FYI, by the 

way, the product you just bought is a little bit more expensive because 

we want to offer you the convenience of using a credit card? 

 MR. ARMOUR. That would sure do that. I think what you are 

suggesting is the ultimate in consumer protection. Mr. Muris, I think, 

brought up in his comments ATMs and the amount of money that is 

made on ATM fees. There is huge transparency in ATM fees. You put 

your card in, you enter your PIN and it says hey, do you realize you are 

going to have to pay $1.50 or $2? Do you want to do that, yes or no? 

That is transparency. 

 MR. FERGUSON. And it is on your receipt. 

 MR. ARMOUR. Absolutely. There is no industry, I think, that is 

more transparent than mine in its pricing. We put it on the street corner, 

you know? So I just have a problem with why Visa/MasterCard is so 

secretive about their operating rules, why they prohibit retailers from 

disclosing fees and so forth. It just doesn’t make sense to me. I am an 

economist and I believe in free markets, too. The problem is we don’t 

have a free market here. 

 MR. MURIS. I am sorry. I think Mr. Armour is misinformed. There 

is nothing, I believe, in the agreements that prevent a merchant from 

doing exactly what you are saying and listing the price. In fact, I was--

speaking of hotels, I was at a bed and breakfast in Pennsylvania last fall 

and they did exactly that. They said we have to pay, I don’t remember 

what it was, 3 percent, 2 percent more if you use a credit card, please 

don’t use a credit card. There is nothing that prevents that, but consumer 

convenience is what is driving this, your very point. Credit cards are a 

marvelous invention and they don’t come free. There is enormous 

competition. Merchants, if they want, can steer, they can discount for 

cash, they could steer among credit cards. Some do, not many. Not 

many do and the reason is that because consumers want the convenience 

and the consumers would resent it. 

 MR. FERGUSON. Mr. Armour, is--or actually, Mr. Muris. Is that, 

that bed and breakfast that you cited, is that true of every agreement or 

are there some agreements where what Mr. Armour is saying is actually 

true, that they wouldn’t be able to disclose a number? 

 MR. MURIS. I believe that you can disclose a number, if you want. 

 MR. FERGUSON. In any, every contract that you know about? 

 MR. MURIS. I don’t know about every contract, but my 

understanding of the general rules is that you could disclose a number, 

but again, merchants respond to consumers and just why discounts for 

cash went out in gas stations, discounts for cash are not particularly 

prevalent, but it is because of consumers; it is not because of anything 

the credit card companies or the payment card companies do. 
73

 MR. FERGUSON. Mr. Armour. 

 MR. ARMOUR. We will certainly get back to the committee with a 

definitive response, but from what we understand and from what our 

members tell us about the operating rules when several of them have put 

up what fees that they are paying, they have been told by their banks that 

that is a violation of the operating rules. 

 MR. FERGUSON. Well, there is obviously a discrepancy, Mr. 

Chairman, in terms of what merchants are aware of, what they are 

allowed to do and what they are not allowed to do and I, for one, I am 

very hesitant to have the Federal government jump into an issue like this, 

but I am very much in favor of consumers having all the information that 

they need to make a decision. As I say, it maybe wouldn’t affect my 

behavior, but there are many, many millions of people for whom it might 

affect their behavior if they knew exactly what they were paying for that 

convenience, for that service and perhaps encouraging industry to go in 

this direction is perhaps better than a law or a price control or whatever 

else. 

 MR. ARMOUR. If we had the operating rules, we could answer the 

question. 

 MR. STEARNS. Perhaps the gentleman is also indicating that he 

would like to see a complete description of the full operating rules on 

interchange fees. Now, Ms. Schakowsky has alluded to that. Maybe the 

member has an interest in seeing that. There is some talk that it is 

proprietary information, they don’t want to reveal it. They have 

indicated it might be on a website you can get, but a lot of people say 

what is on the website cannot be understood, it doesn’t have the 

complete rules, so I don’t know. The Member must think about whether 

he wants to do that. I mean, as Chairman, I am also concerned about it. 

 MR. FERGUSON. Well, just to respond, Mr. Chairman. 

 MR. STEARNS. Sure. 

 MR. FERGUSON. I am not a lawyer. I am less interested in the 

legalese and the guts of these agreements that bunches of lawyers work 

out in corporate board rooms or meeting rooms, but what I am most 

interested in is are merchants allowed and do they have the ability, as we 

have heard at least one example of, are merchants allowed to tell their 

customers exactly what they are paying for, exactly how much they are 

paying for the convenience and it seems to me that ought to be able to 

happen. Again, I don’t know, I don’t pretend to understand all the 

intricacies of these agreements that are signed, but it seems to me that, at 

least, would be a better step than, perhaps, some new Federal law. 

 MR. STEARNS. Mr. Terry. 

 MR. TERRY. Thank you, Mr. Chairman. I have a question that was 

brought up by a business in my district and it says basically besides the 
74

collective setting of the interchange by Visa and MasterCard boards, do 

the card associations have other rules that restrict competition among 

payment types at the point of sale? Mr. Armour, are you familiar with 

whether, from what you are hearing from your merchants, your 

members, that they are restricting, at the point of sale, some of these 

unknown rules and procedures of what the payment type could be, 

whether it is debit card, which I understand has one set of rules in 

payment, versus credit card? 

 MR. ARMOUR. I think the Wal-Mart litigation addressed that. That 

was a steering case that Visa met, has been settled in the, to the benefit of 

retailers that prohibited the type of steering to lower cost cards that you 

just-- 

 MR. TERRY. And that what, I think, this business and I am getting at 

is are there other ways that they are skinning the cat now to force the 

merchants to have to use a credit card versus another payment would 

have lesser charges? 

 MR. ARMOUR. Well, the gap between the cost of processing debit 

cards and credit cards have significantly narrowed, so that might be one 

indication of one of the things they are doing. 

 MR. TERRY. Mr. Muris. 

 MR. MURIS. Well, because of the nature of this market with 

consumers on the one hand and merchants on the other, we have some 

interesting phenomena. One of the reasons the interchange fees 

merchant discounts, when the Diner’s Club started all this, in the 4 and 5 

percent range; they have fallen considerably. In recent years, we have 

had more extensive competition, particularly between American Express 

which has gotten involved, MasterCard and Visa, and one of the ways 

they compete for banks is through interchange fees, but what happens, 

there is so much competition among issuers, the interchange fees are 

passed on to consumers in benefits. 

 Annual fees, there are far fewer annual fees than there used to be. 

The rewards cards, there is an enormous number of rewards cards. We 

all get the offers in the mail. It is an extraordinarily competitive business 

and consumers benefit from that and consumers have voted with their 

feet. And the result of the lawsuits that have been filed, if the relief 

requested, which is to end the price fix, I believe would seriously hamper 

the existence of Visa and MasterCard and your constituents can’t 

possibly find that a result that they would be happy with. 

 MR. TERRY. Well, since the interchange fees have become 

substantially similar between debit and credit card, which baffles me, as 

a layperson that is not involved in the financial--I am more associated 

with those trial attorneys that extort people. 
75

 MR. MURIS. We have heard that word extortion here this morning, 

so-- 

 MR. TERRY. But I am not familiar with the rules in the financial 

services market, but it seems odd to me that when I am using my debit 

card, which I almost use exclusively, I have no rewards, I have no other 

reward than I made a transaction at the gas station or at Target and that 

was deducted from my checking account. No one carried debt, it was 

just an electronic transfer for the ease of everyone involved, but that 

process is still, the charge is still substantially similar as if I used a credit 

card that did have rewards and somebody carried the debt for 30 days 

until they could bill me. Is that fair? 

 MR. ARMOUR. It is less, but the gap-- 

 MR. TERRY. Is it that fair that they are similar? 

 MR. ARMOUR. It is not the same. It is less, but the gap is closing. 

But let me point something out because I think there is a huge 

misconception and you may be one of the rare people in this room that 

doesn’t use a credit card that has rewards on it and yet you, in fact, are 

far more typical than anybody else in this room. We have done a study 

at NACS and less than one in seven of the Visa/MasterCards used in our 

members’ establishments are reward cards. So over six out of seven are 

non-reward cards and as I said in my testimony, this presents some rather 

bizarre consumer things where the people, most of the people are 

subsidizing the rewards for very few people and I think many of us in 

this room think that everybody has a reward card. Actually, less than 

one in seven has reward cards. 

 MR. MURIS. There are significantly different users of credit cards. 

There are people like most of the people in this room, I suspect, who 

don’t use credit cards as a form of credit and therefore they care a lot 

about the rewards, but there are people for whom credit cards are a much 

better source of credit than payday lenders, than having to borrow from 

their families, than loan sharks, you know, more traditional ways. It is a 

better form of credit than installment credit. Those people pay attention 

to the interest rate, to the APR, so you have got to remember we don’t 

think, in this room, of credit cards as a form of credit, but for a lot of 

people, they are a very good form of credit and that is one of the reasons 

that explains these differences. In terms of the questions that you were 

asking, it is absolutely true that you pay more for credit, you know, those 

rewards cost more than the use of the debit cards, and if there was an 

implication that the numbers are close, they are not all that close. They 

may be a little closer than they used to be, but they are not all that close. 

 MR. MIERZWINSKI. Mr. Terry, if I could just briefly say that there 

are now debit rewards cards and in fact, it is the view of consumer 

groups that the banks are promoting the debit rewards cards as a way to 
76

switch people from cash to debit transactions so that they can increase 

the profits from interchange fees. And then the second part of that is it is 

my understanding that if I use a debit rewards card at a merchant, the 

merchant is forced to pay the bank higher interchange. 

 MR. ARMOUR. That’s right. 

 MR. TERRY. I will yield back. 

 MR. STEARNS. Thank you, Gentleman. Mr. Rogers. 

 MR. ROGERS. Mr. Chairman, it has been an interesting discussion. I 

use credit cards as a matter of convenience, but when I, as a consumer, 

use a credit card, am I, in fact, and I am just going to open it up to the 

panel, I am borrowing money, am I not? Borrow money for at least 30 

days or maybe longer? And isn’t that the service that a credit card 

provides? General agreement on that, okay. So there is a service to the 

consumer up front, that in fact, that I get to borrow that money until I 

determine to pay it back. Is that correct? Okay, I just want to make sure 

I understand the business here, as well. And I guess my concern, Mr. 

Chairman, is--and it has been a great discussion. I believe in 

transparency, I believe in competition. I think all those things will serve 

us better than Federal intervention. And I want to ask Mr. Mierzwinski--

by the way, I want to compliment your child safety issues. Your State of 

Michigan chapter does a fantastic job on child safety issues with-- 

 MR. MIERZWINSKI. Thank you, sir. 

 MR. ROGERS. Yes, they do great work. I have worked with them. I 

am a little concerned on this issue, however, and I just want to quote you 

something out of a Brookings study and then maybe Mr. Armour can 

help me answer this, as well, because this is my concern when you have 

a national or a Federal intervention. And they actually did a study on the 

Australian experience. “The study of the experience in Australia 

preliminarily confirms cooperative network issuers in Australia indeed 

did cut their cardholder benefit packages and raised fees. Merchants 

have benefited from lower discounts, but merchants have not lowered 

their prices. If cardholders have lost benefits, pay higher fees and have 

not gained from lower merchant prices, then they have not benefited.” 

And I will start with you, Mr. Mierzwinski. You are obviously 

advocating on behalf of the consumer. It sounds like in Australia the 

consumer, with a lot of good intention, ended up paying a lot more 

money. 

 MR. MIERZWINSKI. I have not yet read the Brookings or American 

Enterprise Institute’s study, but I would point out that this particular 

issue isn’t only about credit cards, it is also about debit cards and so in 

fact, the consumer is not borrowing any money from the bank when he or 

she is using a debit card in this transaction and that is, in fact, one reason 

that some of the fees have finally started to go down on debit 
77

interchange. But even within debit interchange, there is also the issue of 

unfair practices where there is PIN debit, which is cheaper and less risky 

and then there is signature debit, where the profits primarily accrue to the 

big banks, where the primary owners of the Visa and MasterCard 

association, because they have more volume and whether the practices of 

the industry are designed to migrate consumers first, from cash to plastic 

and second, from PIN plastic to signature plastic, so that is all occurring. 

As for the Brookings study, I am going to take a look at it and I will get 

back to you on its results, but I want to point out one more thing, 

Congressman, and that is simply that the consumer groups, I think the 

industry has rolled out, they have got banners in the back room. 

Whenever Congress talks about regulation, they always bring out the 

price control banner. Price controls are bad for America. The consumer 

group’s issue here is how does the merchant discount or the interchange 

fee get to be fixed at such a high level and is it fixed at such a high level 

because the companies are asserting market power? Are they asserting 

market power, which is illegal, because of a series of illegal practices, so 

it is not just the market setting this price, are illegal practices setting this 

price? 

 MR. ROGERS. And I think that is a fair question to ask, but I would 

argue and I believe you would argue, as well, that if at the end of the day 

a proposed intervention from the Federal government caused higher 

consumer fees, you would probably be opposed, would you not? 

 MR. MIERZWINSKI. We would be opposed, probably, but we would 

want to look at it. That is why we have suggested the committee 

continue this. We think it is a good rock to be looking under. 

 MR. ROGERS. Thank you. Mr. Armour. 

 MR. ARMOUR. We would certainly oppose that, yes. I mean, we are 

retailers and our mission, really, is to take value to consumers. But let 

me address a couple things. First of all, I hear other people talking and 

most ask me about the Australian model, we are not talking about any--I 

also hear about price controls and caps; we are not talking about price 

controls or caps, we are talking about way, way earlier in the cycle, how 

about some transparency here? How about disclosing some rules here 

and then how about looking into what is behind that graph over there? 

 I mean, we are not advocating that Australia has skinned this cat 

successfully. What we are advocating is that looks really odd over there. 

And by the way, Australia was paying lower interchange fees before 

regulatory intervention, than the United States. What is happening in 

this country? We have the highest volume of transactions, the best 

technology, low fraud rates, and decreasing fraud rates, and yet, we are 

paying among the highest interchange fees in the world. We would like 

help. We would like you all to help us and consumers to really shine the 
78

light on what is going on in this marketplace that causes market pricing 

to result at the levels that it is. So don’t mistake Mr. Muris and Ms. 

Kerrigan saying that we are asking for price control or price caps, 

because we don’t know. 

 MR. ROGERS. Yes. But you are, in fact, asking for government 

intervention and I always say be very careful for what you ask for. 

When the government intervenes, we will intervene. It is the old story 

about picking about the steak and walking down the block and no 

question. 

 MR. ARMOUR. But I believe in the light of day. I believe in free 

markets and I believe in consumers-- 

 MR. ROGERS. I appreciate that. Mr. Muris, would you like to 

respond? 

 MR. MURIS. Yes, could I respond to the point about benefits? Your 

point about borrowing the money for 30 days is an excellent point and 

you don’t have to pay for that. You get the float if you pay it back 

immediately, one of the many benefits of cards. I think one of the things 

we are missing are the benefits to Mr. Armour’s members. Before 

general all-purpose payment cards, the large retailers had cards and the 

small stores couldn’t afford the fixed cost and the other costs of having 

those cards. Because the banks and the proprietary associations are more 

efficient at assessing the risk, we now have cards, and I am old enough to 

remember when you had, in your wallet you had cards from all the 

different department stores and a lot of people didn’t have the general 

all-purpose cards. Those general all-purpose cards represent a 

tremendous benefit that aid the small businesses. Look at the Internet. 

The Internet has been facilitated enormously by the confidence everyone 

has in these general all-purpose payment cards. Now, because of fraud 

and other risks, the interchange fees are actually higher on the Internet. 

But again, it reflects the marketplace and consumer demand. 

 MR. ROGERS. It is not just fraud, though. It is non-payment, isn’t it? 

Isn’t that a part of-- 

 MR. MURIS. Sure, sure. 

 MR. ROGERS. The fraud may be going down, but non-payment, that 

is probably why-- 

 MR. MURIS. Well, whatever one calls non-payment, sure. I am 

willing to accept that addendum, sure. 

 MR. ROGERS. Well, is that-- 

 MR. MURIS. Sure, sure. 

 MR. ROGERS. I mean, the risk, is that not a factor of some of your 

interchange? It is kind of risky. 

 MR. MURIS. Right. Well, and it is the problem we were discussing 

with the gas station. It is unfortunate. It is unfortunate that you can’t fill 
79

your gas and then go inside and pay if you are going to do a cash 

transaction, but because so many people would, you know, I mean, a 

significant enough percentage abuse that. Retailers, like Mr. Armour’s 

members, had to come up with a different strategy. 

 MR. ARMOUR. No one is disputing the value of-- 

 MR. ROGERS. Sir, if you may, Ms. Kerrigan, I think was raising her 

hand. I see I have gone over my time, but if you don’t mind, Mr. 

Chairman, to allow her to answer the question? 

 MR. STEARNS. Sure. Ms. Kerrigan, we will let you finish the 

question. 

 MS. KERRIGAN. Thank you. You know, from what I have seen that 

has come from the merchants who are calling for some type of 

government intervention, I mean, they are pointing to and have asked 

and have urged to look at what has been done overseas and they point to 

these as success stories. But I think the more and more we look at what 

has happened in Australia and everything that has happened overseas 

with respect to interchange has been price controls, that this is not a good 

deal for consumers and is certainly not a good deal for small merchants. 

And in fact, in Australia they continue to re-regulate or fix, or try to fixup, the mess that has already been caused there. So we can’t go down 

that path and I do believe that if you are looking for the government to 

do something, you do have to watch out what you ask for, because you 

may get it and certainly, price controls are not the solution. 

 MR. ROGERS. Okay, thank you. 

 MR. STEARNS. I thank the gentleman. I would just add within that 

graph there might be something of question because Americans have so 

much consumer debt and lack of savings in the country. I would be 

curious to see how that skews this graph, too, because so many people 

have a huge amount of credit card debt, but with that, the gentle lady 

from Tennessee is recognized. 

 MS. BLACKBURN. Thank you, and I thank our panel for a great 

discussion on this issue. Ms. Kerrigan, coming to what you were saying 

about the Australian experiment, I think that you would agree and Mr. 

Mierzwinski, I think, what I am hearing you all say is that the customer 

is the one that lost out in the Australia agreement because higher fees 

were charged. They lost a lot of the bonus or the rebate programs and it 

did not seem to be of benefit to the consumer, is that correct? 

 MS. KERRIGAN. Well, correct, and we would never mandate or you 

know, I think it would be wrong to mandate that the merchants who have 

been able to save money have to pass those on to consumers; we would 

not be for that. But also, I think, in the long run, maybe in the mid-term, 

that merchants are going to be on the losing end, as well, if there are less 
80

cards in the system and if you have consumers paying higher prices for 

their cards, they are going to use them less. 

 MS. BLACKBURN. Okay, then let me ask-- 

 MS. KERRIGAN. And in addition, you do have the migration to the 

more expensive cards-- 

 MS. BLACKBURN. Okay. All right. 

 MS. KERRIGAN. --which, again, is going to be costly for merchants. 

 MS. BLACKBURN. Okay. Mr. Armour and Mr. Muris were speaking 

a little bit about the way the marketplace responds and you talked about 

how they respond at the point of purchase. If you don’t have price 

controls, then merchants respond at the point of purchase with saying 

please do not use a credit card; we have to pay an extra fee, or not 

allowing the use of certain credit cards or as in some of the small stores 

where I shop, they only will use a credit card with a purchase that is over 

a certain amount, $10 or $20 amount, so thereby they are changing the 

behavior of the customer, whether they like it or not. So let me ask you 

this, I had read the January 12 article from the Wall Street Journal on 

“Credit Where Due.” I don’t know if any of you read it, if not, I would 

recommend that you do take a peak at it. 

 And in reading that, it was talking about merchants having recourse, 

another recourse, which is to offer, to look at banding together and 

starting their own credit card competitor to Visa and MasterCard and I 

thought well, that is a pretty good concept, and I remembered when I was 

in the State Senate in Tennessee. We had a program with a card called 

Fuel Man and this was for state cards, automobiles, vehicles, and you 

took your Fuel Man credit card to the service station and you swiped it 

and you filled it up and it was charged back on a specific account; all 

done magna-strip, all done right there at the pump; the pumps were 

geared to take that. What would happen if merchants were to band 

together and start their own credit card competitor? Mr. Armour, what if 

your members were to do that? 

 MR. ARMOUR. In fact, we have had those discussions for over six 

years and much like Ms. Kerrigan testified, and these are with very, very 

large retailers and the economics of it are just cost-prohibitive to launch a 

competitive product against two associations with common ownership 

that has upward of 70 percent market share. I mean, that is a very, very 

tough deal. We continue to look at that as Visa and MasterCard continue 

to raise their interchange fees and the final thing, Congresswoman, if you 

like the store that you are shopping at, that says they can, you have to 

buy so much in your hometown to use a credit card, please don’t tell 

anybody about it because it is against the operating rules and Visa and 

MasterCard will cancel their contracts. 

 MS. BLACKBURN. I will dare not say another word, how is that? 
81

 MR. ARMOUR. Very good. 

 MS. BLACKBURN. Okay. Ms. Kerrigan, I wanted to come to you. 

Looking at the growth of e-commerce, and that is something that we 

have done in other hearings here in this committee, do you think that 

forcing a price cap on credit card interchange fees could prohibit or 

affect e-commerce advancement and the growth of that sector of our 

retail economy? 

 MS. KERRIGAN. I do, but if I can first, on this whole aggregation 

issue that you talked about, if I-- 

 MS. BLACKBURN. I would rather you answer the second question 

first. 

 MS. KERRIGAN. Okay. 

 MS. BLACKBURN. We are almost out of time. 

 MS. KERRIGAN. Okay. I do. I think any type of price control, any 

type of regulation will hurt innovation in that industry, whether it is 

enhancements, improvements, you know, making the system bigger and 

better. It is going to have to be that way as our global economy 

continues to expand and to allow small firms and e-commerce to take 

advantage of opportunities. So again, you know, price controls do quell 

investment and innovation and that would be one of the things that we 

would be concerned about. 

 MS. BLACKBURN. Okay. Go back to the aggregation now. 

 MS. KERRIGAN. On the aggregation, I was going to say it goes back 

to regulation and establishing any type of regulatory framework. What 

you are doing is you are setting up, you know, if we do that with 

interchange now, you are establishing bars and barriers, if you will, again 

to more innovation and potential entrance into that market, so we feel it 

will deter competition and deter innovation. 

 MS. BLACKBURN. Excellent. Thank you. I yield back. 

 MR. STEARNS. The gentle lady’s time has expired. Mr. Bass. 

 MR. BASS. Mr. Chairman, are we in recess? 

 MR. STEARNS. We are in recess right now. 

 MR. BASS. It is an interesting hearing and I must apologize for being 

late and I have read the committee memoranda here. I am trying to 

figure out what the problem is. Is the problem that different card 

companies are charging different interchange fees or that the problem is 

that some, that it isn’t sensitive to the size of the transaction or the 

amount of business that occurs in a specific area, thereby giving 

favorable treatment, if you will, in terms of bottom line to big businesses 

versus little? What are we trying to solve? Anybody want to address 

that? What is the problem that we are trying to solve? 

 MR. ARMOUR. Sure. I think there are two major problems. There is 

a huge lack of transparency, so that retailers really don’t know what rules 
82

they are supposed to abide by until they break them and then they are 

told; that is problem number one. Problem number two is why is 

America paying the highest interchange fees or among the highest in the 

world when we have the most sophisticated credit system, the highest 

volume of transactions that should drive economies of scale cost 

reductions and so forth. And when you look at that and you look at the 

way the card associations arrive or fix their prices and they require all 

member banks to charge the same interchange fee, one looks at that and 

it looks like there is abnormally high market power leading to higher 

than competitive interchange rates. 

 MR. BASS. Can anybody tell me why America is charging the 

highest fees in the world? 

 MR. MURIS. It is not true and I have asked to put a study in the 

record that shows that in a 15 country study, there are only three 

countries lower than the United States. The reason we are here, quite 

frankly, is that many merchants like credit cards, in fact, all merchants, 

they want to pay less for them and they have convinced--there is a group 

of plaintiffs’ attorneys who have convinced them to file 47 suits. The 

implication of those suits, and I believe what they want, is it is not that 

the prices are fixed, they want the prices fixed less. I don’t blame 

anyone for wanting to pay less, but I believe that in our market economy, 

that that sort of government intervention is inappropriate, but I think that 

is quite frankly the simple reason why we are here. 

 MR. BASS. If I could follow up on that. In a market economy, if 

there lacks transparency in the transaction process, how does the 

consumer go about getting those fees lower outside of the judicial 

system? 

 MR. MURIS. Well, I think transparency is a smoke screen. I think 

everyone knows, if the issue is the interchange fee, they know what the 

interchange fee is and indeed, there are numerous interchange fees and 

they are negotiated. As I mentioned a little while ago, some very large 

merchants, I don’t know the exact numbers; I would be willing bet that 

they pay lower interchange fees. I mentioned American Express is the 

only credit card that you can use in Costco and I would be surprised--

American Express normally has the highest merchant discount. I don’t 

know what the arrangement with Costco is. I would be very surprised if 

it is not a substantial discount. That is the way the market works. 

 MR. MIERZWINSKI. Mr. Bass, if I could just add, the consumer 

groups are here for different reasons than the merchants. We are here to 

see whether or not this system is fair, whether these prices are being set 

by, these fixed prices are being set by the market or by market failure, 

and we are hoping the committee will continue its examination and 

oversight of this industry. 
83

 MR. BASS. And what do you think as to your own-- 

 MR. MIERZWINSKI. Well, I think what we think there are a lot of 

reasons that you should be looking under the banks’ rocks, as I have said 

several times, because the banks don’t want people to know how much 

money they are making on interchange and whether all consumers are 

paying too much. That is the real question, are all consumers paying too 

much because of unfair practices of banks? And I am talking about 

consumers who pay with plastic and consumers who pay with cash and it 

is a very significant amount of money that we are talking about and it is a 

very significant cost to the merchants. Transparency in the marketplace 

would help a great deal. 

 MR. BASS. Are the margins in credit card commerce very large or 

are they not? 

 MR. MIERZWINSKI. Well, bank regulators at the Federal Reserve are 

required to produce for Congress an annual report on the profitability of 

credit cards. In fact, credit cards are the most profitable form of banking 

bar none. This marketplace includes credit cards and debit cards to be 

fair. 

 MR. BASS. Is most of the profit, though, associated with the interest 

rates that are charged versus the transaction fees? 

 MR. MIERZWINSKI. The consumer groups, our review of studies is 

that interest made tremendous profits for banks for many, many years, 

but banks wanted those profits to be even higher and so fee income is 

their growing source of increased revenue. They have set the bars 

higher, they have imposed fees on consumers. The biggest fees, 

probably, in the consumer marketplace are bounce protection fees on 

service accounts, that is the new name for bounced check fees, bounce 

protection fees; ATM-related fees and of course, late fees and penalty 

fees associated with credit cards. But then there is the hidden tax, the 

hidden fee and that is the fee imposed on merchants, the interchange fee 

we are here to talk about today. 

 MR. MURIS. But if we put a little reality into this, if there is any 

market where consumers have enormous number of choices, it is for 

credit cards, payment cards. Every day in the mail, everyone in this 

room, I suspect, gets numerous solicitations with a wide variety of terms. 

It is an extraordinarily competitive market and the benefits are passed on 

to consumers by this myriad forms of payment cards they can receive. 

 MR. ARMOUR. Even my minor children get those solicitations. 

 MR. BASS. Mr. Chairman, this is an important subject, interesting. 

There is one other issue, however, that I hope this subcommittee can 

address and that is the issue of gift cards and their regulation and their 

relationship with the state regulation, and Mr. Barton and I have written 

the Federal Trade Commission asking them to give us a full accounting 
84

of how the gift card system works and whether or not there are issues 

that need to be addressed by Congress because if there was ever an 

instance where there is no accountability, it is in the gift card business 

and where the potential for mischief exists is in that market which is now 

a very large or significant part of the total gift market, if you will, in the 

country, especially around the Christmas season, so I am hopeful, Mr. 

Chairman, that we can address that issue at a future date. 

 MR. MIERZWINSKI. If I could add, the consumer groups, Mr. 

Stearns, Mr. Bass, the consumer groups strongly support that effort and 

as I point out in our testimony, you have strong rights with credit cards, 

somewhat fewer rights with debit cards and some other stored value 

cards; virtually no rights with gift cards and it is a very important 

endeavor you are engaged in. 

 MR. STEARNS. And we will just wait for the Federal Trade 

Commission, I guess their letter should be forthcoming. And I thank the 

gentleman. By unanimous consent, if no objection, then, Mr. Sullivan, 

who has been patiently waiting, is recognized for questions. 

 MR. SULLIVAN. Thank you, Mr. Chairman. I know we are in, are 

we voting now, I guess? Or are we in--oh, okay. Mr. Armour, we have 

talked about this a lot today, but I still don’t quite understand it. Let us 

say that my convenience stores, headquarters in my district, Quik Trip, 

for example, and other convenience stores. Let us say I have a little 

convenience store and I want to take credit cards, of course, because so 

many people have them, and I call, I guess, a representative would come 

out to me and meet with me or they would mail an application in or 

something like that, right? 

 MR. ARMOUR. There is, really you would go to a merchant bank. 

You would go to one of your local banks and ask if they provided 

merchant credit card services. 

 MR. SULLIVAN. Would I sit down with the person to talk about that? 

 MR. ARMOUR. You could very well sit down with that person. 

 MR. SULLIVAN. So then I would fill out that application? 

 MR. ARMOUR. Bear in mind, that is not Visa/MasterCard, okay, 

because that is another entity that is behind the bank, so you are going to 

negotiate a processing agreement. 

 MR. SULLIVAN. Yes, whatever. I want to start accepting Visa and 

MasterCard to fill up, get gas and buy candy bars and so I want to get 

that done and I am filling out whatever I have to fill out to get that done, 

now you are telling me if I ask that person, I say hey, this interchange 

fee, what is it? What would they say to me? 

 MR. ARMOUR. Well, you are going to get a merchant agreement 

from that local bank that says okay, under the terms of our processing 

agreement, you have to abide by Visa/MasterCard interchange rules. 
85

 MR. SULLIVAN. And what are those? 

 MR. ARMOUR. They will say, in that agreement, a limited number of 

them, as I said earlier, you can’t restrict the amount of money, either 

minimum or maximum on a charge, you can’t credit surcharge and you 

have to abide by all of the other operating rules of Visa/MasterCard that 

you don’t get a copy of. 

 MR. SULLIVAN. And if you ask for a copy of it, I am sure someone 

has, what do they tell you? 

 MR. ARMOUR. They say you can’t have it. At Quik Trip, your 

constituent has asked for the Visa/MasterCard operating rules and have 

not been able to acquire copies of those rules. 

 MR. SULLIVAN. Can you tell me what the industry, as a whole, pays 

yearly in these interchange fees? Do you know? 

 MR. ARMOUR. About, I think, $27 billion. 

 MR. SULLIVAN. $27 billion. And how does that affect, you know, 

with gas prices and all that, how did that play--on a transaction, let us 

say, of a car, 20 gallons, what would that cost in interchange fees? 

 MR. ARMOUR. Roughly, 1.9%, but let us use 2% because it is easier 

to multiply. 

 MR. SULLIVAN. All right. 

 MR. ARMOUR. So at $3 a gallon, that is six cents a gallon. 

 MR. SULLIVAN. Almost $2, it is a $30 dollar transaction? 

 MR. ARMOUR. Right. 

 MR. SULLIVAN. Okay. And Ms. Kerrigan, have you surveyed your 

members about this at all, of your organization, and if you have, or talked 

to them or anything, can you tell me what results you have had or 

discussion? 

 MS. KERRIGAN. Well, we talked with many members of our 

organization about the issue, itself, and some of their comments and 

communications have been provided in the testimony. This has not been 

a hot button issue yet. I mean, the biggest issues really are healthcare 

costs, taxes, regulation, energy costs, things of that nature. Obviously, 

we are more broad based, so we don’t have the type of membership as 

the retailers, of the concentration of those type franchise or retail 

operations, but by and large, you know, what we have heard and just the 

general thrust of our mission and our purpose is that there is concern that 

intervention will mean price controls. 

 They certainly have no faith in the trial attorneys straightening this 

out for us in the business community, and that there will be unintended 

consequences in terms of fewer consumers using cards, more costs on 

their end, and that it won’t turn out well, let us just put it that way. So 

obviously, they don’t like paying interchange fees; no one does, and they 

feel that way about many of their business costs. But they don’t see 
86

government intervention as being something that is going to be, you 

know, drive those prices lower or help fix the system. They believe 

strongly in the power of the market and that innovation and the evolution 

in the market will eventually drive these prices lower and they will get 

better service out of all payment cards. 

 MR. SULLIVAN. Well, thank you, Mr. Chairman. I yield back. 

 MR. STEARNS. Okay. Thank you, Gentleman. I thank him for his 

patience for staying. We appreciate his contribution. I think we are 

ready to conclude. I think I am going to ask a few more questions and 

Ms. Schakowsky has indicated she has a few more, so we will do that. 

Mr. Mierzwinski, you mentioned in your opening statement that you 

thought one of the things that should be done is a GAO audit. Now, I 

don’t quite understand; could you explore why you think that has to be 

done? 

 MR. MIERZWINSKI. Oh, I am sorry, a GAO study of the issues. 

 MR. STEARNS. Yes. And what would be the reason for that? 

 MR. MIERZWINSKI. Well, I think the reason I simply pointed out, we 

thought that it would be useful to have two studies, have the Fed do one, 

have the GAO do one, and then compare them. 

 MR. STEARNS. Oh, okay. So it is more or less just to get an 

objective view between the two? 

 MR. MIERZWINSKI. Sure, exactly. 

 MR. STEARNS. Okay, Mr. Muris. Mr. Armour has said that all the 

banks must charge merchants the same interchange fee. Is that true? 

 MR. MURIS. The interchange fees are fixed by the association. 

 MR. STEARNS. Right. 

 MR. MURIS. But many merchants negotiate different fees. I 

mentioned that in terms of some of the large merchants, Costco, etc. 

 MR. STEARNS. An example is Costco with American Express. 

 MR. MURIS. Right. But because of the way this system works, 

because of this historical accident that you couldn’t have interstate 

branch banking, we have joint ventures and the joint ventures have 

thousands of issuers. So assume everybody in this room was an issuer 

and if you could, the reason they have to set a fee is obviously, a Visa 

card from any one issuer is a Visa card to consumers, so you want the 

merchants to be required to accept any card that says Visa on it. Well, 

once you set that rule, if you don’t fix the fee, you put everybody in this 

room, as an issuer, in the position of saying pay me a lot, okay. And to 

avoid that hold-up problem and to avoid thousands of individual 

negotiations, Visa and MasterCard set a fee, but the fee might be 

different for different merchants. 

 The proprietary systems, American Express and Discover, you know, 

they went a different route. They don’t have banks, although American 
87

Express has started to have banks, so they just deal directly with the 

merchants and charge the merchant discount. But the function is the 

same between the merchant discounts that are charged in both 

associations. So the bottom line is that if these lawsuits actually succeed 

in preventing the fee to be fixed. MasterCard and Visa can’t exist the 

way they exist now and the plaintiffs’ lawyers and the merchants can’t 

want that. What they want is somebody to fix the fee at a lower level. 

 MR. STEARNS. Mr. Armour, this goes back to what I asked you 

earlier and Mr. Muris’ testimony, what you would really like to see done; 

would you like to see a lower fixed interchange fee or do you simply 

prefer to have the ability to negotiate the fees based upon your particular 

business? 

 MR. ARMOUR. I think we want a free market, so it is the latter, but 

let me also kind of refer to his last question. Interesting that American 

Express, not Visa/MasterCard, has negotiated fees with Costco. 

Visa/MasterCard, I am unaware of, has ever negotiated a lower 

interchange fee because that fee is between the association and the banks, 

themselves. It is not with the retailer. 

 MR. MURIS. That is simply wrong. 

 MR. ARMOUR. And as Mr. Muris said, if there is a free market, 

everybody is going to say pay me more, gee, it seems to me that most 

free markets, a lot of people say pay me less and become my customer, 

so-- 

 MR. STEARNS. Well, Mr. Muris doesn’t agree with you on that? 

 MR. MURIS. It is simply wrong that individual retailers haven’t 

negotiated and I assume that to get the arrangement with Costco, again, I 

am not speaking for American Express. I don’t know what their fee is. I 

would be very surprised that if American Express’ average fee, which is 

higher, the average merchant discount which is higher because they have 

a different business model, a very successful business model. I would be 

surprised if they didn’t make an exception in negotiating individual fees 

with Costco. 

 MR. STEARNS. Mr. Armour, just as a former businessman, I would 

think that if American Express is the sole card that Costco uses, I think 

that American Express cut some deal. 

 MR. ARMOUR. Well, I think that is absolutely what has taken place, 

but they are not Visa/MasterCard. They are not part of the interchange 

fee system. They are a small competitor on the side that is saying pay 

me less, pay me less to Costco and Costco has said oh, okay. 

 MR. MURIS. Such arrangements exist with Visa and MasterCard and 

other large retailers. Again, I don’t know the fees, but very large 

retailers don’t pay the same because they are in a different position. 
88

 MR. STEARNS. Okay, I am going to conclude with this last question, 

Mr. Armour, for you. Isn’t it true, though, that all your members, 

convenience stores, all these gas stations, don’t they sign a contract? 

Don’t they put their name on this contract, and by signing aren’t they 

agreeing to this and so, and you are saying that they have nowhere to go 

and they don’t know what the contract they are signing? 

 MR. ARMOUR. No. You are absolutely right. My testimony, I said 

they virtually have no choice because plastic transaction is the dominant 

form of currency in our economy today. I mean, it is the same thing 

when you sign up for electricity to your house. You don’t need to do 

that. 

 MR. STEARNS. But they could go to Diner’s, they could go to 

Discover, they could go to Visa, they could go to MasterCard, they could 

go to American Express. 

 MR. ARMOUR. But when 70 percent of the transactions are 

Visa/MasterCard transactions and you don’t take that card, you are 

giving away, you are not appealing to 70 percent of the consumers in the 

United States. 

 MR. STEARNS. Do you have any trouble finding this agreement, this 

complete agreement? I mean, is it on the Internet? 

 MR. ARMOUR. To the best of my knowledge, MasterCard has a 300-

page summary of their operating rules. 

 MR. STEARNS. So the full operating rules on the interchange fees is 

available on the Internet or not? 

 MR. ARMOUR. No, it is not. 

 MR. STEARNS. Have you ever seen it? 

 MR. ARMOUR. No, and none of my members have ever seen it. 

 MR. STEARNS. In your litigation have you asked for it? 

 MR. ARMOUR. We have asked for it. 

 MR. STEARNS. And what do they say to you? 

 MR. ARMOUR. I think there are discussions now to provide it under 

protective orders. 

 MR. STEARNS. Okay, Mr. Muris, if this committee wanted it, is there 

any problem us getting it? Is it proprietary information? 

 MR. MURIS. I assume it is proprietary information. I obviously 

can’t speak for the association on that issue. 

 MR. STEARNS. Okay. Ms. Schakowsky. 

 MS. SCHAKOWSKY. First of all, Mr. Chairman, may I ask for 

unanimous consent to submit a statement from the rental car companies 

and for all members to have reasonable time to submit questions for the 

record? 

 MR. STEARNS. Unanimous consent. So ordered. 
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 MS. SCHAKOWSKY. Thank you. Mr. Muris, just a couple of more 

comments I want to make. This notion that Mr. Armour and his 

organization were, somehow the plaintiffs’ lawyers convinced these 

people. I realize you are perfectly capable of defending yourself, but this 
93

offended me, that the plaintiffs’ lawyers convinced these retailers to file 

47 lawsuits and then later on in your testimony that these retailers simply 

somehow don’t understand the benefits of these interchange fees and 

then the notion that retailers want these fees to be lower, bottom line. 

One could also argue that your client, who you are here to represent, 

want these fees to be higher or want these fees to be whatever they want 

them to be. So the characterization here, I think, is inappropriate, really. 

I mean, I understand, again, that you are representing your client. That is 

fine. But to say that it is because somehow these, Mr. Armour’s 

members, are too stupid and they are convinced by plaintiffs’ lawyers, I 

think is misrepresenting what is going on here. This is an honest 

difference and we are going to discuss exactly that. That was a 

comment. 

 I wanted to again ask about this issue of disclosure. I mean, is it a 

factual dispute here and in which case, I think it would be, we need to get 

to the bottom of this. Either these operating rules are transparent or they 

are not. You know, clearly we need to get to the bottom of it. I am not 

sure how, but one way would certainly be to have the General 

Accounting Office take a look at this. Would anyone at this table object 

to the notion of the GAO doing a study of this? 

 MS. KERRIGAN. Specifically what? 

 MS. SCHAKOWSKY. Of interchange fees. 

 MS. KERRIGAN. Oh, interchange. I am sorry. I thought you wanted 

something more specific than that. 

 MS. SCHAKOWSKY. Of interchange fees. 

 MR. MIERZWINSKI. Oh, absolutely; interchange fees including 

looking at all of the information they would need to do the study. 

Absolutely. 

 MS. SCHAKOWSKY. All right. Is there anybody who would object to 

that? 

 MR. MURIS. There is enormous literature on interchange fees. It is 

obviously up to Congress. If I could just state, I believe you have 

mischaracterized some of what I said and every word I have uttered is 

my own. I am here on condition that I speak what I believe and that is 

the condition that I use with everyone that I represent. I spent my entire 

life in public policy and I believe I might have my obviously difference 

of opinion in terms of what is best for consumers, but every word I have 

uttered is what I believe is best for consumers and not because of what 

some particular client told me to say. 

 MS. SCHAKOWSKY. There is one other thing I wanted to get to. My 

understanding is that interchange fees are a percentage of the total cost of 

purchase and that includes any applicable taxes to the purchases. Is that 

right, Mr. Armour? 
94

 MR. ARMOUR. Yes, that is correct. 

 MS. SCHAKOWSKY. So is there any--these taxes don’t pose a risk to 

the credit card companies in any way, do they, Mr. Muris? 

 MR. MURIS. The fees, the $27 billion, I think the actual total 

merchant discounts in the United States are something like $30 billion 

and in an economy that is, I believe, over $12 trillion, and those 

interchange fees are, after a reasonable and normal profit, are given back 

to consumers in enormous benefits and what I was saying the $27 billion, 

the $30 billion is not interchange fees, it is what merchants pay for all 

cards. I believe it is an extremely good bargain. 

 MS. SCHAKOWSKY. I don’t know. I think I may be missing 

something here. So is it not true, then, that Visa and MasterCard are 

making a profit off the taxes that the corner store collects for the 

government? 

 MR. MURIS. Sometimes yes, sometimes no. As a point I have tried 

to make, there are probably hundreds, at least dozens of different--

probably hundreds of interchange fee arrangements negotiated, 

depending on the industry, depending on the firm. Sometimes yes, 

sometimes no, I think, is the answer to your question. 

 MS. SCHAKOWSKY. Okay. Mr. Armour, when you talk about 

disclosure, do you know why you fit into a certain category and why you 

would get those particular fees? 

 MR. ARMOUR. No, and as you are probably aware, the convenience 

store industry has always been an evolving industry. A couple decades 

ago, it was gasoline stations and then a corner store and they evolved 

together to become a convenience store. Now there is a great deal of 

food service going on. And the food service industry has a different 

interchange fee. Why is that? We don’t understand why they have a 

different interchange fee. Grocery stores have a different interchange 

fee, even though many grocery stores now are starting to sell gasoline. 

So it is baffling from this lack of transparency, how are these card 

associations that are owned all by the same banks are together setting 

fees and they insist that they be charged the same, every bank has to 

charge the same fee in this little matrix, but we have no idea how they 

arrived at-- 

 MS. SCHAKOWSKY. Well, we need to understand that, I think, or at 

least--Mr. Mierzwinski, from the consumer point of view, can you think 

of any other example where a business, in this case I am talking about 

the credit card companies, make a profit off of state, local and perhaps, 

Federal taxes? 

 MR. MIERZWINSKI. You know, we are a consumer group and a 

citizen group, and you represent citizens and consumers, so I think I 

agree with you that this is a big problem that the banks are going to have 
95

to answer to. I see no reason, with the sophisticated computers that the 

banks have, the ability that they have to characterize consumers in 

hundreds of different profiles and to charge differential prices to all these 

different categories of consumers and different categories of merchants, 

that they should not be gouging tax payers and making a profit off of 

this, so I don’t know of anyone else doing it and I am not sure the banks 

should be allowed to do it. 

 MS. SCHAKOWSKY. Talking about the taxes? 

 MR. MIERZWINSKI. The tax, charging a fee on taxes. 

 MS. SCHAKOWSKY. Yes. 

 MR. MIERZWINSKI. I don’t know if anyone else is doing it. I don’t 

know why they have to do it and I don’t know if anyone else is doing it. 

 MS. SCHAKOWSKY. Well, this has been a really wonderful hearing, I 

think, and I think the various points of view have been well expressed, 

but there is a lot of information that we simply don’t have and I am glad 

to see that no one would object to a wider investigation, perhaps, by the 

GAO and I appreciate all the testimony. 

 MR. STEARNS. Thank you, Gentle lady. The gentleman from Texas 

has just arrived. 

 MR. GREEN. I apologize, with everything else going on, but I would 

like to place a statement in the record and the questions I have, have 

already been asked. 

 MR. STEARNS. So ordered. You are welcome to ask questions, if 

you want. The House is in recess right now, subject to the call of the 

chair, so-- 

 [The prepared statement of Hon. Gene Green follows:] 

PREPARED STATEMENT OF HON. GENE GREEN, A REPRESENTATIVE IN CONGRESS FROM THE 

STATE OF TEXAS

Good morning. I’d like to thank Chairman Stearns and Ranking Member 

Schakowsky for holding this hearing today. 

This issue first came up when the Full Committee was holding hearings on the 

increase in gas prices surrounding Hurricanes Katrina and Rita. 

We’ve all seen the Washington Post article that revealed an increase of just over 

three million dollars a day in payment card fees as a direct result of the price of gas 

moving from $1.87 to $2.75. 

One of the issues I’d like to see the committee discuss is that of the large variance in 

interchange fees. 

These fees vary depending on the type of credit card the consumer uses, the type of 

business where the transaction is taking place, and sometimes, the rate larger retailers and 

merchants have been able to negotiate with the card companies. 

I understand the frustration of the millions of Americans that own an independent 

convenience store. They do not have the bargaining power Wal Mart does. 

However, the open network association that sets these fees are also trying to 

maintain a network that almost all Americans use to conveniently pay bills, make 

purchases and keep track of their spending. 
96

While there are clearly two industries impacted by this issue, I believe it is the 

responsibility of this committee to look out for the consumer. 

The long-term impact of the Australian model which set caps on these fees is 

uncertain. However, we do know that consumers do not have as many options for cards 

with rewards, and many are now paying annual fees to keep their credit cards. 

There are no easy answers to this issue. However, it is clear that interchange fees 

have an impact on our economy that is invisible to the consumer. 

The average consumer in this country does not know that Wal Mart is paying lower 

interchange fees on a sale than say Amazon.com or their local convenience store. 

At this time, we know interchange fees are based on a variety of variables and that 

sometimes, it is difficult for small business owners to navigate the lengthy contracts that 

enable them to accept cards such as Visa and Master Card. 

We also know that electronic payments are gaining in popularity. In 2003 the 

electronic debit card was used more frequently than writing a check and trend continues 

today. 

I look forward to learning more about this issue and hearing from our panel this 

morning. And again, I urge my colleagues that as we learn more about this issue, we 

keep the American consumer in mind. 

Thank you. 

I yield the balance of my time. 

MR. GREEN. I understand. But again, I know this is our second 

panel and they have been done, so, but again, the questions I had have 

been asked and answered. 

 MR. STEARNS. Okay. Well, thank you. Well, we will conclude this 

hearing and I would just say it has been a healthy discussion. We 

appreciate your patience here and I would say to my good friend, Mr. 

Muris, who I believe has impeccable credentials and character, has 

served in six policy positions and we appreciate his patience here, so 

with that note, we will adjourn the committee. 

 [Whereupon, at 12:13 p.m., the subcommittee was adjourned.] 

RESPONSE FOR THE RECORD BY HON. TIMOTHY J. MURIS, OF COUNSEL, O’MELVENY &

MYERS LLP, ON BEHALF OF THE ELECTRONICS PAYMENTS COALITION

March 20, 2006 

The Honorable Janice D. Schakowsky 

Ranking Member 

Subcommittee on Commerce, Trade and 

 Consumer Protection 

House Committee on Energy and Commerce 

2125 Rayburn House Office Building 

Washington, DC 20515 

Dear Representative Schakowsky: 

Thank you very much for giving me the opportunity to answer your questions about 

the electronic payments industry. Although I feel strongly that Congress should not 

intervene in this robustly competitive industry, I believe that further discussion of the 

issues is productive. 
97

Before turning to your specific questions, let me address an issue that is important to 

understanding why the attacks on interchange are flawed. Merchants that accept cards 

issued on multi-party payment systems like Visa, MasterCard, American Express, and 

ATM/PIN-debit systems such as Star, NYCE, and Interlink do not pay interchange rates. 

They pay Merchant Discount rates. On the Visa, MasterCard and ATM/PIN-debit 

systems, the bank that contracts the merchant to accept the cards issued on those systems, 

and only that bank, sets the merchant discount rate. American Express, which as the only 

acquirer on its system does not have interchange, sets the discount rate that merchants 

pay to accept its cards. 

Interchange is the term used to describe the rate of exchange that will apply to 

transactions taking place on multi-party payment systems. The various networks set 

interchange rates in different ways. Visa’s Board of Directors, consisting of 

representatives from Issuing and Acquiring organizations, currently sets the interchange 

rates on its system. MasterCard’s management sets interchange rates on its system in the 

United States. 

1. Testimony at this hearing indicated that interchange fees are charged after federal, 

state and local taxes. Is there any other example you can think of—outside of tax 

preparers, accounting firms, and attorneys who assist people with their taxes—where a 

business makes a profit on top of Federal, State and local taxes? 

When a merchant properly authorizes a transaction on an electronic payment system 

such as Visa, MasterCard, and American Express, it shifts the risk of non-payment on 

that transaction—including whatever tax it might owe to the relevant local, state or 

federal authority—to the payment network. The price that a merchant pays to accept 

electronic payment quite appropriately reflects this risk. 

This practice of paying to shift the risk of non-payment for taxes owed on a 

particular transaction is quite common. For example, many states apply sales tax and 

other fees to the sale of automobiles. When consumers finance the purchase of an 

automobile, they typically finance the taxes and fees as well as the cost of the car. The 

lender then assumes the risk of non-payment, and it typically charges the consumer 

interest on the total amount, including the taxes and fees. Likewise, retailers that offer 

credit terms to their customers typically include sales tax in the amount financed. The 

retailer assumes the risk of non-payment, and like the auto lender, it typically charges the 

consumer interest on the total amount financed, including the sales tax. 

2. I understand that the U.S. Internal Revenue Service (IRS) can charge a convenience 

fee to cover the interchange that would be charged when a taxpayer pays his or her taxes 

with a credit card, while private retailers and merchants are not afforded this opportunity. 

Is this true? If so, why was the IRS given a break on interchange fees and small business, 

which contribute mightily to the national economy are not? 

Visa, MasterCard, American Express and the other members of the Electronic 

Payments Coalition (EPC) believe that merchants should not be permitted to surprise 

consumers with undisclosed fees when they seek to use an electronic form of payment to 

make a purchase. Rather, merchants believing that cash and other forms of paper-based 

payment are truly cheaper to accept than electronic payments should induce consumers to 

use those forms of payment through discounts and other benefits. 

All the members of the EPC recognize the value associated with the introduction of 

new channels of commerce. All merchants, including the IRS, that open new channels of 

payment for consumers are free to charge consumers for the privilege of paying through 

that channel. Such convenience fees are not unique to the IRS. Ticketmaster, many 

movie theaters and a host of other merchants, large and small, charge such fees. As I 
98

understand it, each of the major electronic networks has different rules and policies 

regarding such fees. To the extent that you have questions about specific practices, I 

encourage you to raise the issue directly with the payment networks. 

3. It is my understanding that credit cards with “rewards” programs, like frequent flyer 

miles, have a higher interchange fee associated with them than a card with no rewards 

programs. Is this true? If so, why? 

 

On this issue, the distinction that I drew above between interchange rates and 

Merchant Discount is quite important. Merchant Discount rates for the vast majority of 

merchants do not vary depending on the particular type of card presented for payment on 

a given payment system. A typical small business accepting Visa cards for payment 

generally pays a single Merchant Discount rate for all Visa transactions regardless of the 

type of card used. This is generally true for MasterCard and American Express as well. 

By contrast, the interchange rates on payment systems do often vary from 

transaction to transaction reflecting a number of factors. For example, the interchange 

rate on a particular transaction might reflect the type of card used, the type of merchant at 

which that card was used, the method in which the transaction was authorized (e.g., keyentered or full capture of the magnetic stripe on the back of the card), and the time 

between authorization and settlement. There are sound reasons why these factors trigger 

different rates. Higher interchange rates often reflect increased risk of loss on particular 

types of transactions. Lower interchange rates often apply to new categories of 

merchants to encourage expansion of the network. 

Competition between payment systems plays a key, though often misunderstood 

role, in driving interchange rates. To remain competitive with other forms of payment 

and, more particularly, other forms of electronic payment, a given system must present a 

competitive value proposition to issuers. At the moment, rewards programs appear to 

drive consumer preference between different forms of payment. If one network offers 

higher rates of compensation to issuers to encourage them to offer rewards to consumers, 

then another network will likely increase rates for rewards program to maintain its 

position in the competition for card issuance. 

4. On February 21, 2006, MasterCard International, a member of the Electronic 

Payments Coalition submitted a copy of MasterCard’s Merchant Rules, a copy of which 

is also available on the Internet. Has Visa made such a document available? If not, why 

not? Can you supply for the Subcommittee a representative sample of all the various 

interchange fees charged by both MasterCard and Visa? Understanding that such fees 

may vary over time, please use figures for the year 2005. 

The rules and rate structures of the various electronic payment networks are, 

obviously, important to competition between the networks. The various networks have 

very different policies related to the disclosure of this information, and I encourage you 

to raise this particular question with each network. For general information about 

prevailing rates across all three major electronic networks, you should consult the paper, 

Interchange Fees in Various Countries: Developments and Determinants, presented by 

Stuart Weiner at last year’s conference at the New York Federal Reserve. (Available at 

http://www.ny.frb.org/research/conference/2005/antitrust/WeinerWright.pdf.) 

With regard to Visa, it has made an acceptance guide for merchants available on its 

website. Visa has also disclosed considerable information to various third-parties about 

its rates and rate structures. For more information about particular Visa rates and its 

overall rate structure, see the report published by UBS about Visa last year. Although I 

believe from the members of the EPC that your office received a copy of this report prior 

to hearing, I have attached a copy to this response for your convenience. 
99

5. Interchange Rates and Rates of Fraud. 

[Complete text of the question submitted for the record follows: 5. One of the 

justifications given for an interchange fee is to cover the risk and losses due to 

fraud that banks assume with each transaction. For the most recent year in 

which figures are available, please detail the losses incurred by Visa and 

MasterCard due to fraud (and other members of the Electronic Payments 

Coalition) in terms of dollar amounts, and in percent of total annual profits. 

Please indicate how these figures relate to past years. For instance, are they 

higher or lower? Has the amount of fraud increased or decreased since 1990? 

Have interchange rates risen or fallen since 1990? Please include an explanation 

for the answer given. In addition, please include total profit from interchange 

fees for the most recent year in which figures are available.]

Rates and rules related to the exchange of transactions have been an important 

element of competition between electronic payment networks since such networks were 

first conceived more than three decades ago. As discussed above, interchange rates 

reflect a range of factors. Only some of these involve cost. Risk is one of the factors that 

contribute to differences in rates that apply to specific transactions. Even more critical, 

however, is the consideration of the value products bring relative to other brands and 

forms of payment, including back office efficiencies through data capture, faster payment 

at the point-of-sale and settlement, and a payment guarantee. 

As a historical matter, electronic payment networks have used interchange rates to 

encourage innovations on both sides of this very competitive business. In the late 1970s, 

for example, Visa devised an interchange rate specific to electronic transactions. Using 

these and other tactics, Visa managed to reduce fraud on its system by 7% on an annual 

basis between 1990 and 2004 while dollar volume on the Visa system grew by 16% per 

year over this same period. (See Bill Sheedy, Interchange Reimbursement Fees: 

Delivering Value and Driving Innovation May 2005 (available at 

http://www.kansascityfed.org/FRFS/PSR/PDF/SheedyPanelRemarks.pdf ).) Likewise, 

the American Express and MasterCard payment systems are seeing volume hit all time 

highs, while fraud rates are at historic lows. 

Thank you again for allowing me to answer your questions on this important topic. 

If I can further help you or the other members of your committee analyze these important 

issues, please let me know. 

Sincerely, 

Timothy J. Muris 

cc: The Honorable Cliff Stearns 

The Honorable Nathan Deal 

 The Honorable George P. Radanovich 

 The Honorable Charles Bass 

 The Honorable Lee Terry 

 The Honorable Michael A. Ferguson 

 The Honorable Michael D. Rogers 

 The Honorable Marsha Blackburn 

 The Honorable John Sullivan 

 The Honorable Edolphus Towns 

 The Honorable Gene Green 
100

RESPONSE FOR THE RECORD BY KAREN KERRIGAN, PRESIDENT AND CHIEF EXECUTIVE 

OFFICER, SMALL BUSINESS AND ENTREPRENEURSHIP COUNCIL

March 17, 2006 

The Honorable Cliff Stearns 

Chairman 

Subcommittee on Commerce, Trade and Consumer Protection 

Committee on Energy and Commerce 

U.S. House of Representatives 

Washington, D.C. 20515 

Dear Chairman Stearns, 

As requested, please find attached my answers to questions submitted by 

Congresswoman Jan Schakowsky as a follow up to the hearing entitled “The Law and 

Economics of Interchange Fees” held on February 15, 2006. 

Please feel free to contact me additional questions you may need. Thank you for the 

opportunity to participate in this important hearing. 

Sincerely, 

Karen Kerrigan 

President & CEO 

Answers to Follow Up Questions on 

“The Law and Economics of Interchange Fees” 

held on February 15, 2006 

Submitted by: 

The Honorable Jan Schakowsky 

To: 

Karen Kerrigan 

President & CEO 

Small Business & Entrepreneurship Council (SBE Council) 

1. Your testimony did not endorse any government involvement in 

interchange fees and seemed to cast doubt about the ability of the court system to 

help resolve many of the disputes that have arisen around interchange fees. Do you 

believe that rising interchange fees are an issue for small businesses at all? If so, 

what is your proposed solution to this problem? 

 Indeed, I did not endorse -- and continue to be unenthusiastic -- of government or 

court-ordered intervention in setting or regulating interchange fees. Government 

intervention, for example, in Australia is leading to unintended consequences for 
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merchants and credit card consumers. Credit card holders are facing higher costs and 

getting fewer benefits. There has been a shift to credit cards that cost merchants more not 

less, and such dislocation is begetting additional regulatory initiatives as the outcome is 

not what the authorities had planned or desired. 

 The SBE Council is also concerned about the impact that regulatory intervention or 

court-prescribed solutions may have on the millions of small business owners who use 

credit cards as finance tools for their business. Paying higher finance charges or cutting 

back on benefits will hurt small business owners as consumers of credit cards, while a 

drop in the use of cards (or other forms of electronic payments) by customers cuts on the 

revenue end. What impact electronic payments regulation will have on the availability of 

credit for small firms is also an unknown. I believe these are issue that we need to 

explore. 

 With respect to interchange fee impact on small businesses and whether I believe it 

is an issue for them, of course rising costs and operational costs in general squeeze the 

bottom line, particularly for businesses with thin profit margins. From the small 

businesses owners we have heard from on this issue, those who found credit or debit 

cards uneconomical or unnecessary, of course, do not use them. For those who have 

embraced electronic payments in their businesses, such a decision has largely been driven 

by necessity. That is, there is growing consumer demand to take such payments, and/or 

the business model is better served by electronic payments (online storefronts, for 

example). However, the general consensus is that electronic payments, particularly credit 

cards, help drive and increase sales. The cost-savings, efficiencies and guaranteed 

payment that come with electronic payments is also highly valued. But as I made clear in 

my testimony, no small business owners enjoy paying external costs – particularly if they 

are rising. 

 We hope that legislators continue to study the issues (as noted above) and let the 

market work. I am hopeful that solutions will be driven by demand (for lower 

interchange fees), and that the evolution of the electronic payments system, technology, 

innovation and entrepreneurs respond accordingly. It would be an error to construct 

artificial barriers such as regulations or price controls, which may hamper innovations (or 

solutions) in the market. 

 I think the National Association of Convenience Stores (NACS) Card Processing 

Program is the early development of a paradigm shift in interchange fees – that is, they 

have developed a program with First Data “designed to reduce card processing fees for 

convenience and petroleum marketers.” NACS members and non-members can 

participate in the program (thus the power of aggregation is tapped), with members 

receiving deeper discounts. The average store, according to the NACS website, “can 

save an estimated $4,257 per year” in the program. According to the NACS website, the 

program started in late 2003. I would be interested in learning more about the successes, 

shortfalls, restrictions and challenges of such a program as it would appear that it would 

have mass appeal to small business owners who want to lower their interchange fees. 

 I think we have to allow the market and innovation to work as tinkering with a 

highly complex and well-constructed payments system could very well do more harm 

than good. 

2. Have you conducted a survey of your members on the issue of interchange 

fees? If so, can you share the results with this Subcommittee? 

 The SBE Council has not conducted a formal survey of our members on the issue of 

interchange fees. But as with the broad range of issues we address as an advocacy 

organization, we certainly seek their advice and input. As an organization devoted to the 

market innovation in resolving problems, we do not believe that government intervention 
102

should be the first course of action, if at all. Small business owners and entrepreneurs 

join our organization because of our limited government approach. 

 If the Subcommittee reviews the policy positions or solutions that we support or 

advocate on a range of issues, it will find we are consistent in this regard. That is 

certainly the case with interchange fees, as credit and debit cards are working very, very 

well for many small businesses and it would not be beneficial to those who are 

experiencing greater sales and better efficiencies to upset the applecart because of the 

unforeseen or unintended consequences of legal or regulatory intervention. 

 It would be beneficial from our perspective to review the results of the surveys of 

the other organizations that are suing the credit card companies or those that support 

some type of government intervention. That way, we may be able to learn how the 

conclusion was reached to move solutions out of the private sector and into the courts, 

and whether these business members support the fee-setting policy advocated by certain 

organizations. As I mentioned in my testimony before the Subcommittee, interchange 

fees has not emerged an issue that we hear about from our members. The SBE Council 

also hears from hundreds of non-member small business owners and entrepreneurs each 

month about their concerns. Again, interchange fees is not an issue we hear about. This 

simply may be the nature of our broad-based membership. In our regular interaction and 

collaboration with other broad-based small business groups in working on issues, I don’t 

hear this issue mentioned either. 

 The SBE Council has heard the views of a diverse range of small business owners 

on the interchange issue. As is the case with other issues, we regularly receive letters and 

email communications on a variety of issues. I hope the Subcommittee finds these 

comments useful on the interchange fee issue: 

● “Restaurants have the highest rate of failure among small businesses. I am 

proud that I have built a successful bistro, and developed a loyal clientele. One of 

the many reasons that I am successful is that I accept credit cards. The flexibility 

that credits cards provide consumers, along with the assured payments that the 

business receives, makes doing business easy, fast, and profitable. I pay the 

interchange fees because this investment in my business brings me larger returns 

that if I did a cash-only business. By accepting credit cards, I lower my risk of theft 

by not having large amounts of cash on hand.” (Montgomery, AL) 

● “We are a full service restaurant and bar that accepts credit cared because our 

customers expect it. Frankly, I don’t have a problem with the cost of credit card 

interchange fees and I don’t believe price fixing has occurred. I look at it this way: 

Visa and MasterCard are businesses that offer merchants like me the ability to 

accept electronic payments for a reasonable fee. I am not required to use their 

services. I choose to use them because it has proven to boost my business.” 

(Mishawaka, IN) 

● “I own a travel agency that relies heavily on credit cards to facilitate client travel 

plans. There is no better way to do what we do. Without credit cards, our cost of 

doing business would be much greater than it is today. I oppose such abuse of our 

legal system and I oppose any change in the system that works so well.” 

(Anaheim, CA) 

● “I own and operate a small retail store in Dublin, Ohio. I know from experience 

that customers who pay with a credit care are more likely to make higher dollar 

purchases than those who pay with cash. Accepting Visa and MasterCard also 

makes my business run more efficiently because I have guaranteed payments, easy 
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tracking of receipts and customer check-out is fast and simply. All of which is 

worth the small interchange fee that I must pay.” 

(Dublin, Ohio) 

● “...demanding our courts or the government impose price controls to reduce 

interchange fees or charging customers a check-out fee when they use their credit or 

debit card is ridiculous. Shifting the entire cost of interchange fees onto 

consumers...will result in consumers making a conscious effort to carry cash and 

selectively use their plastic. That also means a decrease in consumer spending at all 

businesses.” 

(Washington C.H., OH) 

 

 Again, we have not conducted a formal survey of the SBE Council membership. 

The views expressed above were taken from the fifty or more comments we have 

received on the issue to date. 

3. Do you believe that the members of your organization should be allowed to 

negotiate the interchange fees they are charged as part of the Visa and/or 

MasterCard networks? 

 Larger retailers and other types of businesses have the transaction volume to 

negotiate fees, and unfortunately, most of the time; we simply do not have the volume to 

cut deep into these fee costs. Like other business costs – supplies, shipping, health 

insurance, etc. – sometimes small firms have the ability to negotiate and other times they 

do not. The issue of negotiating leverage obviously ties into how small firms can better 

aggregate, collectively use our numbers and transactions to build volume on the system in 

order to deal for lower interchange fees. Perhaps, as technology develops, or the 

electronic payments system evolves, or if someone “builds a better mousetrap” so to 

speak the playing field will be more leveled. Obviously, technology has done that for 

small businesses in so many other operational areas of their business. We hope the result 

will be the same for interchange fees as the electronic payments system develops and 

matures.
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RESPONSE FOR THE RECORD BY HENRY O. ARMOUR, PRESIDENT AND CEO, NATIONAL 

ASSOCIATION OF CONVENIENCE STORES
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RESPONSE FOR THE RECORD BY EDWARD MIERZWINSKI, CONSUMER PROGRAM DIRECTOR,

U.S. PUBLIC INTEREST RESEARCH GROUP

Rep. Schakowsky: Thank you again for the opportunity to testify on this important 

issue. Please have your staff contact me if you have further questions. 

Question No. 1 

We’ve heard a lot about the benefits of low interest rates, reward programs, and 

convenience that credit and debit cards offer consumers. Although our hearing focused 

on interchange fees, interest rates and interchange fees seem to work in tandem to 

influence the ultimate price paid by consumers. Can you submit some information on 

credit card interest rates and how they affect consumers? With regard to rewards 

programs, how beneficial to consumers have these programs been? Do you have any 

estimate of how interchange fees affect consumers and how much these fees contribute to 

prices for consumer goods in the United States? Do you have solutions to the issue of 

high interchange fees that you and your organization would like to submit to the 

Subcommittee? 

Response 

Consumers ultimately pay the costs of credit card services regardless of the form 

these costs take (fees or interest paid by consumers or fees paid by merchants). There is 

significant evidence that high credit card interest rates impose a significant cost on 

consumers. Those consumers who revolve end up paying a very high interest rate for the 

credit card transactions-- significantly above the interest rate that can be secured in other 
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types of transactions. Excessive interest rates and fees make credit cards the most 

profitable form of banking. When interest rates generally (mortgages, car loans, etc) fell 

to their lowest levels in 50 years in the early part of the decade, credit card rates remained 

high due to the market power of the associations and their largest members, and many 

lower and moderate income customers were forced to, and still do, pay penalty rates well 

over 25% APR. As we noted in testimony1

 to the Senate Banking Committee in 2005, we 

support a variety of credit card industry reforms, including a cap on credit card interest 

rates. Some of the other credit card reforms we believe would be helpful include the 

following: 

• A cap on all other charges, whether considered a finance charge or not, to an amount the 

card issuer can show is reasonably related to cost. 

• No unilateral change-in-terms allowed. 

• No retroactive interest rate increases allowed (when rates are increased, it should only 

be for prospective purchases, not previous balances).. 

• Ban on late fee penalties when payments postmarked before due date and require a 

minimum 30 days to pay bill 

• No penalties allowed for behavior not directly linked to the specific card account at 

issue. 

• No over limit fees allowed if issuer permits credit limit to be exceeded. 

• No improvident extensions of credit –require real underwriting of the consumer’s 

ability to pay. 

• Meaningful penalties on issuers for violating any substantive rule or disclosure that 

provide real incentives to obey the rules. 

• A private right of action to enforce section 5 of the Federal Trade Commission Act, 

which prohibits unfair or deceptive practices by businesses, including banks. 

However, in the matter of credit card interest rates and annual fees, the costs of the 

credit card -- even if unfair, deceptive, changeable at will or even draconian -- are at least 

confined to the user of the credit card. And although the level of disclosure of interest 

rates and annual fees is far from adequate, there is at least some government-compelled 

disclosure of these fees. Based on these disclosures, we suppose you could argue that 

consumers could at least attempt to make choices between different credit card programs, 

which can have some impact on the price consumers pay. (Unfortunately, many 

consumers have been tricked by deceptive practices into having bad credit or too much 

credit, limiting their further choices, but the market probably works for some consumers.) 

Interchange fees are different than interest rates or annual fees in two respects. First, 

the fees are not at all transparent. Consumers often do not know that merchants and 

ultimately consumers pay a fee for credit card transactions. The rules of the credit card 

associations prevent the merchants from disclosing the amount of the fee or effectively 

attempting to steer consumers to lower-priced payment mechanisms. This lack of 

transparency along with what amounts to monopolistic practices of price fixing/setting by 

Visa and MasterCard has essentially removed competitive forces. Put simply, the card 

associations can easily increase interchange fees without suffering any loss of volume. 

The other fundamental difference is that interchange fees affect all consumers, not 

just those using credit cards. The card association rules require that the predominant 

price advertised by merchants be the “credit card” price. As a practical matter this means 

that virtually all posted prices include an extra markup to accommodate Visa and 

 

1

 See PIRG’s testimony before the Senate Banking Committee on 17 May 2005, available at 

http://www.senate.gov/~banking/_files/mierzwin.pdf. Also see testimony of Travis Plunkett, 

Consumer Federation of America, for a more detailed analysis of historic credit card interest rate 

trends http://www.senate.gov/~banking/_files/ACF1448.pdf. 
108

MasterCard. Merchants try to average it, but it means that interchange fees raise the 

costs of all goods, regardless of whether the consumer pays with credit card, check, cash 

or debit. We believe that the average U.S. family pays over $250 a year in credit card 

interchange fees, and statistics show interchange expenses are more than 7 times higher 

than what consumers pay in ATM fees. Under Visa and MasterCard rules, retailers and 

consumers have no real choice. 

The card associations will suggest that interchange fees go to a variety of things that 

benefit consumers, including reward programs. Reward programs may rebate some 

modest amount of the interchange fee to some consumers. However, only some credit 

card users benefit from rewards programs, while all customers ultimately pay for 

interchange fees. Therefore, even if this were the case, it would amount to a subsidy 

from low and modest income cash-and-check-paying customers to higher income rewards 

card-paying customers. 

Ultimately, credit card interchange fees are paid for by all consumers. They subvert 

market forces through their lack of transparency, and to the extent that they contribute to 

reward programs, they essentially function as a regressive tax. 

Question No. 2. 

The United States has the greatest technology in the world, the largest number of 

credit card transactions, and some of the lowest fraud rates, yet we have some of the 

highest interchange fees. Why are our interchange fees so high if we have low fraud 

rates and such a technologically advanced communications network? 

Response 

Good question! In the limited public debates that have occurred over interchange, 

credit card interchange fees have been justified time and again based on the alleged need 

to compensate card issuers for a variety of costs that they incur in issuing credit cards. 

Some of those costs include “the cost of fraud and the cost of transaction processing.” 

However, each of these costs has decreased substantially over the past decade. It is quite 

striking that interchange fees have continually increased even though these costs have 

decreased substantially. This is further evidence that the market is not behaving 

competitively with respect to interchange fees. The bottom line is that Visa and 

MasterCard are duopolists. Their cards are ubiquitous and their fees are hidden. So long 

as they operate in relatively close concert (a fact made easier by their overlapping bank 

memberships) there is no effective market mechanism to restrain what they charge. In 

other words, they charge high fees just because they can. 

As we suggested in our testimony, we believe that the appropriate next step for 

Congress is to sponsor an extensive review of interchange fees, focusing in particular on 

the impact of those fees on consumers and how transparency and choice might be 

harnessed to the benefit of all consumers. 

Please let me know what else I can do to assist the committee. 

Sincerely, 

Consumer Program Director 

U.S. PIRG 
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SUBMISSION FOR THE RECORD BY THE HON. SUSAN MOLINARI, CHAIRMAN, AMERICANS FOR 

CONSUMER EDUCATION AND COMPETITION
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