U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

42–373 PDF 2009

CREDIT CARD FAIR FEE ACT OF 2008 

HEARING 

BEFORE THE

TASK FORCE ON COMPETITION POLICY 

AND ANTITRUST LAWS 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

ON

H.R. 5546 

MAY 15, 2008 

Serial No. 110–179 

Printed for the use of the Committee on the Judiciary 

( 

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

(II) 

COMMITTEE ON THE JUDICIARY 

JOHN CONYERS, JR., Michigan, Chairman 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

LINDA T. SA ́ NCHEZ, California 

STEVE COHEN, Tennessee 

HANK JOHNSON, Georgia 

BETTY SUTTON, Ohio 

LUIS V. GUTIERREZ, Illinois 

BRAD SHERMAN, California 

TAMMY BALDWIN, Wisconsin 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

ARTUR DAVIS, Alabama 

DEBBIE WASSERMAN SCHULTZ, Florida 

KEITH ELLISON, Minnesota 

LAMAR SMITH, Texas 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

STEVE CHABOT, Ohio 

DANIEL E. LUNGREN, California 

CHRIS CANNON, Utah 

RIC KELLER, Florida 

DARRELL ISSA, California 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TOM FEENEY, Florida 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

PERRY APELBAUM, Staff Director and Chief Counsel 

SEAN MCLAUGHLIN, Minority Chief of Staff and General Counsel 

TASK FORCE ON COMPETITION POLICY AND ANTITRUST LAWS

JOHN CONYERS, JR., Michigan, Chairman 

RICK BOUCHER, Virginia 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

STEVE COHEN, Tennessee 

BETTY SUTTON, Ohio 

ANTHONY D. WEINER, New York 

DEBBIE WASSERMAN SCHULTZ, Florida 

STEVE CHABOT, Ohio 

RIC KELLER, Florida 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

BOB GOODLATTE, Virginia 

CHRIS CANNON, Utah 

DARRELL ISSA, California 

TOM FEENEY, Florida 

LAMAR SMITH, Texas, Ex Officio 

PERRY APELBAUM, Staff Director and Chief Counsel 

SEAN MCLAUGHLIN, Minority Chief of Staff and General Counsel 

(III) 

C O N T E N T S 

MAY 15, 2008 

Page 

OPENING STATEMENTS 

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

State of Michigan, and Chairman, Task Force on Competition Policy and 

Antitrust Laws ..................................................................................................... 1 

The Honorable F. James Sensenbrenner, Jr., a Representative in Congress 

from the State of Wisconsin, and Member, Task Force on Competition 

Policy and Antitrust Laws ................................................................................... 1 

The Honorable Lamar Smith, a Representative in Congress from the State 

of Texas, Ranking Member, Subcommittee on the Judiciary, and Ex Officio 

Member, Task Force on Competition Policy and Antitrust Laws .................... 4 

The Honorable Darrell Issa, a Representative in Congress from the State 

of California, and Member, Task Force on Competition Policy and Antitrust 

Laws ...................................................................................................................... 5 

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

of Ohio, and Ranking Member, Task Force on Competition Policy and 

Antitrust Laws ..................................................................................................... 6 

WITNESSES 

Mr. Thomas L. Robinson, Vice President of Regulations, National Association 

of Convenience Stores 

Oral Testimony ..................................................................................................... 8 

Prepared Statement ............................................................................................. 10 

Mr. Joshua R. Floum, General Counsel and Corporate Secretary, Visa, Inc. 

Oral Testimony ..................................................................................................... 32 

Prepared Statement ............................................................................................. 33 

Mr. Joshua Peirez, Chief Payment System Integrity Officer, Mastercard 

Worldwide 

Oral Testimony ..................................................................................................... 71 

Prepared Statement ............................................................................................. 74 

Mr. John Blum, Vice President of Operations, Chartway Federal Credit Union 

Oral Testimony ..................................................................................................... 80 

Prepared Statement ............................................................................................. 82 

Mr. W. Stephen Cannon, Chairman, Constantine Cannon, LLP 

Oral Testimony ..................................................................................................... 93 

Prepared Statement ............................................................................................. 95 

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

Research Group 

Oral Testimony ..................................................................................................... 115 

Prepared Statement ............................................................................................. 117 

(1) 

CREDIT CARD FAIR FEE ACT OF 2008 

THURSDAY, MAY 15, 2008 

HOUSE OF REPRESENTATIVES,

TASK FORCE ON COMPETITION POLICY

AND ANTITRUST LAWS

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Task Force met, pursuant to notice, at 11:02 a.m., in Room 

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

Jr. (Chairman of the Task Force) presiding. 

Present: Representatives Conyers, Lofgren, Jackson Lee, Cohen, 

Sutton, Smith, Sensenbrenner, Chabot, Cannon, Keller, Issa, and 

Feeney. 

Staff present: Stacey Dansky, Majority Counsel; Perry Apelbaum, 

Majority Staff Director and Chief Counsel; Stewart Jeffries, Minority Counsel; Sean McLaughlin, Minority Chief of Staff and General 

Counsel; and Brandon Johns, Majority Staff Assistant. 

Mr. CONYERS. We are going to start the hearing even though the 

Ranking Member of Antitrust isn’t here. But since I have the 

former Chairman and the Ranking Member here, I think it is safe 

to begin. And I know he is on the way. 

But I am glad that everyone has come together this morning to 

examine together the Credit Card Fair Fee Act, which is H.R. 5546. 

Last year, there was a hearing on the topic of credit card interchange fees. And I was surprised by the depth of the problem facing merchants. Members on both sides of the aisle seemed equally 

concerned about these fees and the effects they ultimately have on 

consumers. 

And so, after deliberation with Chris Cannon, we have brought 

together a bill to be examined this morning. We hope it will go a 

long way toward restoring some balance between retailers and the 

credit card companies. 

Now, just a couple of things, and then I am going to yield to 

some other Members for any remarks. 

We do not think that this is regulation of the industry. We think 

that this measure we are examining addresses potential anti-competitive aspects of interchange fees. We think that lower interchange fees will help merchants and consumers and lower prices. 

And, with that in mind, we want to hear what you all think 

about it. 

I would like to yield to the Chairman emeritus, Jim Sensenbrenner, for anything he might want to say. 

Mr. SENSENBRENNER. Thank you very much, Mr. Chairman. 

2 

First of all, I would like to ask unanimous consent that a statement by the Electronic Payments Coalition be placed in the record 

at this point. 

Mr. CONYERS. Without objection. 

[The information referred to follows:] 

3 


A.eps
4 

Mr. SENSENBRENNER. Mr. Chairman, I am going to be very brief. 

Let me say I think this bill is a very ill-advised bill. It is going to 

have a lot of unintended consequences in the eyes of the Chairman 

and its supporters. 

One of the things that plastic has done to benefit merchants is 

that they don’t have accounts receivable of their own. They get paid 

right away when people use a credit card to pay for their purchases. And the credit card company basically assumes the risk of 

somebody not paying their bill. 

When I started out practicing law, I represented a mom-and-pop 

grocery store, and there were a number of folks in town that never 

seemed to want to pay their bills. And, as a result, I had to try to 

collect the money and really wasn’t very successful in doing so. 

And, as a result, the small-business operator ended up having to 

absorb the loss by basically being good people and extending credit 

to folks in town. 

The credit cards, in the way this is set up now, insures the 

small-business operator from having to deal with those kinds of 

losses. But nothing in life comes free, and part of that is paid for 

by the interchange fees that merchants that accept credit cards 

take. 

So I think that we are going to have to look at the impact on 

small business of this legislation, as well as the impact on consumers and on merchants that take the credit cards. 

And I think that the current situation is actually a big plus for 

both consumers who pay their bills as well as small-business operators. And I will talk a little bit more about that later. 

Mr. CONYERS. Thank you, Jim. 

Could I turn now to the Ranking Member of the full Committee, 

Lamar Smith? 

Mr. SMITH. Thank you, Mr. Chairman. 

Mr. Chairman, America has gone through a radical transformation in the way it pays for its goods and services. Ten years 

ago, almost 80 percent of all financial transactions involved checks 

or cash. Today, fewer than half of all purchases are conducted that 

way. And 3 years from now, consumers are projected to use credit 

and debit cards for over 70 percent of all their purchases. 

Properly used, credit cards offer many benefits for consumers 

and businesses alike. For consumers, they offer fraud protection, 

payment flexibility, the ability to track purchases and collect airline miles, for example. For merchants, they offer guaranteed faster 

payment and the opportunity to expand businesses through Internet and phone sales. 

Some studies have shown that consumers who use credit or debit 

cards at the time of purchase are likely to spend more than they 

would otherwise with cash or checks. 

Of course, this growth has not come without its cost. Consumer 

groups complain about credit card practices that they think are unfair or illegal. Merchants, too, have had their complaints. 

In 2005, the 2nd Circuit affirmed a settlement in which Visa and 

MasterCard paid $3 billion. The settlement arose from a case 

brought by a group of retailers who claimed that Visa and 

MasterCard had illegally tied the acceptance of their credit cards 

to their debit card offerings. 

5 

Today, retailers continue to claim that Visa and MasterCard are 

charging excessive fees for the acceptance of their cards and that 

these fees are ultimately passed on to consumers. A group of retailers have brought a series of Federal antitrust suits challenging the 

way that Visa and MasterCard set these interchange fees, and that 

suit is pending in the Eastern District of New York now. 

For their part, the credit card companies maintain that the setting of credit card interchange fees is a necessary part of their 

business that maximizes the number of consumers who are willing 

to carry their cards and the number of merchants who are willing 

to accept them. 

In considering this legislation, my primary concern is how it will 

affect the American consumer. Will the consumer pay less for goods 

and services if interchange fees are reduced for merchants? Will 

those lower prices be offset by reduced credit card benefits and 

higher charges and fees on credit cards? 

Retailers have raised some serious questions regarding Visa and 

MasterCard’s business practices. For example, the credit card firms 

must answer who sets the interchange fee and how is it set. How 

much competition is there? Do merchants really have options when 

it comes to accepting Visa and MasterCard? 

In the end, though, the ultimate question is how this bill will 

help the American consumer. 

And, Mr. Chairman, I will yield back the balance of my time. 

Mr. CONYERS. Thank you. 

Darrell Issa of California? 

Mr. ISSA. Thank you, Mr. Chairman. 

And thank you for this continued process of evaluating what is, 

for me, a global competitiveness issue. As you know, in the current 

form I haven’t signed on to the bill, but I have signed on to exactly 

what caused that bill to be brought. 

We have two interesting dichotomies here. On one hand, the efficiency of a global and universally accepted card system has benefited us and the rest of the world. On the other hand, the rest of 

the world has become convinced that the fees were too high and, 

in most cases, both Europeans and other nations have artifically 

lowered those rates. 

Recognizing that when we look at competition, if my Visa card 

represents 1 percent in Spain and 4 percent in the United States, 

American competitiveness is at stake. 

I deny no one—I repeat, no one—the ability to make as much 

profit as they can justify. But when you have, by definition, a monopoly—and I don’t say that in a perjorative way; in fact, we need 

a universal system, we need a system that, in fact, is so complete 

as to have that kind of reach and power—you have a situation in 

which the United States government has an obligation to assert 

sufficient control to ensure that America is not put at an unfair 

disadvantage. 

To that end, I believe that the bill’s attempt to have transparency is critical, to deal with competitiveness on a global basis 

is critical. I also believe that although it is well-intended, that 

there may need to be additional safeguards for two reasons: one, 

to make sure that this is an American solution and not simply an 

attempt to get to a global rate quickly; secondly, I believe that if 

6 

Visa’s rates, by an arm’s length relationship equivalent, are to be 

lowered, as I am sure many of the authors would hope them to be, 

that it be a soft landing. 

So at the appropriate time, when this bill is mature, I intend on 

offering some input for amendments. But today I look forward to 

hearing from all the parties about how, in fact, we can find a situation in which countries are paying dramatically less for the same 

service with my same credit card. 

And last but not least, quite frankly, I will be asking one critical 

question, and that is, why is it that when I have discount rates of 

perhaps double between the highest and lowest, I cannot pass that 

on in any way, shape or form to the consumer? It is an all-or-nothing. I think that, in fact, has allowed competitiveness but not competitiveness that the consumer truly understands is being paid for 

by the merchant that he or she does business with. 

Mr. Chairman, thank you again. And I yield back and appreciate 

the time. 

Mr. CONYERS. Thank you very much, Darrell Issa. 

Congresswoman Zoe Lofgren, Chair of Immigration. 

Ms. LOFGREN. I don’t have an opening statement, but when we 

are ready, I would like to introduce my constituent who is a witness. 

Mr. CONYERS. All right. 

I turn now to the Ranking Member of the Antitrust Task Force, 

Steve Chabot of Ohio. 

Mr. CHABOT. Thank you, Mr. Chairman. 

And I, first of all, want to apologize for being a couple minutes 

late. I am also the Ranking Member of the Small Business Committee and just came from a hearing there. A very interesting hearing, we were talking about the high price that the grocers, the restaurants, snack foods, you name it, how that is related to energy, 

how it is related to ethanol and requirements that a certain 

amount of ethanol be utilized nowadays. And very interesting hearing, but I do apologize for being late for this. That is why I was 

late. 

And I want to thank the Chairman, the very distinguished gentleman from Michigan, for holding this important hearing. 

And we have an expert panel of witnesses with us, and I know 

we all look forward to their perspectives. And, therefore, I am going 

to keep my remarks very brief. 

The hearing this Task Force held last year and the resulting bill 

that we are examining today demonstrate how technology has 

changed the way individuals, businesses and the markets interact 

with one another. Credit cards have brought consumers and merchants together in ways never thought possible. 

There are more than 14,000 card issuers in the United States 

today, with 1 billion cards in use. Experts predict that, by 2009, 

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

payment systems. 

In my district, in Cincinnati, I have heard from all sides—banks 

and credit unions and retailers and grocers and merchants of all 

types. So I know this is an issue that is of great interest to an 

awful lot of people and affects many Americans. So I know that all 

Members are interested in hearing all sides to this issue. 

7 

As I have said in these hearings over the last year, in my view, 

Government intervention is not always the best remedy, and we 

must be very careful not to do more harm than good. Today’s hearing is about whether the market for credit cards is flawed to the 

extent that Government intervention is warranted. 

And, again, as I mentioned, I have been trying to listen to every 

different party, individual, business that has an opinion about this, 

to make sure that, when this Member ultimately acts, will do so 

having considered all points of view. 

So, again, Mr. Chairman, I want to thank you very much for 

holding this hearing. And I will yield back the balance of my time. 

Mr. CONYERS. Thanks, Steve. 

Go ahead, Zoe. 

Ms. LOFGREN. Thank you, Mr. Chairman. 

I appreciate the opportunity to introduce two of our witnesses 

today, both from my part of California. 

First is Mr. Tom Robinson, who I have known for many, many 

years. He is the CEO of the San Jose, California-based Robinson 

Oil Corporation and has been with the company since 1974. 

Last year, Tom was named vice chairman of government relations for the National Association of Convenience Stores, which is 

the association for conveniece and petroleum retailing. 

He earned his bachelor’s degree in economics from Santa Clara 

University at home. He is the past president of the Society of Independent Gasoline Marketers of America and is active in the California Independent Oil Marketers Association. He is also a member 

of the 25-Year Club at the Petroleum Industry. 

And he and his wife Lynn reside in Los Gatos. They have two 

adult daughters and an adult son, all of whom have followed him 

in the family business. 

And it is a pleasure to see Tom here in Washington. 

I also would like to introduce Josh Floum, who is also a native 

Californian and serves as the executive officer and general counsel 

of Visa, Incorporated, which is based in Foster City, California. 

Mr. Floum helped lead Visa through its recent merger, creating 

a global company and its IPO in March of this year. And that was 

the most successful IPO in U.S. history, despite a down economy. 

Mr. Floum is a former antitrust trial attorney. He is a graduate 

of the University of California at Berkeley. He earned his J.D. from 

Harvard Law School. 

He is a longstanding member of the Lawyers’ Committee for 

Civil Rights and a senior legal advisor to Earth Island Institute, 

a nonprofit conservation organization. 

I am really very happy that these two individuals are here from 

California. They don’t agree with each other on this subject, which 

just shows the value of our diverse community at home. 

So I yield back, Mr. Chairman. 

Mr. CONYERS. Thank you. 

Welcome, gentlemen. 

Mr. Robinson, why don’t you begin our discussion? 

8 

TESTIMONY OF THOMAS L. ROBINSON, VICE PRESIDENT OF 

REGULATIONS, NATIONAL ASSOCIATION OF CONVENIENCE 

STORES 

Mr. ROBINSON. Chairman Conyers, Ranking Member Chabot, 

and Members of the Committee, thank you for the opportunity to 

provide my views regarding the Credit Card Fair Fee Act, H.R. 

5546. 

My name is Tom Robinson, and I am president of Robinson Oil 

Corporation. Robinson Oil operates 34 Rotten Robbie gas stations 

and convenience stores in northern California. 

I am here today representing the National Association of Convenience Stores, NACS, which represents an industry of more than 

145,000 stores, of which more than 60 percent are owned by onestore operators. 

I want to thank you for holding this hearing today. 

Let me start by stating clearly: NACS fully supports this legislation and urges you to move swiftly toward enactment. 

Credit card interchange fees hurt my customers, who, in the end, 

pay for them and hurt my business. In today’s market, many convenience stores will not survive without the action of this critical 

issue. The Credit Card Fair Fee Act will help fix this problem. 

Right now, there is no market for interchange fees. The fees are 

fixed by the banks, hidden from the public and forced on merchants 

in a take-it-or-leave-it offer. Right now, the banks act collectively 

but merchants cannot. 

The Credit Card Fair Fee Act would create a market for interchange fees for the first time by allowing merchants and the card 

associations to negotiate on equal footing. 

The card associations claim there is no problem with the current 

system. If I were able to fix prices with my competitors and make 

more than $40 billion per year doing it, I suppose I wouldn’t think 

there was a problem either. Of course, just because the price fixers 

want to keep doing business the same way doesn’t make it right. 

I am not an antitrust attorney; I am a businessman. But I know 

I cannot agree with my competitors to charge the same price. Yet 

that is precisely what the banks that issue credit cards have done 

for years. 

From my perspective, the best way to understand the antitrust 

problem is looking at what would happen if the same situation prevailed in my industry. 

NACS does not, and never has, set the prices or terms for which 

member companies charge the public. But let’s just say that we set 

a default price for a gallon of gasoline at $9 and that every member 

of NACS across the country charged that default price. 

The speed with which this Committee and the Justice Department would haul us in front of them for agreeing to a default price 

would be dizzying. I would fully expect someone to fit me for a notvery-fashionable yellow jumpsuit. 

Yet that is precisely what Visa does with its banks and, separately, what MasterCard does with its banks. All these banks that 

are supposed to compete with each other charge the same default 

interchange fees, and the rest of us have no choice but to pay them 

because of the huge combined market power Visa and MasterCard 

wield with their banks. 

9 

And don’t just take my word for it. The Kansas City Federal Reserve has found that merchants like me have no realistic but to accept Visa and MasterCard. 

The impact on my industry is incredible. And, in fact, I think 

there are slides up there on the board. If you take a look at these 

charts, you will see that in 2006 the industry paid more to accept 

cards than it made in pre-tax profits, $6.6 billion to $4.8 billion. 

The 2007 figures are simply incomprehensible. My entire industry made pre-tax profits of $3.4 billion. Note that our profits went 

down by more than $1 billion at the same time card fees increased 

by $1 billion, to $7.6 billion. And we received nothing more for this 

additional $1 billion or for the billions of additional dollars these 

fees increased in prior years. 

Processing the card swipe probably cost Visa and MasterCard 

less than before, but now we are paying far more than double our 

profits simply to accept cards. It is clear that the price for the 

cashless society is way too high if you let the credit card industry 

set the rate. 

Every time you buy gasoline, I ask you to remember this: The 

station you are buying it from is likely paying more than twice in 

much in fees than it is making, and every time gas prices go up, 

the card fees go up right with them. 

If you are concerned about prices at the pump, you need to be 

concerned about interchange fees. These fees have simply taken 

over our industry. My business is more for them than it is for me. 

I don’t even time to describe the ways that Visa and MasterCard 

create anti-competitive and abusive rules to make the situation 

even more difficult for businesses like mine, but I am happy to answer questions regarding these abuses. 

The bottom line is that we need legislation to at least make this 

playing field level. The Credit Card Fair Fee Act is a critical first 

step to bringing market fundamentals to this nonexistant market. 

Critics of this bill say it is a Government price-fixing proposal. 

Nothing could be further from the truth. The bill provides merchants an opportunity to negotiate reasonable terms with the card 

associations. However, if a deal cannot be reached, there must be 

a way to resolve the differences. 

In the event a deal is not reached, each side will present a final 

offer. The bill simply identifies a decisionmaker to pick the offer 

that is closest to what is happening in the competitive market. At 

no point does this bill allow judges to independently come up with 

the price of interchange. They do the minimum necessary to say 

which side has the better offer, and that is chosen. 

This is just the type of approach that appeals to me as a businessman. I negotiate the prices and terms of nearly everything that 

happens in my business. This is the way American businesses operate. What I need is the ability to present myself to the card associations and to the banks in the same way they present themselves 

to me, as a group. The card associations should not be afraid to negotiate on an equal footing with merchants. 

Thank you for your time, and I would be happy to answer questions. 

[The prepared statement of Mr. Robinson follows:] 

10 

PREPARED STATEMENT OF THOMAS L. ROBINSON


TR-1.eps
11 


TR-2.eps
12 


TR-3.eps
13 


TR-4.eps
14 


TR-5.eps
15 


TR-6.eps
16 


TR-7.eps
17 


TR-8.eps
18 


TR-9.eps
19 


TR-10.eps
20 


TR-11.eps
21 


TR-12.eps
22 


TR-13.eps
23 


TR-14.eps
24 


TR-15.eps
25 


TR-16.eps
26 


TR-17.eps
27 


TR-18.eps
28 


TR-19.eps
29 


TR-20.eps
30 


TR-21.eps
31 


TR-22.eps
32 

Mr. CONYERS. Thank you very much. 

Attorney Floum, welcome. 

TESTIMONY OF JOSHUA R. FLOUM, GENERAL COUNSEL AND 

CORPORATE SECRETARY, VISA, INC. 

Mr. FLOUM. Thank you, Mr. Chairman and distinguished Members of the Committee. My name is Josh Floum. I am an executive 

officer and the general counsel of Visa. I have prepared some written testimony, which I would request be submitted for the record. 

Mr. CONYERS. Yes, yours and everyone else’s as well, without objection. 

[The prepared statement of Mr. Floum follows:] 

33 

PREPARED STATEMENT OF JOSHUA R. FLOUM


JRF-1.eps
34 


JRF-2.eps
35 


JRF-3.eps
36 


JRF-4.eps
37 


JRF-5.eps
38 


JRF-6.eps
39 


JRF-7.eps
40 


JRF-8.eps
41 


JRF-9.eps
42 


JRF-10.eps
43 


JRF-11.eps
44 


JRF-12.eps
45 


JRF-13.eps
46 


JRF-14.eps
47 


JRF-15.eps
48 


JRF-16.eps
49 


JRF-17.eps
50 


JRF-18.eps
51 


JRF-19.eps
52 


JRF-20.eps
53 


JRF-21.eps
54 


JRF-22.eps
55 


JRF-23.eps
56 


JRF-24.eps
57 


JRF-25.eps
58 


JRF-26.eps
59 


JRF-27.eps
60 


JRF-28.eps
61 


JRF-29.eps
62 


JRF-30.eps
63 


JRF-31.eps
64 


JRF-32.eps
65 


JRF-33.eps
66 


JRF-34.eps
67 


JRF-35.eps
68 


JRF-36.eps
69 

*The May 2008 GAO report, ‘‘Credit and Debit Cards,’’ has been made a permanent part of 

this record and is archived at the Committee on the Judiciary. The report may also be viewed 

on the Internet at the following address: http://www.gao.gov/new.items/d08558.pdf. 

Mr. FLOUM. Thank you, Mr. Chairman. 

There was also a report released just today from the GAO entitled, ‘‘Credit and Debit Cards.’’ May I also request that that be submitted for the record? 

Mr. CONYERS. Without objection, it will be.* 

Mr. FLOUM. Thank you. 

I appreciate the opportunity to appear before this Committee. 

And what I would like to focus on today are interchange fees. I am 

sure that this Committee will deliberate and take action based on 

the facts and only the facts, so let’s get right to them. 

Electronic payments provide extraordinary value to retailers, to 

consumers and to the economy. Visa connects over 29 million retailers, over a billion cardholders, and over 16,000 large, small and 

very small financial institutions. 

What we do, what Visa does, is provide the backbone or provide 

a platform for innovation in electronic payments, products and 

services. What we do not do is issue cards; we don’t extend credit. 

We don’t set the rates and the fees to retailers and consumers, 

which have been the subjects of other hearings. That is not our 

function. 

What is interchange? And this is widely misunderstood. Interchange is a transfer fee from one back to another that enables millions of stakeholders to participate in the system. 

Interchange is not revenue to Visa. Interchange is not a fee to 

retailers. Visa has no incentive to set interchange fees too high or 

too low. It is not our revenue. 

The reason that we set interchange fees are to drive growth in 

electronic payments, which replace legacy systems such as cash 

and check, and we think that electronic payments are much more 

efficient and beneficial to consumers, retailers and the economy in 

general. That is why we set interchange rates; it is not our revenue. 

Now, let’s dispell a rumor that we have heard a lot about interchange rates increasing. They are not increasing. They have remained flat for 10 years, even though today’s payment services are 

much more valuable than they have ever been in the past. 

And, finally, our rates and processes are wholly transparent. We 

have answered all the calls for transparency. All of our rates, all 

of our rules, there are telephone books thick of them. They are 

available on the Internet. And we have done that largely in response to the merchants saying that they would like to look at 

them. We have made them all available. 

Now, I mentioned that our services have improved and become 

much more valuable. The chart up here depicts, on the bottom left, 

what we call the old knuckle-buster. Remember? That is how credit 

cards used to work. They were metal, you dragged it, you had carbon paper. 

And even though the rates have remained flat for all of this time, 

we have innovated into incredible new categories: Debit cards, they 

don’t carry interest rates or late fees. They are an electronic access 

to your checking account. Debit is bigger for us now than credit. 

70 

We have gotten into community cards: local universities, firemen’s 

credit union cards, et cetera. 

All of that enabled by Visa. E-commerce couldn’t exist at all 

without electronic payments. And we are going into mobile and 

contactless into the future. 

So our products are more valuable. The electronification of the 

point of sale—over 99 percent of transactions at the point of sale 

now are electronic instead of cash and check. We have reduced 

fraud rates. We have increased acceptance. And we have lowered 

cost relative to cash and check. 

Just today’s GAO report, released today, the Government found 

that with respect to the Government, the Government has paid 

$380 million in acceptance fees for electronic payments in 2006, 

and they have saved $1.7 billion. I am not saying this; this is the 

GAO. So you can see the cost savings by using electronic payments. 

We provide retailers with guaranteed payment. And, as some of 

you have commented, it is the card issuers who bear the credit 

risk, not the retailers. 

Now, let’s just dispell this rumor once and for all, if we can. 

These are our rates; these are our interchange rates. And you can 

see, from 1998 to 2007, on an average blended basis, they have remained relatively stable at about 1.6 percent. So the rates have not 

been going up. 

What has been going up is the use of electronic payments, which, 

yes, it costs more in paying electronic payments acceptance fees, 

but retailers save more not having to handle cash and checks. And 

it is indisputable that the economy, as a whole, benefits from this 

efficiency. 

Now, what the price-control legislation—and it is price control. It 

takes rate-making out of the hands of the marketplace. It would 

give it to three judges. There are subpoenas and depositions. And 

it would take the free market and turn it into a regulatory proceeding. 

And we believe that that poses a triple threat to consumers. And 

I spoke to Mr. Mierzwinski about this yesterday. I want to have 

continuing discussions with the consumer groups. Because this is 

an anti-consumer bill, with all respect, Mr. Chairman. And I know 

you care greatly about consumers in your district. But what happens when interchange is artificially suppressed? 

We have seen it now twice in other jurisdictions. The retailers 

don’t lower their retail prices. They simply keep the revenue at the 

expense of the local community banks. So that is threat number 

one to consumers. 

Threat number two to consumers is they pay more for cards, and 

they get fewer rewards. The Reserve Bank of Australia, there is a 

quote—they are the regulators. They found that themselves. And 

in today’s GAO report, just released, on page 36, the GAO concluded that lowering interchange in Australia meant that—this is 

a quote—‘‘cardholders have experienced a decline in the value of 

credit cards, reward points for most cards, and an increase in annual and other consumer credit card fees.’’ So consumers pay more; 

that is the second problem. 

71 

And third, the retailers, they have sued us 54 times. And in their 

lawsuit, they want to impose additional checkout fees on consumers 

who use cards. 

So that is a triple hit to consumers. 

Now—— 

Mr. CONYERS. How much longer will you need? 

Mr. FLOUM. Two minutes, Mr. Chairman, if I may? 

Mr. CONYERS. All right, without objection. 

Mr. FLOUM. Thank you. 

Retailers can and should negotiate their merchant discounts. 

And they should not pay the sticker price. There are 16,000 financial institutions within the Visa system that would love to do business with Mr. Robinson, and they compete with each other to provide merchant discount rates in a very, very competitive marketplace. 

Now, I have up on here a Web page from Mr. Robinson’s group, 

the National Association of Convenience Stores, telling gas station 

owners how to negotiate their merchant discount rates. And it says 

right on here that they offer interchange plus 6 cents. That would 

bring his rate from $2.50 down to $1.75. So I am not sure why they 

are not taking advantage of it. 

Finally—and we do have Mr. Blum from the community banks 

and credit unions here—default interchange provides very important protections for the 13,000 local community banks and credit 

unions who are able to issue cards in competition with the larger 

banks. Suppressing interchange would harm these very small local 

financial institutions. 

Thank you, Mr. Chairman. 

Mr. CONYERS. Thank you, sir. 

We now turn to Mr. Joshua Peirez of MasterCard Worldwide. He 

has served as group executive for global public policy and associate 

general counsel, and formerly was a partner with Clifford, Chance, 

Rogers and Wells. 

Welcome to our hearing, sir. 

TESTIMONY OF JOSHUA PEIREZ, CHIEF PAYMENT SYSTEM 

INTEGRITY OFFICER, MASTERCARD WORLDWIDE 

Mr. PEIREZ. Good morning, Chairman Conyers, Ranking Member 

Chabot, and Members of the Task Force. My name is Joshua 

Peirez, and it is my pleasure to appear before you today on behalf 

of MasterCard to discuss H.R. 5546. 

We are brought together by a basic commercial dispute. There 

are some merchants who would like to pay less to accept payment 

cards. We fully understand the desire to reduce the cost of doing 

business, and we have attempted to help them achieve this objective. 

Merchants are an essential part of our system, and we are deeply 

committed to addressing their needs. Let me repeat that: Without 

merchants, there is no payment system. And as a result, we have 

attempted to address all the issues raised by the merchants in this 

dispute. 

Merchants said that they did not have access to the interchange 

rates set by MasterCard. In response, we now public interchange 

72 

rates on our Web site. These rates provide an extraordinary tool for 

merchants to use when negotiating with their banks. 

It is our hope that merchant groups will be encouraged to use 

this tool to better educate themselves and their members on the 

full range of negotiating opportunities that exist today, rather than 

seeking to arbitrarily lower merchant discount fees through Government intervention. 

Merchants have also said that they wanted to see our rules. In 

response, we posted all of the rules that apply to merchants on our 

Web site a few years ago, and we continue to publish more and 

more rules so that all of our operating rules will be available soon. 

Almost 2 years ago, gas station owners said that rising gas prices 

were adversely affecting their profits when they accepted our payment cards. In response, we have capped interchange fees on gas 

sales. In addition, MasterCard has lower rates for supermarkets, 

utilities and convenience purchases to encourage acceptance by 

these types of merchants. 

Merchants can use all of these tools to negotiate better terms. 

We would like to work with the Task Force to ensure a deeper understanding of the opportunities for negotiation. 

Our interchange cap for gas sales provides a good example. We 

announced the cap in September of 2006. We expected gas retailers 

to use this information to negotiate lower fees and to point to our 

initiative to lower the fees from our competitors. We have been disappointed that most gas merchants have not taken advantage of 

this opportunity. 

The merchant lobbying groups have made other statements that 

are patently false. For example, they have been saying that merchants cannot discount for cash. This is simply not true. Under our 

rules, merchants are permitted to discount for cash, and each merchant is free to choose the manner in which the discount is offered. 

They also state that merchants cannot tell card holders the fees 

they pay when they choose to accept a payment card. Again, this 

is not true. MasterCard permits any merchant to disclose its merchant discount fees to consumers. MasterCard also permits merchants to disclose their interchange fees to consumers. 

The merchant lobbyists have even claimed that MasterCard has 

a rule that requires a merchant that accepts MasterCard to accept 

it at every one of its retail locations. There is no such rule. 

We are concerned that the opportunities to negotiate are being 

cast aside for litigation and legislation. While the merchants seek 

legislation claiming that existing antitrust laws are inadequate, 

they are telling a different story in their litigation on these same 

issues. 

I would like to offer a quote from Craig Wildfang, the lead attorney representing the merchants in their litigation against 

MasterCard. He said in November of 2007, just recently, ‘‘I actually 

don’t think that the antitrust laws are in need of much reform. Although the Antitrust Modernization Commission considered many 

proposals and proposed a few, I don’t think that anyone has really 

made a persuasive case that the U.S. antitrust laws are not working well to achieve their goals of enhancing and preserving competitive markets.’’ We agree. 

73 

And so did the Antitrust Modernization Commission, on which 

two of the merchant representatives sat, when it concluded that 

antitrust exemptions, like proposed here, should be strongly 

disfavored, as they ‘‘undermine, rather than upgrade, the competitiveness and efficiency of the U.S. economy.’’ 

As the Task Force considers these important issues, please note 

that the parties in the litigation have agreed to mediation, which 

began last month. If a resolution is achieved through mediation, it 

will resolve the litigation and all the issues raised in this basic 

commercial dispute. 

In closing, Mr. Chairman, we deeply appreciate your concerns 

about this issue. We are committed to working together to fully address your concerns and resolve this commercial dispute without 

the need to move forward with legislation. 

While we agree with you that free-market negotiation provides 

the best way forward, we have concerns about price controls and 

the antitrust exemptions in the legislation that would enable the 

merchants to negotiate in ways that violate the antitrust laws 

today, rather than negotiating in a free market with the antitrust 

laws in place to protect consumers. 

I am prepared to answer any questions you may have. Thank 

you. 

[The prepared statement of Mr. Peirez follows:] 

74 

PREPARED STATEMENT OF JOSHUA PEIREZ


JP-1.eps
75 


JP-2.eps
76 


JP-3.eps
77 


JP-4.eps
78 


JP-5.eps
79 


JP-6.eps
80 

Mr. CONYERS. Thank you very much. 

We have been called to the floor for—all right, we will try to get 

in one more witness. 

Mr. John Blum, vice president of operations for Chartway Federal Credit Union. He has 20 years of experience managing operations, both in retail and within the military. 

We have your statement, and we would like to hear from you 

now. 

TESTIMONY OF JOHN BLUM, VICE PRESIDENT OF 

OPERATIONS, CHARTWAY FEDERAL CREDIT UNION 

Mr. BLUM. Thank you. Good morning, Chairman Conyers, Ranking Member Chabot and Members of the Committee. My name is 

John Blum, and I am testifying on behalf of the National Association of Federal Credit Unions. 

I serve as the vice president of operations for Chartway Federal 

Credit Union, headquartered in Virginia Beach, Virginia. Chartway 

has more than $1.2 billion in assets and serves over 160,000 members. 

NAFCU and the entire credit union community appreciate the 

opportunity to participate in this hearing. 

The electronic payment system has proven to be one of the most 

important advances in the financial services marketplace and is 

tremendously beneficial to consumers as well as merchants. Retailers reap tremendous benefits in the form of increased sales, reduced costs for overhead, substantially fewer fraud losses, and immediate payment for goods and services. 

I would like to focus today on the benefits of the current system, 

specific to the credit union community, and our concerns with H.R. 

5546. 

The electronic payment system is incredibly important to the 

credit union community. The system allows us to compete with the 

largest financial institutions. Credit and debit card products are 

important tools in developing and fostering relationships with our 

members. And interchange fee revenue helps cover the considerable 

cost of maintaining this system. 

Capping interchange fees would provide an advantage to large financial institutions at the expense of credit unions. We are much 

smaller than national banks. Consequently, the credit union community will find it more difficult to offset the losses from a cap on 

interchange fees. In contrast, large banks will be able to internalize 

the loss. 

H.R. 5546 authorizes a three-judge panel to set a single rate for 

a payment system. Credit unions have a higher per-transaction 

cost for processing card payments. Further, credit unions make up 

an extremely small percentage of the financial services market. 

This panel may be compelled to set the rate based on the cost for 

larger institutions, as they process significantly more transactions. 

Smaller institutions would then receive the lower cap rate even 

though their actual costs are much higher. 

And it will be doubly painful for credit unions. First, it will be 

more difficult to provide our members a credit or debit card without increasing costs elsewhere. Credit unions have a number of restrictions on their activities, as well as stricter capital requireVerDate Aug 31 2005 12:36 Feb 04, 2009 Jkt 000000 PO 00000 Frm 00084 Fmt 6633 Sfmt 6601 H:\WORK\ATRUST3\051508\42373.000 HJUD1 PsN: 42373
81 

ments. As a result, credit unions have fewer avenues to offset any 

losses created by a cap on interchange fee income. 

Second, if credit unions cannot afford to offer card services to 

their members, they will lose an incredibly important relationshipbuilding tool. 

For many financial institutions, interchange fees are not a huge 

income-generating engine. Last year, Chartway processed over 14 

million transactions. The fees generated by each transaction are 

not pure profit. The system does not simply run itself. Chartway 

employs 11 people for debit card support, and we contract with a 

large service provider for our credit card portfolio. 

Interchange fees help offset the significant fraud losses associated with plastic cards. In 2006, there was over $1.1 billion in plastic card fraud losses. In nearly all situations, the financial institution covers these losses. Chartway reimburses all members in full 

for any fraudulent transactions. 

We spend nearly $425,000 a year to cover fraud losses and related insurance. These statistics do not account for a number of 

other costs associated with each instance of fraud, including issuing 

new cards and time spent working with members who have been 

victims of fraud. 

It is important to note that debit cards and some credit cards 

generate little income outside of interchange. At Chartway, 34 percent of our active credit card accounts are paid in full at the end 

of every month. We do not receive any interest income on these accounts. In fact, Chartway is essentially providing these customers 

a short-term, unsecured loan at no interest. Interchange fees help 

cover these costs. 

In conclusion, NAFCU opposed H.R. 5546. The electronic payment system has been incredibly beneficial to merchants. We understand why retailers would like price controls. However, we are 

wary of the Government interfering with a valued product that is 

used by millions on a daily basis. Further, we do not think the 

Government should dictate prices between private parties. 

A cap on interchange fees will harm credit unions. As not-forprofit cooperatives, we will suffer, finding it more difficult to offer 

credit and debit card services to our members. Those credit unions 

that remain in the card business will have to adjust, by either raising interest rates, decreasing dividends or reducing services. 

As financial cooperatives, the ultimate cost of this proposal will 

be shouldered by the 90 million Americans who are member owners of their credit union. 

Thank you. And I would be happy to answer any questions the 

Committee may have. 

[The prepared statement of Mr. Blum follows:] 

82 

PREPARED STATEMENT OF JOHN BLUM


JB-1.eps
83 


JB-2.eps
84 


JB-3.eps
85 


JB-4.eps
86 


JB-5.eps
87 


JB-6.eps
88 


JB-7.eps
89 


JB-8.eps
90 


JB-9.eps
91 


JB-10.eps
92 


JB-11.eps
93 

Mr. CONYERS. Thank you, Mr. Blum. 

We have been called to the floor for several votes. I will leave you 

to the tender mercies of Andrea Culebras, who will—identify herself—so we can go back to the conference room. And if you want 

to go downstairs to the deli, you can get a quick lunch. And we will 

reassemble as soon as the votes are over. 

And so we stand in recess for a short period of time. Thank you 

very much. 

[Recess.] 

Mr. CONYERS. The Committee will come to order. 

I would like to welcome Steve Cannon, chairman of the law firm 

of Constantine Cannon, an experienced antitrust lawyer. Served as 

senior vice president, general counsel, and secretary for Circuit 

City stores. Was responsible for FCC/FTC regulatory and antitrust 

matters. 

He was also a partner earlier in a firm where he concentrated 

in antitrust law. And he has also been chief antitrust counsel for 

the Senate Judiciary Committee from 1981 to 1984. 

So you are familiar with the process. 

Mr. CANNON. Just a little bit, sir. 

Mr. CONYERS. Welcome. 

TESTIMONY OF W. STEPHEN CANNON, CHAIRMAN, 

CONSTANTINE CANNON, LLP 

Mr. CANNON. Thank you. 

Mr. Chairman and Members of the Task Force, Ranking Member 

Chabot, thank you so much for the opportunity to appear before 

you today to testify on this issue of extreme importance for the millions of merchants in this country and the consumers they serve 

every day. 

We appreciate your leadership, in particular, on this bill. We endorse it enthusiastically and hope that the Committee will pass it 

at its earliest convenience. 

Mr. CONYERS. Could you pull the mike a little closer, please? 

Mr. CANNON. Okay. Is that better? Oh, there we go. Do you want 

me to start over? 

Thank you, sir. We very much appreciate this. We represent 

today millions of merchants and obviously the consumers that they 

serve in this country every day. It is vitally important to the Merchants Payment Coalition. We applaud the bill. We think it is a 

terrific solution to a big problem. And we endorse it enthusiastically. 

You know, a few minutes ago, Mr. Floum told you that Visa 

doesn’t really care about what the amount of interchange is because they get no revenue. Now, that raises a really important 

question, which is, who really should be at this table? 

And I will tell you, while we are hearing today from the small 

banks and credit unions, you really should not lose sight of, really, 

who Visa and MasterCard are. And while there are approximately 

14,000 financial institutions of all sizes that issue some sort of payment cards, the top 10—the top 10—banks in this country control 

88 percent of credit card receivables. 

These banks, Mr. Chairman, do not negotiate with merchants to 

set interchange rates, as you would expect in a competitive market. 

94 

Rather, acting through their agents at Visa and MasterCard, the 

banks collude to set high rates and onerous terms, and they tell the 

merchants to take it or leave it. 

Governments around the world have scrutinized the conduct that 

you are looking at today, and their conclusions are the same as 

ours. Visa and MasterCard’s interchange scheme is anti-competitive, it is certainly anti-consumer, and it needs to change. This system truly represents a market failure that needs an immediate fix. 

Contrary to what you hear, merchants do not want or need price 

controls or industry regulation. What they do need is a fair chance 

to negotiate market-based rates and terms, and that is exactly 

what H.R. 5546 provides. 

Merchants do not object to paying a competitive market price for 

the ability to conduct payment card transactions. They do, however, object to paying a price set by colluding banks. 

We set forth a pretty detailed analysis of your bill. We obviously 

think that it works, it works well. It is based on something that 

the Committee has blessed and worked on for many years in Title 

17, involving sound recordings. And that is in great detail in my 

written testimony. 

But suffice it to say that this is not a price-control bill. The fate 

of the parties, under your legislation, is in their hands at all times 

from beginning to end. They have the ability to negotiate. They 

have the ability to give a final offer. And it is completely in their 

hands. So you will hear ‘‘price control, price control, price control,’’ 

but saying it a million times will not make it so. 

Let me address something today that everyone is going to focus 

on, which is the impact of this legislation on all of us as consumers. 

I can tell you, coming from Circuit City for 10 years, there is no 

more brutally competitive industry than the retail industry. 

I remember when a plasma television at Circuit City sold for $35,000 10 years ago, and today that television sells for $1,000. 

Technology and competition does wonderful things. 

And on the banks’ argument, the side of the banks have simply 

argued that if their cartel-set interchange fees are lowered, the 

banks will merely raise their fees to their customers. You know, 

this is a truly remarkable argument. No bank is entitled to the illegal revenues from high cartel prices. Visa and MasterCard banks 

around the world continue to issue cards even though interchange 

fees in many countries are significantly lower than they are in the 

United States. 

One more thing I would like to address, with your indulgence, 

Mr. Chairman, and that is that, listening to the prior panel and 

seeing Mr. Floum’s chart, I would urge you not to be fooled by that 

chart. As you might note, it is in terms of percantages and not in 

terms of fees. And while a percentage may or may not go up a certain amount, fees have gone up by billions of dollars for doing exactly the same thing. So I would encourage you to think about this 

in absolute terms. 

And I also note that Mr. Floum said proudly that fees had not 

gone up much since the days of the knuckle-buster. I thought technology was supposed to drive prices down, not keep prices the 

same, especially when they have been developed in such an anticompetitive and anti-consumer form. 

95 

So I see my time is up. I appreciate the Committee’s indulgence 

and look forward to answering your questions. 

[The prepared statement of Mr. Cannon follows:] 

PREPARED STATEMENT OF W. STEPHEN CANNON


WSC-2.eps
96 


WSC-3.eps
97 


WSC-4.eps
98 


WSC-5.eps
99 


WSC-6.eps
100 


WSC-7.eps
101 


WSC-8.eps
102 


WSC-9.eps
103 


WSC-10.eps
104 


WSC-11.eps
105 


WSC-12.eps
106 


WSC-13.eps
107 


WSC-14.eps
108 


WSC-15.eps
109 


WSC-16.eps
110 


WSC-17.eps
111 


WSC-18.eps
112 


WSC-19.eps
113 


WSC-20.eps
114 


WSC-21.eps
115 

Mr. CONYERS. Thank you so much. 

Ed Mierzwinksi, are you an attorney? 

Mr. MIERZWINSKI. No, sir. Consumer advocate. 

Mr. CONYERS. All right. We have that title. I was going to bestow 

another one on you, but I am not authorized. 

Mr. MIERZWINSKI. Okay. [Laughter.] 

Mr. CONYERS. Mr. Ed Mierzwinski, consumer advocate in the office of the National Association of State Public Interest Research 

Groups. He has been testifying since 1989 and has been before 

Congress and the State legislatures on a wide range of issues. 

And we are very happy to have you here. And your written testimony is already in the record, and you may add any comments you 

would like at this time. 

TESTIMONY OF EDWARD MIERZWINKSI, CONSUMER PROGRAM 

DIRECTOR, U.S. PUBLIC INTEREST RESEARCH GROUP 

Mr. MIERZWINSKI. Thank you very much, Mr. Chairman and 

Members of the Committee. 

As you said, I have been working here in Congress since 1989 as 

a consumer advocate for the Public Interest Research Groups. And 

over that period of time, the consumer advocates, our group and 

other organizations, have tried to rein in the unfair practices of the 

issuing banks and other unfair practices of the card network associations. And it has been very difficult, over the years, to get any 

changes made. 

Lately, we have seen some progress. We are running a campaign 

on college campuses to go after unfair college credit card marketing. Recently, the Federal Reserve Board of Governors joined 

the consumer advocates’ call to rein in the unfair practices of the 

card-issuing banks. 

And for years, the merchants have been trying through a number 

of strategies, litigation strategies, convincing the Department of 

Justice to investigate, to go after the anti-competitive practices of 

the bank networks, which, until recently, were owned and controlled by the biggest banks. 

And I am unconvinced, completely unconvinced, that there is any 

competition in this marketplace. The so-called 6,000 issuers are 

really dominated by the very small number in the tight oligopoly 

of issuers that dominate the marketplace. 

For many years, those issuers have the Office of the Comptroller 

of the Currency at their back. They could do whatever they wanted. 

They could change the rates at any time, for any reason. They 

could impose mandatory arbitration on consumers, preventing us 

from getting any justice. 

And the merchants have faced the same problem. So when we 

look at this issue, it is a very significant issue for us. Consumers 

pay too much; merchants pay too much. And when the merchants 

pay too much, it affects consumers. Consumers pay more at the 

store and more at the pump, because of the collusive nature of the 

agreements that are forced on them with no negotiations, no transparency, by the bank associations. 

And I am very concerned for the unbanked. I am very concerned 

that the 27 million people who pay cash at stores are paying part 

116 

of the cost of interchange. They are paying part of the cost of my 

rewards. 

And I believe that it is fortunate that your Committee is shining 

light on this important issue. And you have certainly got the attention of the industry, based on the size of the—the filled seats in the 

room. 

What we are very pleased with is that your legislation, the Credit Card Fair Fee Act, would create a non-price-control mechanism. 

It would force negotiation, increase transparency, without going to 

price controls. 

I have, you know, worked against the banks for many years. 

They do their polling. They know that ‘‘price controls’’ is an evil 

word on Capitol Hill, so they use it in almost every statement that 

they make about every piece of legislation. 

But I want to say that your bill is much more elegantly crafted 

than that. I believe it is a common-sense approach to the problem 

that will force the two sides to the bargaining table. 

I am unconvinced with the little pieces of the Australian report 

that have been extracted by the bank witnesses or by the network 

witnesses. I think the reports are much more complex than that. 

I think you see in Australia that there has been more competition 

developed. There are new kinds of lower-cost cards out there. Debit 

card customers are getting lower rates. 

And I think that the Committee, I am sure your staff, will take 

a very close look at what is really happening in the other countries 

that have restricted or banned or changed the way that the interchange system is forced on the merchants. And I encourage you to 

continue to do that. 

But we are simply not in any way convinced that the price to 

consumers will go up or that the merchants won’t pass along any 

savings. There will be changes in the marketplace, but there are 

consumers that need to be considered, including the cash consumers and including the consumers who carry a balance and have 

the basic credit cards, the classic credit cards. 

If I carry a balance on a credit card, I shouldn’t have a rewards 

card in the first place. One-percent rewards against up to 36-percent interest? That is not going to help me very much at all. And 

some consumers out there, the ones that I care about, are paying 

36-percent interest under the unfair practices that many of the 

issuers are imposing upon them, although the Federal Reserve is 

trying to stop it. 

Again, we are very encouraged by sunlight being the best disinfectant, that your Committee is shining on this issue. We look 

forward to working with you to try to get the card issuers who have 

demonstrated market power according to the U.S. courts, that have 

prevented the merchants from negotiating fairly with them, that 

have raised the prices that all consumers pay—your legislation is 

important step forward. We look forward to working with you on 

it. 

Thank you. 

[The prepared statement of Mr. Mierzwinski follows:] 

117 

PREPARED STATEMENT OF EDMUND MIERZWINSKI


EM-1.eps
118 


EM-2.eps
119 


EM-3.eps
120 


EM-4.eps
121 


EM-5.eps
122 


EM-6.eps
123 


EM-7.eps
124 


EM-8.eps
125 


EM-9.eps
126 


EM-10.eps
127 


EM-11.eps
128 


EM-12.eps
129 


EM-13.eps
130 

Mr. CONYERS. Thank you very much. 

I thank all of you. 

You heard the Members of Congress, and you have heard your 

fellow panelists at this witness table. 

Mr. Robinson, what say you now about the subject matter that 

brings us here? In other words, has anything deepened your resolve 

or made you wonder more or had you nearly blow your stack or 

what? [Laughter.] 

What are your feelings about the measure at this point? 

Mr. ROBINSON. I guess a couple of things. 

One, it has not reduced my resolve. And I think just to truly hit 

on a couple of points for me is that, one, I am not anti-plastic. I 

do recognize that they provide benefits. The concern that I have, 

which I think has been stated more than once and clearly stated, 

is that there is a complaint about anti-competitive behavior, which, 

you know, occurs with, you know, what we see in the high rates 

and some of the abusive rules. 

And, you know, we do hear the comments that this is some sort 

of price control, and I hope that that has come across clearly that 

this solution is not a price control mechanism. 

So those are just a couple of my thoughts. 

Mr. CONYERS. Thank you. 

Attorney Floum? 

Mr. FLOUM. Yes, sir. Well, I am struck today hearing from Mr. 

Robinson and the other witnesses for the Merchants Payments Coalition. They acknowledge the value that electronic payments 

brings to them, but they want it for less money. Well, I guess that 

is the way of the world, but the way to handle that is through the 

marketplace and through negotiation. 

And I hope if we have dispelled anything today, it is that we and 

the acquiring financial institutions stand ready and willing and 

eager to negotiate. If we at Visa thought that lowering interchange 

rates would drive more volume, we would lower them tomorrow. So 

we would like to negotiate with the merchants so that they would 

prefer our products. That is the free market, not price controls. 

And with all respect to the witnesses, if you look at the bill, with 

subpoenas and depositions and three administrative law judges 

who would set a single price, that is not the free market. That is 

regulatory intervention setting prices. 

So I remain as concerned as when I started about the bill and 

what it would do, particularly to consumers. 

The final point, if I can, Mr. Chairman, is we hear about subsidization and the problem with cash spenders subsidizing card 

users. And we think that the subsidy runs in the other direction. 

I quoted from the GAO report where, with the increased use of 

electronic payments, the GAO, the Government, was saving more 

money. The use of electronics is cheaper for merchants than cash 

and check. And so, as the volume goes up, their savings goes up. 

If there is a subsidy, it runs in the other direction, and electronic 

payments drive efficiency. 

Thank you, Mr. Chairman. 

Mr. CONYERS. Mr. Peirez, what say you? 

Mr. PEIREZ. Thank you, Mr. Chairman. 

131 

I am actually encouraged, to a limited extent, in listening to my 

colleagues, Mr. Cannon and Mr. Robinson, in that I think the crux 

of their complaint is really about one thing and one thing only: a 

claim that there is some alleged anti-competitive conduct as a result of allegation of market power and that that causes an inability 

to negotiate. I think everything else becomes noise, but ultimately 

that is their core complaint. 

And the reason I am encouraged is, if that is really the crux of 

the complaint, luckily for us we have a very effective system of 

antitrust laws in this country that have proven to be able to address these types of things, including when Mr. Cannon’s firm 

brought a case against us in the past, not just, as Mr. Cannon 

would have us believe, for past conduct but also in changing future 

conduct. 

Now, we don’t think that that case will prove out to have any of 

the allegations that they make be true. But if, in fact, that is the 

crux of the complaint, then indeed the best defense against alleged 

anti-competitive conduct is enforcement of the antitrust laws for 

the purpose of free, competitive markets, as was found throughout 

the report from the Modernization Commission. 

And I gave one quote, but I will give one other: ‘‘The antitrust 

laws stand as a bulwark to protect free-market competition. They 

prohibit anti-competitive restraints that harm consumer welfare.’’ 

So I think that enforcement of those laws, if, in fact, there is a 

problem, is the best recourse, rather than trying to set up an alternate process to address the same thing. 

Thank you. 

Mr. CONYERS. Thank you. 

Mr. Blum? 

Mr. BLUM. Thank you, Mr. Chairman. 

My concern, listening here today, is that perhaps we are using 

that noise a little bit to cloud the issue, and that for some reason 

we have some oversimplification of what I view as a very complex 

system. 

I think we are missing some of the transference-of-technology 

issues that we have talked about, where we seem to have a perception that it is as easy as swiping the card and then we somehow 

gouge some merchant for simply swiping the card. 

You know, I would just bring to everybody’s attention that the 

transference of risk, the transference of float on the funds, you 

know, the transference of maintaining the system from a check-or 

a cash-based retailer to a card-based processor is moved over on my 

side. 

So I am just concerned that there is some oversimplification of 

that issue, that we are using the noise to speak about ‘‘if technology has been that improved, why haven’t costs gone down,’’ I 

would challenge—the gas industry, as an example. I was surprised 

to hear that MasterCard capped the interchange on gas purchases. 

I think if this technology is so simplified, I would like to see the 

merchants apply it at the pump, so that when I use my 

MasterCard to fill up an SUV, that the price of gas, when I exceed 

whatever their cap is, begins to be lowered. I don’t see the technological, you know, advances that they are using to challenge what 

we have done with the interchange income. 

132 

Thank you, Mr. Chairman. 

Mr. CONYERS. Thank you. 

Before I go to Mr. Cannon, Mr. Mierzwinski? 

Mr. MIERZWINSKI. Mr. Chairman, I think what is interesting to 

me as a consumer representative is that the tricks and traps that 

have been imposed on consumers seem to be paralleled in the merchant association relationship. 

The consumers don’t always know and don’t have the right to go 

to court. The consumers have their rates changed at any time for 

no reason. The kinds of ways that the banks have tried to expand 

the volume of sales on consumers through the use of rewards and 

other things—it just strikes me as a parallel. 

And I know that consumers have no ability to negotiate with the 

banks, and the merchants are saying they have no ability to negotiate with the card associations. I am not surprised. 

Mr. CONYERS. Yes. 

Mr. Cannon? 

Mr. CANNON. Mr. Chairman, it is interesting, Mr. Floum, a few 

minutes ago, and Mr. Peirez, both of whom are friends of mine, 

keep talking about, ‘‘We like to negotiate,’’ or, ‘‘We at Visa’’ or ‘‘We 

at MasterCard like to negotiate.’’ But if you remember what Mr. 

Floum said at the beginning of the hearing, is Visa or MasterCard 

don’t really get the benefit of interchange, but what they get is 

dues and assessments, is what it is called. 

So, again, the question we have is, who is the proper party to negotiate with? Now, what you don’t see here today is Citicorp or 

Chase or one of the other very large banks that control the vast 

majority of credit card receivables in the country. And to my knowledge, Mr. Chairman, I don’t know of anybody that has ever successfully sat down with Citicorp or Chase to negotiate an interchange rate. 

It is really not an issue of market power here. Your bill, obviously, has a screen there that talks about market power. The question here is, how did we get to be where we are today? How did 

these rates get to be as high as they are today? 

And the point is, we got this way because of a price-fixing agreement that goes on today between large banks. The fact that it is 

Visa and MasterCard that help control it and run it is important, 

but keep your eye on, I would submit, the most important players 

here, which really are not at this table. 

Mr. CONYERS. We should have invited other witnesses? Is that 

what you are telling me? 

Mr. CANNON. I think it would have been a great idea; I think it 

would be terrific. 

Mr. CONYERS. We may have to have a second hearing. I hope 

they would respond without the use of the processes that follow 

nonresponse. But we will see. 

Ranking Member Steve Chabot? 

Mr. CHABOT. Thank you, Mr. Chairman. 

And I come from the philosophical perspective that less government is better and less regulation is generally better than more 

and that markets should be free and unfettered and unencumbered 

to the greatest degree possible and that competition is good for consumers. 

133 

On the other hand, you know, I want consumers to pay less and 

be able to stretch their paycheck as far as possible and hopefully 

be able to, you know, save as much as possible, maybe invest a little, and better the family. And I want retailers to be successful and 

hopefully employ more people, especially in the 1st District of Ohio, 

in Cincinnati, which is my district. 

So if each one who would like to, if you could make your best 

case, your best argument as to why, in this particular case, it is 

appropriate for us to regulate more because of the various issues 

that we have discussed and in previous hearings. Because I think 

this is really a very important issue. 

Mr. Robinson, you would be welcome to go, and we will just go 

right down the line, anybody that wants to take a shot at it. 

Mr. ROBINSON. Thank you. 

I agree with you, I agree with you, that less regulation is better, 

especially when you have a competitive market. I think that our 

complaint is that this is not a competitive market. And so you have 

to do something to make it competitive. 

I have heard that we have the ability to negotiate. I think that 

negotiating ability is illusory. I mean, I don’t think that exists. 

There is an example that was showed up there about NACS having negotiated this deal on the interchange fees. I think it is important to understand what NACS negotiated. NACS did not negotiate 

interchange. It only negotiated the processing fee. And if you were 

to use the example, it is kind of like having no ability to negotiate 

on the refrigerator, you just get to negotiate on the delivery charge. 

And that is the situation. 

So, you know, we would love to have the ability to negotiate. We 

would love to have a competitive market. And that is the reason 

that we think, since it is not—we don’t have the ability to negotiate, we do not have a competitive market, and that is the reason 

that we are here talking to you today. 

Mr. CHABOT. Okay. Thank you very much. 

Mr. Floum? 

Mr. FLOUM. Ranking Member Chabot, thank you for the question. 

There is no need to regulate or for the courts to determine that 

there is any kind of problem unless there is market dysfunction. 

That is the only reason that there would need to be intervention 

either by the legislature or by the courts. 

There is absolutely no evidence of market dysfunction. If Visa 

was a monopolist, as the merchants like to claim because it is very 

rhetorical, what we would be doing is we would be lowering output 

and raising prices. That is what monopolists do. But instead, as I 

have mentioned, our rates have not gone up over 10 years, and 

over 30 years they have gone down significantly. 

Diners Club was the first credit card network. It charged a 7-percent merchant discount rate. Today’s average Visa merchant discount rate is a third of that. And our interchange rate has remained flat at 1.6 percent. 

So we are not raising prices. And we are not restricting output, 

because everyone wants to use our cards and millions of more merchants are accepting the card. So there is no indicia of market dysfunction. 

134 

My colleague here says, ‘‘Well, the volume goes up, so the rates 

should come down.’’ That is what they are saying today. But, again, 

that ignores the incredible innovation in our business. It is not the 

same Visa product; it is not at all. Fraud rates have come down. 

It is much more automated. It works a lot better. And instead of 

one product, we have 10. 

So the fact that we have held rates flat I think is quite remarkable, given the innovation in our products and the tremendous benefits that we drive to consumers, retailers and the economy in general. 

Thank you. 

Mr. CHABOT. Thank you. 

Mr. Peirez? 

Mr. PEIREZ. Thank you. 

First, I am further encouraged that Mr. Cannon still considers 

me a friend as we continue through these hearings. So, more good 

news. 

But I would like to take off on the refrigerator example for just 

a second, because I think it is very illustrative. And I would say 

that what is really at issue here is negotiating about the refrigerator versus the condenser, the ice tray, the shelving inside, and 

the other pieces like the power cord. 

Ultimately, merchants negotiate for MasterCard acceptance the 

fee that they will pay. They negotiate that every day, and no witness has ever claimed they don’t, with the hundreds of merchant 

banks that are out there and independent service organizations 

that are out there that provide those services. And those fees have 

gone down over time, as you would expect them to. 

That is no different—and I think this is a very important point— 

than the way that merchants negotiate with American Express. No 

merchant has claimed that they must accept American Express. 

They can’t say that they have monopoly power, as we have heard, 

or now, you know, Mr. Cannon saying it is not simply a question 

of market power, it is a cartel. Okay, fine, same issue, antitrust at 

its core. They can’t claim AmEx is a cartel or ever has been. We 

don’t believe we are either. But they can’t claim it as to AmEx. 

They have always negotiated with AmEx; they say that all the 

time. And they pay more for AmEx than they pay for MasterCard 

and, I believe, for Visa. 

At the end of the day, the merchants can negotiate the fees they 

pay. They also have the ability to negotiate certain interchange 

fees. There are examples I would be happy to go through with any 

Members of the Task Force, those examples, in great detail. 

But separate and apart from that, they negotiate the merchant 

discount fees they pay every day. They pay less for our system than 

a system that doesn’t have all the alleged antitrust problems that 

they are claiming here in American Express. 

And I would also point out that merchants are the ones who initially invented credit cards. And it costs merchants much more 

money to run their own system than to use ours. 

And there is nothing that prevents merchants today from keeping their own cards, creating their own cards, offering cards together for acceptance. Many of them are utilizing rails built by 

companies that are just coming into the market, like Tempo and 

135 

others, today. Merchants invited Discover. Sears invented it; ended 

up selling it. But there is no reason why merchants can’t do that, 

as well. 

So there are many opportunities for them to change costs, reduce 

costs, or otherwise. But ultimately they pay less for our cards than 

if they did it themselves. They pay less for our cards than they do 

for AmEx, where they don’t allege any antitrust problems and they 

don’t allege an inability to negotiate. And I will leave it at that. 

Mr. CHABOT. Thank you. 

Mr. Chairman, do the other witnesses have time to answer, or 

should I yield back? 

Okay, if the last three could maybe make it relatively brief, because I think they have covered a pretty wide range there, but if 

you could maybe make it short. 

Mr. BLUM. Thank you, Ranking Member Chabot. 

My concern on any kind of legislation is that, you know, if enacted, from a credit union perspective, the adverse or unintended 

consequences are not necessarily visible here in this bill. 

First of all, I have heard about protecting the consumer. Nowhere in this bill, in this regulation, says that once the three-judge 

panel decides on some sort of capped rate that the consumer benefits directly from it. There is no legal requirement for that reduced, 

if you will, interchange to be passed on. 

Secondly, I think that if you were to cap a component, from a 

credit union position, of interchange, you would also have to cap 

my fraud. You would have to cap my responsibility for fraud losses 

by, you know, another large retailer’s disclosing information that 

cost me money. You would have to cap my cost of overnight funds 

for those immediate settlements and my back-end processing costs. 

And if you don’t regulate those as well, you are attempting to regulate a component of the industry that is, as I said, very complex. 

Thank you, Mr. Chabot. 

Mr. CANNON. Mr. Chabot, all I would add is that you would legislate when you have a market dysfunction, as you say, or a market 

failure. What is the market dysfunction here? It is the collusion 

and it is the price-fixing that has gone on over a large number of 

years. That is the market failure; that is the market dysfunction. 

I would also have to add, for Mr. Floum, one more time, he needs 

to talk about what his increase in revenue or fees are, not what 

his increase in his rates are. There is percentage, and then there 

is absolute revenue, and that is a very important distinction. 

The other thing I would also say is, in terms of the merchant discount fee, that is true, the merchant discount fee is both interchange and processing fee on top of that. But I will tell you, by 

comparison, processing fees is like negotiating for the flea on the 

tail of the dog. It is a very small part of this, and they know it. 

And they know that negotiation is not possible on interchange. 

And I have never heard of anybody who has gone to a bank like 

Citibank or Chase and said, ‘‘We have successfully negotiated interchange rates.’’ 

Mr. MIERZWINSKI. Thank you, Mr. Chabot. 

Mr. Cannon and Mr. Robinson have pointed out that there is no 

ability to negotiate anything other than the merchant processing 

fee. I have no information to dispute that. 

136 

As a result of your hearings, the merchants are finally starting 

to see little bits of the industry’s paper and their rules. They kept 

those hidden for years and years. They are trickling them out now. 

They may be available. 

So I think there is just a clear example of market failure here. 

The companies have market power; they are abusing it. 

But I want to point out just another example. It was pointed out 

earlier that debit cards have no interest on them, so we only need 

the revenue from interchange to make money on the debit cards. 

There are a lot of unfair practices related to debit cards and consumers. The cheapest and safest, most secure kind of debit card is 

when you use your pin. Some companies charge you a fee to use 

your pin and give you a reward to use the unsecure, signaturebased debit card. 

They are also gaming the system of how much money you have in your checking account. We have heard about the $42 billion they 

make in interchange. $17 billion a year goes to the banks, in terms 

of tricking consumers into using their debit cards when they don’t 

have any money in their accounts, allegedly. 

So I think there are just a lot of unfair practices out there. And, 

again, I will just say what is happening in the merchant universe 

seems parallel to what has happened in the consumer universe. We 

have the Federal Reserve stepping in on the consumer side, in the 

consumer universe, and I think it is fortunate that the Judiciary 

Task Force is stepping in on behalf of the merchants. 

Mr. CHABOT. Thank you very much. 

And thank you to all the panel members. 

Mr. CONYERS. Thank you very much, Steve Chabot. 

I turn now to Sheila Jackson Lee, the distinguished gentlelady 

from Texas. 

Ms. JACKSON LEE. Mr. Chairman, thank you very much. 

I want the audience to recognize that there has been a series of 

these very important Task Force hearings that I really believe shed 

light on crucial and important issues. 

I hope the witnesses will take to heart the interest of the Members in ensuring that the legislative fixes, which we happen to believe have merit, are in fact an effective pathway. 

So I want to thank the Chairman for his initiative. And I hope 

the witnesses will take this as an opportunity, as I have seen that 

you have done, to be instructive. 

Mr. Robinson, my question to you is why, in the marketplace as 

it is now postured, you cannot survive or you cannot find a remedy 

on the interchange fees, in terms of some mutual agreements. 

Mr. ROBINSON. Let me be clear. Are you asking me why they 

won’t negotiate with me? 

Ms. JACKSON LEE. I am asking you why the market is not helping you at this point. So you can answer it in any way you so desire. Why do you need the legislation? 

Mr. ROBINSON. I believe that we need the legislation because the 

banks and the credit card companies have a, sort of, favored situation, where they have the ability to set rates and they can give us 

those rates in basically a take-it-or-leave-it type of a situation. 

We do get to negotiate with them on things like the processing 

fee. I used the delivery charge on the refrigerator analogy, and Mr. 

137 

Cannon used the flea in the dog analogy—that is probably closer 

to a better analogy. 

So the reality for us is that we do not have the ability to negotiate with them currently. And, you know, they keep saying that 

we have the ability to negotiate, but just because they say it 

doesn’t make it so. 

So that is why I believe that we need this legislation. 

Ms. JACKSON LEE. Mr. Cannon, build on that. Why do you not 

have the ability to negotiate? Interchange fees are represented by 

the industry to pay for their risk, pay for their processing and 

paper. They represent that there is some market discussion of retailers who, every day, can shout out to them and get relief. What 

is your response to that? 

Mr. CANNON. Ms. Jackson Lee, first, let me thank you on behalf 

of the merchants for cosponsoring the bill. We appreciate that very 

much. 

But, secondly, it is important to focus on what this means. There 

is so much discussion about negotiation. And it is important to understand this tiny little bit and then the rest of it, which the bulk 

of this is the interchange fee, set by and between banks with Visa 

and MasterCard. 

Ms. JACKSON LEE. The bank of the merchant and the bank of the 

issuer? 

Mr. CANNON. No, ma’am. No, ma’am. All of the banks—the banks 

that all get the interchange fee are the issuing banks. So that is 

the Citis and Chases. And, as I said earlier—— 

Ms. JACKSON LEE. And some of them may be banks of merchants? 

Mr. CANNON. Oh, banks of merchants—oh, sure. Well, if you are 

an issuing bank and you issue a credit card, then that interchange 

comes back to you, absolutely, no doubt about that. 

But the point there is that is not negotiated. And—— 

Ms. JACKSON LEE. So you are suggesting that the merchant’s 

bank—I happen to go to Joe Smith Bank. It is my friendly neighborhood bank. They have been knowing me, I have been having 

mom-and-pop grocery store for 20 years. You are suggesting that 

that bank who has issued me a card will not advocate for me, the 

merchant? 

Mr. CANNON. Oh, that is absolutely true. 

Ms. JACKSON LEE. You need to make it clear on the record. That 

bank is the bank of the merchant. 

Mr. CANNON. Oh, sure. Well, it is the merchant’s acquiring bank. 

That is where—— 

Ms. JACKSON LEE. I understand. 

Mr. CANNON. You are a merchant, you have to have a banking 

relationship or a credit card—so you have that bank be your acquiring bank. That is fine. That bank can also be an issuing bank. 

And it is the issuing banks that get the interchange. And that is 

how that works. 

So you have to understand—and there are banks all over this 

country that are both issuing banks and—— 

Ms. JACKSON LEE. And acquiring banks. All right. 

Mr. CANNON. They certainly are. 

138 

Ms. JACKSON LEE. So let’s go to the point of why the market does 

not work. You are saying the merchants are put at a disadvantage. 

Let’s see if we can get it precisely why. 

Mr. CANNON. The market does not work because, as the system 

exists today, there is no ability for the merchants, the merchant 

community, to negotiate, to try to do something in the marketplace. 

Now, retailers, as a whole, and certainly Tom, they are used to 

negotiating for every single thing, every aspect of their business, 

every day, except when it comes to credit card acceptance. And 

they have learned long ago that that just simply is not a possibility. 

And the reason it is not is because of how this has developed 

over time. Because you have all of these banks, which over the 

years have essentially gotten together and agreed, this is going to 

be the amount that we are going to charge each other. And, as you 

know, there is litigation on this today, there are 50 lawsuits in 

New York, that are alleging that that agreement constitutes pricefixing, good old-fashioned price-fixing, getting together. 

I worked at Circuit City. I knew that Circuit City and Best Buy 

couldn’t get in a room and decide what the price of TVs are going 

to be. However, you have these independent entities, these independent banks that get together—— 

Ms. JACKSON LEE. With no intervention. With no oversight, no 

intervention. 

Mr. CANNON. Well, you know, Visa and MasterCard is obviously 

a private entity. These banks are private entities. In the end, these 

are rooms full of competitors. And I can’t get in a room with my 

competitors and fix the price of anything. And that is what has occurred over the years. 

And so we have today a situation where we have enormously 

high interchange fees, as we believe it—by the way, one study 

showed that, in terms of the amount of money that it cost to actually provide the service, is 13 percent of the total of interchange. 

That means that is a roughly 87-percent profit margin. I would 

love to have that, but I can tell you that—— 

Ms. JACKSON LEE. Let me give equal time to Mr. Floum. 

Mr. Floum, look precisely at the legislative fix or the legislative 

structure, which, in laymen’s terms, I believe, simply opens the 

door to the retailer or the merchant to sit in the room and to give 

antitrust immunity or to be able to protect that discussion where 

you can come out with a rate that is fair. 

What Mr. Cannon said seems to be shocking, that you have an 

80-percent turnaround on profit. And I respect the fact that you 

have paper, machines, you have risk. What is wrong with having 

this kind of protection for you to have a discussion that just includes a third party and a protection against antitrust laws? 

Mr. FLOUM. Thank you for the opportunity to respond, Congresswoman. 

There is nothing wrong with negotiation. That is the free market, 

and I think everyone at this table is in favor of the free market 

and the opportunity to negotiate. 

What is wrong with the bill is it is a negotiation with subpoenas 

and depositions and a three-judge tribunal that would ultimately 

determine the rate, and that is not the free market. 

139 

Now, if I could just explain about interchange, because I think 

that there is a complexity to this which is important to understand. 

Again, the interchange rate is an interbank transfer fee. It is not 

what the merchants pay. The merchants pay merchant discount 

rates. And they should and can negotiate. 

Now, as to this—I have heard at least 10 times, it is price-fixing, 

it is a cartel, it is competitors getting in the room. There have been 

four courts in the United States that have looked directly at this 

issue, whether interchange is unlawful under the antitrust laws in 

the United States. Every single one of those courts has found that 

interchange is pro-competitive and is lawful. 

You couldn’t have a system without interchange. Because we 

have 16,000 banks—and you might go to Joe Smith Bank and buy 

something, and your bank is Joe Smith Bank, and you might buy 

something from a merchant who banks with Chase, in order for 

that transaction to happen instantaneously, securely at the point 

of sale, there needs to be a rate that is predetermined. That is 

what interchange is. 

Nobody has suggested, that I am aware of, in the world that 

interchange should be abolished. Instead they are saying it should 

be lower. And—— 

Ms. JACKSON LEE. If you would yield to me for a moment? 

Mr. FLOUM. Yes, ma’am. 

Ms. JACKSON LEE. I need to put on the record that I think the 

magnitude of the profit and the return that you are getting, 641 

million credit cards and growing, $1.7 trillion—so even if this is a 

competitive fairness, meaning that you are already competitive, the 

returns are enormous and the retailers are suffering. 

But I understand that, as the legislation is structured, there is 

an arbitration, there is a first step. There probably could be an 

agreement without yielding to the legislative fix if it would work, 

if you would work and let it work in the marketplace by listening 

to the merchants and the retailers. 

The problem we saw was that the only people that were part of 

the interchange—and you have right risk that should be addressed—was enormously one-sided. We couldn’t find a way to get 

in the door. You haven’t shown us the way to get in the door. 

We would be happy if you would have a structure, a private market structure for these individuals to get into the door. This gives 

them the door opening. 

And we want to look for a way that this works. But I think the 

fact that there is an arbitration first and then the court gives you 

some relief. And I hear what you are saying, and I am not unsympathetic. But I am very sympathetic to a sector of the marketplace 

that seems to be shut out. 

If you want to finish the sentence. 

Then I will yield back, Mr. Chairman. 

Mr. FLOUM. Thank you again, Congresswoman, for the opportunity. 

I am not sure if you were in the room—— 

Ms. JACKSON LEE. Probably in another hearing. 

Mr. FLOUM [continuing]. When I mentioned that interchange revenues do not come to Visa or MasterCard. We don’t receive those 

revenues. We set interchange to try to grow our system. 

140 

Now, with respect to negotiation, I would love to talk to Mr. Robinson right after this hearing or any other merchant who would 

like to discuss how they can drive volume to our network in return 

for incentives and other ways that they can offset their costs. So 

we are very much in favor of those discussions. 

Ms. JACKSON LEE. Just one sentence, Mr. Chairman. 

I hear you, Mr. Floum—I am sorry if I am saying it incorrectly. 

But let me just say this. The banks and the card have—I don’t 

want to use this very strong word of ‘‘collusion,’’ but they certainly 

have an opportunity to speak to each other. 

And I think that is the crux of our concern. And I will allow you 

to think about that, as others question you, to be able to clarify 

that point for us. 

Mr. Chairman, I thank you very much, and I yield back. 

Mr. CONYERS. Thank you so much. 

The Chair recognizes the distinguished gentleman from Florida, 

Ric Keller. 

Mr. KELLER. Well, thank you very much, Mr. Chairman. 

And, Mr. Robinson, I understand your stores operate under the 

term Rotten Robbie? Is that right? 

Mr. ROBINSON. That is correct. 

Mr. KELLER. Did Visa and MasterCard give you that nickname 

of Rotten Robbie, or how did that nickname come about? [Laughter.] 

Mr. ROBINSON. You really want that story? 

Mr. KELLER. Well, if you can tell it in about 10 seconds, because 

I have about 20 other questions for you. 

Mr. ROBINSON. Well, as a small marketer, we needed something 

that was catchy and that somebody would remember without having a major oil company budget. And so we picked that name because people would remember it. 

Mr. KELLER. All right. Well, thank you. I am known as Rotten 

Ricky, but for different reasons. [Laughter.] 

Mr. ROBINSON. They might be the same. 

Mr. KELLER. Yes. 

Mr. Floum, I am going to start with you. 

And I am going to ask you all some questions on both sides, so 

if it seems rough at times, it will be easier later for both of you, 

time permitting. 

You made a statement that I thought was pretty surprising. 

Some stuff I could agree with, but the one statement that really 

surprised me was, ‘‘Interchange rates have not increased over the 

past 10 years.’’ 

And before this Committee, on July 19, 2007, we have Steve 

Smith, the CEO of Food City, from Virginia. And he testified that 

in the 1990’s his grocery stores were paying 1 percent interchange 

fees and now they are paying 2 percent, more for premium cards. 

He seemed like a pretty credible witness to me, frankly. 

Last week, on May 7, 2008, Bill Douglas, the CEO of a convenience store chain called Douglas Distributing, testified that 10 

years ago they were paying 1 percent interchange fees and now 

they are paying 2 percent on average, more for premium fees. He 

seemed pretty credible to me. 

141 

Do you agree with me, sir, that, in fact, the Visa interchange reward-based premium cards have gone up over the past 10 years? 

Mr. FLOUM. Congressman Keller, yes. And if I could take a 

minute to talk about rewards cards, I think it might be instructive 

for the Committee. I would just ask my colleague to put up a chart, 

if I may, that discusses reward cards. 

Our blended, average interchange rates have remained flat, as I 

mentioned, over the past 10 years. We have introduced debit cards 

that have lower interest rates, pin debit—— 

Mr. KELLER. Right. And I have your chart. And I only have 5 

minutes, so let me say, if you look at that chart, back in 2002, you 

only had, like, 13 percent of people using these premium cards and 

now you have 63 percent, or two-thirds of the credit market is 

these premium cards, right? 

Mr. FLOUM. Correct. 

Mr. KELLER. Okay. And so, if now you have two-thirds of the 

market with premium cards, and premium prices have gone up, 

then, in fact, these folks like Mr. Smith and Mr. Douglas were telling the truth when they are saying they are having to pay more 

for credit card interchange fees. 

Mr. FLOUM. For rewards cards, yes, Congressman. 

But I would just like to highlight that what Visa has done is gotten into a market niche that was occupied by American Express. 

These are high spenders. Typically they have rewards cards, travel 

and entertainment, jewelry stores, high-end merchandise. And look 

at our rates compared to American Express. They are 60 basis 

points lower. So it is less expensive for the retailers, thanks to the 

fact that we have gotten into this space. 

Mr. KELLER. They have gone up over 10 years, especially with 

premium cards. And the fact of the matter is, the guy sitting next 

to you, Mr. Robinson, with his small convenience store, is absolutely required to accept the Visa premium card along with the 

basic Visa cards, correct? 

Mr. FLOUM. Yes, that is correct. 

Mr. KELLER. Okay. And if the solution here is that he has the 

ability to negotiate with Visa and MasterCard under the free market principles, as has been suggested by you and counsel for 

MasterCard, and 10 years ago the interchange fees were significantly less, around 1.2 percent according to one of your charts, then 

would you agree today that Mr. Robinson and his company will 

only, going forward, have to pay 1.2 percent interchange fees? 

Mr. FLOUM. No, Congressman. And it depends—again, we have 

brought debit cards to Mr. Robinson and amazingly electronified 

his business so that he can operate on the low margins. We have 

enabled his business to prosper. And the debit cards are lower—— 

Mr. KELLER. I agree totally about the debit cards; you are 100 

percent right. 

But my point is, this guy doesn’t have the ability to negotiate 

with you, because Wal-Mart is the biggest employer in the whole 

country, Fortune 1 on the Fortune 500, and they had to bring a 

suit, resulting in a $3 billion settlement, because they themselves 

don’t have the ability to negotiate. 

And so, if they don’t have the ability to negotiate with you to get 

lower rates, how the heck is a small, mom-and-pop convenience 

142 

store in a position to negotiate lower rates on these premium reward cards that Visa offers? 

Mr. FLOUM. Well, Congressman, I showed before this is Mr. Robinson’s organization. This is NACS, and this is how to negotiate 

with first data for a low merchant discount rate. So he can and 

does negotiate through the National Association of Convenience 

Stores, which sell, I think, 85 percent of the retail gas in the country. 

Mr. KELLER. Okay. 

Mr. Chairman, my time has expired, but let me just say to Mr. 

Floum, I have a lot more questions and lot more that you will like 

to answer, other than those. And I want to get to the other side, 

too, to be fair. And hopefully, as time goes by, we will have a 

chance to get to the rest of them. 

We have important folks waiting, so I will yield back the balance 

of my time, Mr. Chairman. 

Mr. CONYERS. Thank you very much, Ric Keller. 

The Chair recognizes Lamar Smith, Ranking Member of the full 

Committee. 

Mr. SMITH. Thank you, Mr. Chairman. 

Mr. Cannon, let me direct a couple of questions toward you. 

If this bill, H.R. 5546, passes, what I want to know is what you 

think the consequences of the bill might be. Which is to say, how 

much—and presumably the rates would be lowered as a result of 

the bill. How are you going to benefit? How are consumers going 

to benefit? Is it going to mean an increase in profit to you, or is 

it going to be lower prices to consumers? Who is going to benefit 

if this bill passes? 

Mr. CANNON. Well, I can tell you, Mr. Smith, right now the merchant community, and I believe justifiably so, believe that rates 

today are wildly beyond competitive rates. And if, in fact, you got 

to a—— 

Mr. SMITH. Could you answer my question, though? 

Mr. CANNON. Yes, sir. 

Mr. SMITH. My question is, are consumers going to benefit? And 

if so, why and how? 

And, by the way, I don’t mind that you would make more profit. 

I have nothing against profits. But I am just trying to get an answer as to who would benefit. Are consumers going to benefit from 

lower prices, or are you going to benefit from higher—— 

Mr. CANNON. Well, Mr. Smith, in this country, and coming from 

a retail background, as you know, I have seen this every day for 

10 years. And all I can tell you is, of course retailers can’t agree 

what they are going to do or not going to do among each other; that 

would be a violation of the law. But I cannot fathom that, as brutally competitive as retail is today, that somehow merchants would 

be able to keep a certain amount of benefit, of money, and not see 

that enter the competitive fray. Just knowing what I know about 

it, to me it seems really impossible to fathom. 

However, I will say this. I think that, in terms of how this should 

be viewed, that it is absolutely going to be pro-consumer and that 

these benefits will flow into consumer pockets. 

Mr. SMITH. Obviously, benefits go to merchants from using credit 

cards. You get instant payment, you get more business, you don’t 

143 

have bounced checks, you get timely payment and so forth. Why 

isn’t that worth a cent and a half on every dollar? 

Mr. CANNON. Oh, Mr. Smith, you are not going to have merchants tell you that there is not a benefit here. You know, the credit system today is certainly a benefit. 

Mr. SMITH. Right. 

Mr. CANNON. But the question is, it may be a benefit, but why 

are we paying the rates we are paying today? Is it a result of a 

competitive marketplace, or is it a result of an antitrust violation 

and a market failure? 

Mr. SMITH. So you don’t think you are getting your money’s 

worth? 

Mr. CANNON. I think that is an understatement, sir. 

Mr. SMITH. Okay, thanks. 

Mr. Floum, let me go to you. The appearance here, with Visa and 

MasterCard controlling 80 percent of the market, is that there is 

not enough competition. At least, that is the optics on it. 

Is there a time that you can point to where Visa has lowered its 

rate on a merchant or a group of merchants because they threatened to use another credit card or they threatened to use cash or 

they did use cash or they did use another type of credit card? 

Mr. FLOUM. Absolutely, Congressman. There are all kinds of examples of where we have lowered rates, particularly to drive increased use in certain market segments. Supermarkets, we have 

lowered our rates dramatically. Gasoline, we are lowered our rates 

over time. Utilities, which was not a sector that worked for payment cards, we introduced low rates to drive volume. 

Quick-service restaurants—here is an example. We hear about 

how retailers can’t live without Visa or MasterCard. Well, McDonald’s and other fast-food companies did very well without credit 

cards for years and years and years. Now they are using them. 

Why? Because it drives even more benefits to those retailers. 

So we have rates that go down, rates that go up—it is very complicated—in order to drive usage in particular sectors. 

Mr. SMITH. Okay, thank you. 

And can you, Mr. Floum, or can any other member of the panel 

today tell me a breakdown of how interchange fees are used? In 

other words, I have been told that about 13 percent of the fees go 

to processing, maybe 44 percent go to benefits, something like that. 

Is that generally accurate, or can you—and the rest would be profits. Can someone give me a breakdown on where those interchange 

fees go and how they are used? 

Mr. PEIREZ. Congressman, I can try to explain it in a very simple 

way, which is the interchange fee revenue that is received by the 

issuing bank is far, far, far less than the fully loaded cost—— 

Mr. SMITH. What I would like, though, is some specifics. I gave 

you some percentages; are those percentages accurate, or are they 

not accurate? 

Mr. PEIREZ. They are not accurate because there are no—— 

Mr. SMITH. Okay. What are the accurate percentages? 

Mr. PEIREZ [continuing]. There are no direct—from an accounting 

perspective, there is no direct way to equate—— 

Mr. SMITH. You can’t tell me what the cost of processing is? You 

can’t tell me what the cost of benefits are, how those fees are used? 

144 

Mr. PEIREZ. What I can tell you is that any individual bank that 

receives the fees can account for it in many different ways. But it 

is their costs of loans, the cost of funds, as you heard Mr. Floum 

say—— 

Mr. SMITH. Okay, well, what is the average? If you can’t go by 

specific—I mean, if you want to go by specific industry, forget that. 

Go by the average. Give me an order of magnitude. 

Mr. PEIREZ. I would say that you could take the entire amount 

of interchange fees and it won’t cover the full cost of lending and 

float. 

Mr. SMITH. What part of interchange fees are used for processing? 

Mr. PEIREZ. I don’t believe that interchange fees are directly used 

for processing. And I would be happy to walk through—— 

Mr. SMITH. I thought that was one of the arguments made. 

Mr. PEIREZ. It is one of the arguments that the merchant side 

is making. 

Mr. SMITH. So you are saying that none of the interchange fees 

are used to pay for the cost of processing. 

Mr. PEIREZ. What I am saying is that interchange fees—— 

Mr. SMITH. Well, didn’t you just say that or not? Did I misunderstand something? 

Mr. PEIREZ. No. What I am saying is that the interchange fees 

are used by the issuing banks in order to cover some of their costs. 

Mr. SMITH. Right. 

Mr. PEIREZ. Different issuing banks may use it for different 

things, but it ultimately is far exceeded by their costs of lending, 

their cost of float, their cost of credit risk assumption, their cost of 

fraud, as Mr. Floum laid out. 

Mr. SMITH. I know I have some more time, because the precedent 

has already been set. So I want to yield Mr. Keller a couple of minutes. [Laughter.] 

But having said that, I am disappointed you didn’t answer my 

question. 

I will yield the balance of my time, at least 2 or 3 minutes, to 

the gentleman from Florida, Mr. Keller. 

Mr. CONYERS. Who said you had any more time? [Laughter.] 

Mr. SMITH. I was going by the precedent set by my colleague 

from Texas, Mr. Chairman. 

Mr. CONYERS. Okay. 

Mr. KELLER. I can wait another round, Mr. Chairman. 

Mr. CONYERS. Oh, no. Go ahead. 

Mr. SMITH. Just 2 minutes. 

Mr. CONYERS. Go right ahead, Ric. 

Mr. KELLER. Okay. 

Mr. Floum, let me go back to you. You made a statement earlier 

about prior case law said that you guys haven’t violated antitrust 

laws. Correct? 

Mr. FLOUM. Yes, sir. 

Mr. KELLER. And, in fact, I pulled the most recent decision, the 

9th Circuit case of Kendall v. Visa, just handed down, March 7, 

2008. And you are certainly correct in that. And I want to walk 

through the gist of what that says for our nonlawyers. 

145 

MasterCard, Visa and some banks were accused of essentially 

engaging in price-fixing, conspiracy and collusion. And the court 

gave the plaintiffs a chance to amend their complaint to be more 

specific and tell us the details. And they came back, and they, after 

deposing a couple key witnesses, had no details, just legal conclusions. And the court said, I am throwing it out. It is not enough 

just to make legal conclusions. They said, specifically, tell us who 

did what to whom, where and when? 

Is that a fair summary? 

Mr. FLOUM. Yes. 

Mr. KELLER. Okay. I then pulled the most recent class action litigation in the Eastern District of New York against Visa and 

MasterCard. This is a 98-page complaint. You are familiar with 

this certain litigation? 

Mr. FLOUM. I am. 

Mr. KELLER. Well, I decided to spend all night reading this 98- 

page complaint from cover to cover, and what I found was, in fact, 

more just legal conclusions. 

And I will give you a quote: They collectively fixed interchange 

fees. These are illegal. MasterCard and Visa, by agreeing separately and together to establish and implement and maintain a 

price-fixing scheme whereby they fixed supercompetitive credit 

card interchange fees, nothing more than legal conclusions once 

again. 

Is that a fair summary? 

Mr. FLOUM. I think that is very fair. 

Mr. KELLER. Okay. With that as the basis, let me just ask you— 

and I am going to ask you directly, Mr. Peirez, as well, with your 

high position at MasterCard—Mr. Peirez and Mr. Floum, have you 

ever had conversations, or anyone between MasterCard and Visa, 

where you talked about acting together to fix the interchange fee 

rates at a certain amount? 

Mr. FLOUM. Absolutely not. 

Mr. KELLER. Have you ever conspired with each other or with 

banks to raise interchange fee rates? 

Mr. FLOUM. No, sir. 

Mr. PEIREZ. No. 

Mr. KELLER. Have you ever colluded either with MasterCard or 

any bank on the planet to set interchange fee rates? 

Mr. FLOUM. No, sir. 

Mr. KELLER. Okay. 

Mr. Mierzwinski, do you have any evidence, in terms of disgruntled employees, witnesses, documents, letters, anything that would 

contradict the testimony of MasterCard and Visa that they have 

never engaged in illegal price-fixing, conspiracy or collusion? 

Mr. MIERZWINSKI. The consumer groups don’t have anything like 

that. I don’t know whether the merchants do. 

Mr. KELLER. Mr. Cannon, do you have any specific evidence, as 

requested by the 9th Circuit Court of Appeals, to contradict what 

you heard today? 

Mr. CANNON. Well, Mr. Keller, a couple things about that. 

Number one, the issue here isn’t alleged conspiracy between 

MasterCard and Visa. I don’t think there are allegations about 

that. 

146 

Mr. KELLER. Well, that is actually—that is the issue. Trust me, 

I didn’t need my Ambien for this—— 

Mr. CANNON. Let me put it this way. From the merchants’ perspective, the question here that we raise is the conversations, 

agreements, et cetera, between the banks. And that is the Visa system and the MasterCard system. And, in fact, that is what this legislation is directed to do and pointed at doing, is making sure that 

that negotiation—excuse me, the agreement on that side is somehow eliminated and that negotiations start with this legislation. 

But the point is, on Kendall, as you know, virtually no discovery 

done on that. Really, a motion to dismiss—— 

Mr. KELLER. Depositions were taken of MasterCard and Visa. 

Mr. CANNON. I believe that is correct. 

Mr. KELLER. All right. Massive amounts of discovery, I believe, 

in New York, at this point. To my knowledge, I don’t even believe 

that Visa or MasterCard or the parties in that case have even 

raised Kendall as determinative of—that case would have been dismissed—— 

Mr. CANNON. I am thinking you are going to see it, down the 

road, raised. 

Mr. KELLER. Since you brought up this legislation, you are a fan 

of it, let me ask you this about this legislation. One thing is very 

different in this Conyers bill than the Copyright Royalty Board, 

and that is this: When this three-judge panel hears the decision— 

and let’s say it is Mr. Robinson’s little company versus the big 

banks and MasterCard and Visa—they are bound by what each 

side makes as their final offer. 

So, for example, if Mr. Robinson says, ‘‘I want the 1-percent 

interchange fee rate that we used to have 10 years ago,’’ and 

MasterCard and Visa and the banks say, ‘‘No, we want a 5-percent 

interchange rate,’’ that judge panel is required to take either 1 percent or 5 percent. He cannot pick something in the middle like 3 

percent. 

Is that correct? 

Mr. CANNON. He would have to pick whatever comes closest to 

the standard—— 

Mr. KELLER. But is that a correct statement? 

Mr. CANNON. Yes, sir, absolutely. 

Mr. KELLER. Okay. And that is the difference in the copyright 

royalty situation. 

Mr. CANNON. Sure, that the judges on the CRB are essentially 

allowed to make their own decision. The whole idea behind the legislation, as I understand it, is you wanted to make sure that the 

fate were still in the hands of the parties. And so, therefore, you 

would assume that perhaps negotiation offers would come fairly 

close to each other. You don’t know for sure. 

Mr. KELLER. I just wanted to clarify that. 

And I will get to other questions later, Mr. Chairman. Thank you 

for indulging us, and we yield back the balance of my time for now. 

Mr. COHEN. [Presiding.] The gentleman from Utah? 

Mr. CANNON OF UTAH. I thank the Chair, but I had to miss part 

of this hearing because I had some War College people in my office, 

and I needed to spend time with them. 

147 

Mr. Issa has been very patient. I would appreciate it if you would 

pass me over and give time to Mr. Issa. 

Mr. COHEN. All right. 

Mr. Issa? 

Mr. ISSA. I thank the Chairman since I have the Army War College next. 

I think because this is an antitrust Task Force, I should start off 

by full statement. I do know Mr. Cannon. I did sell to Best Buy 

and Circuit in my last profession. And they do hate each other, and 

they do fight bitterly to the bottom. The only sad truth is that 

when they can’t make a profit after they have beat down the prices, 

they usually come back to the manufacturers or suppliers like myself. So my experience makes Steve a friend and an acquaintance 

sometimes. 

For the rest of the panel, I am sure I would have loved you all 

if I would have been a vendor, equally. [Laughter.] 

Mr. Robinson, I am going to work with you for a moment, because I view myself and I view everyone on this dais—we are on 

the board of directors, not the executive committee, but the board 

of directors of the United States of America, Inc. We have an absolute responsibility to make sure that we do everything we can to 

maintain the opportunity for America to be competitive around the 

world. 

And the antitrust laws, since the time of Teddy Roosevelt, have 

been all about making sure that America is competitive, because in 

the long run competition makes America do better globally. 

I am going to ask you, if you could have the so-called 1-percent 

rate that is available in Spain and you could open a bank account 

in Spain and run your millions of dollars through that account at 

that rate, knowing that it is a global market and those funds would 

be transfered for a de minimis amount back into U.S. dollars, 

would you do that today? 

Mr. ROBINSON. Yes. 

Mr. ISSA. So the absence of a global market in which other countries’ merchants—the gas station in Madrid—has a lower cost of a 

transaction, even if it is my credit card, my premium United Airlines Mileage Plus card, even if it is that card, they have a lower 

cost of transaction than you do. Is that your understanding? 

Mr. ROBINSON. That is my understanding. 

Mr. ISSA. Okay. I have a ‘‘no’’ next to you from Visa, so I want 

to be fair. 

My understanding is that some countries, many countries around 

the world have set rates, and the rates are lower than what Mr. 

Robinson pays today. 

Mr. FLOUM. Thanks for the opportunity to respond, Congressman. 

Mr. ISSA. You are welcome. 

Mr. FLOUM. The merchants pay a merchant discount rate to accept cards. And the merchant discount rate in the United States 

is not higher than many countries in the world. It is right about 

the middle of the pack. The interchange rates have been reduced 

by regulation in certain places like the U.K. and Australia. But 

that, again, is not the price that merchants pay. 

148 

So I think Mr. Robinson’s, if he did compete with gas stations, 

maybe he does, in other parts of the world, their acceptance costs 

are about the same as his. So it is not the case that acceptance 

costs are lower in other parts of the world. 

The interchange rate may be, but, again, that is just an indirect 

cost, not the costs that they merchants pay to their—— 

Mr. ISSA. I appreciate that, but I never had an indirect cost that 

I didn’t consider when I went from my top line to my bottom line. 

Tell me why that doesn’t make Mr. Robinson more competitive if 

he is able to avail himself of a lower difference between selling 

price and net cash. 

Mr. FLOUM. Oh, certainly, Congressman, that would help him. 

Again, but his cost is his acceptance cost, which he pays to his acquiring financial institution—— 

Mr. ISSA. That is now in Spain. 

Mr. FLOUM. That is what he wants lowered. That is what he—— 

Mr. ISSA. Right. So he is going to go to Spain, and he is going 

to work out a deal with the Bank of Madrid. And he is going to 

accept people at his gas stations in dollars, okay, on U.S. credit 

cards like mine, but, in fact, it is going to be transported back electronically in real time every 2 hours, batched, through the Internet, 

and he is going to receive U.S. dollars transfered on a daily basis 

for the few dollars it takes, $10 for a wire transfer, of millions of 

dollars a day. 

Now, what in the world, in a global market, is he not able to 

avail himself of that? And wouldn’t that make him more competitive? He thinks it would. 

Mr. FLOUM. Can we put up the chart on the different countries? 

Because I think that might help, Congressman—— 

Mr. ISSA. Well, the point, though, is that there is a difference in 

these rates. And, look, I only care about America being competitive 

and markets working. If a market works in China or in Australia 

or in Spain or anywhere in the European Union—we are talking 

about particularly in developed countries—and it works more efficiently, in that you accept the transaction for less money, and it 

would make his business more competitive or more profitable, 

whichever, then I think he has a right to avail himself of it. 

And that is not what the bill is about. That is one of the reasons 

I haven’t signed on to the bill, is I am trying to deal with global 

competitiveness, because that is the responsibility—so, as I am trying to dissect this, what I see is somebody somewhere gets a better 

rate, even with my credit card today, than he gets. 

And in a normal market—and Steve Cannon, obviously, is very 

aware that the products sold at Circuit City come from anywhere 

in the world and they come de minimisly into the United States, 

as far as exchange fees, if you will, in order to give him the absolute best product at the lowest price on a global basis. 

My question to you—and I am going to indulge the Chair like 

some of the previous ones, but this is important—is, this Committee, as we are considering legislation, regardless of whether the 

draft legislation becomes law, why shouldn’t we ensure that the 

most favored price you give to any like company is available to his? 

And we are talking about based on a cost basis, not necessarily 

based on your target markets, because target markets are kind of 

149 

a monopolistic thing. Cost and profitability tends to be more a freemarket-type decision, and certainly on a global basis. 

So, as I looked at all these things—and, look, I want to be a fan 

of every one of your interests, and the only way to do that is to ask 

the tough question here, which is, if you could work for less in 

Spain, why can’t you work for less for Mr. Robinson or for Circuit 

City or anyone else if, in fact, in a normal global market they could 

simply open a bank account in Spain? 

Mr. FLOUM. Well, Congressman, it is a very important question. 

We are a global company, and it is very important to us, as well. 

I apologize. I don’t think I have Spain on—oh, I do have Spain 

on this chart. So you can see that, in the United States, the overall 

acceptance costs are slightly higher than—— 

Mr. ISSA. But what is the lowest one on the far left? I can’t see 

it from here. 

Mr. FLOUM. That says Denmark. 

Mr. ISSA. Okay. He is now doing business in Denmark, is in a 

global market—— [Laughter.] 

I got to tell you, he skipped Spain, he went right to Denmark. 

And, by the way, he picked up cheese on a premium with every 

transaction. 

Mr. FLOUM. Again, the acceptance costs are set by the acquiring 

banks in these different countries. The interchange rate is just a 

part of that. And, for the most part—— 

Mr. ISSA. But if he went to Denmark and put a bank account 

there, he would do better. 

Mr. FLOUM. He would do better, in terms of the acceptance costs 

in Denmark, that is correct. But he would do worse than in the 

Netherlands. 

Mr. ISSA. And I am going to close out, and I am only going to 

say that I would like to hear just short answers from the others. 

When I look at Denmark and I look at—or Belize or anywhere 

in the world, but I will pick Denmark—if everybody in the United 

States today skipped their U.S. bank, went to Denmark and said, 

‘‘How low will you go in total cost?’’, knowing that the interchange 

fee starts off low and knowing that they can put hundreds of billions of dollars in transactions through Denmark, do any of you believe for a minute that, in fact, you wouldn’t find banks there willing to operate on an incredibly thin sliver to give Mr. Robinson and 

Circuit City and Best Buy and all the other companies a more competitive rate when they are trying to offer the lowest price to the 

consumer? 

I will give you all the time to answer, and then that is it. I have 

run out of time to ask. 

Mr. FLOUM. I can’t argue your point, Congressman. But if you 

look at Australia, which I believe is on—maybe it is not—or the 

U.K., where there has been regulation, consumers are paying more 

on the other side of the equation. So interchange, in part—— 

Mr. ISSA. That is why I am going to Denmark. 

Mr. FLOUM. Okay. Well, in Denmark, we have to look at what 

consumers pay in Denmark. 

Mr. ISSA. Yes, sir? 

Mr. PEIREZ. Sir, what you will see, Congressman, is, if, in fact, 

all the U.S. merchants started contracting with a bank in Denmark 

150 

in this scenario, what you would see is U.S. consumers paying 

more on their cards, you would see less cards made available to 

U.S. consumers, you would see rewards or other benefits go away 

from any of those consumers, you would see the period of float time 

go away or be charged for, you would see interest rates increase, 

and many other things which are detailed as a result of exactly 

what happened in Australia in the study I have submitted with my 

testimony. 

So, yes, for a short period of time maybe it would appear like 

things are doing better, but the long-term impact would ultimately 

be that you would end up in a situation where credit cards here— 

and if you look at all these markets that are on Mr. Floum’s chart, 

this is the one market that has the most robust, competitive marketplace for cards, the most consumers benefits and the best products available, the most diverse set of products. 

So I think it is very important not to just look at one piece of 

the equation and say, ‘‘Well, that fee would be driven down.’’ There 

would be consequences, and we are seeing them play out in some 

markets today. 

Mr. ISSA. Mr. Blum? 

Mr. BLUM. Thank you, Congressman. 

I think, in your example, as a Federal credit union not authorized to operate in Denmark, I would lose significant market share 

and membership and, you know, the member services. I certainly 

wouldn’t applaud or encourage any of my members to move away 

from me, to move overseas. 

And my only concern here would be the currency transactions 

fees, the volatility of the currency market, what might happen 

switching their U.S. dollars to the Danish krone and back to U.S. 

dollars multiple times. 

Mr. ISSA. Mr. Cannon? 

Mr. CANNON. Mr. Issa, I believe that merchants in the United 

States would be delighted to take the Denmark rate today. 

Mr. MIERZWINSKI. One point that hasn’t been made yet, Mr. Issa, 

is that the credit card industry is the most profitable form of banking by far. And that is according to the Federal Reserve, not me. 

So I think the banks could absorb this. And I think if the merchants went to Denmark, they would figure out a work-around. 

But right now, consumers in the United States are paying an 

awful lot for their credit cards, whether or not they get these socalled rewards. 

Mr. ISSA. Well, thank you. 

And thank you, Mr. Chairman. 

I very much believe that we need to make sure that we maintain 

a robust and efficient system in the U.S. So lest anyone think I am 

inviting them to move their dollars offshore, I am not. But I do 

want to make sure that all of us realize that USA, Inc., has to be 

the most competitive in the world. And that is a goal, I think, of 

all of us on the dais. 

And, with that, I yield to the gentleman from Florida for another 

2 minutes. [Laughter.] 

Mr. KELLER. I will let the gentleman from Utah go, and then if 

we do another round of questions, I will take it afterwards and 

151 

seize one of them, the principals here. But thank you, Mr. Issa, for 

yielding. I do have some questions, but I will let him go first. 

Mr. COHEN. Mr. Cannon? 

Mr. CANNON OF UTAH. I think, Mr. Chairman, that is the last 

time I am going to defer to Mr. Issa. [Laughter.] 

Not because his concerns are not interesting, but because other 

matters press on us all. 

Mr. Peirez, you were talking about all the competitiveness and 

the options that we have in the American market, and that is true. 

But it is not because of the interchange fee or the way we regulate 

it as opposed to other markets. It is because America is a more robust place to do business. So we actually really want to keep that 

environment where we are. 

But you listed a series of fees that are going to go up. There is 

a dramatic difference between the fees you just listed—and I think 

others, Mr. Floum and others, have talked about those fees—and 

the interchange fee. That is, if you are going to add a fee on a credit card, the person who decides to use that credit card will understand those fees because they are explicit, as opposed to the interchange fee, which, really, nobody ever gets to talk about. 

Isn’t that the case? 

Mr. PEIREZ. Thank you, Congressman. I think that is a very important question. 

I think that whenever a consumer goes to a merchant and uses 

any form of payment, there are costs inherent in—— 

Mr. CANNON OF UTAH. But please just answer the question. The 

question is, is there not some benefit from having explicit costs 

versus hidden costs? 

Mr. PEIREZ. Again, Mr. Congressman, I don’t believe there are 

hidden costs. I believe that when a consumer goes to a merchant 

and chooses how to pay for a good or service, there are many costs 

involved. And I think as Mr. Floum stated earlier, it is our belief 

that many other forms of payment, like using a card from the retailers, American Express—— 

Mr. CANNON OF UTAH. Pardon me. Let me just get in here, sir. 

You listed a series of alternative costs that could be imposed on 

that transaction. The one thing that is very consistent about those 

alternative costs is that they are understood, or at least available 

for understanding, by the consumer. Whereas, the consumer has no 

idea about what or how much the interchange fee is, and he has 

no way of accessing that, and the merchant has no way of negotiating that. That is a hidden cost. 

But regardless of the term we are using here, is there not something better about costs that are more transparent? 

Mr. PEIREZ. We absolutely have no problem with transparency 

and encourage merchants to go ahead and tell consumers exactly 

what those costs are for them when they are making—— 

Mr. CANNON OF UTAH. And when did you start encouraging merchants? 

Mr. PEIREZ. We have always allowed that. We have never—— 

Mr. CANNON OF UTAH. You have always allowed that? Did you 

have a practice of telling merchants they can’t offer cash discounts, 

they can’t tell what the cost is? 

Mr. PEIREZ. We do not have a practice—— 

152 

Mr. CANNON OF UTAH. Ever? 

Mr. PEIREZ. Ever. 

Mr. CANNON OF UTAH. We had a panel some time ago where two 

merchants were surprised that that was the case, because they had 

been told somewhere in the system—is it Visa that is doing that, 

and not you guys? 

Mr. PEIREZ. I honestly don’t know what Visa does. You can ask 

Mr. Floum. 

But I can say that we do not and have not disallowed discounts 

for cash. We were surprised to hear that merchants actually 

thought they couldn’t do it, and we are encouraged now that we 

can tell them they can. 

Mr. CANNON OF UTAH. Thank you. 

You said in your earlier testimony that—you talked about several things that you are making public, like you are posting rates 

on your Web site, you are publishing ‘‘more and more,’’ I think was 

the term you used, of your rules. 

When did you start doing that? 

Mr. PEIREZ. Well, we have always, again, permitted the banks 

that contract with merchants to provide the merchants with—— 

Mr. CANNON OF UTAH. No, no, no. I am asking—you took actions 

that you touted a few minutes ago—— 

Mr. PEIREZ. About 4 years ago was the first time that we did it. 

Prior to that time, we had a rule that required the banks that 

contracted with merchants to provide the rules to those merchants 

in their merchant agreements. We were made aware by merchants 

that they did not feel that they had access to those rules. So 4 

years ago, we published what we believe to be the set of rules that 

were covering merchants. 

We were told by merchants and asked by merchants for other 

things, which we have now published. And we are now going to 

publish all of our operating rules and are in the process of doing 

so. 

Mr. CANNON OF UTAH. Good. And when did you ramp up the rate 

at which you began publishing? 

Mr. PEIREZ. Well, we have published the first set 4 years ago. We 

published another set about 3 or 4 months ago. And then we have 

been starting, in recent days, to now get the rest of the materials 

ready to be published. 

Mr. CANNON OF UTAH. And when did you start publishing your 

fees? 

Mr. PEIREZ. We started publishing the fees in the fall of 2006. 

Mr. CANNON OF UTAH. Good. I think the discussion over this bill 

and in the direction of the bill has actually had a salubrious effect 

on the transparency of this market. We appreciate that. 

Mr. Floum, I just wanted to be fairly clear. You have been very 

clear and very consistent in talking about your fees and those 

fews—the percentage of that fee has been stable over the last 10 

years. During that same period of time, the amount of transactions 

has skyrocketed. 

Mr. FLOUM. Yes, sir. 

Mr. CANNON OF UTAH. And, therefore, the gross income, the revenue, has skyrocketed. 

Mr. FLOUM. Yes, sir. 

153 

Mr. CANNON OF UTAH. And at the same time, virtually all other 

electronic transaction processing fees have plummeted. So I suspect 

that the actual cost of accounting for the transaction—that is, processing the transactions—has become a lesser part of the interchange fee, has it not? 

Mr. FLOUM. Again, Congressman, the rates have remained the 

same, and the value of those products has increased exponentially—— 

Mr. CANNON OF UTAH. But you have contractors out there, Visa, 

I believe, has contractors out there who process transactions. 

Mr. FLOUM. We process them over VisaNet. We own many computers, and we have a—— 

Mr. CANNON OF UTAH. But you also have subcontractors out 

there that do—I got approached last weekend by somebody who 

does it and was concerned about the effect of this bill. So you have 

other people that actually perform services for you. 

Mr. FLOUM. On the card-issuing side and on the acquiring side, 

there are many third-party processors, yes. 

Mr. CANNON OF UTAH. So what do they do in relationship to 

what Visa does as its processing? 

Mr. FLOUM. Well, we are the central switch, so the transaction 

between the acquiring bank and the issuing bank, that is what we 

do, we switch the transaction and we settle between those two 

banks. 

Mr. CANNON OF UTAH. Okay. So the acquiring banks or the merchant banks have processors that prepare information for you, and 

then they take it to your central process. 

Mr. FLOUM. Well, for example, First Data is a large merchant 

processor, yes. 

Mr. CANNON OF UTAH. And there are also some small merchant 

processors. 

Mr. FLOUM. Yes, sir. 

Mr. CANNON OF UTAH. Have the costs that those people have 

been reimbursed, First Data or smaller operators, have they declined? 

Mr. FLOUM. I need to answer your question directly. It really depends on the type of transaction. For a standard transaction, perhaps. But they are much more complicated today, with automatic 

authentication, clearing settlement, fraud control, verification of 

the risk and so forth. So I can’t say that, in all instances, it has 

gone down. 

Mr. CANNON OF UTAH. But has it had a tendency to decline? 

Mr. FLOUM. If you are looking at it as just a scale business, you 

could make that argument. But, again, because it is a different 

product and service, I don’t think that is an apt analogy, with all 

respect. 

Mr. CANNON OF UTAH. Well, in other words, you have more service involved. You have a better product, a higher-quality product 

that is happening, and so there is some tendency to raise the value 

because of that quality. 

But you are not suggesting—I mean, you are having a hard time 

saying this, but, in this regard, almost all prices have been falling 

where you have had automated transactions. 

154 

Mr. FLOUM. What we have done in recent years, Congressman, 

is we have paired together our products and our processing services. They are one. And so, to that extent, I can’t say that the cost 

has declined, just because of all the added value that comes with 

the product and the processing sevrices. 

Mr. CANNON OF UTAH. Of course, price declines tend to occur 

more readily where there is competition and transparency. I don’t 

think there is any question about that. 

The record ought to note that Mr. Floum has nodded in agreement. 

Mr. FLOUM. I agree with you, Congressman. 

Mr. CANNON OF UTAH. Thank you. 

Mr. Chairman, I am not sure where we are on the light. Has it 

gone red and off? 

Mr. COHEN. Your light never goes off, sir. [Laughter.] 

Mr. CANNON OF UTAH. The problem is it doesn’t go on either, 

right? [Laughter.] 

Let me just ask one other question to Mr. Floum and probably 

also to Mr. Peirez. 

One of the principal complaints about H.R. 5546 is that it is a 

price-control bill. If we amended the bill to remove the three-judge 

panel but still kept the antitrust exemptions in it, maybe adjusted 

those a bit, for the merchants and banks to negotiate the interchange terms, would that be acceptable to you? 

Mr. FLOUM. We would have a problem with imposing an antitrust exemption, because the merchants—— 

Mr. CANNON OF UTAH. It would not be imposing; it would be allowing an exemption to people if they wanted to get together and 

negotiate. 

Mr. FLOUM. And today they can get together and negotiate, Congressman. And there are many examples of that, and I have cited 

several of them, the—— 

Mr. CANNON OF UTAH. But my question was not what they are 

doing now, but if we change the law and allowed them to negotiate 

as a group, is that something that would remove your opposition 

to this bill? 

Mr. FLOUM. We would certainly—it would certainly improve the 

bill. We would need to study the antitrust exemption. Again, the 

negotiation is basically between the merchant community and the 

acquiring community, and I have seen—— 

Mr. CANNON OF UTAH. But that is because the interchange fee 

is outside the scope of the acquiring community. Isn’t that right? 

Mr. FLOUM. Acquirers can negotiate interchange with issuers, 

and often do. 

So what we do is we set default interchange rates. We allow negotiation of those rates. Those rates are frequently negotiated between issuers and acquirers. The default rate protects people like 

Mr. Blum, the small credit unions, who aren’t able to effectively negotiate in the same way that the larger financial institutions can. 

Mr. CANNON OF UTAH. How many institutions actually negotiate? 

I suspect that Wal-Mart does. How many others actually effectively 

negotiate that? 

Mr. FLOUM. Well, the acquirers that have business relationships 

with large merchants or large groups of small merchants negotiate 

155 

with issuers over the interchange rates in return for driving volume toward that particular card program. It happens all the time, 

Congressman. 

Mr. CANNON OF UTAH. Are there any of your thousands of Visa 

banks, or any of your thousands, Mr. Peirez, of your MasterCard 

banks, that offers a published interchange rate that is lower than 

the rate that is set by Visa and MasterCard? 

Mr. FLOUM. A published merchant discount rate? I am not aware 

of any that are lower than interchange. I am aware of many that 

are very, very close to the interchange rate, such as the NACS, 

which is interchange plus 6 cents. 

Mr. CANNON OF UTAH. Thank you. 

Mr. Peirez, could you answer that question also, the prior question that I had asked Mr. Floum? 

Mr. PEIREZ. Sure. We would definitely see an improvement in the 

bill were it to remove the price control setting by the three administrative law lawyers. 

But as far as antitrust exemption goes, I will simply quote from 

the Modernization Commission as to why we would still have a 

problem with that, which is that, ‘‘They should be disfavored, and 

they should be granted rarely and only where it is necessary to satisfy a specific societal goal that trumps the benefit of a free market 

to consumers and the U.S. economy in general.’’ 

So it is not that you offer an antitrust exemption, according to 

the Modernization Commission, to deal with an antitrust problem. 

It is that, in fact, you offer an antitrust exemption in lieu of, and 

in fact to the detriment of, what the antitrust laws would otherwise 

enforce. So it is our belief that—— 

Mr. CANNON OF UTAH. That balancing act would sort of be implemented by a vote of the House and the Senate. 

Mr. PEIREZ. Sure, absolutely. And we think that, from our perspective, what that would do is harm competition and harm consumers. Because, whether the prices went up or down as a result 

of that, when we set our default interchange rates, we do so to 

maximize the output of our system. We do it to increase the number of merchants that accept our cards. We do it to increase the 

number of cards that are issued. And we do it to increase consumer 

usage of our cards. And we think we are doing it incredibly effectively and legally today. 

Mr. CANNON OF UTAH. Isn’t all of that done within—I am not 

anti-profit. I love profit. I think you guys should be profitable. But 

isn’t all that done within—the three things you just stated are done 

in the context of how you optimize your profit. So you say, how do 

we continue to grow, et cetera, while still making the most profit. 

Mr. PEIREZ. Absolutely. And legally. 

Mr. CANNON OF UTAH. That is a unilateral decision in a marketplace that has no way to affect that portion of that decision. 

Mr. PEIREZ. We make a decision as to a default rate. It is not 

unilateral, in the sense that there are many, many actors who 

choose to participate or not participate or to go to Visa or to American Express or to PayPal or to many other payment systems that 

are available, many new ones that are coming out. So it does not 

exist in the abstract and standing alone. There are many competitive forces that play into how we set those rates. 

156 

Mr. CANNON OF UTAH. Do you have any banks that actually publish an interchange rate that is different from the default rate? 

Mr. PEIREZ. I am not aware of any banks that publish any interchange rates. But I am aware of banks that have negotiated interchange rates in connection with cobranded cards, in connection 

with ‘‘on-us’’ traffic, in connection with many other instances. 

I would be happy to sit down with your office and go through 

many examples that are confidential and I would not want to speak 

about in depth here. 

Mr. CANNON OF UTAH. Let me just ask—before I yield back the 

vast amount of time remaining, I think that—Mr. Keller, did you 

want me to yield a couple of minutes to you? 

Okay, then I yield back. 

Mr. COHEN. Thank you. 

Does the lady from Texas seek recognition? 

Ms. JACKSON LEE. I do. 

Mr. COHEN. You are recognized. 

Ms. JACKSON LEE. I thank the gentleman. 

And I thank the witnesses. 

Let me just focus on two lines of questioning, if I might. Mr. 

Floum—and I won’t—if Mr. Peirez and Mr. Blum want to answer— 

if you would answer this question: If interchange tithes do not generate profit to the credit card companies, what purpose do they 

serve? 

Consumers are paying for the convenience of many credit cards, 

with the security protections, et cetera. We understand that. I 

think I have said that on the record before. Should consumers have 

to pay extra to pay for a good, functioning credit card or a good 

usury that a credit card may have? I would just put that on the 

table. 

Mr. Cannon, can you give us a sense of how final-offer arbitration works in the private sector today and how you expect it to 

work under the context of the new legislation? In light of that system, do you view the legislation as Government price controls? 

Let me yield to the three gentlemen who might want to answer 

about the interchange fees. I think in your testimony you have 

been representing that they are not profit. Then what are they? 

And maybe I have missed it; maybe you have already conceded 

that you are willing to engage in the kind of marketplace negotiation that would give relief to these retailers. 

Mr. FLOUM. Congresswoman, thank you for the question. 

We are absolutely willing and eager to negotiate, as I have said 

before, at any time. My phone line is always open, as are our merchant representatives. 

Interchange, again, is not—— 

Ms. JACKSON LEE. And would that mean that you would bring 

the interchange fee down if Mr. Robinson asked you, along with a 

number of others? 

Mr. FLOUM. We would certainly negotiate with anyone about 

driving volume to Visa in return for lower rates, absolutely. 

Now, with respect to the interchange question, again, interchange is not revenue to Visa. And we don’t set it with the purpose 

of making profits to Visa. It doesn’t come to Visa or Mastercard. 

It goes to the issuing bank—— 

157 

Ms. JACKSON LEE. Well, and I think one of the elements is—and 

I appreciate what you have said, and that is on the record, and we 

will be posing these serious questions to banks. But allow me to 

just ask you the question, from your perspective, it is profit, is it 

not, to the banks? I mean, you can continue to answer, but someone is gaining a profit. 

Mr. BLUM. Congresswoman, perhaps as a credit union, I can give 

you an example in Chartway. 

I placed in my testimony that I did 14 million transactions last 

year, that it is not a windfall; it is not, in fact, a profit. You will 

see in my written testimony that I named it at 24 cents per transaction. 

And that is net of some of my costs that, you know, we didn’t 

include. We didn’t include in that net, if you will, return to our 

shareholders or our members the cost of marketing. We didn’t include in that the cost of brand repair when there is a compromise, 

when our members go out and attempt to use their credit card at 

a restaurant and it has been closed because there has been a tragic, you know, large data breach, and in order to protect a relatively 

small financial institution I have had to block a card. My members 

didn’t recall that to be T.J. Maxx or to be B.J.’s. It was, 

‘‘Chartway’s card was closed,’’ or, ‘‘Chartway did that,’’ or, 

‘‘Chartway did this.’’ They expect a card to work when they want 

to use it, 24/7. Some of those costs associated with that pull into 

that 24 cents. 

More importantly, years ago, those 14 million transactions equate to a little over $500 million that was transacted electronically in 2007 for Chartway. If we take it bank 10 years to when 

it was a check system, and prior to this larger surge 20 years, 

Chartway would have enjoyed 2 more days, on average, of those 

funds to be in our institution, where I could invest them at an overnight rate. The immediacy of that payment system, that interchange recovered for me, if you will, a small, a relatively small portion of what I lost by immediately debiting those funds and moving 

them out of my—— 

Ms. JACKSON LEE. And, you know, we have worked with credit 

unions. Are you suggesting to me that there is no profit that you 

gain through the interchange fee? 

Mr. BLUM. There is an advantage. I mean, as a credit union, I 

don’t use the word ‘‘profit.’’ You know, I am able to—— 

Ms. JACKSON LEE. But it goes back into your shareholders. You 

must be getting something from—— 

Mr. BLUM. It certainly goes back in higher dividends and a lower 

loan rate—— 

Ms. JACKSON LEE. Right. 

Mr. BLUM [continuing]. So there are extended services. So there 

are advantages. 

Ms. JACKSON LEE. Well, would you be willing to sit down and negotiate in the marketplace a response to the interchange fee and 

lowering it? 

Mr. BLUM. In negotiating in the marketplace, as a credit union, 

again, we are not staffed to be in that position to go out and work 

what I would perceive to be a rather extensive and ongoing ‘‘who 

are we going to meet with today.’’ 

158 

Again, our service focuses on our membership. We need these 

credit and debit cards in order to compete with larger financial institutions. And I would poll the Committee: How many Committee 

Members would do business with a financial institution as their 

primary institution if that institution could not provide them credit 

or debit card services? 

Ms. JACKSON LEE. I appreciate that. 

Let me move quickly to Mr. Cannon. And, Mr. Peirez, I am not 

going to leave you out, and I will let you finish last. 

Mr. Cannon, I asked you a question. Do I need to repeat it for 

you, or are you—— 

Mr. CANNON. Sure, I guess the question is, as I recall, the benefits of the arbitration, how it would work or how this—— 

Ms. JACKSON LEE. How it works today and how it will work 

in—— 

Mr. CANNON. Sure. 

Ms. JACKSON LEE. It has been described as being onerous and 

burdensome. 

Mr. CANNON. Well, I can’t fathom that. Mr. Floum talked about 

negotiation with subpoenas. I don’t think we are reading the same 

bill, because that has nothing to do with it. If, in fact, negotiation 

is successful, that is the end of it and there is no proceeding. And 

they understand that. 

This whole process is known, as you know, Congresswoman, as 

baseball arbitration, which just says, the parties, all having negotiated, if they can’t come to an agreement, then they just simply 

each decide a final offer. And then you give this panel, in this particular legislation, the authority to make a decision using a standard as to, essentially, which offer comes closest to a competitive 

market rate. 

That is not very hard to understand. I think it is going to be simple to administer. And I will tell you, the great thing about it, I 

think it will get the parties together, because they will all understand what will end up being a competitive rate. 

Ms. JACKSON LEE. Mr. Peirez? 

Mr. PEIREZ. Thank you, Congresswoman. I guess I am going to 

answer the first question that you had asked about the profit? 

Ms. JACKSON LEE. Yes, sir. 

Mr. PEIREZ. What I can say is the interchange fees are absolutely 

revenue to the banks that receive them and the credit unions that 

receive them. As to whether they are profit, of course, you would 

have to look at all of their revenues and all of their costs. 

If you took just interchange revenue, took all other revenue out, 

and looked at that relative to the costs of running the card businesses that the banks run, they would not have a profit, they 

would have a loss, because their costs of running it far exceed the 

interchange revenue. 

And the perfect example of that is the fact that, for American Express to run this system themselves, they charge a higher fee to 

merchants than our system does, because they use that money to 

subsidize the running of their card business. 

And when merchants run their own card systems, it costs them 

much more than it costs them to take our cards, which are much 

more cost-effective for them and consumers than the cards that 

159 

they issue directly to consumers, which is why they have ended up 

using our systems or co-branding their existing cards with our systems or outsourcing the management of their card programs to the 

banks that run our card systems. 

Because, between lending, credit-risk-worthiness determinations, 

monthly compliance requirements, and statementing and the like, 

acquiring new accounts, looking at losses, costs of funds and all the 

other costs that are associated with running a card program, they 

are far in excess of what is received on interchange revenue. 

So, yes, card businesses are profitable, and, yes, interchange fees 

are a component of the revenues that are added up to make them 

so, but that profitability is also competed away every day when 

American consumers receive the vast away of product offerings 

that they can choose from from a credit union like Mr. Blum’s up 

through the largest banks in the country. 

Ms. JACKSON LEE. Well, I would just ask that you submit for the 

record a total of those fees that you have just represented orally, 

that I think you indicated that the cost of the card itself, what the 

card company has to expend, or the bank. 

Mr. PEIREZ. We can provide you some averages, and particular 

banks would have to give you their specific numbers. 

Ms. JACKSON LEE. But if you could bring it on the—— 

Mr. PEIREZ. We can give you what we have. 

Ms. JACKSON LEE [continuing]. Card, I would greatly appreciate 

it. 

I do believe, again, to close, that the 671 million cards and $1.7 

trillion revenues, whether it is merchants, cards, and/or issuers, 

which are the banks or credit unions, that we can find some way 

to resolve what I think has come about because of the status of our 

economy. We have to find relief. And, frankly, I welcome your discussion on this point. 

And I yield back. 

Mr. COHEN. Thank you. 

The gentleman from the State of Florida and Vanderbilt University? 

Mr. KELLER. Thank you very much. 

Mr. Floum, I did go to Vanderbilt Law School. I was this close 

to going to your alma mater, Harvard Law. That is how thick my 

rejection letter was, if I can recall. [Laughter.] 

But I was very happy to stay in Tennessee. 

Mr. FLOUM. Isn’t Harvard the Vanderbilt of the East? 

Mr. KELLER. Something like that. 

Let me ask you, Mr. Floum, about market share, because we 

have heard that. I went and pulled the Forbes magazine and the 

Nielsen Reports, and it says that the market share, collectively, of 

Visa and MasterCard is 75 percent, with Visa at 44 percent and 

MasterCard about 31 percent. 

Does that seem right to you? 

Mr. FLOUM. If you are just talking about cards, that sounds accurate. 

Mr. KELLER. Okay. So we have a market share of 75 percent 

with you two; also, AmEx, 20 percent, according to them; and Discover, 5 percent. 

Visa does set the default interchange rates, is that correct? 

160 

Mr. FLOUM. Yes, sir. 

Mr. KELLER. What is the single lowest default interchange rate 

available right now from Visa? 

Mr. FLOUM. I believe it is around 1.2 or so. I might be off a little 

bit, Congressman, but that order of magnitude, in the supermarket 

sector, would be one of our lowest rate. 

Mr. KELLER. Mr. Peirez, what is the single lowest default interchange rate currently set by MasterCard in the supermarket sector? 

Mr. PEIREZ. Solely in the supermarket sector? 

Mr. KELLER. Yes, sir. 

Mr. PEIREZ. It is around that 1.2—— 

Mr. KELLER. 1.2. Is that a coincidence, that MasterCard and Visa 

both have 1.2 percent as their single lowest default interchange 

rates in the supermarket sector? 

Mr. PEIREZ. I think it is competition, just like if you go to the 

corner and there are four gas stations, they are all going to charge 

the same price for a gallon of regular. 

Mr. KELLER. And what if, tomorrow, Visa decides to go to 1.3 

percent as their single lowest default interchange rate for supermarkets, what would be the response of MasterCard? 

Mr. PEIREZ. We would have to carefully consider whether we had 

an opportunity to drive more volume by not changing our rates or 

by lowering them. We would look at it similar to the way we did 

in the gas cap situation, where we said, you know, there may be 

an opportunity for us here. We would have to take a look at other 

competitive factors like what American Express is charging in that 

segment, whether ACH is gaining traction. There are multiple 

other factors. 

Mr. KELLER. Okay. If that is the case, you look at the competition and you know that Visa is charging a 1.2-percent default interchange rate for the supermarket sector, why don’t you lower yours 

to 1.1 percent to take competitive advantage of the lower rates? 

Mr. PEIREZ. Again, where we think we can do that, as we did 

with the gas cap, we do. We have also recently—when you say the 

lowest rate, it is going to depend on the transaction size. But for 

gas, for example, if someone does fill up an SUV, for a $90 tank, 

that may well be our lowest rate. We have a 75-cent flat-fee rate 

published, I believe, for—— 

Mr. KELLER. All right. Let me get to some more things here. I 

appreciate that. And I will stick with you, Mr. Peirez, because I 

want to give you a chance to talk about some other stuff. I have 

been asking Mr. Floum a lot of questions here. 

If, over at Rotten Robbie, Mr. Robinson decided to place a sign 

next to his cash register and says, ‘‘If you use cash, we will give 

you a discount on some of the items here,’’ would he be allowed to 

do that? 

Mr. PEIREZ. Yes. 

Mr. KELLER. Would he be able to provide a discount if his customers used a debit card discount over the credit card? 

Mr. PEIREZ. Under our current rules, I believe not. 

Mr. KELLER. And why is that? 

Mr. PEIREZ. Because we do not allow our form of payment to be 

discriminated versus others in the electronic space. On the cash 

161 

side, we have always allowed and continue to allow the discount for 

cash. But when it comes to between different electronic forms, we 

do not allow that. 

Mr. KELLER. Would he be allowed to put a sign there in front of 

his cash register that said, ‘‘Please use your debit card instead of 

your credit card’’? 

Mr. PEIREZ. Yes. 

Mr. KELLER. He would. 

Mr. Floum, do you concur in that? Would he be able to first have 

a sign that says he can offer a cash discount? 

Mr. FLOUM. Absolutely, Congressman. 

Mr. KELLER. Would he be able to have a sign that says he can 

offer a discount over the credit cards if you use your debit card? 

Mr. FLOUM. Yes. Under our rules for pin debit, he could also offer 

a discounted price. 

Mr. KELLER. Okay. 

You have said that you don’t think that the retailers would pass 

along their savings if they did get a lower interchange fee. Is that 

correct? 

Mr. FLOUM. That is what the evidence would suggest, yes, sir. 

Mr. KELLER. The evidence in Australia, correct? 

Mr. FLOUM. Yes, and also in a litigation settlement, interchange 

rates were lowered, the Wal-Mart settlement, and there was no 

passing along of those increased retailer profits to consumers. 

Mr. KELLER. All right. I would think Wal-Mart would think they 

offer a pretty good deal. I mean, they are doing pretty well. But 

we will let them speak for themselves; they are big boys. 

Mr. Robinson, you heard that you are not going to pass along any 

of the savings to your consumers. Let me just ask you point-blank, 

if you have a favorable result, either through legislation or litigation, where you pay lower interchange fees, are you going to pass 

along the savings to consumers, or are you going to take all the 

money and put it in your pocket as additional profits? 

Mr. ROBINSON. Petroleum retailing is a fiercely competitive business. Generally when costs go up, generally when costs go up, we 

increase our prices. And generally when costs go down or benefits 

increase, we pass those along to the consumer also. 

Mr. KELLER. Let me just be crystal-clear. Let’s say you are paying 2-percent interchange fees now, and the Conyers bill passes, 

and you go to the arbitrator, and the arbitrator says, ‘‘I agree with 

100 percent with Rotten Robbie, and it is going to be 1 percent,’’ 

will Rotten Robbie customers get a discount when they go to buy 

donuts or gasoline or Coca-Cola as a result of that taking interchange fees from 2 percent to 1 percent? 

Mr. ROBINSON. Well, I don’t think the marketplace works exactly 

like that. 

Mr. KELLER. But your whole argument—— 

Mr. ROBINSON. But, ultimately, ultimately, the answer to your 

question, the consumer will benefit. 

Mr. KELLER. Okay. That is the $64,000 question, because your 

whole argument is you want lower interchange fees because it is 

better for consumers. And so that is why I want to give you the 

chance. He is saying it is not going to benefit consumers. Is it going 

to benefit consumers or not? 

162 

Mr. ROBINSON. There is not a businessman that 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. 

Mr. KELLER. All right. My time has expired. Let me just give you 

one last question. You said over and over you are a businessman 

and not a lawyer, and I really respect that. But I am going to ask 

you sort of a legal question here anyway. 

And that is, when you look at this lawsuit, one of the big things 

in bold that you see is ‘‘jury trial demanded.’’ And there is a reason 

for that, as someone who spent many years as a litigator, often on 

the side of the big companies, in the interest of full disclosure. But 

the little guy wants to have a jury. Often, the big guys would rather not have a jury; they would rather have a judge or an arbitrator 

and other folks, so you don’t have the possibility of massive, inflated verdicts from emotion and that sort of thing. And there are 

always exceptions, but that is the general rule. 

You are seeking legislation that is going to put you in front an 

arbitrator that is binding, not a jury. And, in fact, if you say you 

want a 1-percent fee and Mr. Floum’s Visa client says, no, we want 

5 percent, you are taking a real risk that this binding arbitrator 

may go with his side. 

Are you comfortable taking that gamble and putting yourself in 

that forum, as opposed to the jury trial situation? 

Mr. ROBINSON. The short answer is yes. 

As we looked at the problem in trying to do something about the 

anti-competitive behavior of Visa and MasterCard, we looked at the 

various options. We looked at the option of breaking it up like 

AT&T. We looked at it dealing with it like a utility. And we felt 

that this was a competitive marketplace solution that, quite frankly, we might not do better with. 

I have a hard time believing that we will not. 

Mr. KELLER. But the gist of it is you are willing to take that 

gamble? 

Mr. ROBINSON. Yes. 

Mr. KELLER. Okay. 

Issues have been raised about whether or not you have bargaining power. Have you ever worked with a merchant bank that 

was willing to negotiate a lower interchange fee rate? 

Mr. ROBINSON. No. 

Mr. KELLER. Have you ever attempted to negotiate a lower interchange fee rate with a merchant bank? 

Mr. ROBINSON. We don’t even know who to talk to. So, no, to answer your question, no. 

Mr. KELLER. Well, your own bank you can talk to, right? I mean, 

the acquiring bank you can talk to? 

Mr. ROBINSON. Yes. And we negotiate—the acquiring bank, we 

negotiate processing. And it is interesting, on the processing side, 

that is fiercely competitive. I mean, it is amazing how aggressive 

the processing banks. So you have a processing rate—and they 

have negotiated a processing fee, and that has come down because 

of competition. 

163 

Mr. KELLER. So you are able to negotiate with the banks, in 

terms of the acquiring bank, lower processing fees. But you are not 

sure who to talk to in terms of the issuing bank, negotiating lower 

interchange fees. Is that a fair summary? 

Mr. ROBINSON. Yes. We do not negotiate interchange fees. 

Mr. KELLER. Have you ever tried to negotiate with Visa or 

MasterCard, in terms of getting them to set lower interchange 

fees? 

Mr. ROBINSON. It is not—I mean, it is not an option. 

Mr. KELLER. You are sitting right next to two pretty big players, 

and they said they are going to talk to you. Do you feel any optimism? Are you going to try? 

Mr. ROBINSON. I can’t wait for this hearing to be over, to do that. 

Mr. KELLER. Okay. You have heard the criticism from 

MasterCard and Visa saying that this is price control, because you 

are having the three-judge panel set the rate. Some folks think it 

is only price control if you are having the Government, itself, or bureaucrats set the rate or Congress. But they would dispute that. 

But others may think that you are living under a price-control system now, since you have these two companies with a 75-percent 

market share, and they are telling you, here is the default interchange rate that they are giving to the banks, and take it or leave 

it. 

Do you feel that you have a price-control situation now? And if 

you feel that it is not price controls under the new scheme, tell me 

why. 

Mr. ROBINSON. I would basically call the existing system a pricefixing system, not necessarily a price control. But the result is effectively the same. So that is the existing situation. 

And I think that when you set up an opportunity to provide for 

the parties to negotiate and yet you have something that holds 

their feet to the fire, that at some point in time they can’t just 

stonewall the negotiation process, I consider that a competitive system. 

Mr. KELLER. Mr. Floum, let me go back with the bargaining 

power and negotiation issue. You have heard, essentially, that the 

little guys can negotiate with the acquiring banks to get lower 

processing fees, at least in the mind of Mr. Robinson. Do you think 

that is a true statement, they do have the power to at least negotiate with the acquiring banks? 

Mr. FLOUM. Absolutely. And I believe they are charged a single 

fee for acceptance. The processing fee is a component of that. But, 

yes, absolutely, they can bargain with their acquirer. 

Mr. KELLER. My next question is, I come into Rotten Robbie and 

I use my credit card, which I think is the local credit union here 

in the building. Does he have the ability to negotiate a lower fee 

with my credit union, the so-called issuing bank? 

Mr. FLOUM. He does. And his group, the National Association of 

Convenience Stores, I would think, would have quite a lot to say 

about driving volume to either Visa or one of our competitors. That 

is competition in return for favorable terms. So I am very happy 

right after this to sit down with Mr. Robinson and we can talk 

about. 

164 

Mr. KELLER. So you are saying, not only can he negotiate with 

the acquiring bank, he can also, through some sort of organization 

like the convenience stores trade group, negotiate with a variety of 

issuing banks as well as MasterCard or at least Visa? 

Mr. FLOUM. Yes, sir. And, again, it is a very competitive environment, and we would be looking for something that would drive volume in return for lower rates. 

Mr. KELLER. Let me just—my time has expired, and I think I am 

the last person now, so let me just do a short question to you, Mr. 

Robinson. 

What percentage of your customers at Rotten Robbie use credit 

cards, would you estimate? 

Mr. ROBINSON. Right now, cash represents, total company, just 

a little over 25 percent. We have some locations where we are almost 90 percent plastic. 

Mr. KELLER. Okay. Well, in those locations where you are 90 percent plastic, I understand you are upset about the interchange fees 

that you are paying to the credit cards. Why don’t you just put a 

sign up and say, hey, if you use your debit card, I would appreciate 

it or may even give you a discount, since that apparently is at least 

allowed with Visa? 

Mr. ROBINSON. Basically doing some sort of a cash discount type 

of a—— 

Mr. KELLER. Or debit card. Why don’t you just tell them, hey, 

you know—when they hand you a card that can be used debit or 

credit, why don’t you just tell them, can you use this as your debit 

instead? 

Mr. ROBINSON. There is a number of considerations. 

Number one, the rules that Visa and MasterCard have make it 

more challenging to be able to do that. You do run into some issues 

relative to the State weights and measures. A challenge that you 

run into—I mean, we would prefer to say yes to our customer, not 

no. And trying to do something where you have different pricing is 

confusing to the customer. 

It is very interesting, if you are a credit card user, oftentimes you 

will not perceive that as a discount for cash; you will consider it 

a charge for credit. 

Mr. KELLER. Right, but you are listening to what these smart 

guys are saying, and they are saying, hey, if you don’t like the 

credit card fees, just tell them to use the debit card, because that 

is still a pretty good deal. And it seems common-sense to me. 

If I were you, I would probably be saying, well, I can’t do that 

with everybody because, for a debit card, you have to have money 

in the bank and, credit card, you don’t need the money in the bank. 

So it is not a perfect solution. 

But I just wanted to give you the chance to respond to that, because that is what you are hearing. 

Let me go on and ask you this: If you decided today that, ‘‘I am 

mad as heck, and I am not going to take it anymore, and I am not 

accepting MasterCard and Visa at Rotten Robbies,’’ what would 

happen to your business model? 

Mr. ROBINSON. Oh, I don’t think that is an option. I mean, when 

you are dealing with whichever number that I said, whether it be 

165 

60 percent, 80 percent, 90 percent, and you have that much business in plastic, you not accepting it just really doesn’t work. 

Can I just answer or make a—— 

Mr. KELLER. Yes, but you are saying you would go out of business if you stopped taking MasterCard and Visa? 

Mr. ROBINSON. Well, probably. 

Mr. KELLER. Okay. Yes, go ahead. 

Mr. ROBINSON. One of my options is to push the debit side. What 

is very interesting is, if you look at all the advertisement, you 

know, for pin debit versus signature debit, if you come in with your 

debit card and you don’t use the pin, you don’t use the thing that 

makes the card more secure, that product doesn’t go through the 

debit card network; that goes through the credit card network. I 

am charged credit card rates if you use your debit card. 

Mr. KELLER. All right. 

Mr. ROBINSON. So one of the things that gets a little bit challenging is, if you want to have a discount for debit, it really depends on how it is used. 

Mr. KELLER. Thank you. 

I have been told to wrap up. Just, in fairness, Mr. Floum, on this 

whole debit card issue, do you have anything that you want to respond to about encouraging folks to use debit if you are worried 

about the high interchange fees for credit card? 

And that will be my final question. I will let you respond. 

Mr. FLOUM. Thank you, Congressman. 

Just to clear up any confusion, discounting is permissible. It 

doesn’t require to label separately every item in the store, as we 

have heard from merchants. So that would certainly be a solution 

for retailers that want to try to drive their costs down by steering— 

it is permissible, under our rules—to different forms of payment. 

Mr. KELLER. Thank you. 

And I thank you, Mr. Chairman, for your indulgence. I will yield 

back. 

And I just want to thank the witnesses so much for being here 

and being patient. We appreciate you doing that. 

Mr. COHEN. Thank you, Mr. Keller. 

I just had one question. Is there a Visa Triple Crown this year? 

Mr. FLOUM. I don’t think that we still sponsor the Triple Crown. 

Mr. COHEN. The interchange fees weren’t high enough to be able 

to afford it? [Laughter.] 

Mr. FLOUM. I am not going to respond to that. [Laughter.] 

Mr. COHEN. I didn’t know if Big Brown was going to have to pay 

part of his winnings out of that or not. 

Thank you. I would like to thank our witnesses for their testimony. 

Without objection, Members will have 5 legislative days to submit any additional questions. And we would ask that you answer 

those questions as promptly as you can, which we will forward on 

to you, and they will be made part of the record. 

Without objection, the record will remain open for 5 legislative 

days for the submission of any other additional materials. 

The hearing is adjourned. 

[Whereupon, at 2:34 p.m., the Task Force was adjourned.] 

166 

Æ