UNDERSTANDING THE FEDERAL RESERVE’S 

PROPOSED RULE ON INTERCHANGE FEES: 

IMPLICATIONS AND CONSEQUENCES OF 

THE DURBIN AMENDMENT 

HEARING 

BEFORE THE

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AND CONSUMER CREDIT 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

FEBRUARY 17, 2011 

Printed for the use of the Committee on Financial Services 

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UNDERSTANDING THE FEDERAL RESERVE’S PROPOSED RULE ON INTERCHANGE FEES: 

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UNDERSTANDING THE FEDERAL RESERVE’S 

PROPOSED RULE ON INTERCHANGE FEES: 

IMPLICATIONS AND CONSEQUENCES OF 

THE DURBIN AMENDMENT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS 

AND CONSUMER CREDIT 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

FEBRUARY 17, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–8 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SHELLEY MOORE CAPITO, West Virginia, Chairman 

EDWARD R. ROYCE, California, Vice 

Chairman 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JEB HENSARLING, Texas 

PATRICK T. MCHENRY, North Carolina 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

JAMES B. RENACCI, Ohio 

ROBERT J. DOLD, Illinois 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

CAROLYN B. MALONEY, New York, 

Ranking Member 

LUIS V. GUTIERREZ, Illinois 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

GREGORY W. MEEKS, New York 

STEPHEN F. LYNCH, Massachusetts 

JOHN C. CARNEY, JR., Delaware 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

February 17, 2011 ............................................................................................ 1 

Appendix: 

February 17, 2011 ............................................................................................ 77 

WITNESSES 

THURSDAY, FEBRUARY 17, 2011 

Floum, Joshua R., General Counsel, Visa Inc. ...................................................... 43 

Kantor, Doug, Partner, Steptoe & Johnson, on behalf of the Merchant Payments Coalition .................................................................................................... 41 

Kemper, David W., Chairman, President and CEO, Commerce Bank, on behalf of the American Bankers Association (ABA) and the Consumer Bankers Association (CBA) .......................................................................................... 40 

Michael, Frank, President and CEO, Allied Credit Union, on behalf of the 

Credit Union National Association (CUNA) ...................................................... 37 

Prentzas, Constantino (Gus), Owner, Pavilion Florals, and Life & Health 

Fitness ................................................................................................................... 36 

Raskin, Hon. Sarah Bloom, Governor, Board of Governors of the Federal 

Reserve System .................................................................................................... 2 

Seltzer, David, Vice President and Treasurer, 7-Eleven Inc., on behalf of 

the Retail Industry Leaders Association (RILA) ............................................... 45 

APPENDIX 

Prepared statements: 

Canseco, Hon. Francisco .................................................................................. 78 

Marchant, Hon. Kenny ..................................................................................... 80 

Renacci, Hon. James ........................................................................................ 82 

Floum, Joshua R. .............................................................................................. 84 

Kantor, Doug ..................................................................................................... 101 

Kemper, David W. ............................................................................................ 147 

Michael, Frank .................................................................................................. 160 

Prentzas, Constantino (Gus) ............................................................................ 174 

Raskin, Hon. Sarah Bloom .............................................................................. 179 

Seltzer, David ................................................................................................... 192 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Capito, Hon. Shelley Moore: 

Written statement of various higher education associations ........................ 199 

Written statement of the Electronic Payments Coalition ............................. 200 

Written statement of U.S. PIRG, Public Citizen, and the Hispanic Institute ................................................................................................................. 204 

Written statement of the 60 Plus Association ................................................ 211 

Written statement of the Association of Kentucky Fried Chicken 

Franchisees, Inc. ........................................................................................... 212 

Written statement of the Independent Community Bankers of America 

(ICBA) ............................................................................................................ 215 

Written statement of Senator Richard J. Durbin .......................................... 220 

Written statement of Hy-Vee ........................................................................... 225 

Written statement of the National Association of Federal Credit Unions 

(NAFCU) ........................................................................................................ 227 

Page

VI 

Capito, Hon. Shelley Moore—Continued 

Written statement of the Network Branded Prepaid Card Association 

(NBPCA) ........................................................................................................ 230 

Marchant, Hon. Kenny: 

Written statement of the Texas Credit Union League .................................. 234 

Perlmutter, Hon. Ed: 

Letter from William A. Cooper, Chairman and CEO, TCF Financial Corporation .......................................................................................................... 236 

Kantor, Doug: 

Excerpt from a House Judiciary Committee hearing held on May 15, 

2008 ................................................................................................................ 331 

Kemper, David: 

Written responses of the American Bankers Association to questions submitted by Representative Capito ................................................................. 334 

Written responses to questions submitted by Representative McCarthy .... 337 

Michael, Frank: 

Written responses to questions submitted by Representative McCarthy .... 338 

Raskin, Hon. Sarah Bloom: 

Written responses to questions submitted by Representative Capito .......... 339 

Written responses to questions submitted by Representative Maloney ...... 340 

Written responses to questions submitted by Representative McCarthy .... 361 

Written responses to questions submitted by Representative Pearce .......... 363 

Written responses to questions submitted by Representative Westmoreland ................................................................................................................ 364 

Seltzer, David: 

Written responses to questions submitted by Representative McCarthy .... 368 

(1) 

UNDERSTANDING THE FEDERAL RESERVE’S 

PROPOSED RULE ON INTERCHANGE FEES: 

IMPLICATIONS AND CONSEQUENCES OF 

THE DURBIN AMENDMENT 

Thursday, February 17, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 11:30 a.m., in room 

2128, Rayburn House Office Building, Hon. Shelley Capito [chairwoman of the subcommittee] presiding. 

Members present: Representatives Capito, Marchant, Royce, 

Manzullo, Hensarling, McHenry, Pearce, Westmoreland, Luetkemeyer, Huizenga, Duffy, Renacci, Canseco; Maloney, Watt, Baca, 

Miller of North Carolina, Scott, Velazquez, Meeks, Lynch, and Carney. 

Also present: Representatives Green, Welch, Peters, Perlmutter, 

Clay, and Cleaver 

Chairwoman CAPITO. This hearing will come to order. I would 

like to welcome everyone to the Subcommittee on Financial Institutions and Consumer Credit’s first hearing for the 112th Congress. 

Before we start, I would like to remind everyone briefly of our 

rules. Ranking Member Maloney and I have agreed that both sides 

are going to waive our opening statements in light of this chaotic 

schedule that we have. 

So normally, we would have 10 minutes for the purpose of opening statements on each side. Without objection, we can have all 

members’ opening statements be made a part of the record. I would 

like to remind the witnesses as well that you have 5 minutes to 

give your oral statements, and without objection, your written 

statements will be made a part of the record. 

The last item of housekeeping is to first of all say how thrilled 

I am to have the gentlelady from New York as the ranking member 

of this subcommittee. She has a long history of dealing with issues, 

and I am very excited that we are going to be able to work together 

on this subcommittee. But I would like to recognize her for the purpose of making a unanimous consent request. 

Mrs. MALONEY. Thank you. I join the chairwoman in welcoming 

all of the witnesses who will be testifying today, as well as the 

members of the subcommittee. I congratulate the Chair on her apVerDate Nov 24 2008 13:23 Aug 02, 2011 Jkt 064557 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\64557.TXT TERRIE
2 

pointment and express my deep desire to work constructively to 

move forward in a positive way for our country. 

I am thrilled to be here. We have a very good panel; welcome to 

Governor Raskin. Due to time constraints, I am yielding back and 

will place my statement in the record. And I am delighted that this 

thoughtful hearing is among our first. Thank you. 

Chairwoman CAPITO. Thank you. 

I would also like to ask for unanimous consent for Representative 

Welch to participate in the hearing. If there are no objections, is 

is so ordered. 

With that, I would like to say before I introduce our first witness, 

this is obviously a topic of great interest to a lot of people, so we 

are going to be listening very closely and I appreciate everybody’s 

weighing in on the topic. And hopefully the point of this hearing 

is to hear all sides of the issue so we understand it better. So with 

that, I would like to welcome the Honorable Sarah Bloom Raskin 

who is a Governor on the Federal Reserve Board. 

STATEMENT OF THE HONORABLE SARAH BLOOM RASKIN, 

GOVERNOR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Ms. RASKIN. Chairwoman Capito, Ranking Member Maloney, and 

members of the subcommittee, thank you for the opportunity to discuss the Board’s proposed Regulation II which the Federal Reserve 

was directed to implement pursuant to Section 1075 of the DoddFrank Act. Generally unnoticed by the customer, each time a debit 

card is swiped to make a purchase here in the United States, interchange fees are paid by the merchant to the bank that issued the 

debit card. 

Interchange fees are a controversial feature of the debit card system. And their substantial rise in recent years has precipitated a 

national and international debate about the appropriate level of 

those fees. Supporters of the current interchange system contend 

that interchange fees play an important role in balancing the two 

sides of the payment card market by encouraging merchants to accept cards and encouraging card issuers to issue cards and consumers to hold and use them. 

Critics of interchange fees contend that due to characteristics of 

the debit card market, merchants generally do not have the leverage to control their cost of accepting debit cards. And network competition tends to result in higher interchange fees as networks 

strive to attract issuers and cardholders. 

Critics of interchange fees note that non-card-based payments 

take place without any such compensation being provided by merchants’ banks to consumers’ banks. So for Section 1075 of the 

Dodd-Frank Act, Congress engaged in this debate and enacted a 

law that addresses the concerns of interchange fee critics in several 

ways. 

First, I will discuss what is referred to as the prohibition on network exclusivity arrangement and routing restrictions. Second, I 

will discuss the part of the law that requires the Board to establish 

an interchange fee standard. The statute exempts small issuers, 

government benefit programs, and certain prepaid cards from this 

3 

interchange fee standard but it does not exempt them from the exclusivity and routing restrictions. 

Turning first to the prohibition on network exclusivity, the statute requires the Board to adopt rules that prohibit issuers and payment card networks from restricting the number of networks on 

which a debit card transaction may be processed to fewer than two 

unaffiliated networks. 

We requested comments on two alternative interpretations of 

this prohibition. One interpretation would require issuers and networks to allow a debit card transaction to be routed over at least 

two unaffiliated debit card networks, for example, one signaturebased network and one unaffiliated PIN-based network. 

Another interpretation would require a debit card to have at 

least two unaffiliated networks for each method of authorization 

that can be used with that card, such as signature and PIN. This 

latter approach would provide more merchants with routing choice 

but would entail far more substantial operational changes by networks, issuers, merchant acquirers, merchants, and their processors. 

Additionally, the statute requires the Board to adopt rules that 

prohibit issuers and networks from inhibiting the ability of merchants to route debit card transaction over any network that may 

process such transactions. The proposed rule includes examples of 

actions that would impede merchants’ routing flexibility. These network exclusivity and routing provisions, along with the statutory 

provisions that give merchants more flexibility to set differential 

prices based on method of payment used, could promote competition among networks and place downward pressure on interchange 

fees. 

But let’s turn to interchange fee standards. In addition to these 

market approaches to constraining interchange fees, the statute 

limits any interchange fee that an issuer may receive for a debit 

card transaction to an amount that is reasonable and proportional 

to the issuer’s cost with respect to the transaction. 

To establish standards for assessing whether an interchange fee 

meets this statutory reasonable and proportional requirement, the 

law directs us to consider a number of things. First, the functional 

similarity between debit card transactions and checks which clear 

at par without interchange fees. 

The statute also directs us to distinguish between the issuer’s incremental cost to authorize, clear, and settle a particular transaction which by law, we must consider. And the other costs that 

are not specific to a particular transaction which by law we may 

not consider. Given the statute’s mandate to consider the functional 

similarities between debit card and check transactions. 

Our proposal includes as allowable costs only those incremental 

costs that the statute explicitly directs us to consider. There is no 

single generally accepted definition of the term ‘‘incremental cost’’ 

as it applies to a particular transaction. So the proposal uses average variable cost as a proxy. We have requested comments on 

whether other costs of a particular transaction should be included 

as allowable costs and how these costs should be measured. 

The Board requested comment on two alternative approaches for 

implementing the interchange fee standard. The first approach is 

4 

based on each issuer’s allowable cost with a safe harbor and a cap. 

The second approach adopts a cap that is applicable to all covered 

issuers. 

We also requested comment on different conceptual approaches 

for implementing a fraud prevention adjustment to the interchange 

fee standard. Comments on the proposed rule are due by next 

Tuesday, February 22nd. We have already received thousands of 

comments raising a variety of issues and expect to receive many 

more in the next several days. The other Board Members and I are 

reserving judgment on the terms of the final rule until we have the 

opportunity to consider these comments. 

As you can see, the debit card interchange provisions of the 

Dodd-Frank Act raise a number of complex issues. The Board is devoting substantial resources to understanding and addressing these 

issues within the parameters established by the statute. We welcome input from the public and from members of the committee in 

this effort. And I would be happy to answer any questions you may 

have. 

[The prepared statement of Governor Raskin can be found on 

page 179 of the appendix.] 

Chairwoman CAPITO. Thank you, Madam Governor. And I would 

like to lead off the questions. I appreciate your testimony. On the 

issue of the exemption, on page five of your testimony, you talked 

about the—and you said this in your statement that the statute applies these provisions to all issuers, talking about the exclusivity 

portion of it, including the small issuers and the government-administered payment and other pre-paid programs. 

As you are well aware and you stated in your statement, this is 

an issue that has brought many questions as to whether the exemption for community banks and credit unions can actually result 

in exempting them from the interchange fee. And you mentioned 

in your statement pretty—and actually Mr. Bernanke said today 

which I am sure you are probably not quite aware of because he 

just said it in another committee, that there are some risks that 

the exemption will not be effective. 

Could you speak a bit about how this exemption can hold up 

through the different parameters that you are charged with? 

Ms. RASKIN. Certainly. And thank you. Thank you for that question. Yes, small banks are exempt. They are exempt from the interchange rules portion of this section of the law. And they are also 

made to be exempt in the proposed rule that the Federal Reserve 

has put out for comment. 

The small issuer exemption is looked at from the perspective of asset size. So we have set a $10 billion level and that is looked at 

from the perspective of the size of the issuer as well as its affiliates 

and subsidiaries. But as you note, small banks and credit unions 

do in fact have concerns about this exemption. And they note in 

particular that the law does not put a similar exemption that it has 

in the interchange fee portion into the other portion of the law. 

So the exemption does not apply in the provisions having to do 

with network exclusivity and the routing restrictions. Just to elaborate, Chairman Bernanke’s earlier comments, there are, I think, legitimate questions regarding how in fact small issuers are going to 

in essence have this exemption work in their favor because there 

5 

is indeed no statutory authority provided in the law that would 

permit the networks to in fact engage in two-tier pricing. 

So it is a matter of whether the networks in fact will put two 

tiers of pricing in place and the extent to which that pricing becomes maintainable or whether in fact it gets rerouted by market 

forces. 

Chairwoman CAPITO. Right. And the question being that if you 

are an issuer from a community bank or a credit union, that your 

interchange fee could remain higher, will there be, as you said, dollar pressure to move customers towards the lower cost interchange 

issuers? 

The second question I have is on the fraud provision, because 

this is the one that I have heard a lot about. And in your statement, you mentioned that the—considering the comments they received, the Board plans to issue a specific proposal on the fraud 

prevention adjustment. 

My understanding is that the Federal Reserve felt that the language was written so tightly that to calculate for fraud prevention 

was not included in the parameters of—when you were looking at 

the cost, the incremental cost. 

What do you mean by the comment? Are you actually going to 

be calculating this? Or is this something that is going to come 

through in the comments? Do you have a comment on that? 

Ms. RASKIN. Sure. The whole issue of fraud prevention cost is 

dealt with explicitly in the statute. So, the statute has directed the 

Federal Reserve Board to allow for a fraud prevention adjustment 

that takes into account fraud prevention cost. And essentially, 

what we are directed to do by law is to develop standards for what 

those fraud prevention— 

Chairwoman CAPITO. But not a pricing standard? 

Ms. RASKIN. It is actually silent on standards, but essentially, 

the law requires us to develop standards. And what we have done, 

because this is an area that I think is something we want to learn 

more about, is in our proposed rule, we have asked for comment 

on what fraud prevention costs might, in fact, be. These are costs 

that we should consider before we promulgate the final rule. 

So we have, in fact, adhered to the notion that fraud prevention 

causes something that standards need to be developed for. And we 

really await, with some eagerness, the comments that we receive 

and we will review them so that we can determine what makes 

sense. 

Chairwoman CAPITO. Right. Thank you. 

I will turn to our ranking member for questioning. 

Mrs. MALONEY. Thank you very much, and congratulations on 

your appointment, Governor Raskin. 

As you may know, I had the honor of serving on a conference 

committee with Chairman Frank and Mr. Meeks and Mr. Pearce 

and Mr. Watt. Many of my colleagues were on this panel. 

We did work quite a bit on the compromise language that we put 

forward on interchange. And part of it was that everybody be treated fairly and that the financial institutions be able to recoup the 

price or cost of providing a service, but also limiting it to a reasonable amount. 

6 

When do you think you will finish your review of fraud prevention, which regrettably is becoming a huge issue, along with identity theft and the other items that are part of our financial system? 

When do you think that review process will be over? 

Ms. RASKIN. By law, we are required to have final rules in place 

by July 21st. 

Mrs. MALONEY. July 21st, okay. 

Ms. RASKIN. For effectiveness. And by April 21st, we need to 

have—after we back up from the date of effectiveness, by April 

21st, we would need to have final rules in place. 

So, backing that up further, the comment period is now coming 

to an end, but there are still some more days to it, and on Tuesday, 

the comment period ends. And as I noted before, one of the issues 

we put out explicitly for comment has to do with the fraud adjustment issue. So those comments are coming in and we will consider 

them carefully after they are all in and make a determination as 

to how to appropriately contemplate including them or not in the 

rule. 

Mrs. MALONEY. In relation to the comment period, some organizations, some constituents have suggested that the process was not 

as thorough as it should be, that the Federal Reserve should have 

had more time to study the issue and to survey a wider set of financial institutions and retail establishments. 

Can you go through your review process and whether or not you 

believe it was extensive enough? And what studies have been done 

either by the Federal Reserve or by others? Can you comment on 

your review process? 

I know from the credit card bill of rights, which I track daily, it 

was expensive and exhaustive. But this one, I have not—with the 

elections and everything else—tracked as carefully. So, if you could 

go through the details of the review process, please? 

Ms. RASKIN. Certainly. It was quite a massive set of efforts because, as you know, the Dodd-Frank Act passed July 21, 2010. So, 

from July to October, the Federal Reserve Board staff engaged in 

a number of industry surveys; from July to September, those surveys were developed in-house. 

We essentially arranged for multiple public drop-in calls for industry participants to comment on the draft surveys. I should note 

that some calls had well over 100 participants and there were more 

than 50 phone call lines that had to be opened up for this process. 

We accepted many written comments on draft. And the input, I 

think, really did help us refine the survey instrument so that by 

the time September 13th came around, surveys were sent to all the 

covered issuers. 

Surveys were also sent to payment card networks and to large 

merchant acquirers. And what we indicated in those drafts in those 

final surveys was that we would like the responses due October 12, 

2010. 

Let me say a little bit about what those surveys, who they went 

out to and what they covered. Essentially, there were three major 

surveys: a debit card issuer survey; a payment card network survey; and a merchant acquirer survey. 

For the debit card issuer survey, it was sent to about 131 financial organizations which had over $10 billion in assets. Of those 

7 

131 organizations, 89 responded with data, 13 did not have debit 

card programs, 3 declined to participate, and the Board didn’t receive any communication regarding 26 of them. 

The questions that survey included were very broad in terms of 

cost. So, they not only included authorization clearing and settlement costs, but included fixed and variable costs and other broad 

definitions of cost. 

In terms of the payment card network survey, that was sent to 

all 14 networks which we believe to be active in debit card— 

Chairwoman CAPITO. Just a second. I am going to let you go on, 

if you could kind of summarize it more quickly, because this is an 

area of very great importance. So, we will try to stick to the 5- 

minute— 

Ms. RASKIN. It was very thorough. 

Chairwoman CAPITO. Do you think you need more time to study 

this issue? 

Ms. RASKIN. I would leave that to your discretion. I can complete 

the answer for the record and you can evaluate whether you think 

it was something that we possibly missed. 

Mrs. MALONEY. I think that would be appropriate if we can get 

in writing a review of your entire review system and other studies 

that you know that are out there. Thank you. 

Chairwoman CAPITO. Thank you. 

Mr. Marchant, from Texas. 

Mr. MARCHANT. Thanks, Madam Chairwoman. 

The issue I would like to stress this morning is the claim by the 

small banks and credit unions that the regulation of this fee, lowering it from, according to everything I have been able to read, 44 

cents to about 12 cents, 12 to 15 cents, results in a loss of the income of about $12 billion. Is that a number that the Fed has recognized? Is that a recognized number, is that a claim or— 

Ms. RASKIN. I have heard that number used. 

Mr. MARCHANT. Is it a reasonable argument that this regulation 

will limit the amount of fee income that the banks and credit 

unions can charge? 

Ms. RASKIN. The interchange fee portion of the rule essentially 

requires the Fed by law to look at the reasonable and proportional 

cost that the issuing bank faces. 

One methodology that we follow in order to try to understand the 

broad nature of what those costs might be was essentially to engage in the set of surveys that I described. 

Interestingly enough, what those surveys revealed was a broad 

range of average variable cost—and as I mentioned before, the average variable cost proxy was used for incremental cost. The language of the statute uses the term ‘‘incremental cost,’’ that was a 

little bit hard to translate into something workable. And we 

thought the notion of average variable cost came closest to it. 

So, in our survey, we looked at a range of issuing banks and 

tried to understand what their average variable costs were. And we 

saw interestingly enough quite a range, so that there are some 

issuing banks that can do this at very low cost and others that do 

it at very high cost. 

When the amount that you cite, of 12 cents and 7 cents, when 

those amounts were arrived at, they were really derived from 

8 

standards regarding those average variable costs. So, the 7 cents, 

essentially, is the median point that we found in our survey, so the 

median issuing banks that would be covered by this proposed rule 

has average variable cost of 7 cents a transaction, the 12-cent number was arrived at in terms of looking at the 80th percentile of 

issuing banks that had responded. So, 80 percent of the banks in 

the sample survey were essentially at 12 cents or lower in terms 

of their average variable cost. 

Mr. MARCHANT. My concern is that at a stage in the country’s 

banking system where many banks are trying to rebuild their capital base, they are trying to maintain some degree of profitability, 

and they are desperately trying to stay open, in many cases, especially the small banks and the credit unions that we, at this time, 

decide that we are going to go in and review standards and cap the 

amount of fees that they can charge on this, in effect, lowering 

their profit, not allowing them to put profit into their capital base 

and something that is very, very counterproductive in this day and 

age that we are in. 

Why has it become so critical to do this now? Is there a feeling— 

I understand that you have been instructed—the Fed has been instructed to do it. But I don’t receive any complaints in my district 

from people who are complaining that their debit card fees are too 

high or that their—that in fact, they love their debit cards, they 

love the ability of the banks to offer them a debit card and not 

have to pass on exorbitant fees. 

So, I think that—I would like for you to take more time, I would 

like for you to consider the impact that this is going to have on 

small to medium-sized banks and on their ability to add capital to 

their banks so they can have more money. 

Chairwoman CAPITO. Thank you. 

Mr. Watt? 

Mr. WATT. Thank you, Madam Chairwoman. 

Governor Raskin, I know you can’t control the pace of this process, and you can’t tell us whether we put you under too tight of 

a deadline, but I need to push you a little bit more on Mrs. 

Maloney’s question. It seems to me that from what I gather, you 

had at least a two- or three-stage process: a survey; a proposed 

rule; and a comment period on one aspect of this and not on the 

fraud cost aspect of it—9 months to do something that we punted 

to you as a Congress, it wasn’t the House bill, it was in the Senate 

bill, we had to reach reconciliation. 

My question to you is not should we or ought we, the question 

is whether you would benefit from a further extension of time to 

evaluate these multiplicities of comments, particularly on the fraud 

calculation section of this, and go through a more thorough process. 

Ms. RASKIN. Thank you for that question, and I want to say that 

we are doing— 

Mr. WATT. I understand that, Ms. Raskin. I am just trying to figure out whether you would benefit or wouldn’t benefit. Don’t be 

vague. Either you would or you wouldn’t. 

Ms. RASKIN. It is hard to—it is actually hard to know and I am 

not trying to skirt that— 

Mr. WATT. Okay, then, that is the answer. Okay. 

Ms. RASKIN. You know. 

9 

Mr. WATT. Let me go to the next question. If that is the answer, 

then you don’t have an answer, that is really what you are saying— 

Ms. RASKIN. I am saying the comment period is still moving 

strong and we still— 

Mr. WATT. You know you are going to get a substantial number 

of comments, you know you have gone through more stages on one 

aspect of this than you have on the other aspect of it, the fraud section, because you just said that. But I will draw my own conclusions from that. 

The other real question I have is whether there is something in 

this rule that really addresses what we would be trying to get to, 

I think in this whole discussion, and that is whether—is there anything here that allows you to assess who benefits from this process, 

whether the issuer benefits, whether the merchant benefits, our ultimately beneficiary we were hoping was the consumer. 

I guess my question is, is there anything in what we gave you 

as instructions to rule make about that would make some assessment of whether this is just a fight between merchants and issuers 

or whether ultimately the consumer really is going to benefit from 

this cost reduction or cost shift. 

I have been troubled by that from the beginning of this discussion because I haven’t been able to see how we ensure that the ultimate beneficiary that we were advocating for—that we all should 

be advocating for, consumers, really get the benefit of this. Is there 

anything in the legislation or your rule-making process that will 

allow you to address that? 

Ms. RASKIN. It is an excellent question and the consumer effects 

are always in the forefront of our deliberations. The statute itself 

didn’t direct us to look at the consumer effects but that is beside 

the point. The consumer effects are something that we have tried 

carefully to articulate and to the extent we can try to measure. 

I am going to describe a little bit what those— 

Mr. WATT. No, no. I am trying to figure out what in this rule 

would do that? Is that what you are getting ready to say? 

Ms. RASKIN. What I am getting at is essentially, I think the theory behind— 

Mr. WATT. Oh, I know the theory. I am trying to talk about the 

practice. Is there something in the rule that gets you to that determination? 

Ms. RASKIN. Yes. The idea— 

Mr. WATT. Okay, tell me what that is. I know the theory. 

Ms. RASKIN. The idea is that lower interchange fees, it is argued, 

would lower cost to merchants who possibly in competitive environments, could lower their cost to consumers. That is one consumer 

effect. Not that that effect was directed by Congress to be looked 

at explicitly but that is what animates, I believe, the statute. 

So, there is that one consumer effect. Another consumer effect 

which may work in a different way has to do with debit card holders who get rewards. Those rewards are often made possible 

through higher interchange fees. 

If those rewards were somehow to be reduced or changed, I think 

that would be a factor that would be involved in evaluating the 

consumer well-being. Similarly, we would want to think about 

10 

banks that charge fees for other services. If banks were to change 

that portfolio of services, query as to whether consumers would be 

helped or hurt. 

So, I think that there are consumer effects, and my sense from 

the statute is that these consumer effects animated the statutes 

but they are not particularly noted explicitly. 

Chairwoman CAPITO. Thank you. 

We will go to Mr. Royce, from California. 

Mr. ROYCE. Thank you, Madam Chairwoman. 

I think some of the surprising things in life are the things we 

all take for granted. And when I think about the attacks on our 

payment system that occur every day, there are attempts to find 

new innovative ways to create fraud. And you look at the billions 

and billions of dollars that are invested by card issuers and invested in the system, in building a network that in such an extraordinary way today allows the system to stay ahead, for the 

most part, to the extent that the consumer himself or herself does 

not have to pay for that fraud. There is a guarantee that the system works well enough, and I guess what is surprising to me is 

how often, in most cases, the fraud is actually discovered by these 

complicated processes that have been developed to pick this up in 

the process of the fraud being committed before the consumer ever 

knows that she or he have been defrauded. 

And so, you look at the billions that are invested into that and 

I was going to ask, why does the proposed rule lack a full accounting of several things? One would be the fixed cost in all of this and 

the next would be the network fees and other costs. But why did 

the Board omit adjustment for fraud prevention cost or actual 

fraud cost? I ask that because in watching the way in which fraud 

evolves so quickly, it is clear that whatever we invested yesterday, 

it is not going to be enough tomorrow to keep up with all the miscreants who are finding new ways to attack the system. 

Could I have your thoughts on that? 

Ms. RASKIN. Certainly. The fraud prevention costs, as you can 

imagine, are probably something that are going to be substantial. 

And I imagine that through this comment period, we are going to 

be hearing about what those different programs look like, what the 

technologies look like, what in fact the parameters are for so-called 

legitimate fraud prevention efforts. 

And part of the reason for this comment period was really to get 

a more robust understanding of what you are talking about in 

making sure that essentially we understand what efforts and costs 

go into fraud prevention. That said, I do want to suggest something 

that the statute was silent on, and that has to do with costs that 

are related to a particular transaction that are not related to authorization, clearance, and settlement. So if you read the law carefully, as we have now done many times, the law directs us to look 

at a couple of things. 

We are supposed to consider, for example, functional similarity, 

that is, the similarity between debit card cost and debit card transactions as compared to check clearing. But, we are also supposed 

to consider the incremental cost that is incurred by an issuer when 

that issuer engages in authorization clearance or settlement. And 

we are supposed to make sure that those costs are specific—debit. 

11 

Mr. ROYCE. Okay. 

Ms. RASKIN. So, what you are suggesting in terms of fraud losses, 

could be something that falls in a so-called bucket that the statute 

is silent on, which doesn’t mean that it would be either— 

Mr. ROYCE. Right, right. No, I understand your point but there 

is going to be less bank incentive, clearly. There are going to be 

fewer resources for fraud prevention and less likelihood that the 

billions that need to be invested in the future will be there. 

Another point I was going to make is one that Chairman 

Bernanke made today. He said we are not certain how effective the 

exemption might be when it—as merchants might reject small 

banks’ cards, there are some risks that the exemption will not be 

effective going back to the argument made earlier. Chairman 

Bernanke said that there is a possibility that merchants won’t accept more expensive cards or the cards won’t offer two-tier pricing. 

So as you look at all of these different issues that are coming up, 

there is at a minimum some confusion about the provision in this 

rule and if done incorrectly, this could be the final nail in the coffin 

for many of the smaller financial institutions, I think, that have 

been decimated by a weak economy and piles of new regulations 

from Washington. And larger financial institutions can maybe pass 

these costs on to consumers, but this isn’t the case for smaller 

banks. 

And for those—I will yield back, Madam Chairwoman. Thank 

you. 

Chairwoman CAPITO. Mr. Baca, from California? 

Mr. BACA. Thank you very much. 

Ms. Raskin, one of the questions that was discussed earlier about 

profits for small banks and others—how much profit—will they still 

be able to make a profit? 

Ms. RASKIN. It is a very good question. The small banks and 

small credit unions, in fact any small issuer, remember by law are 

exempt from the interchange fee provisions. Whether or not they 

still are able to make a profit is going to depend on the market dynamics on how this all looks in the end. So, it will depend on obviously what the final rule looks like, but it is also going to depend 

on some of the things that Congressman Royce pointed out, some 

of the different dynamics regarding what kind of routing becomes, 

what the costs are of that routing. 

Essentially, a bank by bank kind of perspective is needed because some banks have different portfolios of products so it is going 

to depend, I think, particularly on the portfolio of that issuing 

bank. 

It is important to note that what I think the statute has directed 

us to do is to look at one payment stream that is related to debit 

cards. So, it is this interchange fee payment stream. Now, there are 

other payment streams that are associated with the issuance of 

debit cards, there are payment streams that are associated with 

other kinds of cards, there are other accounts and other kinds of 

products that banks offer and all of those products have different 

revenue streams associated with them. And it is complicated in 

terms— 

Mr. BACA. But would it level the playing field in terms of the 

debit card, because I am concerned from a diversity perspective in 

12 

terms of who is actually being charged ‘‘X’’ amount about—without 

the regulation it is quite open right now, so diversity in certain 

areas would be charged ‘‘X’’ amount of dollars based on the debit 

card versus someone else. 

Under the new regulation on the cap, this sort of sets a standard 

that applies to everybody on a fair and equal basis versus the way 

it was it before, is that correct, the possibility? 

Ms. RASKIN. With the exception of what is carved out, so with 

the exception of small banks. 

Mr. BACA. Okay, let me ask another question. Another critique 

about the proposed rule is the calculation of fraud. You allow for 

two options: one based on new technology being used; and the other 

being a small flag fee taxed on the interest change rate. 

Can you describe how you came to this conclusion, and in your 

mind, should the calculation of fraud take into account the overall 

amount of the transaction? 

Ms. RASKIN. Certainly. When we put out the fraud adjustment 

rule, or a portion of the rule for comment, we really wanted to hear 

from commenters, so we really wanted to make sure we were hearing enough about the robustness of their fraud prevention effort. 

We wanted to make sure we understood the variety of them, essentially what they did and how they did them, what was necessary 

in terms of cutting edge technology. 

At the time we put out the rule, we did not know enough really 

to set out definitive standards, and the idea—and the proposed rule 

really opened the debate—was to make sure we were hearing everything we needed to hear before we promulgated something final. 

Mr. BACA. Thank you. Other countries have taken steps to curve 

the interchange fees much like the proposed rules that would be 

done here. Can you comment on your analysis of other countries’ 

rules and the market’s reaction? That is question number one. 

Question number two, could you see the benefits passed on to the 

consumers or did you see the eliminated, or eliminating the financial products offered to the consumers? 

Ms. RASKIN. Sure. I will talk a little bit about one well-worn example which is Australia, actually. The Reserve Bank of Australia 

actually regulates credit card interchange on a cost basis. Aready 

we see, there is a difference here to what Australia has done, 

which applies to credit card interchange. We are obviously looking 

just at debit card interchange. 

But essentially, the Reserve Bank of Australia was given authority under something called the Payment Systems Act of 1998 to establish benchmark interchange fees for credit cards and this happened in 2002. And then for signature debit cards in 2006. 

And so what the Reserve Bank of Australia did for credit card 

interchange fees was they established the cost-based benchmark 

with a cap and they capped it at a half of a percent on an annual 

value weighted basis. For signature debit card interchange fees, 

the Reserve Bank of Australia also established a cost base benchmark and they capped it at 12 cents and that is in Australian 12 

cents which I am told is approximately the same in U.S. dollars. 

So 12 cents per transaction, again, on an annual value weighted 

basis. So although interchange fees for PIN debit transactions are 

paid from the issuer to the acquirer in Australia, in 2010, the ReVerDate Nov 24 2008 13:23 Aug 02, 2011 Jkt 064557 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\64557.TXT TERRIE
13 

serve Bank of Australia applied the same 12 cents per transaction 

benchmark in debit interchange fees. 

Throughout all of this, what have been the— 

Chairwoman CAPITO. Sorry. Can you just kind of wrap it up 

there because—did you have a one-line summarization of the question, which in my view was, what did this result in? 

Ms. RASKIN. Inconclusive in terms of prices to the consumer. 

Chairwoman CAPITO. Thank you. 

Mr. Hensarling, from Texas. 

Mr. HENSARLING. Thank you, Madam Chairwoman. 

Governor Raskin, I want to follow up on a question that my colleague, Mr. Royce from California, was asking you. And I want to 

make sure I understand this. I believe that essentially your testimony is that in the interpretation of the Fed under the statute, you 

cannot recoup fraud prevention because that is a fixed cost, correct? 

Is that a fair assessment of the Fed’s interpretation? So apparently, it is not? 

Ms. RASKIN. Not exactly, no. 

Mr. HENSARLING. Okay. What is it exactly? 

Ms. RASKIN. Okay. Let me— 

Mr. HENSARLING. I still don’t understand this. And I have been 

listening carefully. 

Ms. RASKIN. In terms of what can and can’t be done, the statute 

sets out allowable cost, it sets out disallowable cost, but then there 

are costs like you mentioned which were not explicitly put into either allowable or not allowable. 

Mr. HENSARLING. I thought I heard you say that actual fraud 

losses may be a permissible cost to be recouped in response to his 

question. Did I hear you correctly? 

Ms. RASKIN. You did. 

Mr. HENSARLING. Okay. And you also allow for the possibility 

that fraud prevention cost may not be recouped, is that correct? 

Ms. RASKIN. That is also correct. 

Mr. HENSARLING. Okay. So does that mean that we could end up 

with the rather perverse conclusion that if a credit card company 

prevents fraud, they don’t recoup their cost, but if they allow the 

fraud to take place in the system, you will allow them to recoup 

their cost? 

Ms. RASKIN. Obviously, this is why we want to collect comments. 

We want to make sure that when we hear of different combinations 

of things that we don’t allow what is a very difficult statute— 

Mr. HENSARLING. The world works off of incentives. If I was the 

credit card company and you wouldn’t allow me to recoup my fraud 

prevention cost, and you would allow me to recoup my fraud cost, 

I guess I would allow fraud in the system. My guess is that it 

would not be good for our economy. 

Looking at the Federal Register of December 28th when you 

asked for—to open up the comment period, you said there is not 

a single, generally accepted definition of the term ‘‘incremental 

cost.’’ Yet again, you seem to interpret it in such a way that fixed 

cost would not be allowable, but on page 8, 1, 7.3, 6, I read the 

Board requests comment on whether it should include fixed cost in 

the cost measurement. 

14 

So it seems, and maybe I am misinterpreting something, it 

seemed like on December 28th, you interpreted the statute to permit fixed cost to be recouped but I think you are saying in your 

testimony today that your interpretation is different. 

Is this correct? 

Ms. RASKIN. Let me try to clarify what our understanding is of 

the statute and it is a difficult statute to interpret so— 

Mr. HENSARLING. Could you help me here—is your interpretation 

different today than it was on December 28th, when you put out 

the— 

Ms. RASKIN. No. 

Mr. HENSARLING. It is not. 

Ms. RASKIN. No. 

Mr. HENSARLING. Okay. So on December 28th—I don’t know; I 

don’t believe I am taking this out of context—the Board requests 

comment on whether it should include fixed cost and the cost measurement which it seems like if you are haven’t changed your legal 

interpretation on December 28th, you agreed that you had the 

flexibility to put fixed cost into the incremental cost measurement? 

Ms. RASKIN. And we requested comment to hear what those costs 

might look like to see essentially whether we could move them 

through another part of the statute regarding functional similarity 

with checks, which is also required by law. 

So we needed to understand what the dimensions were of the different— 

Mr. HENSARLING. You think your hands are tied, but they are 

not tied by that particular language, is that what you are telling 

me? 

Ms. RASKIN. They are tied in various ways. But in terms of that 

particular language, you are describing a part of—a category of cost 

that the statute is silent on. And I think what we need to do is understand what that category of cost could— 

Mr. HENSARLING. I am trying to understand your legal interpretation of where Congress may need to act, and where Congress 

may need not to act, and it still appears to me you are saying that 

fixed cost could be part of the transaction fee that you set. I see 

my time is running out. 

I know that under the statute, you were to consult with other 

Federal agencies. I have to tell you, my mailbox is full from community banks telling me that this is going to harm their bottomline. Let’s put the consumers aside for a second. We have discussed 

that, but a number of small community banks said, ‘‘We are going 

to get left off this system. It is going to hurt our net revenue.’’ 

I am concerned also, what is the impact on their bottom line and 

did you consult with the FDIC, I know you are a bank regulator— 

and the other bank regulators, ultimately what will be the impact 

when fees by estimates are going to be reduced 73 percent? 

Ms. RASKIN. Yes. And the law requires us to consult and we 

would consult anyway with our colleagues in the other banking 

regulating agencies. And yes, so we have spoken to the FDIC, the 

NCUA, the OCC, the Small Business Administration, and others. 

We continue to have discussions with them, and as recently as yesterday, the NCUA has essentially looked at the issue of exempting 

15 

small banks from not just the portion of the law regarding interchange but the other portions as well. 

Chairwoman CAPITO. Thank you. 

Mr. Scott? 

Mr. SCOTT. Thank you very much, Madam Chairwoman. 

And welcome, Governor Raskin. 

If there is one thing that I hope you will take from this hearing 

this morning, it is that a delay in the implementation of this rule 

is definitely in order. Several of my colleagues have asked if that 

would be a benefit to you and the Fed. 

I would like to rephrase that question. It is not the question of 

whether the delay would benefit you, the question is, would it benefit the American people and the institutions, the financial institutions, the merchants, the people who are on the ground who would 

have to make this work. And the answer is yes, there are just some 

profound questions here, starting off with what is reasonable and 

proportional. 

It is questionable to me, a move from 45 cents down to 12 cents, 

that is a glaring 73 percent reduction. Is that fair? Is that proportionate to the situation? 

This debit card situation is beginning to be the fulcrum around 

which our entire commercial retail system operates. Just last year, 

I think the debit card transactions accounted for over 35 percent 

of all of the transactions that were non-cash, some 39 billion different payments there. 

This is a profound impact. And I think we owe it to the American 

people, to these institutions to be able to delay and make sure that 

we get this rule right. So I hope and I admonish you very strongly 

to put a delay on the implementation of this rule without protections, for example, provided by debit interchange fees, the networks 

can restrict some high-risk retailers such as internet merchants 

from accepting debit cards at all. 

Was this taken into consideration when the Federal Reserve developed its formula, that is a very serious question. My colleagues 

have gone over the fraud adjustment issue that has to be cleared 

up. It is the case of the larger cards issuing banks with significantly higher volumes and will be able to negotiate a smaller interchange fee than the smaller community bank. 

So has the Federal Reserve considered the potential anti-competitive environment that this proposal would create against smaller banks and credit unions, for example, that currently issue these 

debit cards, these are very profound questions. And what will this 

cost be to the consumer and the bottom line? 

It all ends up. The banks are not going to pay for this, the merchants are not going to pay for this, do you know who is going to 

pay for this? It is going to be the American consumers at the end 

of the line. 

So we need to pause. We need to reflect on this and we need to 

give this rule implementation the kind of serious study that it 

needs to make sure we get it right and I am convinced and I hope 

you will be convinced at the end of this hearing that we need more 

time on this issue. 

16 

So let me just ask you this question. Do you feel that there is 

a possibility that consumers eventually could bear the majority of 

the burden of this regulation? 

Ms. RASKIN. First of all, let me tell you that I do take your statement very seriously, and we are committed to doing everything we 

can to get this right. We have engaged in a process that is thorough and continues to be very thorough. We are hearing all of the 

same kinds of comments that I imagine you are, this is indeed very 

controversial, and we are trying to take everything into account 

that has been presented our way while still making sure we reflect 

what is in the law. 

So I want you to know it is something that is taken very seriously and I do hear you loud and clear. 

Mr. SCOTT. With all due respect, Governor, would you consider 

a delay in this in view of the points that we have made this morning so far within this issue? 

Ms. RASKIN. I think that is Congress’ prerogative. If, in fact, you 

determine that these deadlines are unrealistic, then of course we 

would adapt to those new deadlines. We would continue gathering 

information and analyzing information as I have heard today and 

we have been hearing through the comment period. We would, 

most definitively, defer to Congress’ desire in that regard. 

Mr. SCOTT. Thank you very much for your service. 

Thank you, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. 

Mr. Huizenga? 

Mr. HUIZENGA. Thank you, Madam Chairwoman. I appreciate 

the opportunity. 

Governor Raskin, it is good to see you again, and I appreciated 

our visit earlier. I think we are all hearing a very common theme 

and, yes, I am sure we will hear from our retailer and merchant 

friends a little later about that delay or discussion of that. And I 

am trying to take it back maybe a step more to the basic, since I 

am a freshman Member, I was not here during the time of the 

writing of both the underlying Act as well as this Durbin Amendment that was proposed in the machinations that went into adopting that and what was going on. 

Ms. RASKIN. That makes two of us. 

Mr. HUIZENGA. Okay, we are on par then with this. So you were 

talking about downward pressure on the Act and what was happening. I am wondering if you didn’t want any kind of perspective 

as to the Fed’s view of what and why there was not any sort of this 

downward pressure on pricing pre the act. 

And really, do we have any way of knowing the cost of implementing this regulation? Is it going to be proportionally beneficial 

to not only the large banks but the small banks as have been indicated, the retailers and the merchants that are going to be getting 

it and most importantly of consumers. Are they going to actually 

be seeing any kind of benefit? 

Ms. RASKIN. I know these are all excellent questions and different impacts that are all occurring in a dynamic environment at 

the same time, and it is very hard to measure exactly how one will 

affect another. 

17 

I will try on a couple of fronts to answer some of those questions. 

In terms of the market structure, in most markets, competition 

leads to prices going down. In payment card markets, we have seen 

something that seems a little bit more unusual where you have 

competition but interchange fees are going up. 

And so, there were clearly issues regarding market structure, I 

think, that were animating the development of this statute. I don’t 

think it came out of nowhere. They are clearly with the sense that 

merchants had prohibitions on how essentially they could route 

transactions, but those prohibitions had cost implications that they 

could not control. 

Mr. HUIZENGA. And it could be that price pressure is swimming 

upstream because of some of the expectations that the consumers 

and/or regulations that have been put on those that are handling 

those transactions? 

Ms. RASKIN. That is interesting. I don’t know if I have thought 

about it from that perspective exactly, but I think the increase in 

fees has actually come—it will be hard to evaluate the extent in 

which the regulatory environment has brought any of that about. 

But essentially, it is what they call a two-sided market where 

you have the networks looking at fees both to the issuing bank and 

to the merchant side. And typically, the networks use those two 

sides to balance—to have credit cards and debit cards accepted in 

the marketplace. 

And it is a balance that had some kind of possibly perverse pricing consequences. Essentially, we have issuing banks now who are 

taking these directives from the networks and increasing their 

interchange fees to merchants. So, there is that characteristic. 

The other characteristic that you pointed out has to do really 

with the impact on consumers. And the consumer really doesn’t 

even know, right? When you swipe your debit card or hand it to 

the cashier, you don’t even know essentially that there is an interchange involved. But that interchange fee is somehow being paid 

for. And the impact of what changing the interchange fees would 

do is something that has been postulated would be of savings to the 

consumer. But we don’t quite know. 

Mr. HUIZENGA. It seems to me that we need to just blame intergenerational expectations. The staff section doesn’t carry cash, the 

rest of us actually do. And we still want to go buy a $1.90 coffee 

somewhere. And we expect to be able to use whatever is convenient 

for us, not necessarily what is convenient for the retailer or convenient for those of us who are dealing with it. 

So, thank you. I appreciate that and I look forward to continuing 

to pursue that. So, thank you, Madam Chairwoman. I yield back. 

Chairwoman CAPITO. Before we go to the last—I would like to 

ask unanimous consent to submit for the record letters from the 

EPC, KFC Franchisees, the ICTA, NAFCU, U.S. PIRG, the Prepaid 

Card Coalition, TCF Financial Corporations, an ACS education letter, the Food Market Institute, Senator Durbin, IV Supermarkets; 

as I said, there is a lot of interest. 

Ms. Velazquez? 

Ms. VELAZQUEZ. Yes. Thank you, Madam Chairwoman. 

Governor, thank you for being here today. This is a very important issue that has implications for both sectors—financial instituVerDate Nov 24 2008 13:23 Aug 02, 2011 Jkt 064557 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\64557.TXT TERRIE
18 

tions, small businesses—and as the ranking member of the Small 

Business Committee, and a member of this Financial Services 

Committee, I am very concerned about this issue. 

At a recent conference hosted by this European Central Bank, 

policymakers and banking experts suggested adopting a card fee 

system that took into account the cost that businesses will pay to 

operate their own credit systems. This seems to me only reasonable. Why weren’t these costs taken into account in the Fed’s proposed fee cap? 

Ms. RASKIN. Thank you. The European Commission, as you mentioned, did in fact initiate an investigation of cross-border debit and 

interchange fees. And essentially, they used different criteria that 

were not based on issuer cost. So they arrived at numbers and I 

should say they look to be about a 0.2 percent interchange fee 

which is about 8 cents on an average $40 transaction. 

But the European Commission used criteria that were not based 

on issuer cost. Our reading of the statute is that we need to stay 

focused on issuer cost. And so, that was primarily the focus of our 

effort in putting forth the proposed rule. 

Ms. VELAZQUEZ. So, you are telling me that the cost criteria that 

they used are different from what is in the statute here? 

Ms. RASKIN. Yes, either that or else they look at criteria that 

were even cost based. They might have looked at other explicit customer consumer well-being kinds of matters. 

Ms. VELAZQUEZ. Okay. 

Ms. RASKIN. They had a different set of criteria. 

Ms. VELAZQUEZ. I would like to talk a bit about the Australia experience. Since Australia placed a cap on interchange fees in 2003, 

their Central Bank found a sharp decrease in the availability of rewards and no conclusive proof of lower prices for consumers, why 

do you believe that the Fed’s proposal to cap rates on debit cards 

in this country will produce better results for consumers? 

Ms. RASKIN. Actually, I don’t know. I don’t know what the results 

exactly will be in terms of the ability of merchants to actually pass 

on costs to consumers. I don’t know exactly. I would say that theory tells us that if it is a competitive market that the retailers 

would pass on those savings, but I don’t know exactly. 

Ms. VELAZQUEZ. Theory dictated that in Australia and apparently didn’t produce the results. 

Ms. RASKIN. I am not exactly sure of that either, because I think 

the results in Australia actually are difficult to interpret. It is hard 

to know the extent to which the price change had to with the factors outside of the change in the interchange fee standard. 

Ms. VELAZQUEZ. Okay. Thank you. Last April, the world’s largest 

card company voluntarily reduced interchange fees on debit transactions in Europe to 0.2 percent of the total cost of a transaction. 

In that same period, the same company increased the same fees 

paid by U.S. businesses to almost 1 percent of the transaction total. 

Are there any practical reasons why it should cost 5 times as 

much to process a debit transaction in this country as it does in 

Europe? 

Ms. RASKIN. It is a very, very important kind of distinction and 

I would encourage you to ask that on the next panel and see what 

kind of answers you get. 

19 

Ms. VELAZQUEZ. Thank you. 

Chairwoman CAPITO. Mr. Renacci? 

Mr. RENACCI. Thank you, Madam Chairwoman. 

And thank you, Governor, for being here. 

Yesterday, I appreciated the opportunity to have some time to 

spend with you and ask you some specific questions. A lot of them 

are being asked again today about cost. And as I told you, I come 

from a very unique perspective, because I have been involved with 

banks, I have been a retailer, and I have been a CPA who audited 

both. 

So when it comes to my CPA background, I always look at cost 

and what are the true costs of any transactions. And yesterday, we 

had an—I asked you the same questions that many of my colleagues are asking you, do we have all the costs? 

If we are going to impose, as I called it yesterday a price fix, and 

I know you corrected my by saying a standard. It doesn’t matter 

what we call it. If we are going to impose a set fee, do we have 

all the costs to compare? I think your answer yesterday and I think 

your answer today has been the same thing. We do not have under 

statute the ability to look at all those costs. 

And that concerns me, because if we are going to come up with 

a standard and you are being given this task to come up with a 

standard rate, you need to be able to look at all costs. 

Over the last couple of weeks, I have talked to retailers, and I 

have talked to bankers, and I have had costs submitted to me 

which I told you yesterday showed that they are a lot more than 

7 cents to 12 cents. 

But truly the questions here is, how do we get to the right standards, as you called it yesterday? And my concern is that you have 

been tasked with only coming up with a standard and your hands 

are tied at looking at all these costs. But also available, that is not 

just fraud, there was—as a CPA there are costs, there is overhead 

there is the labor, the technology, all the things that are necessary 

to run a debit card. 

So my question for you is in moving forward in establishing this 

final rule, would you be willing and able to identify, and willing to 

identify and consider those additional costs? And if you can’t, because of statute, would you need a congressional fix so that you can 

look at these things? 

My other question is, and I know a lot of people talked about 

delay, it is not about how fast we get it done; it is about getting 

it done right. So, I have asked you a couple of questions there. But 

would you consider looking at those costs without a fix, a congressional fix? 

Ms. RASKIN. Thank you for that. And I have benefited enormously from our conversation. The idea of cost is absolutely critical 

in terms of getting this right. We want to make sure that we are 

looking at all the costs possible. And then I think it is fair to say 

we should sift those costs through the parameters of the statutes 

to determine which would be permissible by law assuming that is 

the law that we are dealing with. 

The surveys that we did turn out to have been quite comprehensive in terms of gathering costs. While in the proposal you are seeing a fairly narrow band of permissible costs, for purposes of our 

20 

methodology, we in fact, collected quite a breadth of costs. So we 

went beyond the authorization clearing and settlement costs. 

We looked at fixed cost. We looked at all variable costs. We essentially tried to get a broad understanding, now whether it is 

broad enough for your CPA mind, I am not sure, but my understanding is that it was a fairly broad based set of costs. 

And what I am more than happy to do is make sure that we provide that aggregate data to you and your colleagues so that you 

could actually provide some kind of feedback regarding how essentially that looks. 

Mr. RENACCI. But are you agreeing that all costs are not being 

evaluated because the statute does not allow you to evaluate all 

costs? 

Ms. RASKIN. We should evaluate. We need to look at costs, okay. 

And we were trying to pull them out through the survey and 

through this comment period we are going to continue— 

Mr. RENACCI. I guess I want to ask you, yes or no. Do you agree 

that yes, there are costs that were not able to be evaluated because 

the statute has limited your ability to look at all costs? 

Ms. RASKIN. I don’t know if I can answer it with a simple yes 

or no, because we need to look at a lot of costs and move them 

through the parameters of the statute and see whether they would 

be permissible. 

Mr. RENACCI. Again, it is an interpretation, I understand. But I 

think there are a lot of costs that were talked about but really are 

not being evaluated. And we need to get them all. If we are going 

to do this, we need to do it right. And I appreciate the comments 

from my colleague on the other side who said we need to delay this 

to the point to get it right. 

A delay for just having a delay is not a good delay, but a delay 

for doing it right is important. 

Ms. RASKIN. And again, a delay is fully within the prerogative 

of the Congress. 

Chairwoman CAPITO. Mr. Lynch? 

Mr. LYNCH. Thank you, Madam Chairwoman. 

Madam Governor, I want to thank you for coming before the 

committee and helping with us with our work. I do want to just 

comment, the gentleman from Texas earlier mentioned that he 

didn’t hear any complaints on anybody in this district regarding 

debit cards. 

I just want to say that I heard a lot of complaints from the merchants in my district and across Massachusetts about the amount 

of money they were paying in these transaction costs. And I get the 

sense that there was some overreach on the part of the issue—on 

the part of the banks here and I am not sure where reasonable is 

in terms of the cost that are really related to the transaction. And 

I think that is what we are trying to get at. But there is probably 

a lot of credibility in the claim of the merchants and we are trying 

to get that price down. 

Now, you are limited by the language in the statute and I understand that. And, with respect to the reasonable and proportionate 

language in there, it further limits you in terms of what you can 

consider in terms of incremental costs. One of the things that you 

cannot consider is something that my colleague from California, 

21 

Mr. Royce raised earlier, and that is the integrity of the system, 

the fixed costs, the connectivity. 

And in the Boston area where I represent, we have had a huge, 

huge scandal there and a huge hacking incident with TJX and Boston Chicken and—and 7-Eleven, 46 million credit cards were stolen. The numbers were stolen with the PINs. These hackers are 

getting much more sophisticated, and let’s face it, the way we 

transact business in the United States has changed enormously. I 

think that these electronic transfers are 35 percent of the non-cash 

transactions now in the country. 

I am tremendously concerned about the integrity of the system 

and I am wondering if you think that you should have been allowed to consider the—I guess the systemic cost and maintaining 

a system that has integrity in light of all this hacking and it is 

going every single day. We just prosecuted a young fellow who got 

20 years, but the damage that he caused there was tremendous. 

I just think that we have to make sure that we are continuingly 

updating the systems that we transact business on going forward. 

And would it help if we allowed—if Congress allowed you to consider the underlying cost in maintaining a system with integrity 

because I guess forgot to mention that a lot of this happened because the merchants were storing the PIN number and were storing the ATM numbers within their systems and they were hacked 

out of that system. 

It wasn’t hacked against VISA or whoever the facilitator was; it 

was some of these merchants. So there is a shared cost in maintaining a system with integrity and I am just wondering if we gave 

you a broader mandate, whether you might be able to better protect consumers going forward. 

Ms. RASKIN. Thank you for that, and I, too, share your concern 

about the integrity of the system and the importance of fraud detection software and processes and systems that essentially can 

help limit the kinds of experiences that you have had first-hand experience of. In terms of your specific question, the notion of costeffective fraud prevention technology is one that is currently in the 

statute. 

So I fully anticipate that we are going to need to look at exactly 

the questions that you are raising in the context of the information 

that we are currently gathering. The comments that are coming in 

now and continue to come in on this point are going to have to be 

evaluated from the perspective that you described. 

Mr. LYNCH. And, again, I am probably repeating the questions 

that were previously asked, but in terms of the timing of this, do 

you think that some measure of delay might be in order here in 

order to get this right or do you think we pretty much have it? I 

don’t think you will ever get it absolutely 100 percent perfect, but 

I would just be very nervous about going forward with something 

that might inhibit the system, given the widespread use of the system. 

Ms. RASKIN. I think you see how controversial this is and how 

difficult and challenging it has been for us to make sure we come 

very close to what Congress intended in passing this. And, from 

that perspective, it is your prerogative regarding in fact how much 

22 

longer you want us to look at this regarding essentially questions 

of timing. 

Mr. LYNCH. Yes. It is controversial, I think, and let me just say 

this. I think we sometimes overlook the degree to which we have 

transformed the way we conduct business in this country with the 

respect to electronic transactions. I think we take it for granted 

now. I try to explain to my daughters how we used to go the bank 

on Saturday and try to take out enough money in order to cover 

the whole week, and they just think that is hilarious. 

And, even my daughters have a debit card, which is obviously a 

glitch in the system. But it is one more reason that—two more reasons that we need to get this right. But thank you and again, I appreciate it. Madam Chairwoman, thanks. 

Chairwoman CAPITO. Thanks. Mr. Canseco? 

Mr. CANSECO. Thank you, Madam Chairwoman, and thank you, 

Governor Raskin, for being here today and subjecting yourself to 

questions. Let me just start off by saying that the breadth of rulemaking that has resulted from Dodd-Frank is just extraordinary 

and I feel that the current timetable for implementing this interchange rule is not sufficient for those who are affected whether you 

are the consumer or the retailer or the bank and it is going to be 

very difficult for them to adjust. Would you support a delay of this 

implementation? And with that, I am also echoing what the gentleman from Georgia, Mr. Scott, and the gentleman from Ohio, Mr. 

Renacci, have asked you before. 

Ms. RASKIN. Again, I would echo your concerns, essentially this 

has been very difficult. I think we are doing a thorough job. We are 

doing our best to meet the standard, it is obviously your prerogative to extend the timing if in fact you think that is warranted— 

Mr. CANSECO. I think it is highly necessary. But let me go on to 

a question—one that is one of my main concerns with the proposed 

rules by the Federal Reserve. It is—seemingly a lack of economic 

rationale behind the rule in Dodd-Frank that requires that interchange fees be reasonable and proportional. 

And in the rule proposal that the Federal Reserve, it noted there 

and found only limited examples and I am referring to the Federal 

Register Volume 75 Number 248 Section 235.3 Subsection A1 

where in the middle it says, ‘‘EFTA Section 920 does not define 

‘reasonable’ or ‘proportional.’ The Board has found only limited examples of other statutory uses of the terms ‘reasonable’ or ‘proportional’ with respect to fees.’’ 

The Fed was tasked with creating a rule that not only lacked an 

economic argument behind it, but was basically unprecedented in 

this premise. This requires further examination, would you not 

agree? 

Ms. RASKIN. What we have done best with what we have been 

given and I agree that there are quite a number of provisions in 

this set of directives that have been difficult to interpret. And reasonable and proportional fall within that category as do the notions 

of incremental cost, as do the notions of what constitutes appropriate fraud prevention cost. 

Mr. CANSECO. But reasonable and proportional is so, so broad 

that it really bears some very heavy study and more logic behind 

it. Let me ask you this. What economic considerations were given 

23 

to the proposed rule by the Fed in order to—with regards to reasonable and proportional? 

Ms. RASKIN. The terms ‘‘reasonable’’ and ‘‘proportional’’ are 

baked right into the statute and what we have attempted to do 

through the construction of two possible alternatives which are 

now, as you know, out for comment is try to embed what those 

terms could possibly mean. So for example, in one alternative, we 

have looked at a very issuer-specific kind of way of evaluating the 

reasonable and proportional cost that is again baked into the statute. 

And so, one alternative essentially tries to determine what the 

median average variable cost would be and give issuers the ability 

to stay within that amount without any kind of extensive compliance cost or proof, kind of matters—the idea of having some kind 

of cap I think is only reasonable for those—for those entities in fact 

that have very high cost. And I think the Congress directed us to 

somehow try to bring those costs into some reasonableness parameters. 

Mr. CANSECO. But it seems by reading the Federal Register and 

your report that it was made by pure discretion as to what reasonable and proportional was, that there was not actual factual process that went into it other than being esoteric in its nature. Is that 

true? 

Ms. RASKIN. No. I agree that ‘‘reasonable’’ and ‘‘proportional’’ are 

quite esoteric, but essentially what we tried to do is anchor those 

terms with the results of the surveys that we conducted and as I 

have described the process, it has been quite thorough in trying to 

understand what those costs and the range of those costs might be 

so that we can somehow anchor those very vague terms. 

Mr. CANSECO. In the past, has the Fed been given such discretion before on rule writing and if so, what was the outcome? 

Ms. RASKIN. That is an interesting question. I can’t speak to the 

whole realm of interpretation that the Fed has been asked to do 

over its long history. But I can state from the perspective of statutory interpretation always that it is a complicated task and that it 

is sometimes very difficult to get meaning around words. 

Mr. CANSECO. Thank you very much, Governor. My time has expired. 

Chairwoman CAPITO. Thank you. Mr. Carney? 

Mr. CARNEY. I am new at this. I have two lines of questions that 

are similar to others that you have answered today. I don’t know 

that—I think I am a little bit more confused than I was when I 

walked in the room about cause and effects here. The gentleman 

from Ohio, my freshman colleague there, who is the CPA, had 

questions and I thought they were right on point and I will try to 

be direct. Do you feel like you understand all the costs involved in 

these transactions? 

Ms. RASKIN. I feel that we are in the process of collecting all the 

costs that could be involved yet. 

Mr. CARNEY. You mentioned that in your testimony—I apologize. 

I haven’t had a chance to get all the way through, but on page 

seven that you reached out and you have asked for comment on 

other costs, other costs that should be allowable. Have you gotten 

any preliminary feedback on that? 

24 

Ms. RASKIN. We have gotten quite a lot of feedback, about 7,000 

comments worth of feedback in fact and it is probably premature 

to comment on it. Yes. 

Mr. CARNEY. Fair enough. So we have thought a lot about fraud, 

do you have a sense that you are allowed to consider all the costs 

associated with fraud? We talked about fraud prevention. I thought 

I heard you say or somebody say that it does not include losses— 

does not include other, detection, maybe other things. I don’t know 

exactly that. Can you comment on that, please? 

Ms. RASKIN. Sure. And it is interesting because the statutory 

language for fraud, fraud losses with that piece essentially says 

that the Board may allow for an adjustment to the fee amount if, 

and I am skipping over pieces to just to give you the relevant sections, if the issuer complies with the fraud-related standards established by the Board which standard shall and then it tells us what 

those standards need to do. 

So it says those standards shall be designed to ensure that any 

fraud-related adjustments of the issuer are limited to the amount 

described in clause one above, which are the costs of preventing 

fraud and takes into account any fraud-related reimbursements. 

We have to figure out what that means and take into account any 

fraud-related reimbursement. And then we have in parentheses including amounts from charge-backs received for consumers, merchants or payment card networks in relation to electric debit transactions involving the issuer. 

So the question of fraud losses, if you interpret—takes into account to mean you look at it, that is one interpretation in terms 

of what you do with those fraud-related losses or just takes into account means to track it. In other words, don’t include it in your determination of standards for the fraud prevention cost. So, this is 

difficult stuff and I— 

Mr. CARNEY. So it, so do you feel like you understand it clearly 

enough to make the kind of judgment that the Congress is asking 

you to make there? 

Ms. RASKIN. Again, I really want to underscore that I understand 

how important it is to get this right. But then again, it is Congress 

who will need to—with the same concerns that we have, and if it 

is something that you are concerned about essentially and you 

want us to take more time, we would do that. 

Mr. CARNEY. And touch a little bit on fixed costs. I am not sure 

I understand what they are, I understand what they are in other 

contexts, the development of systems, capital investments, all that 

kind of thing not able to recover this cost in this context. Is that 

correct? Under what? What part of that includes—I read your comment there on page seven or eight. What part of that includes ongoing maintenance if you will of existing systems? 

Ms. RASKIN. The overall standard just refers to reasonable and 

proportional to the issuer’s cost. Okay. So that is the general bracing which by any definition would look to be fairly broad. First, it 

would have to be reasonable and proportional, but the first look in 

terms of cost appears to be broad in the statute. 

If you read through the statute, we are also directed to take 

those costs into certain kinds of consideration. So in other words, 

we need to consider the functionally of the debit transaction and 

25 

compare that functionally with the functionality of checks. And so, 

we read that to mean that the costs that we collect as being relevant need to be essentially moved through that functional— 

Mr. CARNEY. My time is up, I see, and I haven’t gotten to my 

other question, but thank you very much. 

Chairwoman CAPITO. Thank you. Mr. Luetkemeyer? 

Mr. LUETKEMEYER. Thank you, Madam Chairwoman. Ms. 

Raskin, do you realize that this morning here, you given very conflicting testimony a number of times with regards to your interpretation of fixed costs. You agree with Congressman Canseco and 

Congressman Hensarling in their comments with regards to previous statements made in December. With regards to Mr. Renacci, 

you allow that you are taking surveys that allow for fixed cost to 

be considered in your surveys and you are doing everything, I 

quote, ‘‘doing everything to get this right.’’ 

Yet in your written testimony, your written testimony says the 

proposed rule interprets the incremental cost to be an exclusion of 

fixed costs would be required. Which one is it? 

Ms. RASKIN. It is actually both. 

Mr. LUETKEMEYER. No, no, no. Yes or no? Which—we are not 

going there—take up my 5 minutes—very quickly. Which one is? 

Is it are we—are these guys right? Is your verbal testimony correct? Or your written correct? 

Ms. RASKIN. I am afraid I don’t see a conflict and I could— 

Mr. LUETKEMEYER. I am sorry. I see a tremendous conflict when 

you say in your testimony, your written testimony says, ‘‘Proposed 

rule—incremental cost—dot, dot, dot—the inclusion of fixed cost is 

required.’’ There is a huge incongruence there. 

Ms. RASKIN. Fixed cost may be considered for purposes of the 

fraud protection adjustment and maybe that helps. 

Mr. LUETKEMEYER. Okay. Moving on. Have you done any studies 

yet to show how the banks are going to make up the losses that 

they are going to incur as a result of not being able charge an appropriate fee for these interchange fees? 

Ms. RASKIN. No, we have not been— 

Mr. LUETKEMEYER. Okay. As a regulator, does it concern you at all that the industry is going to lose $12 billion? That your bank 

is going to lose $12 billion of income at a time when a lot of the 

big ones in fact are in very tenuous situations. Does that concern 

you at all as a Fed regulator? 

Ms. RASKIN. We always look at the loss of revenue streams as 

a potential safety and soundness matter. So, yes, our examiners 

would look at this very carefully depending on the particular profile of the bank. 

Mr. LUETKEMEYER. How are you going to mesh what you are 

doing with this rulemaking with what your regulators are going to 

do? 

Ms. RASKIN. We are going to mesh it very carefully so that we 

are going to make sure that once a rule is finalized, that rule is 

put into examination guidelines and spelled out very carefully for 

examiners that need to make— 

Mr. LUETKEMEYER. Are you going to make adjustments for your 

banks with regards to the amount of income they are going to lose 

when you go examine them? 

26 

Ms. RASKIN. I am sorry. Did you say adjustment? 

Mr. LUETKEMEYER. Yes. And whenever you look at them and 

their inability to increase their capital accounts, increase their 

profit or loss for the year. Are you going to make any adjustments? 

Ms. RASKIN. We will take this particular set of regulations, 

should they be made final, into consideration in our examination 

process. 

Mr. LUETKEMEYER. Okay. I have—we are going down a very slippery slope here with this. And a minute ago, you made a comment 

something to the effect that you agreed that we need to be setting 

these prices so we keep those who are charging too much, from 

charging too much. But basically you agree that we are price—and 

as a government entity to set prices on the private sector is unconscionable. 

We are taking a huge step down a road we don’t want to go to, 

because suddenly we are starting to treat the banks and the people 

who do the interchange fees whether Visas, MasterCards or whatever as a utility company instead of a private sector entity. 

Do you agree with that statement? 

Ms. RASKIN. No, I don’t think that a public utility—I don’t see 

a— 

Mr. LUETKEMEYER. You don’t see setting the prices for a business 

by the government is the same as setting prices for a utility company? 

Ms. RASKIN. I don’t see this as price fixing. 

Mr. LUETKEMEYER. Just a minute ago, you said that. You said 

it just a minute ago. You said that we need to set this price for 

those who are making more than this average, need to bring their 

prices down. 

Ms. RASKIN. I possibly misspoke, but I don’t view what we are 

doing as setting prices. We have been told to set standards and 

those standards had been promulgated and put forward— 

Mr. LUETKEMEYER. I have a real concern with the direction of 

this entire bill, obviously. But what we are doing here is the same 

as the credit card company or interchange fee company here, we 

are not going to allow part of your cost of operation. Just like telling a pizza place that delivers pizzas, we are not going to allow you 

to put into your cost to your pizzas, the person who drives the car 

or the car itself, all we are going to let you do is charge for the 

gas. And that is what we are doing here. And that is wrong. 

Where are we going with this? Have you looked at the possibility 

of what is going to happen if we don’t allow debit cards for a lot 

of folks, especially community bank folks, instead of using debit 

card they use the credit card. 

Ms. RASKIN. That is— 

Mr. LUETKEMEYER. That is not even going to solve the problem 

of cheapening the ability of the merchants to lower the price to 

products. We are not accomplishing—are we? 

We are shifting one way of payment to another. Would you agree 

with that? 

Ms. RASKIN. This— 

Mr. LUETKEMEYER. Yes or no? 

Ms. RASKIN. This is something that the Congress has in its— 

Mr. LUETKEMEYER. Are you taking that into consideration? 

27 

Ms. RASKIN. No. 

Mr. LUETKEMEYER. Okay. Thank you, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. Mr. Perlmutter? 

Mr. PERLMUTTER. Thanks, Madam Chairwoman. And Governor, 

let me just say I have a lot of sympathy for the position that you 

are in. The Durbin Amendment was added at the last minute. It 

has been a controversial subject—interchange fees, merchants with 

some legitimate points about their margins getting squeezed as the 

price of gas goes up but the interchange fee remains the same. 

They have some legitimate point. 

On the other hand, I feel like you are in a box because you have 

been prescribed with language that really makes it, in my opinion, 

impossible for the network and the banks and the credit unions to 

recover their costs. But forget about profit, recover their costs. 

So, you are in a pickle, and I appreciate my friends on the other 

side grilling the heck out of you, but it isn’t your fault. Okay, you 

have to do what you have to do and we gave you 9 months to do 

it. 

The beginning of the rulemaking says, ‘‘The Board shall prescribe regulations in final form not later than 9 months after the 

date of the enactment of the Consumer Financial Protection Act of 

2010.’’ 

So, I just want to say, I appreciate the effort that you are making 

but I don’t think you have been given all the tools or the time necessary to come up with reasonable and proportionate, you guys 

may call it esoteric, those are terms of art that are used every day 

and every contract in statute across the country. But you have to 

have time and the ability within the statute to figure out what reasonable and proportionate really means. We didn’t give that to you. 

So, I am one who is on the side of some delay here. Probably, 

Congress has to go back and take a look at this, that is my opinion, 

because of the language in here was done in Conference Committee. I think it should have been opened to much more discussion 

and I would like to introduce into the record, if I could, a letter 

from TCF Bank. Thank you very much. 

And I would like to yield the balance of my time. I have lots of 

questions, but you are just, in my opinion, in a pickle. We have 

to—the statute doesn’t deal with what was always brought to my 

attention which was the margin the merchants were able to deal 

with in escalating price scenarios. It goes much further than that 

and I would like to yield my time to Mr. Carney. So, you can ask 

your second question. 

Mr. CARNEY. Thank you, gentleman from Colorado for that. And 

really quickly, at least there was some discussion earlier about 

looking into bank fees, revenue, and the effect on consumers. Could 

you comment on that at all again? 

And in particular, whether if you curtail fee income in one area, 

an institution is going to look for it somewhere else. A lot of that 

happened as a result of the Card Act and now we have this provision here which could result in negative effects on the consumer. 

There was some discussion about that earlier, and I would just 

like your thoughts on this, if you would? 

Ms. RASKIN. The market dynamics of these are really pretty complicated and unclear. So, it is not exactly perfectly quantifiable reVerDate Nov 24 2008 13:23 Aug 02, 2011 Jkt 064557 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\64557.TXT TERRIE
28 

garding what is going to happen and then what magnitude anything would happen. 

All I can really do is identify some of the potential consumer effects and I think these are consumer effects that you probably are 

aware of. But I really caution it by saying that I don’t know the 

magnitude of what— 

Mr. CARNEY. Right, is this something that you are looking at— 

there was some discussion about it earlier and you mentioned that 

it was something that you are looking at and— 

Ms. RASKIN. We always look at it. It is very important to understand the effect of any regulatory change on consumers and especially in this area. So, yes, we do look at it, which isn’t to say that 

you will find the word ‘‘consumer’’ necessarily displayed in the 

terms of the statute. 

Mr. CARNEY. Thank you. 

Chairwoman CAPITO. Mr. Pearce? 

Mr. PEARCE. Thank you, Madam Chairwoman. And thank you, 

Governor. I think our friend from Colorado got it just right. You 

are in kind of a pickle here. 

In your discussion of cost, are the overdraft risks associated, are 

they considered at all, the overdraft of the debit cards, are they 

considered at all in the costs? 

Ms. RASKIN. I am not exactly certain what we did on that. My 

recollection is that might have been something that we put out for 

comment but I think I need to get back to you on that. 

Mr. PEARCE. No, because I suspected it is not included, which is 

going to be, I am seeing headshakes through the group behind you, 

which then leads me to the same discussion my friends have been 

having. 

How do we get it right if we aren’t considering one of the most 

basic risks that are associated with the debit card? And as I—two 

amazing things happened last year along the campaign trail. The 

first and most amazing thing is that a publisher of a newspaper 

gave me a book, a big thick book titled, ‘‘Atlas Shrugged.’’ 

The second amazing thing was I actually read some of it and I 

was amazed that sitting here listening to your reading of the law 

of what constitutes fraud and doesn’t sounded just like page 864 

out of this book from the 1950s talking about the government getting into the manipulation of the market. 

And so as I sit here and think, the market should be deciding 

who can run their affairs very well. They don’t have to read that 

big, thick book. And they don’t have to target it and get it right. 

They need to get it right or go broke if they don’t figure out the 

costs. And so, we are asking you as the government to—and I will 

use your words, set standards, which in effect sets the price. You 

seem to want to not allow the word to be used. So, I will—so you 

are going to set standards, which then sets the price that should 

be set by markets. 

And in that setting of standards, you, one of the deciders is not 

even certain that one of the huge risks and because people do, they 

overdraft and they can’t get the banks right now. Tell me if they 

don’t have any protection against it. No ability to reclaim that. 

29 

If you have a comment, I would welcome it, but I suspect you are 

just in a pickle, I think like our gentleman said. I will be quoting 

you the rest of the day, sir. 

Do you have any comment? Is that a fair concern on the part of 

the banks that they’re stuck with the overdrafts without being able 

to go back and get it? And by the time they take six overdrafts in 

a year, now they have to set up a counseling service in order to 

talk to the people who are overdrafting so that they might see the 

wickedness of their ways and setting out the banks in business of 

religion and correcting people from their sins. And so, this is what 

we get ourselves into when we allow the government to run the 

markets. 

Ms. RASKIN. Essentially. I will go to page 864 and do a close 

reading of it, but I do want to make sure I answer the question on 

overdrafts correctly, and we will go back to the office and get a 

good reading of that and let you know. 

Mr. PEARCE. You see, my concern is that the Federal Reserve 

with all of its expertise in reading a law and threading a needle, 

my concern is that it is going to come up something like your index 

on inflation, you declare that inflation went up 1.6 percent last 

year and you have this tortured explanation of why it only went 

up 1.6 percent. 

But when I read the paper 2 days ago, I saw that gas went up 

69 percent, oil 127 percent, gold 60 percent, corn 78 percent, soy 

beans 43 percent. And I suspect when we get a standard, it is going 

to not include many of the risk factors; it is not going to allow businesses to thrive. 

So, they are going to start shutting off customers from access. We 

are going to unbank more people than we bank, all in the name 

of protection of consumers, which has been arrived at by this reading of the rules that I heard just a couple of times ago when we 

are talking about the fraud protections and the difficult stuff of getting this right. 

And with all due respect, I suspect that we are manipulating 

things to an extent here in Washington that American people know 

is not correct. They know that they are paying more for food. They 

know that inflation is happening. But they can’t get anyone to confirm it. And whether they are going to see their cost, their ability— 

increase without understanding why. 

And the frustration that we are seeing across the America that 

is causing people to walk around in the streets and complain loudly 

is going to continue. And we are going to be up here setting standards and making sure we follow exactly the definitions that will 

make everybody feel really good. 

So, you are welcome to respond and to disagree or whatever. 

Thank you. 

Chairwoman CAPITO. Do you have a comment or— 

Ms. RASKIN. No, I obviously take what you are saying very seriously and you want to underscore that Congress has quite a bit of 

prerogative in terms of rulemaking and lawmaking and this is the 

law. And if there are changes that you would like to see in it, we 

will of course faithfully execute them. 

Chairwoman CAPITO. Thank you. Mr. Welch? 

30 

Mr. WELCH. Thank you very much, Madam Chairwoman and 

Ranking Member Maloney. I appreciate your willingness to let me 

participate briefly. I was the sponsor of this legislation in the 

House. It eventually passed in the Senate and was part of the Conference Committee report. But there are two basic questions as I 

understand it. 

Number one, is it necessary to provide some regulation? And 

then, number two, is the regulation that is being proposed doing 

the job that needs to be done? 

We had that debate last year about whether there was a need 

for regulation, and my view was that there definitely was a need 

for it. I was hearing from one merchant after another who had no 

control whatsoever over the prices they were being charged. 

It was becoming an increasingly large cost of doing business. 

They acknowledge, as I do, that credit cards and debit cards are 

very good and very important. They are good for consumers because they are convenient. They are very good for merchants because they are secure transactions. 

But what happened, as I understand it, is that without any regulation whatsoever, the charges that have been assessed to our merchants are the highest in the world. And that is I think what 

drove—was the impetus of Congress passing this. I think there had 

been some very good questions asked by members on both sides 

about how you came to the rule that you came to. 

I heard you say that your examination was thorough and comprehensive and you are going to submit at the request of the ranking member the chronology of what you did and how you did it, so 

that the members are going to be able to come to their own conclusions about that. But the one thing I want to ask about is in—on 

the debit card, that is essentially a direct transfer from a person’s 

bank account, correct? 

So, is there much of a fraud risk there? 

Ms. RASKIN. That is what we need to look at carefully, because 

we have been receiving comments on precisely that point and quite 

a number of comments. 

So, I probably want to reserve judgment from the perspective of 

making sure that we give all those commenters the chance to be 

heard. But, essentially, we are looking carefully at that question. 

Mr. WELCH. The debit card it comes right out of my checking account, correct? 

Ms. RASKIN. Correct. 

Mr. WELCH. And if I have overdraft protection, which I now have 

to sign up for that—is that debit will be paid and then the bank 

will assess a fee to me on my account for the overdraft, correct? 

Ms. RASKIN. As I understand it. 

Mr. WELCH. Mr. Pearce, I think, made some good points about 

the market. But my understanding is the point of contention of— 

is whether the market in fact was free and open on the pricing side 

and historically, is it the case that when debit cards were originally 

introduced, the transaction fee was very, very small. The Maestro 

network was only charging $0.10 when the Visa network was 

charging like a $1.30 on a $100 transaction. 

Is that more or less correct? 

Ms. RASKIN. That is what I understand, yes. 

31 

Mr. WELCH. And what Visa did quite effectively from a self-interest standpoint is they raised the fees in order to encourage banks 

to offer more and more of their cards and penetrate the market. Is 

that more or less right? 

Ms. RASKIN. I believe so. But, now, you clearly know more history on this than I do. 

Mr. WELCH. So, you have the credit cards—the debit card was 

not so much competing with the checking account where there is 

no charge to the merchant. They get 100 cents on the dollar. They 

were competing with credit cards where the fees were higher. And 

this was allowed to go on without any push back. Merchants have 

literally no power individually to be able to negotiate a price. 

So, we got to this point where the charges to our merchants, 

these are mom-and-pop stores as well as the Wal-Marts and Home 

Depots, became the highest in the world. Do you understand our 

charges are the highest in the world? 

Ms. RASKIN. I understand that to be the assertion, yes. 

Mr. WELCH. And I know that the Australian study came to no 

specific conclusion about whether the consumer benefited when the 

prices went down and you explained, as I understood it, that there 

were other variables that you couldn’t possibly take into account. 

But normal economics, if you are—you have one gas station on 

a corner and there are three competitors, most of us when we are 

filling up with gas, go to the one that is a penny or two cheaper. 

And is there any reason to think that wouldn’t happen, that competition wouldn’t force—I see my time is up. 

Yes, thank you, I yield back. 

Chairwoman CAPITO. Thank you. Mr. Duffy? 

Mr. DUFFY. Thank you, Madam Chairwoman. Governor Raskin, 

first of all, I appreciate you being here today. 

And I appreciate the number of people who kept coming to my 

office on both sides of this issue to explain their position. It seems 

like it hasn’t stopped the last 2 weeks. 

I guess I have a concern about what we are doing here, that we 

are going to do here, that we are going to set a price in a marketplace by way of Congress between $0.07 and $0.12. 

I believe that the free market should be allowed to work. And I 

don’t think we are doing that here, and as I have talked to a lot 

of different merchants out there, when we talk about Congress potentially stepping in and mandating prices or profits or salaries for 

their companies or CEOs, they take great offense to that. But they 

seem to advocate for Congress stepping in and advocating for price 

fixing in regard to Visa, banks, and their fees. 

My concern is, in Wisconsin we have, especially in my district, 

quite a few small community banks and they have expressed great 

concern over what we are doing here. And when I look at the reports or the analysis that have been done, it is my understanding 

that you have provided a survey to 63 large banks, is that correct? 

Ms. RASKIN. I want to get you the exact numbers— 

Mr. DUFFY. Or is it fair to say that you didn’t really do any of 

these surveys with small community banks? 

Ms. RASKIN. The surveys that were done of issuing banks were 

done of the institutions that would be covered by the statute, and 

remember, the statute exempts institutions of $10 billion or less. 

32 

Mr. DUFFY. But I think it is going to— 

Ms. RASKIN. —$10 billion or less were not included in the survey. 

Mr. DUFFY. Right. But I think it is clear from your testimony and 

from the comments of Mr. Bernanke that we are not so certain that 

they are going to be excluded or this law is not going to impact 

them. It seems quite possible that our small community banks are 

going to be impacted by this rule, but then you haven’t included 

them in your survey. Is that right? 

Ms. RASKIN. They have not been included in the survey. 

Mr. DUFFY. Right. 

Ms. RASKIN. And if you recommend, or suggest, it is certainly 

possible for the exemption that exists in the interchange fee portion 

of the law to also be carried over pursuant to congressional direction to the network routing and those restrictions. 

Mr. DUFFY. But this could affect our small community banks. 

And having that potential impact, the only thing that is beneficial 

is that we reach out to them and try to get their input by way of 

a survey? 

Ms. RASKIN. Clearly, the impact on small banks, I think, needs 

to be understood. 

Mr. DUFFY. So, it is fair to say then it might be beneficial to have 

more time to talk to our community banks and say, ‘‘Let’s take a 

look at what kind of impact this is going to have on you.’’ 

Ms. RASKIN. I am happy to share the methodology that we have 

followed. And you can look carefully at the surveys and make it— 

Mr. DUFFY. Let me ask you something, in the time that is remaining, can you get sufficient information from our community 

banks by way of a survey? 

Ms. RASKIN. In the time that is remaining, I would argue— 

Mr. DUFFY. No? 

Ms. RASKIN. It depends on what comments we have received 

today. And we have a couple more days. 

Mr. DUFFY. Now, there are a lot of folks who have suggested that 

if the structure of the fee is changed, we are not going to have free 

checking, and there are going to be more charges to consumers in 

the banking side. 

And then we will also argue that on the consumer side, prices 

are potentially going to go down, because our merchants are going 

to save maybe 0.5 percent, or 1 percent, or 2 percent per transaction. Is that a fair assessment of how the argument is going? 

Ms. RASKIN. There are arguments all different ways in terms of 

what the ultimate impact is on the consumer. 

Mr. DUFFY. Do you think that Congress should step in and mandate that merchants—that Home Depot and Wal-Mart and Target—should be forced to reduce their prices by 1 percent or 1.5 percent if this law passes? Is that a proper role for Congress? 

Ms. RASKIN. That is Congress’ decision. It is certainly not the 

Federal Reserve’s. 

Mr. DUFFY. Okay. But it is the Federal Reserve’s obviously by 

way of Congress to look at how this interchange fee affects merchants and banks and come up with a pricing structure that you 

guys think is appropriate. 

Ms. RASKIN. That reflects the law that we have been given. 

33 

Mr. DUFFY. And is it fair to say that you capped the top fee at 

12 cents? 

Ms. RASKIN. We have put out alternative approaches, and that 

12 cents fee represents the 80th percentile in the survey that we 

have conducted of average variable cost. And so, 80 percent is the— 

of the people, of the institution— 

Mr. DUFFY. Have you capped that at 12 cents? 

Ms. RASKIN. Nothing has been done yet. This is a proposal. 

Mr. DUFFY. Do you anticipate it being capped at 12 cents? 

Ms. RASKIN. This is a proposal. And we are taking comments. 

Mr. DUFFY. So, it could be capped at 30 cents or 44 cents? 

Ms. RASKIN. We are looking at comments as they come in. 

Mr. DUFFY. Okay. I yield back, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. Do you have any questions, Mr. 

Manzullo? 

Mr. MANZULLO. My only question is a follow up on what Congressman Duffy spoke about. You acknowledge in answer to his 

question that the smaller and community banks are impacted. And 

yet, you neglected to get their input in the first place. 

Wouldn’t that lead you to the conclusion that the results are 

flawed based upon your own testimony, Governor? 

Ms. RASKIN. It is certainly an honest observation. And in fact, it 

is the case that when the survey went out because of interests of 

complying with the statutory deadline that Congress provided— 

Mr. MANZULLO. So, you were under the gun and you rushed to 

judgment on this issue? 

Ms. RASKIN. I don’t want to say we rushed to judgment because 

we are trying to proceed carefully and we have had 9 months to 

do it. But it is very complicated— 

Mr. MANZULLO. I understand. But why couldn’t you have simultaneously brought in the community bankers and other stakeholders with all the resources that you have as a Fed and at least 

get their input on this? 

Ms. RASKIN. We are getting their input. We talk to them frequently. They have— 

Mr. MANZULLO. But not upfront. 

Ms. RASKIN. They have submitted comments. And yes, there 

have been— 

Mr. MANZULLO. But you didn’t survey them. 

Ms. RASKIN. We didn’t survey them because Congress exempted 

them from the— 

Mr. MANZULLO. That doesn’t make any difference. Your job was 

to figure the impact on the consumer, and on the retail industry, 

and on the banking industry. And just because they were exempted, it does not mean that they were impacted. I think that your 

survey and your studies are flawed and you should miss that. 

Ms. RASKIN. Yes, I am not ready to admit that. I think we have 

faithfully executed upon a very complicated— 

Mr. MANZULLO. I would disagree because you would have stated 

in a direct answer to Congressman Duffy that those smaller banks 

are impacted by this legislation. And yet with all the hundreds and 

thousands of people that you have on hand there in 9 months that 

you don’t have the time, or the desire, or the scholarship, or the 

34 

interest to examine other people, that would be the community 

banks that would be impacted by this. 

People make mistakes all the time. If you don’t have all the information before you and if they were not interviewed and questioned in the first place, why would you then take a look at their 

comments on the study as to which they have no input in the first 

place? Why not disregard their comments as they come in, then you 

would be consistent? 

Ms. RASKIN. Based on the comments we have today, we have received plenty of information from small banks and small credit 

unions, and their particular perspective is being taken into account. 

Mr. MANZULLO. The problem is this, you came to a conclusion 

without them being involved in the process in the first place. And 

now, they are playing defense. They have to come back and they 

have to show through their studies and—through their studies 

without being given the opportunity that the larger banks were 

given. 

That is no way to come up with a regulation, Governor. It is 

flawed. And it is disingenuous. 

Ms. RASKIN. I don’t mean to be disingenuous. I am a former— 

Mr. MANZULLO. You are not disingenuous. The study was just 

disingenuous. I think the numbers here we are looking at and I 

think what America is looking at is a study that is fair and balanced, takes into consideration all the stakeholders, and then 

comes to a conclusion as to what that charge would be. 

I have the same people coming into my offices as Congressman 

Duffy. Some are saying it is too high. Some are saying it is too low. 

What the incredible effect of business people being pitted against 

each other in a way I have never seen before in my 19 years of 

Congress. I have never seen this before with a criticism that has 

been leveled at it. And a lot of it has to do with the fact that the 

people, that a large group of people, the banks under $10 billion 

were excluded from this. 

Their bigger concern also is that because they were exempted, 

they could go on there and charge whatever they want. That 

doesn’t help them. They come under the force and pressure of the 

price that you have set. 

And if they truly have expenses that are greater than what you 

have set, then they are going to be in the position of the larger 

banks trying to woo away the customers of the smaller banks saying, ‘‘Oh, by the way, our swipe fees are cheaper. And the way to 

get cheaper swipe fees would be for you to move your accounts to 

the larger bank.’’ 

I am just saying that those are some of the arguments that we 

are hearing. And if they have been—you guys are shaking your 

heads ‘‘no’’ back there. But maybe you are a part of the people who 

had been questioned. 

But we are talking about the people who were not questioned 

and who wanted just a simple opportunity to be able to state their 

case even if, in fact, they were wrong doing so wrong on the facts 

they would have given you. Thank you. 

Chairwoman CAPITO. I want to thank the Governor for her patience for pushing back when we began and for her diligence in anVerDate Nov 24 2008 13:23 Aug 02, 2011 Jkt 064557 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 K:\DOCS\64557.TXT TERRIE
35 

swering the questions. Without summarizing, and I think we still 

have a whole lot of questions left. And so, we are going to have another panel. So, I will dismiss you from the panel. And thank you 

very much. 

Ms. RASKIN. Thank you. 

Chairwoman CAPITO. The Chair notes that some members may 

have additional questions for this witness which they may wish to 

submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to 

this witness and to place her responses in the record. 

We will do a transfer quickly. 

Okay. Sorry about that. 

I would like to thank the panel for their patience. And we are 

going to begin the second panel. 

I think the first witness is the guest of the ranking member. And 

I recognize her to make an introduction. 

Mrs. MALONEY. Thank you so much. 

I am honored to represent Mr. Prentzas. And I thank you for giving me the opportunity to introduce my constituent from the great 

borough of Queens, Gus Prentzas. 

Gus owns two businesses in my district: Pavilion Florals; and 

Life & Health Fitness, a health club in Astoria. He is also president of the Long Island City Business group and an active member 

of the Queens community. And he has been a small-business owner 

for over 20 years and is actively providing jobs and services in the 

district I am honored to represent. 

So, I welcome you Gus, and all of the panelists today. And I very 

much look forward to all of your testimony. Thank you. 

Chairwoman CAPITO. We also have another guest. The next witness is a guest of Mr. Luetkemeyer. Would you care to introduce 

your guest? 

Mr. LUETKEMEYER. Thank you. 

Thank you, Mr. Chairman. My guest today is Mr. Kemper. I am 

pleased to introduce him. He is the chairman, president, and CEO 

of Commerce Bancshares Incorporated, an $18 billion regional 

bank holding company based in Missouri. 

He began his career with Commerce in 1978 as vice president of 

commercial lending at the Commerce Bank of Tennessee. He was 

president of Commerce Bancshares in 1982 and held a wide variety 

of senior positions, being named chairman, president, and CEO of 

Commerce Bancshares in 1991. 

David is a graduate of Harvard University. He received a masters degree in English from Oxford University and an MBA from 

the Stanford School of Business. Dave also served in an advisory 

capacity to Enterprise Holdings and Bungee North America. 

In his spare time, he is the vice chairman of the board of trustees 

at Washington University and a member of the board of trustees 

at the Missouri Botanical Garden and the Donald Danforth Plant 

Science Center. 

Mr. Kemper is also the past president of the Federal Advisory 

Council of the Federal Reserve. As you can see, David is involved 

in the financial services industry in a number of different capacities. I appreciate him taking the time today to be with us, and I 

look forward for his testimony. 

36 

Thank you, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. 

With that, I think we will begin with Mr. Prentzas. And we will 

proceed, as I said earlier, we would like to keep the initial comments to 5 minutes so we can have time for questioning. So, when 

you hear this, it means try to wrap it up. You can see the light on 

your table there. 

So, Mr. Prentzas. 

STATEMENT OF CONSTANTINO (GUS) PRENTZAS, OWNER, 

PAVILION FLORALS, AND LIFE & HEALTH FITNESS 

Mr. PRENTZAS. Madam Chairwoman, thank you. 

Madam Chairwoman, Ranking Member Maloney, and members 

of the subcommittee, thank you for inviting me to share my views 

regarding payment card swipe fees. My observations are based on 

my experience as a small business owner in Astoria, New York. 

From my perspective, these fees, for both credit and debit cards, 

have long been out of control. In fact, they have grown so large, so 

quickly, that I was forced to lay off an employee. 

While I understand that the Durbin Amendment only addresses 

debit card and not credit card fees, I believe this is at least one 

step in the right direction. 

Therefore, I fully support the debit card rules proposed by the 

Federal Reserve and any other efforts to help curve swipe fees. 

I own some small businesses in Astoria, New York: Pavilion 

Florals is a flower ship I have owned since 1998; and I have owned 

Life & Health Fitness for the last 4 years. Both businesses accept 

credit and debit card payments. 

The health club is particularly dependent on credit and debit 

cards as a form of payment because we charge monthly membership fees and allow our members to set up automatic payment 

plans via credit and debit cards for their convenience. For the 

health club, approximately 78 percent of our payments were received by credit and debit cards. 

I pay a monthly interchange fee of approximately $380. And I 

pay roughly the same amount for the flower shop even though the 

health club revenues are double the amount. And I note that the 

interchange I pay is not only based on the revenues I get, but also 

a percentage of the sales tax I collect, money that I don’t even 

keep. 

These fees have grown at an incredible rate. Indeed, they have 

doubled in the last 2 to 3 years alone. Our prices certainly have 

not doubled over the same period. So, there is no question that 

these fees themselves are out of control. 

In fact, these fees have increased so much, so quickly, that I was 

recently faced with an unfortunate choice at my flower shop. I 

could pay these fees or lay off an employee. I was forced to lay off 

an employee because there were no realistic alternatives to accepting credit and debit cards. 

Visa and MasterCard are another form of currency and we must 

accept them like we take cash. This is one reason why I believe 

that the debit card fee limit is a step in the right direction. Policymakers need to begin to see cards for what they really are—a new 

form of currency. 

37 

Approximately 60 percent of the flower shop’s sales are paid by 

credit and debit cards, and 78 percent at the health club. We expect the percentage to increase as more young people patronize our 

stores. 

Overall, for my small business, interchange fees have grown 

more rapidly and significantly than all other expenses. And the fact 

that I cannot control interchange fees the way I can control other 

expenses is a huge problem for me. 

But our interchange fees are what they are. And we have absolutely no ability to change them or take our business elsewhere. 

Finally, I want to share my experience dealing with credit card 

charge-backs to make clear that merchants like me are on the hook 

when problems like fraud come up. 

A charge-back is when the card company doesn’t give me the 

money for a sale even though it was properly authorized. My flower 

shop deals with high-value charge-backs. 

In fact, charge-backs I get at the shop are about one-third of the 

amount of interchange fees I pay. That is a big loss of funds on top 

of what I am already paying, and it offends me when the card companies claim they guarantee payment. Nothing is guaranteed. 

I can do everything right and still lose a sale along with a customer who has left my store with the flowers that I will never see 

again. There have been times when I checked an I.D., obtained a 

security code, and checked a zip code to make sure everything was 

authorized and in order. But when the card turns out to be stolen, 

I have still been charged back for a sale and lost the money on the 

goods. This is blatantly unfair. And losing an entire sale takes a 

big bite out of my business. 

Not only that, I have to pay the interchange fees on the chargeback amount. Once again, I am paying for fees I don’t get. 

In conclusion, I feel fortunate to be able to serve my community 

as an owner of two small businesses in Astoria. The increases that 

I am seeing in credit and debit card fees are unreasonable. 

If interchange fees, even debit card fees alone, were reduced to 

a more reasonable level, I would have the revenue that I could use 

to hire more people, offer discounts, and cut prices. 

I ask you to please support the Federal Reserve’s proposal and 

turn your attention to ways to bring some needed changes to credit 

cards as well. 

I thank you again for inviting me to testify. And I am pleased 

to answer any questions you have. Thank you. 

[The prepared statement of Mr. Prentzas can be found on page 

174 of the appendix.] 

Chairwoman CAPITO. Thank you. 

Our next witness is Mr. Frank Michael, president and CEO, Allied Credit Union, Stockton, California, on behalf of the Credit 

Union National Association. 

Welcome. 

STATEMENT OF FRANK MICHAEL, PRESIDENT AND CEO, ALLIED CREDIT UNION, ON BEHALF OF THE CREDIT UNION 

NATIONAL ASSOCIATION (CUNA) 

Mr. MICHAEL. Thank you, Chairwoman Capito, Ranking Member 

Maloney, and members of the subcommittee. 

38 

Chairwoman CAPITO. You need to keep your microphone on a— 

Mr. MICHAEL. Thank you very much for the opportunity to testify 

at today’s hearing. 

My name is Frank Michael and I run an $18 million—that is 

‘‘million’’ with an ‘‘M’’—Credit Union in Stockton, California, called 

Allied Credit Union. 

We are not Bank of America. We are not Visa. We are not 7- 

Eleven. We are small. And we strive to fulfill our mission to serve 

our members every day. Our members want access to their checking accounts which means the ability to use a debit card. In fact, 

1,100 of my 2,300 members use our debit cards. 

Section 1075 of the Dodd-Frank Act will make it more expensive 

for my members to access their checking accounts. And I know that 

this is not what Congress intended because Congress included an 

exemption for institutions like Allied. 

When the law was passed, the chief proponent said credit unions 

like mine would not lose any interchange revenues that they currently receive. We were skeptical about this statement in July. 

And unfortunately, the proposed Federal rule makes it clear that 

will not be the case. And here is why. There is no guarantee that 

all the payment networks will operate a two-tier system. Even 

though Visa has said it would, it is not clear when it would start, 

for how long, or under what conditions it would do so. Visa is just 

one of several payment card networks. Who is to say the others will 

operate that way? 

Even if they do, with the passage of time, market forces will 

cause at least some convergence of prices for the two-tiers and the 

absence of full implementation of the exemption that Congress intended. 

In our view, the Fed’s proposal errs by failing to include a provision enforcing the small issuer exemption. The Fed has the authority to write rules for innovation of interchange standards. And we 

would hope that the committee would encourage the Fed to use its 

authority to enforce the exemption and protect small issuers. In the 

absence of meaningful protection, credit unions are rightfully concerned about the potential impact that the regulation’s other flaws 

will have on their member institutions. 

At its most basic level, the Fed’s proposal says that if you want 

to issue debit cards, you must do so under a set of government-imposed restrictions that require the program to operate at a loss because many of the costs of operating debit cards have not been considered by the Fed under the statute. Even for not-for-profit credit 

unions, the idea of government requiring the operation of the program at a loss is abhorrent. It flies in the face of safety and soundness. 

Under the current proposal, we are going to lose money on every 

transaction. The only real question is, how much? If the carve out 

is entirely ineffective and credit union interchange fees converge on 

the rate set for very large institutions, credit unions will find their 

net income reduced by $1.6 billion. That represents about a third 

of credit unions’ recent net income. Such a reduction in income will 

lower capital of debit card issuing credit unions by 10 percent after 

6 years absent any reaction by credit unions. 

39 

However, that is not where the story ends, certainly not for credit unions. The real problem with this proposal will be its impact 

on its consumers, including consumers on the margin who may no 

longer have access to free checking. Credit unions cannot absorb 

this lot. Let’s face it, our regulator will not allow it. 

We are not-for-profit institutions but we are subject to safety and 

soundness standards. Regulators will expect credit unions to maintain current net income levels and replace the lost revenue because 

credit unions must maintain at least a 7 percent net worth to be 

well-capitalized. The choices facing credit unions are relatively 

straightforward and carry a consistent theme: charge more to members for services or reduce the services that members are offered. 

Either way, it is a bad deal for members. 

CUNA surveyed its members: 91 percent of credit unions offering 

debit cards anticipate they will make changes to their rates fees 

and/or services as a result of the negative impact of this regulation. 

The four changes most often cited are: number one, increase debit 

card fees; number two, increase NSF fees; number three, eliminate 

free checking accounts; and finally, number four, lower the deposit 

rates. 

If the exemption for small issuers prove completely ineffective, 

the $0.12 rate would require credit unions to impose an annual fee 

in the range of $35 to $55 a card, a transaction fee within the 

range between $0.25 to $0.35, or some combination of the two. In 

order to maintain the pre-reform revenue, there would be new fees 

for our members. 

The timeline for formalization and implementation is very short 

and the consequences are potentially devastating for small financial institutions and consumers. There are problems with the rule 

that the Fed can and should address but there are significant statutory problems that Congress also needs to fix. 

We urge Congress to stop, study, and start over. Enacting the 

moratorium against implementation of the Fed’s interchange rules 

will provide time for the Treasury to study the operational impact 

of the regulation on all issuers including small issuers, the impact 

on the safety and soundness of depository institutions, and the impact on consumers. 

Then the Fed should start its rule-making process again, taking 

into consideration the results of the study and set standards for a 

rate which is proportional of full cost and risk of the transaction. 

Madam Chairwoman, it is important for Congress and the Fed 

to get this right, otherwise consumers face high costs for financial 

services and they aren’t likely to recover those costs from the merchant. We ask Congress and the Fed to stop, study, and start over. 

Thank you very much for this opportunity to testify in today’s hearing. I am pleased to answer any questions you may have. 

[The prepared statement of Mr. Michael can be found on page 

160 of the appendix.] 

Chairwoman CAPITO. Thank you, Mr. Michael. 

Our next witness is Mr. David Kemper, who has already been introduced. He is the chairman, president, and CEO of Commerce 

Bank, on behalf of the American Bankers Association and the Consumer Bankers Association. Welcome. 

40 

STATEMENT OF DAVID W. KEMPER, CHAIRMAN, PRESIDENT 

AND CEO, COMMERCE BANK, ON BEHALF OF THE AMERICAN 

BANKERS ASSOCIATION (ABA) AND THE CONSUMER BANKERS ASSOCIATION (CBA) 

Mr. KEMPER. Good afternoon, Chairwoman Capito, Ranking 

Member Maloney, and members of the subcommittee. My name is 

David Kemper, and I am the chairman and CEO of Commerce 

Bancshares. I am pleased to be here today on behalf of Commerce 

Bank, the American Bankers Association, and the Consumer Bankers association. 

Commerce is a mid-sized Main Street bank founded in Kansas 

City in 1865. Our 5,000 employees serve customers across 5 Midwestern States. Commerce is one of only three banks in the country 

to hold Moody’s highest rating for financial strength. Last year, our 

business and financial strength was recognized on the Floor of the 

House by Congressman Emanuel Cleaver and former Financial 

Services Committee Chairman Barney Frank. We did not contribute to the economic crisis by originating any subprime products. 

The Durbin Amendment and the Fed’s proposed rule implementing it will cost great harm to consumers. It will affect banks 

of all sizes and their ability to revitalize local economies. 

On behalf of Commerce Bank and the thousands of banks represented by the ABA and CBA, I urge Congress to take immediate 

action to stop the proposed rule from being implemented. This 

needs to be done to avoid the profound negative consequences that 

the rule has for the payment system and for consumers. 

I would like to make four points to the committee today. First, 

the Durbin Amendment and the Fed’s proposed rule will severely 

affect consumers everywhere, causing new fees and pushing low-income customers out of the banking system. The fact is that both 

consumers and merchants value debit cards. They are faster at 

checkout, accepted worldwide, provide a payment guarantee, and 

protect from fraud. 

Debit cards reduce the need for cash and checks and the cost of 

handling bad paper. The Durbin Amendment moves the payment 

system backwards, taking a highly efficient system where costs are 

shared by all who benefit, the one where merchants are almost entirely excused from contributing. 

Some have argued that lower interchange rates will bring lower 

prices to consumers at checkout but this far from certain. What is 

certain is that banks will have to find other ways to recover revenue and this will ultimately lead to new fees for the consumer. 

Second, the Fed’s proposal implementing the amendment dictates 

that my bank and indeed every bank throughout the country must 

lose money on every debit card transaction unless we charge customers more. Let me put this in context, the reality is that today’s 

checking accounts have become debit accounts. 

Each month, our average active customer uses his debit card 26 

times while writing only 5 checks. It costs Commerce Bank about 

$230 per year to maintain a checking account, including salaries, 

branch expenses, and issuing statements, among other costs. Our 

overall profit margin for that checking account is about $35 or 13 

percent. 

41 

The Federal Reserve’s proposal would cut our debit card revenue by about 85 percent or $60 per account. This means our profit on 

a typical checking account goes from $35 to a negative $27. We will 

lose money on average for each account. Mandating that banks 

cannot recover the cost of our most popular consumer product is 

unfair, unprecedented, and just bad public policy. 

Third, the exemption for small banks will ultimately be ineffective. Every community banker—and I have spoken to a lot of them 

in the last 9 months—with whom I speak strongly believes his or 

her bank will be severely affected by the interchange price controls 

imposed on larger banks. 

The economics are simple. Market share will flow to the lowerpriced product of big banks, forcing small banks to lose customers 

if they don’t follow suit. And finally, the process Congress used was 

deeply flawed. The amendment was added to the Dodd-Frank legislation on the Senate Floor at the last minute. 

It was never the subject of any hearing in either the House or 

the Senate and never voted on by this or any other standing committee. A policy decision of such importance deserves much more 

thorough consideration. Commerce Bank, and indeed the banking 

industry, supported many of the key principles in Dodd-Frank. 

We are all for sound banks, strong capital, and consumer transparency; however, the Durbin Amendment has nothing to do with 

these principles. It will stifle innovation, lower productivity in our 

economy, and force a number of our customers out of the protection 

of the banking system. On behalf of the ABA and the CBA, I urge 

you to take immediate action to stop the Federal Reserve from implementing the proposed interchange rule. 

I would like to thank the committee for its time today and I look 

forward to your questions. Thank you. 

[The prepared statement of Mr. Kemper can be found on page 

147 of the appendix.] 

Chairwoman CAPITO. Thank you, Mr. Kemper. 

Our next witness is Mr. Doug Kantor, a partner at Steptoe & 

Johnson, on behalf of the Merchants Payment coalition. Welcome. 

STATEMENT OF DOUG KANTOR, PARTNER, STEPTOE & JOHNSON, ON BEHALF OF THE MERCHANT PAYMENTS COALITION 

Mr. KANTOR. Thank you, Madam Chairwoman, Ranking Member 

Maloney, and members of the subcommittee. I appreciate the opportunity to be here and share with you my views about the Durbin Amendment and the debit card rule before the Fed. 

If there is one thing that I would like you to take away from my 

testimony today, it is this: that the banks right now that issue 

debit cards all charge the same schedule of fees when they are 

under the Visa umbrella. And those under the MasterCard umbrella agree to the same schedule of fees as well. 

This is the only area of their operations that we are aware of 

where they all agree with their competitors to charge precisely the 

same fees. On other things, they stand on their own two feet, decide on their own charges, the same lending rates, the same interest rates, they do that for themselves each bank individually. Here, 

they charge the same thing and lock arms in a centralized pricefixed way. 

42 

That is tremendously unfair to merchants across the country and 

it has led to an explosion in these fees where, as you heard in part 

from Gus Prentzas, from any merchants, this is the second highest 

operating cost that they have only behind labor but higher than 

rent. It is the fastest growing expense they face, growing faster 

even than health care costs, and for many parts of the merchant 

and retail industries, these fees are far, far higher even than their 

profits every year. 

That is a problem that cannot continue and the billions of dollars 

that they are being paid cannot continue. And the thing that is key 

here is the Durbin Amendment and the Fed’s rule presents these 

banks with a simple choice. It says, if you would like to charge any 

amount of money that you would like, governed only by the marketplace, go ahead, unregulated, just don’t do it through a centralized price-fixing mechanism. 

The Fed’s rule and the Durbin Amendment only apply to centrally set fees. And so, if banks want to charge merchants whatever 

they want to charge, they can go ahead and that is fine. We believe 

in competition. Our members compete every single day. If they are 

going to fix the fee centrally though, there has to be some reasonable limits and that works where the Fed comes into play. 

And I think it is helpful to understand how we got here. How we 

got here was that banks used to have a different business model. 

The business model was, they tried to attract consumers to give 

them their money. That was kept in the checking account or in the 

savings account. 

And the bank would lend out those funds that was their capital, 

they would lend it out at a higher rate than the interest they paid 

to consumers. It is a good business model. It benefited everyone 

and still does. The consumers, however, had to have a way to get 

at their own money. 

One of those ways was checks. And almost 100 years ago, the 

Congress and then the Federal Reserve by rule, prohibited the 

analogy of interchange fees on checks, the exchange fees that used 

to be there, now they are not there. Now merchants get 100 percent of the amount of the check when they accept the check. Those 

are prohibited, and have been for a long time. We haven’t heard 

any lobbying against that; that was price fixing. 

It has made the checking system much more efficient and made 

it work quite well. Then banks came out with ATM cards. That was 

a convenience to consumers. And in fact, some people put ATMs 

out there and invested money to do that. Interchange on ATM fees 

flows from the card holder’s bank to the person putting the investment to put out the ATMs. They are providing a convenience. 

But then they saw, hey, if merchants would take these cards in 

their store, that is a great convenience as well. That not only saves 

consumers in terms of convenience, it saves the bank. Every time 

a debit card is used, the bank saves money because someone didn’t 

write a check. They used the debit card instead. That has nothing 

to do with the interchange. 

It also saves money because they didn’t go to a teller and take 

the teller’s time to make a withdrawal. It saves the banks money; 

there are tremendous benefits for banks in debit which they don’t 

tend to talk about when we discuss these types of issues. MerVerDate Nov 24 2008 13:23 Aug 02, 2011 Jkt 064557 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\64557.TXT TERRIE
43 

chants have invested billions of dollars putting—stores, accepting 

debit cards and protecting from fraud. I have some of those numbers in my testimony, billions of dollars. 

That investment isn’t recognized through interchange to the merchant although at first, it was. When these cards were first introduced, that is precisely what happened for many merchants; there 

was zero interchange for some. The merchants we repaid on other 

instances to recognize that. However, over time that system has 

changed, and because the price is fixed, those fees have exploded 

to a point where merchants are suffering from that and consumers 

ultimately, unfortunately, are footing the bill. 

Thank you very much. I realize my time is up. I am eager to answer any questions you may have. 

[The prepared statement of Mr. Kantor can be found on page 101 

of the appendix. ] 

Chairwoman CAPITO. Thank you. 

Our next witness is Mr. Floum, who is the general counsel for 

Visa. 

STATEMENT OF JOSHUA R. FLOUM, GENERAL COUNSEL, VISA 

INC. 

Mr. FLOUM. Thank you, Chairwoman Capito, Ranking Member 

Maloney, and members of the subcommittee. My name is Josh 

Floum, and I am Visa’s general counsel and a member of our executive team. We appreciate the opportunity to discuss the DoddFrank Act and the Federal Reserve Board proposal relating to the 

debit interchange and the routing of debit transactions and the 

great harm to consumers and to small businesses that may be 

caused by these government-mandated price and business controls. 

The Durbin Amendment was enacted through a really extraordinary process with no consideration in any congressional committee and no opportunity for the House to consider debate or vote 

at all. The amendment will have significant long-term consequences for consumers, for financial institutions, for small businesses, and for the entire U.S economy, consequences so fundamental and extensive that their full impact may not be known for 

many years. 

Because of this, Congress should consider extending the implementation date and requesting an impact study on unintended consequences. I would like to highlight the issues that may lead to 

those unintended consequences. Turning first to the price controls, 

there are three fundamental issues. First, the proposed regulations 

would result in a $12 billion annual value transfer to merchants, 

primarily to the big box retailers. 

This makes it virtually impossible for issuers to recover the cost 

of the infrastructure and operations required to build and manage 

a world-class debit system and discourages future investment in 

fraud protection, in e-commerce, in mobile payments, and other important innovations. 

This country should continue to drive innovation, technology, 

data security, and commerce. After all, digital currency was invented here and this country shouldn’t get in a situation where it 

lags behind. 

44 

But, while the direct impact is on debit card issuers, big and 

small, it is the consumer who ultimately will pay the cost to advance the industry. The Federal Reserve Board itself admits that 

its interchange proposal will permit issuers to recover only a small 

fraction of their costs but explains that ‘‘issuers have other sources 

of revenue such as cardholder fees to help cover their costs.’’ In 

other words, the Fed suggests raising fees to cardholders. 

Already, we are seeing that the Fed had it right. Many banks 

have indicated that they will have to take the step. Earlier this 

week, for example, the ICBA released a study of its community 

bank members. More than 90 percent of them reported that they 

will be forced to increase other fees to consumers to compensate for 

the interchange regulation. Importantly, and many members have 

mentioned this today, there is no requirement or evidence that 

merchants will pass on this windfall to consumers. In fact, the opposite appears to be true. 

When asked in 2008 whether consumers would benefit from 

lower interchange fees, the retailer representative truthfully testified, ‘‘There is not a businessman who doesn’t attempt to keep the 

margin.’’ 

Ranking Member Maloney, you asked me to discuss the routing 

and exclusivity sections of this amendment, which were added with 

even less discussion and analysis, and also have significant unintended consequences. The retailers specific intent in adding these 

provisions was to establish a system that would further drive down 

their cost without regard to the need for networks and issuers to 

get a fair cost for the significant value delivered. 

By requiring more than one network on a single card and taking 

the routing decision away from consumers, the retailers have set 

up a race to the bottom to drive rates down. The retailers will seek 

the least expensive options regardless of quality or value delivered 

to the consumer. This part of the rule will only do more to stifle 

innovation and shortchange consumers on new and improve payment services. 

And unfortunately, the rule will have a particularly significant 

impact on community banks and credit unions and on the government and prepaid programs that rely in part on debit card revenue 

to fund their operations. Many people have concluded that these institutions and programs are exempt from all the Durbin Amendment provisions, but as we have heard today, the law does not exempt them from the exclusivity and routing control provisions. Of 

note, the routing requirement allows merchants, not consumers or 

card issuers, to decide how debit card transactions are handled now 

and in the future. 

The new rules deprive the consumer of the ability to choose over 

which network transactions will be processed. Now, the merchant 

will decide without notice to or consent from the consumer how 

money from her DDA account is accessed. There is simply no disguising if this is an anti-consumer provision. 

The exclusivity and routing provisions also compromise the security of debit transactions and compromise fraud prevention. Investment in data security and fraud prevention can only be made if 

there are sufficient economic incentives to do so and the opportunity to—I will—if I can have more 30 seconds, Madam ChairVerDate Nov 24 2008 13:23 Aug 02, 2011 Jkt 064557 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 K:\DOCS\64557.TXT TERRIE
45 

woman—and the opportunity to recover the cost of these investments. Finally, the exclusivity in routing provisions add unnecessary cost and complexity. 

In conclusion, given all of this uncertainty and the many concerns being raised, we beseech Congress to extend implementation 

of the Durbin Amendment and request an impact study on unintended consequences. Thank you very much. I am happy to answer 

any questions. 

[The prepared statement of Mr. Floum can be found on page 84 

of the appendix.] 

Chairwoman CAPITO. Thank you very much. 

And our final witness is Mr. David Seltzer, vice president and 

treasurer, 7-Eleven, on behalf of the Retail Industry Leaders Association. 

Welcome. 

STATEMENT OF DAVID SELTZER, VICE PRESIDENT AND 

TREASURER, 7-ELEVEN INC., ON BEHALF OF THE RETAIL INDUSTRY LEADERS ASSOCIATION (RILA) 

Mr. SELTZER. Good afternoon. 

I would like to thank Chairwoman Capito, Ranking Member 

Maloney, and the members of the subcommittee for inviting me to 

testify today on an issue that is important to the thousands of 

franchisees who own and operate 7-Eleven stores. 

My name is David Seltzer, and I am the vice president and treasurer of 7-Eleven. There are more than 6,700 7-Eleven convenience 

stores operating in 32 States nationwide. More than 5,000 of these 

stores are operated by small business franchisees. 

In fact, sitting behind me today is Dennis Lane, who has been 

the operator of the 7-Eleven in Quincy, Massachusetts, for more 

than 36 years. I welcome this opportunity to share the views of 7- 

Eleven, companies of the Retail Industry Leaders Association, and 

small business owners like Dennis, on the topic of interchange reform. Putting this into perspective, a typical 7-Eleven franchisee 

owns a single store, employs 8 to 10 people, and works 60 to 70 

hours a week. 

After payroll, interchange is the largest cost our franchisees face 

and it is the only cost over which they have no control. The proposed rule is critical to our franchisees because it will provide 

meaningful relief. I acknowledge that debit and credit cards are important to 7-Eleven, and as a direct beneficiary of the credit and 

debit clearing system, we expect to pay competitive fees for the use 

of the system. 

At 7-Eleven, 49 percent of our sales are paid using plastic, and 

73 percent of these card transactions are on either a Visa or 

MasterCard. Unlike all other business expenses, the pricing mechanism for this clearing system is not determined in a competitive 

manner. Over the past 8 years, 7-Eleven credit and debit fees have 

quadrupled from less than $40 million in 2002 to $177 million in 

2010. That is a 21 percent average annual increase. Debit cards are 

now used for over 80 percent of our card transactions. According 

to the Kansas City Fed, average PIN debit card interchange rates 

have risen by more than 500 percent over the past 10 years. 

46 

In October 2009, MasterCard increased its Maestro debit interchange rate by 98 percent. On small ticket transactions, the fee can 

be more than 20 percent of the sale. When we spoke to MasterCard 

executives regarding this rate increase, we were told that interchange rates were non-negotiable. 

Further, we were advised that MasterCard views banks rather 

than merchants as their customer and the rates are set at levels 

needed to entice banks to issue cards on MasterCard rather than 

Visa. In other words, competition among the card networks translates into higher interchange fees for merchants. And as we have 

heard today, banks don’t compete on or negotiate interchange fees; 

the rates are the same. 

As the Federal Reserve noted, the financial incentives in the 

debit clearing services market work to encourage higher costs and 

more risky debit transactions. In short, this market is fundamentally broken. In 2009, we and our franchisees and customers petitioned Congress to address this issue and nearly 1.7 million people 

in 285 congressional districts signed petitions. 

Since our petition drive, over 3 million more Americans added 

their names to similar petitions sponsored by members of the National Association of Convenience Stores. So now, more than 5 million Americans have signed petitions calling on Congress to reform 

interchange fees. We are delighted that Congress responded last 

year and the resulting Federal Reserve rule will lead to tremendous savings for hundreds of thousands of small businesses. 

These savings will translate into lower prices for consumers, and 

more development and more economic activity in communities 

throughout America. In fact, Dennis has already hired a new employee in anticipation of the savings from the debit interchange reform. Given the intense price competition that exists within retail, 

there can be no doubt that debit savings will benefit consumers. 

As to the impact on the banks, I want to make it clear that debit 

interchange legislation only affects about 100 financial institutions, 

leaving more than 99 percent of all institutions exempt. According 

to a recent article in the American Banker, some analysts believe 

that community banks and credit unions will benefit from this 

change as it will provide them with a competitive advantage 

against the larger financial institutions. 

Madam Chairwoman, the facts are clear. The system is broken. 

Anyone who accepts debit or credit cards, whether or small or large 

businesses, and the more than 5 million consumers who signed petitions agree that interchange reform is necessary. 

The Federal Reserve has proposed a rate structure, having received substantial input from card networks, banks, credit unions, 

and merchants. Though we believe the data submitted by the 

banks to the Federal Reserve supports a lower rate structure, we 

respect the process undertaken by the Federal Reserve and recognize that the proposed rates developed through this process will 

provide meaningful relief. 

We encourage the Federal Reserve to complete its work to provide some common sense to debit fees for businesses large and 

small, and most importantly, their customers. Delaying this process 

would only harm American businesses and consumers to the tune 

of $33 million a day, or a billion dollars for every month that 

47 

passes. Thank you for the opportunity to appear before the subcommittee this afternoon. 

I would be happy to respond to any questions. 

[The prepared statement of Mr. Seltzer can be found on page 192 

of the appendix.] 

Chairwoman CAPITO. Thank you. 

I would like to thank all the witnesses, and I have so many questions because honestly, conflicting information is what I have been 

seeing streaming through my office. So, I am going to ask some 

short questions and hopefully get some short answers. 

Mr. Prentzas, you mentioned the cost of the debit interchange 

has gone up. Has your business—has your gross revenue gone up 

at the same time or is it a shift in the way people are paying for 

your services? 

Mr. PRENTZAS. It is a shift in the way people are paying for their 

services, so the more they are using their debit cards, the more 

interchange fees I am paying. 

Chairwoman CAPITO. Right. 

Mr. PRENTZAS. But, what creates a problem for a small business 

person like myself and there are thousands out there in the United 

States, is that we don’t know until the end of the month when we 

get that statement what our interchange fees are going to be. That 

creates a very big problem when you are trying to operate a business, not knowing what you are going to end up paying. 

Chairwoman CAPITO. Okay. Let me ask you this, do you decide 

which routing your card goes on in all this? 

Mr. PRENTZAS. No. 

Chairwoman CAPITO. Okay. Who negotiates your fee for you? 

Mr. PRENTZAS. The merchant company. 

Chairwoman CAPITO. So, you go through like a merchant payment— 

Mr. PRENTZAS. Correct. 

Mr. KANTOR. If I could, Congresswoman, folks like us have their 

own service providers who sign them up and provide processing 

and we don’t do that. 

Chairwoman CAPITO. Okay. Mr. Kemper, on your debit cards 

right now, do you have any charges at all associated with debt for 

the consumer? 

Mr. KEMPER. No, we don’t. 

Chairwoman CAPITO. No. 

Mr. KEMPER. And as I said, it is extremely popular for being 

used and it has basically displaced the check. 

Chairwoman CAPITO. Right, I know. I am in that generation 

where I am—he is writing checks, I am using my credit card, but 

my kids are using their debit cards so—has the cost—Mr. Kantor 

mentioned the cost going up, this is another conflicting piece of information. Has your interchange cost on debit cards gone up to the 

98 percent that Mr. Seltzer mentioned? 

Mr. KEMPER. My view is that is primarily because the debit card 

is the most successful product we have ever had. 

Chairwoman CAPITO. Has the cost of the debit card— 

Mr. KEMPER. No, the cost as a percentage of sales to us, and I 

think it is true pretty much across-the-board, has stayed fairly conVerDate Nov 24 2008 13:23 Aug 02, 2011 Jkt 064557 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K:\DOCS\64557.TXT TERRIE
48 

stant. Maybe it has gone up a little bit, but I think the dollars are 

driven by the volume because everybody is using debit cards. 

Chairwoman CAPITO. But if you had to average the average cost 

of interchange fees over 10 years or let’s say 5 years ago because 

7-Eleven made an assertion in their statement that it has gone up 

500 percent over the last 5 or 10 years. Is that— 

Mr. KEMPER. That would be nothing comp—I think that is driven 

by volume. Our debit fees have gone up because they have replaced 

checks and so the fees have gone up, as a percentage of the retail 

sales, they have stayed very steady. 

Chairwoman CAPITO. Okay. 

Mr. KANTOR. If I could, Congresswoman, just for a moment on 

this question. Actually, the rates have gone up very significantly 

over time. In fact, PIN rates were next to nothing about a decade 

ago and so— 

Chairwoman CAPITO. This is what I mean. 

Mr. KANTOR. Yes. 

Chairwoman CAPITO. We are getting two conflicting— 

Mr. KANTOR. We are happy to give you those numbers and I 

would know—there are a lot of things that are conflicting here. 

Commerce Bank’s Web site says they do charge some of their customers for debit cards so there are a number of things—the facts 

of the— 

Chairwoman CAPITO. We will let Mr. Kemper— 

Mr. FLOUM. May I respond, Madam Chairwoman? 

Chairwoman CAPITO. I want to ask Mr. Michael something because I really have only a minute 43 left. You fall into the category 

of the under $10 billion, obviously, with your credit union. 

Mr. MICHAEL. Well under, yes. 

Chairwoman CAPITO. Yes. Did you submit any comments to the 

Fed? 

Mr. MICHAEL. I have not had the time. And in fact, until I was 

asked to speak in this hearing, I didn’t have the time to really investigate the effects of this. That is one of the problems I think 

most have— 

Chairwoman CAPITO. I would agree with that. Would it be a safe 

assumption probably that your association—the Credit Union National Association, I am sure has submitted something representative of—because only two credit unions fall into this category. 

Mr. MICHAEL. They are in the process of submitting two separate 

comment letters to the Fed. 

Chairwoman CAPITO. Thank you. Do you charge for your debit 

card right now? 

Mr. MICHAEL. I have to, because I lose money on my transaction 

accounts. 

Chairwoman CAPITO. So you do it like a fee? 

Mr. MICHAEL. I have a fee on the transactions to try and allocate 

the cost and—most use it. I have too much in fixed cost and those 

fixed cost, I don’t think they are being even considered as part of 

the Fed study. And for a small institution, that is a major portion 

of what we do. 

Chairwoman CAPITO. Yes, I mean proportionately too, that has 

to be a problem. 

Mr. MICHAEL. It is. 

49 

Chairwoman CAPITO. Because you don’t have access to the larger 

networks, then you don’t have the—obviously the lawyers and the 

accountants and everything else that has to go along with finding 

a—with doing the correct fraud and protections and all those kinds 

of things. 

Let’s see, the question that I really want to find out here and I 

assume—I don’t know if the Fed actually knows this or not but is 

the cost—whether they have gone—I understand the volume of 

business has gone up so your interchange is going to go up because 

it is a greater part of your bottom line. 

More people are paying with debit cards and so your interchange 

fee is going to go up with that because you have more people using 

the card. 

Mr. PRENTZAS. Madam Chairwoman, if I may? As a small business owner, what I am really confused about and try to understand 

throughout this whole process and maybe some of the banks can 

explain this to me is, how is an interchange fee actually determined? There are so many different types of debit cards out there 

with rewards where I as a small business don’t know what these 

fees are, what the percentages are, and I am at the mercy of a 

bank, at the end of the month, they give me a statement and tell 

me this is what you have to pay. And I have no understanding of 

what I am paying or why I am paying. 

Chairwoman CAPITO. Thank you. 

Mrs. Maloney? 

Mrs. MALONEY. I want to thank all of the panelists for their 

thoughtful testimony and I would like to ask this apprentice, we 

talked a great deal about small businesses and trying to help them 

here in Congress and wanting them to prosper. They are the backbone of the economy. After Valentines Day and being a florist, is 

the economy improving? 

Mr. PRENTZAS. There is a lot of love in the air this year. 

Mrs. MALONEY. That is great to hear. Can you elaborate and others on the panel on what you think this rule will mean for you as 

a small businessman or as a bank or as a small community bank? 

And if there is any savings, Mr. Prentzas, how would you use those 

savings? What would you do with them? 

Mr. PRENTZAS. Congresswoman Maloney, thank you for that 

question. Actually, that is a very important question. As a small 

business owner, we are in the business of competing everyday. And 

every dollar that we could save will be in our best interest to put 

it back into the market, into the consumer. 

That also includes lowering prices. That is what is going to draw 

another customer to my shop and that is what is going to help me 

create more revenue where I could hire people and give the benefits that all Americans deserve. So, naturally, in my situation and 

as a small businessperson, I think it is going to trickle down to the 

consumer. 

Mrs. MALONEY. Okay. I would like to ask all the panel members 

to comment on what they see as the benefit or perhaps detriment 

to consumers with the implementation of this interchange rule. 

I have heard from financial institutions that this will mean that 

fees on their customers in others areas may be raised. And I have 

50 

heard from merchants that high interchange fees mean that the 

price of goods and services are higher. 

I would just like Mr. Kemper, Mr. Seltzer, all of you, to comment 

on what this means to you. 

Mr. KEMPER. Yes. 

Mrs. MALONEY. And to your customers and to the consumers. 

Mr. KEMPER. Great question. Josh used the number $12 billion to $14 billion that is going to come out of the banking industry primarily to retailers and primarily to the top 1.5 percent of retailers 

who are doing most of the business. That $14 billion is 16 percent of banking profits for last year. 

Banks last year made about 6 percent on equity compared to 19 

percent for the 3 biggest retailers. So, banks have gone through a 

tough time of rebuilding capital and are not particularly profitable. 

This payment system is the most stable income and especially for 

small banks. We do a lot about the businesses, we are in money 

management, we are in commercial. But for small credit unions, for 

small banks, it is going to be devastating. 

As I said, it is going to mean that our basic—system product is 

going to be unprofitable. We are going to have to raise fees. I think 

people have generally said we will be lucky to recoup a third to a 

half of these kind of fees, it was going to suppress profitability immediately, and we have a wonderful system. We have to step back 

and look at what the value of this system is, not what the cost. 

I like to talk about the costs because they are very competitive. 

They are cheaper than checks, they are cheaper than cash, and a 

lot of studies have shown that. We have a wonderful system that 

we could ruin. And Josh, Visa, a lot of people are not going to be 

investing in the future in fraud, on innovation, and we are going 

to go the wrong way. 

Mr. KANTOR. If I could address this question, because it is an important one. What we have shown—and I cited in my testimony, 

a study from Robert Shapiro, the former Undersecretary of Commerce. And he took a look at this and said if interchange fees, he 

looked at both credit and debit, were just cost plus a reasonable 

rate of return, that would return almost $27 billion to the pockets 

of consumers and create 242,000 new jobs in the United States. 

If you look at just debit, those numbers are more than $10 billion 

to consumers and it is more than 95,000 new jobs created. As 

prices go down, people buy more, and that is good for everyone. 

I would like to comment just again at the chairwoman’s helpful 

observation about talking about facts here. Mr. Floum, in his written testimony, and again in his testimony early today before the 

committee, quoted a small businessperson, Tom Robinson, who testified a few years ago before the Judiciary Committee on this issue. 

But that quote was cut off at the critical point of that quote. 

And Mr. Floum quoted Mr. Robinson in talking about passing on 

savings to consumers as saying there is not a businessman who 

doesn’t attempt to keep the margin. 

Mr. Robinson continued that statement. He said there is not a 

businessman who doesn’t attempt to keep the margin, but the competition always drives it back out. And when you have a competitive market, and we definitely have a competitive market unlike 

some others, those benefits will go back to the consumer. 

51 

I expect this was an honest mistake on Mr. Floum’s part. Unfortunately, this artificially truncated quote has been floating around 

for a while. When there was a markup in the Judiciary Committee, 

one of the Members who talked to him had to read it in and correct 

it, and I would just ask that this exchange in the transcript be 

made part of the record of this hearing so that we get it right and 

make it clear that merchants believe in free market and believe 

consumers will save. 

Mrs. MALONEY. Thank you, and my time has expired. Thank you. 

Chairwoman CAPITO. Thank you. 

Mr. Marchant? 

Mr. MARCHANT. Thank you, Madam Chairwoman. 

What I would like to focus on is the expense that merchants no 

longer have to incur because of the debit card. In my life, I have 

worked in stores where a great amount of the time that the cashier 

and the management spent was in compiling the deposit, taking 

the check, checking the ID, taking the hot checks to the door as 

you walk out, and all the expense that went into just making this 

simple transaction take place. 

It seems to me that the debit cards have made a lot of the positions that existed in your store, Mr. Prentzas, maybe you don’t 

have to have a fulltime version that does that now. Now, you can— 

this debit card enables you to have safer transactions, quicker 

transactions. 

Would you admit that there is some value to that versus the way 

it probably was when you started in business? 

Mr. PRENTZAS. Thank you for that question. 

What I could say to that is that I don’t need that person, but I 

also had to lay off one other person because of these fees. And let 

me explain myself, Congressman. As a businessman, you need to 

be able to understand what you are paying for. 

When it comes to interchange fees, I don’t know what I am paying for and what these fees are. What is the rate of taking card 

‘‘A’’, or what rewards are on that? I don’t know. I am at the mercy, 

like I said earlier, of the statement that comes in at the end of the 

day. So, yes, it might be convenient, but I am not willing to give 

anybody a blank check to fill out a portion for that convenience. I 

want to know what I am paying for that convenience and how it 

is being derived at the end of the day. 

Mr. MARCHANT. Okay. So, your point is you don’t know what you 

are paying for. You don’t know how— 

Mr. PRENTZAS. Why it has been increasing so rapidly without 

having any additional services? 

Mr. MARCHANT. The other thing that I am noticing as I am going 

down to the store is that with almost every transaction that I try 

to make, the retailer is trying to push me towards the transaction 

that the retailer would prefer that I make. 

And the retailer absolutely does not want a check. Cash, I am 

pretty sure is okay, but retailers no longer want a check. The retailer really no longer wants a credit card because I am assuming 

the credit card is still 2 to 3 percent. Is that a standard bank 

charge for credit cards, Mr. Seltzer? 

52 

Mr. SELTZER. Mr. Marchant, for us, credit and debit are right on 

top of one another and I think on average—our credit rates are 

about 2.2 percent. 

Mr. MARCHANT. 2.2 percent. 

Mr. SELTZER. Our debit rates are about 2.1 percent of the transaction, so they are right on top of one another. And, I will speak 

to your other question. We absolutely believe there is value in 

cards, we are willing to pay competitive prices. And if there were 

competitive markets for this product, we wouldn’t be here. There 

is no competition within the card space for debit cards. 

Mr. MARCHANT. I think I might get to that if I have enough time 

to get to my question. The retailer, though, now is—even though 

there is no difference, I guess you are saying, between credit and 

debit, they are pushing me towards a debit transaction because I 

will now have to say that I don’t—debit or credit. That is a standard question now so there must be some advantage to one transaction over the other. 

Mr. FLOUM. Yes. Can I say a little bit about the facts? Because 

the one thing I agree with Mr. Kantor about is that facts are important. And there have been a lot of assertions about facts. 

Chairwoman Capito, I am happy to provide you with excruciating 

detail about Visa’s interchange rates. They are transparent, they 

are on the Web site, they are public. 

So, let’s talk a little bit about the facts. You asked whether the 

rates are going up because usage is going up or because the percentage rates are going up, and this is very important; it is because 

people are using debit cards more, and merchants are accepting 

them more. That is a good thing because they are less expensive 

than cash and they are less expensive than checks so merchants 

are achieving savings. 

The debit card rates on average 10 years ago were about 1.4 percent. Today, they are about 1.4 percent. Some rates have gone up, 

some rates have gone down. The average effective debit card rate 

has remained stable over a 10-year period. Any assertion to the 

contrary, we need to look at the facts. 

Credit card rates on average are higher, but the rates that merchants pay for use of debit cards and credit cards in the United 

States are far lower than what they pay in most other countries. 

So, it is important to get the facts correct and we would be happy 

to provide you with all of these facts for the record. 

Chairwoman CAPITO. Mr. Watt? 

Mr. WATT. Madam Chairwoman, I think I will allow Mr. Scott 

to go next. I missed the testimony, I do want to apologize for that, 

but I am trying to get into the flow here. 

Mr. SCOTT. Thank you very much, Madam Chairwoman. 

This is very, very interesting and, as I said, it is very profound. 

The issue, if I could frame it right is that everybody here agrees 

we need to change the fee. The issue becomes, what is reasonable 

and what is proportional? 

Three of you have one set of feelings, and three of you have the 

other. So—if you could briefly just share with this committee what 

do you feel. What rate fee do you feel would be proportional and 

reasonable? 

Let me start with you, Mr. Kemper. 

53 

Mr. KEMPER. Yes, thank you. 

I think you have to go back. And I put this in my written testimony about the different costs of payments. The merchant can take 

checks, the merchant can take cash, the merchant can take debit, 

the merchant can take credit cards. And debit cards are the cheapest form of payment from a social cost. That is not my view, that 

is a Brookings study, and we can show you other studies. 

So, it is a very competitive way of payment. It has huge benefits 

for everybody, for the bank. 

Mr. SCOTT. I want to get to quite a few little points. 

Mr. KEMPER. Okay. 

Mr. SCOTT. So if you could just tell me, we are looking at a range 

here from 43 or 44 to 12? 

Mr. KEMPER. As I mentioned, it costs us $230 for a checking account. And lots of those costs are revolving around debit. So, we 

have millions of dollars in cost of running our call center, issuing 

statements in fraud, all kinds of things that are not being included. 

The Fed has too narrow a rule, and it is a train coming down 

a track. 

Mr. SCOTT. Do you have a figure? Do you have a figure, let’s say, 

from 12— 

Mr. KEMPER. My figure is that we have a huge amount of cost 

that they are not even looking at. 

Mr. SCOTT. Right. 

Mr. KEMPER. And that is why we say you have to delay this, you 

have to step back and really understand the cost involved in this. 

Mr. SCOTT. The one thing you would say is 12 is certainly insufficient? 

Mr. KEMPER. Twelve is certainly—that is one thing I will say. 

Mr. SCOTT. You don’t want to say— 

Mr. KEMPER. It is insufficient. 

Mr. KANTOR. Congressman, thank you. It is a very helpful question because actually I do not agree that the centrally fixed interchange fee should exist at all. In fact, in seven of the eight nations 

around the world that have the highest per capita debit card usage, 

this fee does not exist at all. 

It is important to recognize that, as I talked about in my testimony, banks get tremendous benefits every time there are customers. 

Mr. SCOTT. I know, but I don’t—I am just going to get—do you 

have— 

Mr. KANTOR. There should not be a fee. 

Mr. SCOTT. Period? 

Mr. KANTOR. It should be zero. They should have to set their own 

fees at banks and not— 

Mr. SCOTT. Twelve is even high to you? 

Mr. KANTOR. That is absolutely right. 

Mr. SCOTT. Okay. 

Mr. KANTOR. It is far too high. 

Mr. SCOTT. Let me go to the next point if I may, because we have 

some merchants here, and I would like to get their concerns about 

this. 

54 

Mr. Seltzer, let me ask you, you agree that if someone provides 

a service and someone else profits off that service, that the person 

profiting off that service should pay for that service? 

Mr. SELTZER. Absolutely. 

Mr. SCOTT. How much business would you lose if you stopped accepting the debit card transaction? 

Mr. SELTZER. We sell groceries, we sell gasoline, so we don’t believe that debit transactions or debit cards have increased purchasing volume for our consumers. 

If we stop accepting cards because Visa and MasterCard have 

been successful in transforming American purchasing habits from 

checks to electronic checks as debit cards were originally marketed— 

Mr. SCOTT. Would you say you—yes, and you would lose business 

35 percent, 40 percent? Would it be in that range? 

Mr. SELTZER. I don’t know an answer to that. No retailer can— 

Mr. SCOTT. But it makes a certain portion of your business possible. And you do feel that you should pay for that service. Is that 

correct? 

Mr. SELTZER. Again, if there were competitive rates or competitive interchange— 

Mr. SCOTT. Does 7-Eleven accept checks as a form of payment? 

Mr. SELTZER. We do in our company-operated stores and our 

franchisees can— 

Mr. SCOTT. Okay. Do you pay for a guarantee service, a check 

guarantee service to make sure that check—that you are covered? 

Mr. SELTZER. We do on a guaranteed basis; checks are less than 

half the cost of debit. 

Mr. SCOTT. Yes, so it is less than half the cost of debits? You 

would say that debit cards—how do they compare to the fees that 

you pay out to the check guarantee service? 

Mr. SELTZER. Debit fees are substantially more expensive. 

Mr. SCOTT. Pardon me? 

Mr. SELTZER. Debit fees are substantially more expensive. And 

debit is not guaranteed at the end of the day. We take chargebacks 

on debit. 

Mr. SCOTT. Thank you, sir. 

Thank you, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. 

Mr. Royce, from California? 

Mr. ROYCE. Thank you, Madam Chairwoman. 

I was going to ask Mr. Kemper—you are with Commerce Bank, 

right, Mr. Kemper? 

Mr. KEMPER. Yes, that is right. 

Mr. ROYCE. Which, as I remember, never got into the toxic mortgage mess that a lot of financial institutions did get into. 

Mr. KEMPER. I am proud of that. 

Mr. ROYCE. I read your testimony here. And I was going to ask 

you, do you expect the ability of the system as it exists now to combat fraud to be weakened if the proposed rule goes through? And 

walk us through the logic as to why, if so. 

Mr. KEMPER. In the previous testimony with Governor Raskin— 

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55 

tion and fraud, if you can’t recover the cost of fraud, you are going 

to have to put different restrictions. 

First of all, I think you are not going to guarantee payments on 

larger items, so that is really going to cripple the debit system for 

everybody, for the consumer and for merchants. And if you don’t 

continue to invest, as we talked about before, it is part of a rapidly 

evolving battle, and so the card operators, the banks, we have to 

continually put a lot of money into doing what we must to outwit 

the crooks. 

So if you can’t recover your cost and if you cut your fees by 85 

percent, there is no question that you are not going to invest to 

cover fraud. And if you are not allowed to recover fraud cost, you 

are going to have to put a lot of restrictions on that so you don’t 

take the losses on fraud. And that would be devastating. 

Mr. ROYCE. Let me ask Mr. Floum, too, on that front. I spoke 

earlier when we had the representative of the Fed here just about 

their concerns with the way in which fraud in our society continues 

to evolve, the innovative ways in which people keep trying to hack 

into the system and, also, the evolution of this system where we 

are informed as consumers, where it is found in advance of us finding it, in most cases by the current system. But that system has 

cost billions and billions of dollars to develop. 

And I was going to ask you how often is your network hacked? 

Mr. FLOUM. Congressman, there are efforts to hack our network 

multiples times every day. And, fortunately, up till now there has 

never been a successful breach of our network, not one, and we are 

proud of that. But that takes a lot of investment. We invest at Visa 

alone $800 million a year in preventing fraud and cyber attacks. 

The banks, our issuers invest billions each year. 

And if there is not an incentive and an economic return to continue to invest and to safeguard the data security of our payment 

network and our digital currency, that is a very serious policy concern. I would respectfully submit we need to keep ahead of the 

cyber criminals. It is not enough to be on par with them. That 

takes a very sophisticated technology, thinking ahead and significant investment. 

Mr. ROYCE. Let me ask you then, do you think the system will 

be less safe as a result of this rule if it is implemented as is, without change or without study? 

Mr. FLOUM. Whatever the regulatory environment, we will always strive to make the system as secure as possible. And I am 

sure the issuers will do the same. But without a return, and if 

issuers have to operate at a loss, it makes it very problematic and 

much harder to do so. And I fear that competitors overseas, other 

networks will have an edge because they are not constrained by artificial price controls. 

Mr. KANTOR. Congressman, could I have a word about this fraud 

question— 

Chairwoman CAPITO. Yes. 

Mr. KANTOR. —because it is an important one, and I think it is 

helpful to recognize first that Visa’s fees as a network are not regulated by the Fed under the law or the Fed’s proposal, so if their 

investments are not affected, they can continue to charge merchants, which they do, whatever they desire to charge them. 

56 

But Mr. Hensarling made a very important observation during 

the first panel that you don’t want to create that incentive by paying banks for their fraud losses—then they don’t have the incentive 

to get rid of those fraud losses. And so that shouldn’t be part of 

the analysis and in our view isn’t what is, is fraud prevention. And 

if in fact there are systems that demonstrably prevent fraud, our 

view is—and we believe the law says this and the Fed’s rule accounts for them in the options they put forward—those fraud prevention cost can be recovered if they demonstrably reduce fraud. 

Mr. ROYCE. Thank you, Madam Chairwoman. 

Chairwoman CAPITO. Mr. Meeks? 

Mr. MEEKS. Thank you, Madam Chairwoman. 

It is a very good hearing. And, I can recall when we started this, 

I wish we would have had the time before we passed the bill to 

have this kind of an intensive kind of debate and conversation and 

it might have cleared it up and—because, ultimately, what we are 

concerned about is the consumers and all of you, whether it is merchant or whether it is bank group or the person who is going to 

a bank or credit union and our constituents. We want to make sure 

that they get the benefit. 

There is one question, that before I get into the main question, 

I want to ask. And I don’t know—backing off to Mr. Scott. I didn’t 

get quite the understanding because I know usually, there is a lot 

of tax. How much does it cost or who pays the cost if a check was 

bounced? If you gave the check, what is the cost of the, you know— 

maybe, I don’t know if someone could answer that for me, Mr. 

Floum or someone from the credit union or anybody. How much or 

what is the cost for a bounced check? 

Mr. FLOUM. The cost annually to merchants from bounced checks 

far exceeds the total amount that they pay in debit interchange. 

And as volume increases on debit cards, those bounced check losses 

come down. So, again, this idea that debit fees have gone up, I 

have said that is not true. The rate hasn’t gone up. The overall expense has gone up because more debit cards are being used. That 

means merchants are saving money because it costs them more to 

bounce checks, to pay for bounced checks. 

If you want to guarantee a check, you can go to a check guarantee type of service. And the rate they are going to charge you is 

1.3, 1.4, 1.5 percent. So with that guarantee and with the additional expense, and as Mr. Kemper said, it is not just us who are 

saying this. Everyone would acknowledge who studied it that the 

cost of checks far exceeds the cost of debit cards per merchant. 

Mr. MEEKS. Quickly, please because— 

Mr. KEMPER. Sure. We are happy to bring in the numbers from 

merchants. It is the case because, often, with the bounced checks 

the merchant does get the money. There is—or otherwise, and 

there are fees put on there just like the bank’s $38 billion in overdraft fees. Merchants do put a fee, so it is not the fact that merchants lose more money than they pay on— 

Mr. MEEKS. Let me just—this is another reason why, in my viewpoint, we need to dig into this more because, too, I was watching. 

That is what it meant. The first panel is watching the Senate 

Banking hearing today. And there were two statements that were 

made—one by Chairman Bair—that said that the Durbin AmendVerDate Nov 24 2008 13:23 Aug 02, 2011 Jkt 064557 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 K:\DOCS\64557.TXT TERRIE
57 

ment might not be helpful to consumers and has unintended consequences and really needs to be fixed. He further stated that the 

full policy ramifications might not have been dealt with as thoroughly as they should have been. So we kind of rushed it through. 

And then there was also a statement—because I was particularly 

concerned at that time with the effect that for a small—for credit 

unions and for the smaller institutions, the community banks—and 

so we put in an exemption what we felt would protect them. So my 

question then is—and I think Chairman Bernanke said that the exemption may not work. 

So my question—and Mr. Floum, I will ask you, especially with 

this network, because I heard you testified about network exclusivity provision. How does that affect, if it does, small issuers? 

Mr. FLOUM. Thank you for the question, Congressman Meeks. It 

affects small issuers greatly because although they were exempted 

from the direct price regulation on the debit rate, they are square 

in the crosshairs and exclusivity and routing provisions. Those 

were put in during conference by RILA, the large retail association, 

for one reason and one reason only—and that was to suppress 

interchange rates and issuer revenue. 

So what they do is they say that it is not enough that the networks can’t compete to have cards, but that there had to be two 

networks on one card. Whether the cardholder wants two networks 

or the issuer wants two networks or not, the choice is taken away. 

And the choice is taken away from the consumer to route the transaction. So someone is asking about thin pads and merchants trying 

to steer— at least consumers had a choice before, but with the Durbin Amendment the choice is taken from the consumers and merchants’ route and with two networks they want to set up a situation where they drive the interchange rate down. 

That was the reason. That was the intent. That will be the effect. 

And, unfortunately, the credit unions and community banks are 

not exempt from that provision. 

Mr. MEEKS. Do you have any comments? 

Mr. KANTOR. If I could, it is important to recognize a couple of 

things here. One is that there is robust competition in one place 

here—that is to drive interchange fees up. The networks drive 

interchange fees up to get issuers to put them on the card. That 

won’t change even with the network non-exclusivity and that will 

protect the small banks so that they won’t have to worry about 

their fees. 

Visa has already said they will have a two-tiered system. And 

there have been commentators like Christopher Leonard of the 

American Banker, who said, ‘‘This will allow the small banks to 

win and have their cake and it eat, too.’’ 

Chairwoman CAPITO. Mr. Renacci? 

Mr. RENACCI. Thank you, Madam Chairwoman. 

And thank you all for being here. 

Mr. Prentzas, Mr. Kantor, and Mr. Seltzer, there was a day just 

very recently that I was a retailer. And Mr. Michael, Mr. Kemper, 

and Mr. Floum, there was a day very recently that I was on a bank 

board. So I see both sides of your story. The only concern I have 

is in the long run, who is going to win and who is going to lose? 

58 

If I was sitting on the retailer side, and even if prices were able 

to come down, I know that the bankers have to make these dollars 

up somewhere and those fees will wind up going to the consumer. 

And, today, I am sitting on the side of the consumer and wondering 

who really wins in all of this. 

The other thing that I think we need to be very, very careful of 

is that any time the government gets involved and sets a price or 

a standard or a fix, whatever you want to call it, it is a very dangerous precedent especially for the retailers. So I am concerned 

about that and not comfortable at all. But I do know that, from a 

retailer’s standpoint, these cards do allow you the opportunity to 

sell more. And I do know, from a banking perspective, these cards 

do allow you to make money. 

The issue again is going to be, how does it affect the consumer? 

My biggest concern today, though, goes back to all of the testimony. 

And, Mr. Kantor, I want to—two things you did say in your testimony. You said that interchange rates should be based in many 

cases with the foreign markets charge. I think you need to be extremely careful there, too, because I am sure your retailers would 

not want to have to charge with the foreign—with some of the foreign market for selling things for. I will give you a chance to speak. 

And you also mentioned—the word early on in your testimony— 

fixing fees and you said that the banks are fixing fees. I am not 

too sure you want the government to fix fees. So, again, let’s be 

careful while we are talking about all of these numbers. 

But here is the question I have. After all of this testimony, we 

are still getting down to we now have an interchange fee that the 

Federal Reserve is saying should be at a certain amount. And they 

put that amount inside of a specific box. We didn’t give through a 

statute the Federal Reserve any opportunity to pick up all of the 

costs that are available. 

You heard the testimony earlier that it could be an issue. And 

for the retailers sitting on the panel, I am sure that if you were 

stuck with a certain retail cost that was set by somebody else and 

all you were told was you would want your cost, you would want 

to make sure it is a fair fee and a fair cost. So I am going to ask 

this primarily to the retailers. 

Hearing the testimony earlier and hearing that you know that 

this interchange fee is really—it is flawed in my opinion. It doesn’t 

take into consideration all of the cost. And as I asked the previous 

person who testified, what do you need to get this cost, I really 

didn’t get an answer, so what do you need? 

But for your purposes, do you really want the Federal Reserve 

to set a cost, a standard, as you called it, or do you want it to be 

fair and reasonable? And are you willing to allow there to be more 

time given to the Federal Reserve to have all the details available 

so that they can come up with a fair standard, as they call it? 

Mr. KANTOR. Congressman, I appreciate that. And thank you for 

looking at this question so closely. What is helpful to recognize 

here, as I said in my testimony again, is if banks would compete 

rather than fixing the fees and set their own costs, charge whatever you want and have a market system, that is great with us, 

do it. 

59 

If they are going to fix the fees, we think frankly they should not 

be allowed to charge anything by fixing the fees. The Fed has been 

more generous than that in spite of the fact that we advocated that 

they not do that and, instead, here you can recover this cost plus 

a rather large rate of return on those costs. 

And so, here, I have gone through in my testimony the banks 

have argued for a great many other costs to be included here. Now, 

some of those are costs of the network, which, as I said, aren’t regulated. Some of those are the costs of the credit program— 

Mr. RENACCI. I am going to run out of time, so I just want to 

make sure are you willing to let more time to be allowed from a 

retailer’s standpoint so that actual reasonable cost can be determined, or you are going to stand here or sit here today and say, 

no, I don’t want to waste any more time to have a reasonable cost? 

Mr. KANTOR. The Fed has done a good job here so far. Merchants 

have been— 

Mr. RENACCI. The Fed has said today that they did not take into 

consideration all of the costs. So my question is pretty specific—are 

you willing to allow that there will be more time for the Fed to get 

all the costs outside of the box so that they can come up with a 

fair interchange fee? 

Mr. KANTOR. We have waited more than 10 years too long already. 

Mr. RENACCI. You are not answering my question. 

Mr. KANTOR. The Fed is getting it right. It should go forward. If 

anything, the fees should be lower. 

Chairwoman CAPITO. Mr. Carney? 

Mr. CARNEY. Thanks, Madam Chairwoman. 

First, let me apologize for not being here in the last—when you 

made your opening statements. You may have heard the questions 

that I asked the Governor earlier about the cost—and we have 

been having some discussion about that. 

I am just glancing through the testimony that was provided in 

writing. I am interested in the banker’s view of those costs and if 

there are things that you don’t take into consideration or allowed 

allowable cost because presumably that will be in the—part of the 

comment record and maybe you have already submitted that, but 

could you summarize that for me, I guess, Mr. Kemper? 

Mr. KEMPER. Yes. I would be glad to comment on that. First of 

all, when you step back—and I said that in my testimony, when 

you look at all of the social costs, debit is lower than any other 

form of payment. And so, we talked about facts. There are facts on 

that. 

I mentioned in my opening statement that—and we talked about 

with Governor Raskin that the Feds have really been putting a box 

on this because of the language in Dodd-Frank on how narrowly 

they can interpret what the costs are. It is basically just the marginal electronic and clearing costs. 

The other cost, we talked about fraud, and we paid millions of 

dollars in fraud cost. That is a real cost. Our call center, our 24/ 

7 call center where we have 120 people, we have people call up all 

the time about entries on their checking accounts. They are doing 

far more debit transactions. And they are checks or other forms of 

payments. So how do you allocate that? We have to have systems 

60 

for their payment system. Periodic statements were required and 

we spend millions of dollars sending our customers statements 

every month. 

It is very difficult. And I think the whole—and there are a lot 

of frauds. First of all, price fixing on an unprecedented scale is very 

scary to me. But, secondly, telling businesses that they can only 

price a product, our most popular consumer product, at marginal 

cost just doesn’t make any sense. And it was very narrowly defined 

by the Fed. 

So they are hamstrung on this. And so if we talk about it, then 

it gets very important that we step back from this and have a full 

debate like we are having today and really get the cost right because I think—I have a lot of merchants who are very good customers of mine. We want a fair deal just like the merchants want 

a fair deal. 

Mr. CARNEY. The second question I had this morning was the effect on consumers. I didn’t really have enough time to pursue it. 

Could you outline what you think the effects will be on your customers, I guess, and other fees that you might otherwise have to— 

and you might now have to charge? 

Mr. KANTOR. In aggregate, it is $14 billion. As I mentioned, it is 

16 percent of bank— 

Mr. CARNEY. $14 billion is— 

Mr. KANTOR. $14 billion is just taking that $0.44. And cutting 

it—I think Josh mentioned 12, but it is somewhere in between 

that. I am going from $0.44 to $0.07 and $0.12 cents. And, basically, that is the transfer from the banks to the retailers. Now, 

whether or not they lower cost, who knows? 

Mr. CARNEY. But that is in a nutshell what we are talking about 

in terms of— 

Mr. KANTOR. Yes. And as I mentioned in my opening testimony, 

that would move our basic checking account where we have a full 

cost of profit of maybe 13 percent to a loss of probably 10 or 12 percent on every checking account and so we are going to have to recapture. And, also, we really haven’t talked about it today. 

But, certainly, people are going to fall out of the banking system 

on this. And I have talked to Congressman Clay, who is my Congressman from St. Louis. There are big issues on this about the 

banking system has worked very well and you don’t—you want to 

keep people in the banking system because the alternative is not 

good. 

Mr. CARNEY. One of the things we have tried to look hard to do 

in Delaware, and I am sure others have as well, is to try to get 

people who aren’t banks, if you will, to go to the banks and checking the account fees and all that kind of stuff is a barrier there. 

And I would not want to see that obviously happen. 

I mentioned this morning that some of the regulations with the 

court act have had taken away some other revenue sources for— 

on the credit card side. And so it is just really a question of what 

the ultimate impact is going to be on the consumer with this. 

Again, I apologize for not being here earlier to hear your testimony. I had to go out. And I will read it carefully. Thanks very 

much for— 

Mr. MICHAEL. Representative, may I say something? 

61 

Mr. CARNEY. Yes, you may, please. 

Mr. MICHAEL. On the credit union side, just to let you know, our 

consumers are our members. And as interchange rates are dropped, 

this is going to be a direct transfer from our members to the merchants. So that will—they will have to make that up some way 

through some other sources— 

Mr. CARNEY. What is the estimated loss for the credit unions? 

Mr. MICHAEL. Again, what we are figuring right now that it is going to be fairly substantial, about $1.1 billion a year. They will 

be transferred to merchants. And I don’t have a guarantee that the 

merchants are going to take and give that money back to my members. 

Mr. CARNEY. Thank you. 

Mr. KANTOR. Yes, if I could? 

Mr. CARNEY. No, you can’t. 

[laughter] 

Sorry, I am just a freshman. I don’t mess with the Chair. 

Chairwoman CAPITO. You are a good man. 

Mr. Canseco? 

Mr. CANSECO. Thank you, Madam Chairwoman. 

The Federal Reserve Board has proposed these regulations in an 

effort to implement the interchange fee provisions of the DoddFrank Act. 

Let me ask a simple question, starting with Mr. Kemper. How 

did the Federal Reserve do in writing this rule, in your opinion? 

Mr. KEMPER. I think the Federal Reserve, as I mentioned, was 

hamstrung with some very specific language on what they can do 

on incremental costs, and I think they narrowed. And I have talked 

to—Missouri is the only State with two Federal Reserve districts. 

And I know both persons very well and I have talked with them. 

I think there are a lot of questions on how they came up with 

what they did and why they didn’t include fraud and why it was 

so narrow. But I think it took a very bad law and made it worse 

and narrowed it down. And that is—and I think—I listened to Governor Raskin, and I think you asked a lot of good questions about 

what are the costs that should be in there. And they are not in 

there. 

Mr. CANSECO. So you don’t think that the Federal Reserve did 

a good job in writing? 

Mr. KEMPER. I think they did a very thorough job, but I think 

the outcome was not good. And I don’t think it is right, either. 

Mr. CANSECO. Thank you, Mr. Kemper. 

Mr. Kantor? 

Mr. KANTOR. Thank you for that. I think that the Federal Reserve has done a good job and a credible job of writing this rule. 

It is not everything that we would like it to be, as you heard. I 

think they have the room and should not have centrally fixed interchange fees, whatsoever, allowed anymore by the banks. 

But they did a good, credible job going through it. And it is substantial progress that will benefit everyone, in particular, the consumer. And I would know, just with respect to Mr. Carney’s comment before, too, it is helpful to look the—in Europe, they took a 

look at this question when they moved to a 0.2 percent debit interchange, which is a little bit lower than what the Fed proposed, and 

62 

they found that there is no relationship between the fees that 

banks charge their customers checking and otherwise in the interchange fee. 

In fact, if there were, had interchange fees tripled in this country 

over the last decade, we would have seen bank fees on the consumers fall dramatically. In fact, they didn’t—those increased dramatically to the $38 billion in overdraft just to take one example. 

Mr. CANSECO. So they did well, Mr. Kantor? 

Mr. KANTOR. But I think they did well. 

Mr. CANSECO. And, Mr. Michael? 

Mr. MICHAEL. I think that, again, they have been hamstrung. 

And they had some options where they could have—have made 

some decisions, for example, enforcing—or requiring an enforcement of the two-tier system could be something they could have 

done, but they have decided not to do that. 

I think there are issues in the definition of the cost. It is not an 

incremental cost. It is really an operational cost and it all has to 

be allocated out. But my operational costs are not being surged for 

the process. 

The final thing I am going to say is they have acknowledged that 

the small—the exempt institutions will be dragged in. They said 

that is a reality of what is going to happen. But they haven’t surveyed it. They haven’t determined what our costs are and included 

those as part of their determination. 

Mr. CANSECO. Thank you. 

And, Mr. Floum? 

Mr. FLOUM. Congressman, I think the Fed did not have enough 

time and so it could not and did not do a thorough enough job. 

They didn’t consider all of the costs. They didn’t survey the small 

financial institutions. And they didn’t include all of the costs that 

even the narrow statute should have allowed them to include such 

as fraud cost, such as network fees, such as fixed costs, the investment cost to keep the infrastructure safe, sound, and secure. 

Mr. CANSECO. Thank you, sir. 

Mr. Prentzas? 

Mr. PRENTZAS. I believe that the Federal Reserve is now doing 

a proper job. Like I said, there might be more that has to be done, 

but we are heading in the right direction. 

The only comment I just want to make so maybe we could get 

a down-curve grasp on this problem coming from a small business. 

If you have 2 flower shops within a 50-mile radius, those 2 flower 

shops could basically set their own prices. But, now, if you allow 

four other flower shops to come into that area, there is going to be 

competition. Who benefits at the end of the day? The consumer. 

This is what could happen here. If they allow the competition to 

exist, where not two banks decide what these interchange fees are, 

that, at the end of the day, it is the consumer and the retailer who 

will benefit, including the banks. 

Mr. CANSECO. Thank you, Mr. Prentzas. 

Mr. Seltzer—because we are running out of time. 

Mr. SELTZER. Sure. I think the Fed has, from our perspective, 

gone through a very thorough process. I know that we have spent 

considerable time answering their questions in the fall as did 

63 

banks and other institutions. So from our perspective, they have 

done a very thorough job. 

And there were things that—we think the actual cost of the 

transaction is a bit lower than where the Fed came out. So we 

think the rates could be lower, but at the end of the day, we will 

trust the process and, in any event, we think that the merchants 

and consumers in particular will benefit from their actions. 

Mr. CANSECO. And just a very short follow-up question, if I may, 

Madam Chairwoman? 

If the Dodd-Frank bill was presumably inactive or cobbled together in order to try to and pull back our economy from the brink, 

were interchange fees a root cause of the financial crisis? 

Mr. FLOUM. No. No, they weren’t, Congressman. They had nothing to do with the financial crisis. And, in fact, they are an engine 

for growth. 

Mr. CANSECO. Yes. Dodd-Frank was supposed to be about protecting consumers. And the Durbin Amendment, unfortunately, will 

have the opposite effect by harming consumers. So it really was 

rushed and has no place as a part of a consumer protection bill. 

Mr. KANTOR. And we would not surprisingly perhaps disagree. 

The interchange fees in fact said some—lacks the underwriting 

standards on credit cards system that will in fact be a terrible 

problem. 

Mr. CANSECO. Thank you, gentlemen, very much. 

Chairwoman CAPITO. Thank you. 

Mr. Watt? 

Mr. WATT. Thank you, Madam Chairwoman. 

And I am going to confess to being old school. I don’t use debit 

cards. Just a fact of life—I am behind the times. 

I want to ask a couple of questions here about—Mr. Michael, let 

me start with you because I met with local credit union people last 

week. I think only two, Credit Unions National—exempt. Is that 

correct? 

Mr. MICHAEL. Yes, that is correct. 

Mr. WATT. Okay, but the argument was that, ultimately, even 

being non-exempt was not necessarily a good thing because the fees 

get set so low for the exempt institutions, for the ones who are covered, then the folks will flock to them because of those lower fees. 

And so they seem to be now rethinking the proposition and thinking that they may be ought to have been covered. 

What is your—this is not a trick question. I am just trying to 

find out. 

Mr. MICHAEL. Yes. Basically, the intent of Congress—and we 

thank you for trying to keep us out of this battle to begin with— 

was to keep small institutions out of this interchange. 

Mr. WATT. I understand that. 

Mr. MICHAEL. But the reality is because of the routing provisions 

that are in there and market forces, it will drive costs down to the 

lowest common denominator— 

Mr. WATT. Okay. 

Mr. MICHAEL. —and yank them up on the other side. So I am 

going to see what I received on interchange income drop to what 

the largest institutions have. 

64 

Mr. WATT. Okay. I want to go to Mr. Floum because I couldn’t 

figure out why Visa is here. Visa doesn’t issue debit cards. And so 

I have to stay—you have the network, I understand, or one of the 

networks. Is that your Visa’s involvement in this debate? 

Mr. FLOUM. Yes, Congressman. We are the technology platforms, 

so we operate the network that makes the banks able to talk to one 

another. 

Mr. WATT. Okay. And how many competitors are there in that 

space? 

Mr. FLOUM. There are many competitors in that space. 

Mr. WATT. Okay. And how do you get paid for providing that 

service to banks and whomever uses it? 

Mr. FLOUM. We charge fees to the issuing banks and to the merchant banks. We do not charge fees to merchants or cardholders. 

Mr. WATT. So your network is a convenience to them also, is it 

not? It is a convenience to the banks, but it is not a convenience 

to the cardholders— 

Mr. FLOUM. Yes, it is. 

Mr. WATT. —and to the merchants? 

Mr. FLOUM. It is, sir. The merchants and the cardholders are end 

users of the platform that we provide. And this is an important 

point. I have heard a lot about the uniform interchange fee being— 

Mr. WATT. I don’t mean to disturb you. I am just trying to—in 

short, I am trying to understand how this works. As you provide 

a network, what part of this fee are you getting for providing the 

network as opposed to the financial institution that ultimately has 

the account and the debit is being debited against? What part of 

it goes to them? 

Mr. FLOUM. Of the interchange fee, which is the subject of the 

Durbin Amendment, the networks get nothing, no part of it. Separately, we do charge a fraction of a percent fee to the issuing bank 

and the acquiring bank. That is how we make our revenue. 

But, obviously, we are very interested in the health of the debit 

card program because we are in the business of facilitating that 

program. 

Mr. WATT. And if somebody defrauds the system, is it the network that is defrauded or is it the financial institution that is defrauded? If somebody hacks into the system— 

Mr. FLOUM. Let me give you some examples. 

Mr. WATT. No. No, I am just trying to find out, who loses? 

Mr. FLOUM. The issuers lose. They would bear the financial responsibility, unfortunately. The breaches have occurred at merchants—T.J. Maxx, Hannaford, and others who have stored data in 

ways that could have been more secure. So there is fraud directed 

at Visa, but it has never penetrated our network. 

The problem has been with third parties, but the issuers bear the 

responsibility. And that is part of— 

Mr. FLOUM. They are compensated by interchange. 

Mr. WATT. Okay. So that is the fraud costs that the Fed should 

be taking into account, is that what you are saying? 

Mr. FLOUM. Correct. Fraud losses and fraud prevention costs. 

Mr. WATT. Even though it didn’t go to your network? It goes to 

them? 

65 

Mr. FLOUM. Yes. And the interchange fee we are talking about 

is a revenue to issuers, correct? 

Mr. WATT. Thank you. 

Mr. FLOUM. Thank you. 

Chairwoman CAPITO. Thank you. 

Mr. Luetkemeyer? 

Mr. LUETKEMEYER. Thank you, Madam Chairwoman. 

Mr. Kemper, I know a while ago Mr. Kantor made statements to 

the effect that there is no correlation between bank fees and interchange fees. Would you like to jump in on that discussion to represent the banks, on how you structure your fees and how you 

charge interchange fees? 

Mr. KEMPER. We look at our payment system and our payment 

account as one account that we priced. And there are a lot of different components in that. People write checks. People use credit 

cards. People use their debit cards. And so we take all of those into 

account and we look at what—just like any business would look 

at—we would look at what our revenue is and what our cost is and 

we will price that accordingly. 

The system has worked brilliantly. And I think that is what— 

everybody has benefited from this. When you go to a fast food place 

now, they take debit cards, they take credit cards. That wasn’t true 

5 years ago. When you were on an airplane, they wouldn’t accept 

credit and debit cards. The merchants want to take it, the airlines 

want to take it because they don’t want to handle checks and they 

don’t want to handle cash. We see that. 

So we like—the idea that you can strip out this marginal cost on 

one component of payment systems to me just doesn’t make any 

sense because it is all wrapped together. We have to support all of 

the—we have to support our call center. We have to work with 

Visa. We have to support security. All of those things flow together 

for our payment accounts. So we factor all of that together in trying to carve out one area and price it at marginal cost. It is just 

not the way business is done in this country. 

Mr. LUETKEMEYER. If this price structure goes forward, what are 

you going to do? What are you going to reprice? How are you going 

to reprice your products or all of your products or just the debit 

cards to make up for lost income, to continue to provide the service? Are you going to continue to provide the service? 

Mr. KEMPER. It is a very competitive world out there. And there 

is PayPal, there are all kinds of non-bank kinds of accounts. So the 

market will dictate how we can price up. But there are 7500 banks 

in this country and they compete very vigorously. So, sure, if we 

are going to lose tens of millions of dollars of revenue and we are 

going to start losing as I mentioned on every checking as a whole, 

we will price that up. So costs go up to consumers. 

But the debit card now is paid for by users. And, in fact, as you 

use it, it is a user fee as opposed to spreading it out. I think it is 

a very fair way to do it. But I guess the bottom line answer is fees 

will go up significantly to consumers to—the market will allow us. 

That is the way a free market system works. 

Mr. LUETKEMEYER. Mr. Michael, you indicated that all of your 

members are consumers? 

Mr. MICHAEL. That is correct. 

66 

Mr. LUETKEMEYER. And, therefore, this is going to be a direct 

charge back to them. Have you looked at your model yet to see 

what is—how much it is going to cost? Or how you are going to approach this? Are you going to continue to provide debit card service? Are you going to pull it out of the system of services you provider? How are you going to approach this? 

Mr. MICHAEL. First off, I need to, again, let you know that we 

don’t cover our cost with interchange. I have to charge—currently 

$0.25 in these transactions to help cover the cost of processes and 

transactions, and I still lose money. 

Going forward, the issue is going to be I will have to either adjust that price or find other locations and my financial institution 

to do that. But I have a narrow range of products, and larger financial institutions could take that cost and past it off to another area. 

I can only basically add it back into my deposit products such as 

my checking accounts either through fees or through incremental 

fees on the debit card transactions or checking account fees. Other 

institutions will be able to go other directions with it. 

Ultimately, in the end, if my fees get to be too high, I will not 

be competitive in the marketplace and I will lose members who will 

go to other financial institutions because they will be able to get 

those products cheaper. 

Mr. LUETKEMEYER. Okay. A while ago, Mr. Floum, you indicated 

that you had some data with regards to the cost per transaction of 

cash, credit cards, and debit cards. Off the top of your head, do you 

have the information just roughly which one of those cost would be 

what your research shows? 

Mr. FLOUM. I would be happy to provide that. I believe that one 

bank executive has said that cost of cash ranges 79, 80 basis 

points. The cost of verified checks is 1.35 basis points. But we can 

get you that information. And that doesn’t include fully-loaded cost, 

as Mr. Kemper said. If you look at the—cost to all participants, 

cash and checks have even higher cost. 

Mr. SELTZER. And I could tell you for 7-Eleven, the cash costs are 

about 20 or 25 basis points. So the debit is on the order of 8 times 

more expensive for us than accepting cash, including the bank 

service charge that we incur on depositing cash— 

Mr. LUETKEMEYER. What is your—on checks, etc.? What is your 

cost on checks? 

Mr. SELTZER. I don’t know that one— 

Mr. LUETKEMEYER. And, now, and when—those checks, I am not 

talking about the cost just to handle checks. I am talking about the 

losses you incur on taking bad checks as well. 

Mr. SELTZER. Less than 1 percent. 

Mr. LUETKEMEYER. One percent of the cost of the transaction? 

Mr. SELTZER. Of the transaction as compared to 2 percent plus 

on a debit transaction. 

Mr. LUETKEMEYER. Okay, very good. 

Thank you, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. 

Mr. Clay? 

Mr. CLAY. Thank you, Madam Chairwoman. Let me thank you 

and the ranking member for allowing me to sit in on this hearing 

today. I find it quite interesting. 

67 

And I also want to take this opportunity to welcome my constituent, Mr. David Kemper, here who is a pillar of our community. 

He has been in business for a long time. And in the interest of full 

disclosure, I am a customer of the bank. 

Let me also say that there are other benefits to debit cards. In 

my case, I have a 16-year-old daughter, and I utilize the card to 

teach her the principles of banking. It is very important for young 

people, especially those who think money grows on trees. So it 

helps me with that. 

And all of you appear to be a reasonable business group. I know 

that this is driven by profit margins. But starting on this end of 

the table, have you all—have the opposing sides attempted to sit 

down outside of the Federal Reserve to try to resolve this issue, 

and then be able to come forward with a reasonable solution to 

offer up to the Federal Reserve? Has anyone? I will start with you, 

Mr. Prentzas. Go ahead. 

Mr. PRENTZAS. Okay. Thank you for the question. On my level, 

at the small business level, no, the only thing I could tell you is 

when I did call my local bank that handles my accounts, they basically told me that they don’t control the interchange fees. They 

really can’t do anything about that. 

Mr. CLAY. Mr. Michael? 

Mr. MICHAEL. I am certain that there are conversations that 

have occurred. But I have to be honest with you; I wouldn’t have 

been privy to those. I am just too small to be included. 

Mr. CLAY. Mr. Kemper? 

Mr. KEMPER. I think you want to have the market determine the 

price. I think we would all agree on that. I think we would debate 

about whether or not there is enough competition, but I just go 

back to—I have a lot of merchants who are very good customers. 

Everybody has benefited from the program and we have a real danger here if we don’t do something, that the train is going to go off 

the track here. 

So I would just urge Congress to step back and really examine 

a lot of the issues that have been brought up today. 

Mr. CLAY. Mr. Kantor, would you be willing to go outside of the 

Federal Reserve and be able to offer up a solution that both sides 

could agree to? 

Mr. KANTOR. We have many merchants in our coalition who have 

tried to do that and then rejected both on fees on different legislative and policy proposals in the past and unfortunately, we have 

been rebuffed in any case. We are always open to talking about 

good policy proposals here because we see this as a broken market 

demonstrably so, that needs fixing and the debit card piece is just 

the first step. Credit card fees are even higher and much needs to 

be done there as well. We are quite open to those conversations at 

any time. 

Mr. CLAY. Mr. Floum, any position on— 

Mr. FLOUM. Actually, we are very happy to negotiate. In fact, we 

have negotiated customized agreements with thousands of merchants. We tried with 7-Eleven. We were unable to get to an agreement, but that is the way it ought to work, though negotiation, 

through free market rather than through government intervention 

and price controls. 

68 

Mr. CLAY. Thank you for your response. 

Mr. Seltzer? 

Mr. SELTZER. Sure. We have great relationships with a lot of 

banks that we do business with in many other areas of our business. We have gone to all the major banks before that we do business with and we have asked them, can we have the discussion 

with them regarding interchange. 

The banks that are the beneficiaries, the direct beneficiaries of 

interchange, say they can’t talk to us about it, that all of that goes 

through Visa and MasterCard. So the banks won’t have the dialogue about it. With Visa and MasterCard, our experience has been 

that we have not been able to have a meaningful, constructive dialogue with them regarding these fees. 

Mr. CLAY. We know that fee increases will be passed on to consumers ultimately. Mr. Michael and Mr. Kemper, what do you estimate will happen to your customers as far those who still want to 

use debit cards? 

Mr. KEMPER. Estimates and a number of people have said this 

is that perhaps 5 percent of banking customers will fall out of the 

system as banks raise prices. I don’t know. It probably won’t be 

that magnitude to us—it would be tens of thousands because we 

have 700,000 checking accounts. 

And the cost of going outside the banking system, there is an article I will send you that was done by Candice Troy who is an A.P. 

personal financial writer and she said, ‘‘What would it cost me if 

I couldn’t work with the banks?’’ So she wrote this article last October and she did it for a month and it cost her $93, primarily cashing checks, getting prepaid debit cards which they charge per item 

$1. And $93, that is $1,100 a year—$1,100 and we figure that our 

cost, we are making about $260, so it is a real danger when people 

go outside the banking systems. 

Mr. CLAY. Thank you all so much. I yield back. 

Chairwoman CAPITO. Thank you. 

Mr. Hensarling? 

Mr. HENSARLING. Thank you, Madam Chairwoman. 

To the panel, I heard your testimony. I had to step out for much 

of the Q&A, so I may be plowing some old ground here. I apologize 

about that. 

Like many other members, I have heard from a number of financial institutions in my State and in my district, particularly dealing 

with the small financial institution exclusion. I have heard from 

the First Financial Bank in Hartford, Texas, and they tell me economic forces are going to force their institution to adapt the same 

price level as the large institutions. 

And since the proposal doesn’t permit their bank to cover the 

cost of providing debit card transactions, they will be forced to implement new service charges and other fees on checking accounts. 

I hear from First State Bank of Athens, Texas, who say that if 

the formula applied to their bank caused the result in revenues, it 

would not even cover switch and transaction cost, much less cost 

to issue the cards, administer them, and cover fraud losses. 

I heard from Austin Bank, also in my district, ‘‘We expect a 70 

percent reduction in our interchange fees which will reduce our inVerDate Nov 24 2008 13:23 Aug 02, 2011 Jkt 064557 PO 00000 Frm 00076 Fmt 6633 Sfmt 6633 K:\DOCS\64557.TXT TERRIE
69 

come by 14.74 percent. If net income is reduced, so is our capital 

growth. That leads to less lending by banks.’’ 

So, Mr. Kemper, you are representing a number of the banks 

here today. Why aren’t these small financial institutions convinced 

that they are going to be protected? And they certainly don’t seem 

to believe the consumer is going to be protected. 

Mr. KEMPER. As I mentioned in my opening remarks, and I think 

Mr. Michael has mentioned it too, that whenever you have a lowcost alternative, they are going to take market share. I think that 

is why the small banks don’t think exemption will work their way. 

Chairman Bernanke commented on that this morning. I think 

that this will hasten the consolidation in the industry and of the 

community banks that are most at risk. And we see this all the 

time. I said, we are a Main Street bank. We have banks in Poplar 

Buff, Missouri; Hannibal, Missouri—Illinois. And our profitability 

relates directly to how big the community is. The smaller the community, the less profitable it is. It is a simpler kind of model, the 

community bank model. They are much more dependent on this 

kind of payment stream. So they are going to suffer proportionally 

more because they are not in other businesses. 

Mr. HENSARLING. Mr. Seltzer, in your testimony, you said there 

was a ‘‘lack of a properly functioning market mechanism’’, speaking 

of the payment card network. Do you view there to be a legal barrier to entry in the payment card network market? 

Mr. SELTZER. By that, I meant that—we have never seen another 

product like this. 

Mr. HENSARLING. But, no, I am just asking the question. Does 

your firm believe there is a legal barrier to entry into this market? 

Yes, no, maybe? 

Mr. SELTZER. No. There is a practical barrier. 

Mr. HENSARLING. Okay, a practical barrier. Do you view it as a 

natural monopoly? Do you have an opinion on the matter? 

Mr. SELTZER. No. 

Mr. HENSARLING. We now have a rule, okay, so if we don’t necessarily have a natural monopoly, if we don’t have legal barriers 

to entry, I am not totally unsympathetic here. I take you at your 

word as your testimony. This is very high cost for you. I understand that, but I happen to patronize one of your establishments 

in Lakewood, Texas. I have two small children. They are thirsty. 

They drink a lot of milk. 

So my first question is, we hear to some extent about the benefits 

that can be derived here. If Congress does not act to delay this for 

further study, when the Federal Reserve rule is implemented, if I 

go to the 7-Eleven in Lakewood, Texas, in the Lakewood neighborhood of Dallas, Texas, can I expect a gallon of milk to drop in 

price? Can I expect a gallon of gas to drop in price? Is the DVD 

from the Redbox machine you have in front of your store going to 

drop in price? 

Mr. SELTZER. I think when this goes forward, you are going to 

see competition in every retail merchant. We compete every day on 

gas prices. You mentioned gas prices. So my competitor across the 

street— 

Mr. HENSARLING. So maybe, maybe not. 

Mr. SELTZER. I either have to drop the price— 

70 

Mr. HENSARLING. I expect you don’t know the answer to the 

question, but I want to make a point here. The question is, do you 

know what the incremental cost is of producing a Slurpee? 

Mr. SELTZER. Yes. 

Mr. HENSARLING. What is it? 

Mr. SELTZER. I don’t know specifically— 

Mr. HENSARLING. I just wonder how 7-Eleven would feel if the 

Federal Reserve came in with a rule that said you can only recover 

the incremental cost of selling a Slurpee. My guess is, the ice and 

the fruit flavor don’t cost a whole lot, but you have a lot of fixed 

cost. My time has expired, but I think you get the point. 

Thank you, Madam Chairwoman. 

Chairwoman CAPITO. Mr. Welch? 

Mr. WELCH. Thank you very much. 

It has been informative for me to listen to everybody because I 

go back to the basic proposition that the debit cards and the credit 

cards are really essential for commerce. They are incredibly important to the merchants. They are incredibly important for the customers. I have a Rewards Card and I am very happy that the cost 

of my trip to Disneyworld is paid for by the merchants of America 

because that does get passed on to them. 

But here is the question, there are impacts of this legislation. 

Cost will be shifted. But what might be good, it is good if we have 

banks making solid returns so that they can do the work that they 

do that is so important in our communities. But it is not great if 

you have this uncontrollable expense and you are a merchant. You 

have a floral shop. You have a 7-Eleven. 

And the question really is about what is fair and how do we get 

fair pricing in this? Let me ask you, Mr. Kemper. Your bank does 

have a tremendous reputation. You have done a lot of great work 

in the community and you have a Congressman for a customer who 

is not complaining. But if the Fed did take the time you think they 

need to take, and they included what you fairly thought was a fair 

consideration of the cost, would you accept their authority to then 

make this recommendation as to what was reasonable and proportionate? 

Mr. KEMPER. I wish I had Ayn Rand up here. But I would say 

that the idea of government fixing prices is not the way the system 

works. 

Mr. WELCH. Right. So, no, I can understand it. Mr. Hensarling 

made that point, in fact, I think, quite effectively. But so, what I 

am trying to find out is whether this call for delay is really just 

another polite way of saying you just don’t want it done. 

Mr. KEMPER. No. I don’t think it is good public policy. 

Mr. WELCH. Right. 

Mr. KEMPER. But having said that, I think the box that the last 

Congress put the Fed in is a very tight, little box and I think the 

Fed made it even smaller. 

Mr. WELCH. Right. 

Mr. KEMPER. And I think that the idea—if you are really going 

to price based on marginal cost which you shouldn’t, you have to 

look at all the costs. 

Mr. WELCH. No. I am sorry. I hear you on that. 

Mr. KEMPER. Okay. 

71 

Mr. WELCH. And whether it is a Slurpee or a debit charge, you 

are going to be concerned about it. But the dispute that we have 

here is whether there really is the market setting the price on the 

debit and on the credit card transactions. That is really the question. 

If Mr. Prentzas wanted to get a better deal on his Visa charges, 

Mr. Floum, could he call you up and do it? He is right here. 

Mr. FLOUM. Yes. In fact, the last hearing when that Rotten 

Robbie was here from the gas stations, I told him that we would 

be happy to negotiate with any merchant. 

Mr. WELCH. Okay. I have talked to literally hundreds of merchants in Vermont and they tell me that is not the case. Mr. 

Prentzas, tell me. He is offering a good deal here. 

Mr. FLOUM. I am happy to give you my card and I would invite 

you to call me after the hearing. 

Mr. WELCH. Let’s get real here. That sounds good, to maybe— 

with Wal-Mart, but Mr. Prentzas, have you had any success trying 

to get— 

Mr. PRENTZAS. I shop around to get the best rates out there. And 

basically, every time I turn to a bank, they just—the bank tells me 

that interchange fees are set. They have no control over them. It 

is something that Visa and MasterCard control. 

Mr. KANTOR. If I could— 

Mr. WELCH. Mr. Kantor? 

Mr. KANTOR. Congressman, thank you, and thank you for your 

tireless work on this issue over time. That has been tremendous in 

terms of advocacy for small businesses. What we have heard from 

businesses all across the country is in fact that the answer is ‘‘no.’’ 

They can’t negotiate with the banks because the banks all charge 

the same thing and won’t depart from that. And, no, they can’t negotiate with the card networks either. 

And, in fact, Mr. Floum made his offer to Tom Robinson when 

he was here a few years ago. Tom Robinson followed up on that 

and he was presented with a gag order that he had to sign which 

would have prevented him from talking to Members of Congress 

about this issue in the future if—as a first step before he could 

ever negotiate. 

A similar thing happened before when Senator Arlen Specter’s 

office had this conversation and folks from MasterCard made a 

similar offer to folks from Giant Eagle. And Giant Eagle— 

Mr. WELCH. I get the point. 

Mr. KANTOR. I answered them with ‘‘no.’’ 

Mr. WELCH. If you could sit down and work something out, that 

would be great. There is a lot at stake for American businesses despite of—I have had great relations with my credit unions, but we 

don’t see to eye-to-eye on this one. 

And I would say this to the community bankers, if you guys were 

in charge, we never would have had the Wall Street meltdown. 

Mr. MICHAEL. Can I make a quick comment here on this? 

Mr. WELCH. Sure. 

Mr. MICHAEL. I think that this law is bad public policy, and I 

think the rules are bad public policy. And, the rules are going to 

go in effect unless you as Congress go stand up and say, ‘‘We need 

72 

to intervene and stop this for the time being. We need to delay. We 

need to go back and take a look at this rule.’’ 

Mr. WELCH. But I will ask the same question I asked Mr. Kemper. 

Thank you. 

Chairwoman CAPITO. Mr. Duffy? 

Mr. DUFFY. Thank you, Madam Chairwoman. 

I appreciate you all coming in and testifying and sitting so nicely 

together. 

I understand the concerns. I have heard from—as every district—we have a lot of merchants in my district and my community 

and I understand the problem that they convey to me that they 

face with the interchange fees. But I do have this overwhelming 

concern about the government stepping in and fixing prices. 

And, I guess, Mr. Floum, to you, with regard to Visa, was this 

debit card philosophy developed by Visa? 

Mr. FLOUM. We had a great hand in pioneering the debit category and growing that category including the technology platforms 

needed to deliver instantaneous guaranteed transactions. 

Mr. DUFFY. And what did it cost Visa, $100,000, $200,00? 

Mr. FLOUM. Congressman, over the years, billions and billions 

and if you include the—tens of billions. 

Mr. DUFFY. Okay, fair enough. 

Are you familiar with Mr. Kantor’s organization? 

Mr. FLOUM. Yes, very well. 

Mr. DUFFY. Okay, part of a lawsuit, challenging— 

Mr. FLOUM. Sure. 

Mr. DUFFY. Okay. And were his clients investors in those billions 

of dollars that Visa spent to develop this technology? 

Mr. FLOUM. No, they were not. 

Mr. DUFFY. So you took the risk. You innovated the product. And 

now, Mr. Kantor’s clients enjoy that product. Is that right? 

Mr. FLOUM. Yes, sir. 

Mr. DUFFY. And is it fair to say by way of Visa that sales have 

gone up for merchants who use this Visa product? 

Mr. FLOUM. Without a doubt. 

Mr. DUFFY. So they sell more, is that right? 

Mr. FLOUM. Yes, sir. 

Mr. DUFFY. Which would mean they would probably make more 

money. 

Mr. FLOUM. They make more money out of it. 

Mr. DUFFY. Okay. Mr. Kantor, you and your folks say there is 

not enough competition in this market. Is that right? 

Mr. KANTOR. That is correct. There is price fixing now. 

Mr. DUFFY. But is it fair to say that your clients can use cash? 

Mr. KANTOR. Can they use cash? Sure. 

Mr. DUFFY. Yes. And they can use checks as well, right? 

Mr. KANTOR. Sure. 

Mr. DUFFY. So there are three methods of payment that your clients can choose to use if they so wish, right? 

Mr. KANTOR. There are many methods of payment, yes. The 

problem is— 

Mr. DUFFY. —these are the Visa products, yes? 

73 

Mr. KANTOR. Visa is one product, they have credit and debit, but 

there is no competition among different cards and— 

Mr. DUFFY. But there is competition with the payment method, 

right? You can accept checks, you can accept cash, or you can accept Visa. 

Mr. KANTOR. Right. Thankfully, that was part of the Durbin 

Amendment that we could discount based on those differential 

prices. 

Mr. DUFFY. And so, we are talking about, what is the appropriate charge here, right? Why don’t your clients just pass that cost 

onto the consumers? We will give you a 1.5—we will give you a 2 

percent discount if you use cash or check. 

Mr. KANTOR. There are two things. One, consumers are paying 

these fees right now in the form of higher prices. 

Mr. DUFFY. But they don’t see them, right? 

Mr. KANTOR. They don’t see them, which is— 

Mr. DUFFY. So why don’t you let them see the fees, pass it on 

to them? 

Mr. KANTOR. We have started doing that. Since the Durbin 

Amendment passed, there has been actually a large uptick in cash 

discount, particularly, at gasoline stations and some restaurants. 

Mr. DUFFY. And then— 

Mr. KANTOR. Visa has been quite aggressive about pushing them 

not to do that— 

Mr. DUFFY. But what exactly is the answer to say, ‘‘Listen. Let’s 

expose these fees and let the consumer decide whether they want 

to use a credit card, check or cash.’’ 

Mr. KANTOR. It would not though engender competition among 

different kinds of cards—Visa versus MasterCard versus— 

Mr. DUFFY. But why is that your concern? You have competition 

of payment. 

Mr. KANTOR. Because if they don’t compete with each other, their 

only incentive is to keep driving fees up as it has been. 

Mr. DUFFY. But at what point do we say, this is the appropriate 

role of government. I traveled in a campaign for a very long time, 

and I like the example of Slurpees, but—and I am a big fan of 

McDonald’s. I ate a lot of it. But, I get a super-sized Coke and what 

is the cost of a Coke? The water and the sugar and the ice in the 

cup, $0.20? And they charge $1.50 or $1.80. 

We should get involved and regulate the price of McDonald’s 

Coke. Is that how far we are going to go? 

Mr. KANTOR. If McDonald has fixed their prices with their competitors, the government not only should, but would get in trouble. 

Mr. DUFFY. I go to Burger King and I go to Taco Bell and they 

are all the same price. 

Mr. KANTOR. They are competing. They are competing that price 

down. 

Mr. DUFFY. I don’t know. 

Mr. KANTOR. We fixed this. Trust me. Their profit margins 

wouldn’t be 1 percent to 3 percent. They are very well. 

Mr. DUFFY. But it is fair to say, if we look behind the curtain, 

there are other expenses and costs that feed into the $1.50 or $1.80 

supersized Coke that I get. 

74 

With that, Mr. Kantor, do you think that the Fed has analyzed 

all the costs that go into the fees that the banks charge or interchange fees that are charged? 

Mr. KANTOR. I think they actually have not because there are a 

lot of other costs ranging all the way from marginal to semi-fixed 

that are part of that product. 

Mr. DUFFY. And thank you—one other question. Quickly, Mr. 

Seltzer. You indicated that with the check guarantee service—okay, 

that—what do you guys pay on average for a transaction to your 

Visa, $0.44, $0.50? 

Mr. SELTZER. The average debit transaction is about $0.29— 

Mr. DUFFY. $0.29. And you testified earlier that if you have a 

check guarantee, you pay about half of that. Is that right? 

Mr. SELTZER. Sure. 

Mr. DUFFY. So you pay about 14.50 cents if you are going to get 

a guarantee for a check. 

Mr. SELTZER. Something on that order. 

Mr. DUFFY. And right now, the maximum you are going to pay with Visa with this new rule is $0.12. Is that right? 

I yield back. 

Chairwoman CAPITO. Thank you for making all of us hungry— 

Mr. DUFFY. Congressman? 

Chairwoman CAPITO. And I would like to go to Mr. Prentzas because he is one of the weigh in on this and he is our bona fide merchant on the panel. So if you could, in 30 seconds, respond to Mr. 

Duffy. 

Mr. PRENTZAS. Yes. Mr. Congressman, you made a comment that 

let’s leave it to the consumer to decide their form of payment. I understand that my type of business, for example, is basically by 

phone orders and also by the Internet. There is no way I could accept the check or cash. My business depends on somebody using 

that credit card and debit card. 

On the other hand, you tell me it is not the place of the government, the Federal Reserve—the government to oversee that this is 

a billion dollar industry. It affects every single one in this country. 

And when it doesn’t affect everybody and thus cause a billion dollar 

industry, I believe that the government should be able to oversee 

what is going on. It has been done in the past and it should be 

done today. 

Chairwoman CAPITO. Thank you. 

Mr. McHenry? 

Mr. MCHENRY. Thank you, Madam Chairwoman, and thank you 

for your leadership on this subcommittee and congratulations on 

your subcommittee chairmanship. 

Most of the great questions have been already asked. And it is 

tough for me to follow Sean Duffy on anything. 

Do you want my time, Sean? 

But in all seriousness, this is a major issue, and Congress was 

legislating when a lawsuit was ongoing and some of us had some 

questions about that. But price fixing, this was—Mr. Kantor, to 

your question here—to your comment, rather. What Sean was saying in terms of $0.99 Cokes at all the fast 

food restaurants, you could call that price fixing, that is to be litigated by the courts. So in terms of representing your coalition, do 

75 

you conceptually think that the government setting prices is the 

right path? 

Mr. KANTOR. What the government should do is get rid of price 

fixing here and get rid of these fees and that is what this amendment says exactly, if I may— 

Mr. MCHENRY. Reclaiming my time, so in order to eliminate 

price fixing, we need to have a regulator set the price. Yes or no? 

Mr. KANTOR. Here, we need to have the regulator do something. 

And we thought they should say no more price fixing zero fees. Set 

them on your own. They have instead been more generous to the 

banks and said, ‘‘Oh, charge more than that.’’ Okay. 

Mr. MCHENRY. We just had testimony from Mr. Seltzer that it 

costs, in essence, $0.14 for a check and $0.12 for the Fed’s regulation for debit. Is that a fair assessment, Mr. Kantor? 

Mr. KANTOR. It is. Unfortunately, that price difference doesn’t 

make up for the fact that Dave Seltzer, Gus Prentzas and merchants like them get charged back for fraud transactions and don’t 

get a payment guarantee. He has bought one on the checks and 

paid extra for that, debit cards don’t give— 

Mr. MCHENRY. Okay. 

Mr. KANTOR. The Fed found that in our numbers— 

Mr. MCHENRY. Let’s continue on this question here. And I have 

had merchants tell me prior to this debate going back a number 

of years that the cost of cash is a burden on small businesses. If 

you are—especially 7-Eleven or during a lot of transactions and so 

sticky fingers, taking money out of the till is—and loss prevention 

is a cost and so there is a cash cost. 

And so I just want to better understand that cash cost. This is 

a complicated issue, but it is hard to get an accurate comparison. 

Mr. Seltzer, can you discuss that cash cost? 

Mr. SELTZER. Sure. We calculated this, within the last year or so. 

And as we calculate the cost of cash, we include all of the bank 

service charges we incur for depositing that cash and currency. 

Mr. MCHENRY. What about losses? 

Mr. SELTZER. We include losses. 

Mr. MCHENRY. —okay. Yes. 

Mr. SELTZER. And labor and everything else that goes into it. 

And so at the end of the day, we see our cost of cash being somewhere in the 0.2 percent to 0.25 percent range as we looked at it. 

Mr. MCHENRY. Okay—everything. Okay. 

Mr. SELTZER. That is probably an eighth of what we see for debit 

cards. 

Mr. MCHENRY. So as a merchant, you don’t like the deal you are 

getting with debit, with credit. Okay. Why not simply say no to 

credit and debit? 

Mr. SELTZER. We are happy to pay a competitive fee for debit or 

credit. The challenge we see is that every time we had discussions 

with any of the networks, the answer we get back— 

Mr. MCHENRY. No. No. 

Mr. SELTZER. —change rate because we have to compete with the 

other network. 

Mr. MCHENRY. I know. I understand. But, why not simply say 

no? 

Mr. SELTZER. We would be out of business. 

76 

Mr. MCHENRY. You would be out of business. So there is—the 

current value that they are producing for your business, debit and 

credit is providing some value for you and your business. 

Mr. SELTZER. That is right and if there were a competitive market for this— 

Mr. MCHENRY. Okay. 

Mr. SELTZER. —and prices were set accordingly with— 

Mr. MCHENRY. True. Okay. Mr. Kantor, are you going to answer? 

Mr. KANTOR. I am very eager. There is a benefit. There are also 

benefits to the banks because they save on the check processing. 

What the courts have found is that Visa and MasterCard have 

market power. And they found that there is not an ability for merchants to say no, because of that market power. 

Mr. MCHENRY. Okay. Then, why not come to Congress and look 

for a legislative fix in order to reduce that market power? It is an 

untoward market power. Why not get a remedy in courts? It appears that you just didn’t like the remedy the courts were offering. 

And the simple way to do this is to simply have a regulator fix the 

price. 

Mr. Floum—yes, my time is wrapping up, so I mean— 

Mr. FLOUM. Yes. They have gone to the courts time and again 

with this argument that a uniform interchange is price fixing and 

every time the court has said no, you need to have interchange, a 

uniform rate. That is what keeps the small merchants, the small 

banks and low-income individuals in the system. 

If the banks set the rates themselves, then, sure, some banks 

and some merchants would do fine, but the little guy would drop 

out of the system. So let’s not confuse the benefits of a uniform 

interchange rate which the courts have found every single time to 

be lawful with the kind of price fixing that the government would 

impose under the Durbin Amendment. 

Chairwoman CAPITO. I want to thank everybody on the panel 

and the visitors for their attention. I think you raised some interesting points. And I will go back to my original statement, a lot of 

questions at the same time. 

So I will dismiss this panel and again, thank you, and I apologize 

for the late start. The Chair notes that some members may have 

additional questions for this panel which they may wish to submit 

in writing. Without objection, the hearing record will remain open 

for 30 days for members to submit written questions to these witnesses and to place their responses in the record. This hearing is 

adjourned. 

[Whereupon, at 3:40 p.m., the hearing was adjourned.] 

(77) 

A P P E N D I X 

February 17, 2011 

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