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[Senate Hearing 111-845]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 111-845
 
OVERSIGHT OF FEDERAL PAYMENT OF INTERCHANGE FEES: HOW TO SAVE TAXPAYER 
                                DOLLARS

=======================================================================

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                            SPECIAL HEARING

                     JUNE 16, 2010--WASHINGTON, DC

                               __________

         Printed for the use of the Committee on Appropriations

       Available via the World Wide Web: http://www.gpo.gov/fdsys

                               __________

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                      COMMITTEE ON APPROPRIATIONS

                   DANIEL K. INOUYE, Hawaii, Chairman
ROBERT C. BYRD, West Virginia        THAD COCHRAN, Mississippi
PATRICK J. LEAHY, Vermont            CHRISTOPHER S. BOND, Missouri
TOM HARKIN, Iowa                     MITCH McCONNELL, Kentucky
BARBARA A. MIKULSKI, Maryland        RICHARD C. SHELBY, Alabama
HERB KOHL, Wisconsin                 JUDD GREGG, New Hampshire
PATTY MURRAY, Washington             ROBERT F. BENNETT, Utah
BYRON L. DORGAN, North Dakota        KAY BAILEY HUTCHISON, Texas
DIANNE FEINSTEIN, California         SAM BROWNBACK, Kansas
RICHARD J. DURBIN, Illinois          LAMAR ALEXANDER, Tennessee
TIM JOHNSON, South Dakota            SUSAN COLLINS, Maine
MARY L. LANDRIEU, Louisiana          GEORGE V. VOINOVICH, Ohio
JACK REED, Rhode Island              LISA MURKOWSKI, Alaska
FRANK R. LAUTENBERG, New Jersey
BEN NELSON, Nebraska
MARK PRYOR, Arkansas
JON TESTER, Montana
ARLEN SPECTER, Pennsylvania

                    Charles J. Houy, Staff Director
                  Bruce Evans, Minority Staff Director
                                 ------                                

       Subcommittee on Financial Services and General Government

                 RICHARD J. DURBIN, Illinois, Chairman
MARY L. LANDRIEU, Louisiana          SUSAN COLLINS, Maine
FRANK R. LAUTENBERG, New Jersey      CHRISTOPHER S. BOND, Missouri
BEN NELSON, Nebraska                 LAMAR ALEXANDER, Tennessee
JON TESTER, Montana                  THAD COCHRAN, Mississippi (ex 
DANIEL K. INOUYE, Hawaii (ex             officio)
    officio)

                           Professional Staff

                        Marianne Clifford Upton
                         Diana Gourlay Hamilton
                       Melissa Zimmerman Petersen
                        Dale Cabaniss (Minority)
                    Brooke Hayes Stringer (Minority)
                       LaShawnda Smith (Minority)

                         Administrative Support

                          Molly Barackman-Eder

                            C O N T E N T S

                              ----------                              
                                                                   Page

Opening Statement of Senator Richard J. Durbin...................     1
Statement of Senator Susan Collins...............................     3
Statement of Gary Grippo, Deputy Assistant Secretary for Fiscal 
  Operations and Policy, Department of the Treasury..............     5
    Prepared Statement of........................................     8
Overview of Federal Collections..................................     8
Use of Credit and Debit Cards in Federal Collections.............     8
Cost of Processing Federal Collections...........................     9
The Issue of Card Costs..........................................    10
Negotiating New Rates and Terms..................................    10
Potential Cost Savings...........................................    10
Statement of Dr. Alicia Puente Cackley, Director, Financial 
  Markets and Community Investment, Government Accountability 
  Office.........................................................    12
    Prepared Statement of........................................    14
Credit and Debit Cards: Federal Agencies Benefit From Card 
  Acceptance, but Have Limited Ability to Control Interchange Fee 
  Costs..........................................................    14
Scope and Methodology............................................    16
Federal Entities Receive Numerous Benefits Associated With Card 
  Acceptance, but Also Pay Interchange Fees and Other Costs......    16
Federal Entity Officials Cited Various Benefits From Accepting 
  Cards..........................................................    18
Card Usage by Federal Entities Provides Numerous Benefits, but 
  Creates Control Challenges.....................................    19
Federal Entities Have Worked to Reduce Card Acceptance Costs, but 
  Efforts to Negotiate Lower Interchange Fees Have Had Limited 
  Success........................................................    20
Federal Entities Have Had Limited Success in Negotiating Lower 
  Interchange Fee Costs..........................................    21
Merchants Similarly Have Had Limited Success in Reducing Their 
  Interchange Fee Costs..........................................    22
Card Network Rules Are a Major Factor Limiting Card Accepters' 
  Ability to Negotiate Lower Interchange Fees....................    23
Removal of Anti-steering Rules Seen as Improving Merchants' 
  Ability to Negotiate With Card Networks, but Impact of Lower 
  Interchange Rates on Consumers is Unclear......................    23
Statement of Janet Langenderfer, Senior Director of Credit Cards, 
  Finance Department, National Railroad Passenger Corporation 
  (Amtrak).......................................................    25
    Prepared Statement of........................................    27
The Direct and Indirect Costs of Acceptance......................    28
Fast and Accurate Transactions...................................    28
Security Costs and Considerations................................    29
Statement of Bruce Sullivan, Vice President and Head of 
  Government Services, Visa Inc..................................    36
    Prepared Statement of........................................    38
What is Interchange?.............................................    39
Government Benefits From Accepting Electronic Payments...........    39
Government Benefits From Card Issuance...........................    42
Statement of Edmund Mierzwinski, Consumer Program Director, U.S. 
  Public Interest Research Group.................................    44
    Prepared Statement of........................................    46
The New GAO and Treasury Studies and the Durbin Amendment........    47
Further Discussion...............................................    48
Interchange and its Effects......................................    49
Interchange Fees Force Consumers to Pay Higher Prices............    49
Increases in Interchange Fees Signal a Broken Market.............    50
Durbin Amendment Slows Deceptive Practices That Increase Prices 
  for Consumers..................................................    52
Increased Consolidation of Card-issuers Harms Consumers More 
  Broadly........................................................    53
The Credit Card Oligopoly Also Allows Issuers to Use Anti-
  consumer Practices Against Cardholders.........................    54
Statement of Wendy Chronister, President and Chief Executive 
  Officer, Chronister Oil Company (d/b/a/ Qik-N-Ez Convenience 
  Stores), Springfield, Illinois.................................    55
    Prepared Statement of........................................    57
The Impact of Runaway Credit Card Fees on my Convenience Store 
  Busi- 
  ness...........................................................    58
Background on the Durbin Amendment...............................    59
Consumers Will Benefit From Reform...............................    59
The Durbin Amendment Would Bring Reasonable Reform...............    61
Additional Committee Questions...................................    69
Questions Submitted to Gary Grippo...............................    69
Questions Submitted by Senator Jon Tester........................    69
Questions Submitted to Alicia Puente Cackley.....................    70
Question Submitted by Senator Ben Nelson.........................    70
Questions Submitted by Senator Jon Tester........................    71
Question Submitted to Janet Langenderfer.........................    72
Question Submitted by Senator Jon Tester.........................    72

OVERSIGHT OF FEDERAL PAYMENT OF INTERCHANGE FEES: HOW TO SAVE TAXPAYER 
                                DOLLARS

                              ----------                              

                        WEDNESDAY, JUNE 16, 2010

                           U.S. Senate,    
         Subcommittee on Financial Services
                            and General Government,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 2:35 p.m., in room SD-192, Dirksen 
Senate Office Building, Hon. Richard J. Durbin (chairman) 
presiding.
    Present: Senators Durbin, Nelson, Tester, and Collins.

             OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

    Senator Durbin. Well, good afternoon, everyone. Thanks for 
being here. I am pleased to convene this hearing before the 
Senate Appropriations Subcommittee on Financial Services and 
General Government. Our hearing is titled ``Oversight of 
Federal Payment of Interchange Fees: How to Save Taxpayer 
Dollars.''
    I welcome my distinguished ranking member, Senator Susan 
Collins of the great State of Maine, and other colleagues are 
to join us a little later during the course of this hearing.
    We are also pleased to have a distinguished group of 
witnesses, and I will be introducing them in just a moment.
    Credit and debit cards are rapidly replacing cash and 
checks in today's economy, accounting for more than one-half of 
all retail sales in America, and that percentage is growing.
    Credit and debit cards are also used to buy nearly $30 
billion a year in goods and services from our Federal 
Government.
    People use cards to pay for things like admission passes to 
the national parks, groceries at military commissaries, tickets 
on Amtrak, and co-pays for Veterans Administration (VA) medical 
services.
    There are benefits to being able to use plastic for 
transactions, but there are also some consequences. The more 
Americans use credit and debit cards, the more the American 
economy falls under the control of the two credit card giants, 
Visa and MasterCard.
    Visa and MasterCard control 80 percent of the credit and 
debit card markets, and they have established a system of fees 
and rules that apply to every transaction conducted across 
their networks. Every time a credit or debit card sale is made, 
Visa and MasterCard take a cut of the transaction amount. Some 
of this cut they keep, but most of it is routed along to the 
bank that issued the card used in the transaction. This fee 
that they give to the card-issuing bank is called the 
interchange fee.
    Interchange fees, also known as swipe fees, average around 
1 to 3 percent of the transaction. Because the fees are 
deducted from the transaction, the seller who accepts the card 
ends up with less than 100 percent of the actual amount.
    An estimated $48 billion in credit and debit card 
interchange fees were collected in 2008 from those who accept 
credit cards and debit cards, including small businesses, 
charities, Government agencies, universities, you name it.
    While the interchange fee is not the only fee charged on 
debit and credit transactions, it is the largest. It is also 
unique in the way that it was established. Interchange fees are 
received by the card-issuing bank, but banks do not set the 
rates for the fees that they receive. Instead, interchange fees 
are set by Visa and MasterCard who apply the same schedule of 
rates to all card-issuing banks within their networks. All 
banks in the network are guaranteed the same interchange rates 
regardless of how efficient or inefficient a bank manages its 
card-issuance costs.
    There is no agency with regulatory authority over the 
nearly $50 billion collected every year in interchange fees. 
Nor is there any competition or negotiation in the market to 
keep these fees in check. Visa and MasterCard set the fee rates 
as they see fit, tell the merchants take it or leave it.
    Given the card companies' enormous market power and the 
rigid operating rules that they unilaterally mandate, it is 
extremely difficult for those who accept their cards, including 
the Federal Government, to influence how much Visa and 
MasterCard will make them pay.
    We need to step back and recognize the reality of the 
situation: Visa and MasterCard and their big bank allies want 
credit and debit cards to completely replace cash and checks. 
That is their market goal, and we are already halfway there.
    Already when a sale is made by a credit or debit card, the 
person who makes the sale only receives 98 cents or 97 cent on 
the dollar. The card companies automatically take a cut. The 
cut keeps growing.
    If we do not take steps to reasonably regulate this system, 
a dollar will not be worth a dollar anymore. It will be worth 
whatever Visa and MasterCard want it to be. We will literally 
cede control of America's currency to the Visa and MasterCard 
duopoly. The economic consequences to American businesses, 
particularly small businesses operating on a thin margin, to 
consumers and to taxpayers could be staggering.
    I sponsored an amendment in the Senate that would require 
debit interchange fees to be set at a reasonable level and 
prevent Visa and MasterCard from prohibiting those who accept 
cards from offering discounts to consumers. This amendment is 
critical to addressing the abuses of the card companies' fees 
and rules.
    As chair of this subcommittee, I have also devoted 
particular attention to the amount of interchange fees that the 
Federal Government pays through Amtrak, the Department of 
Defense, the National Park Service, the Veterans 
Administration. Of course, interchange fees paid by the Federal 
Government are actually paid with taxpayer dollars, and we have 
an obligation to make sure the taxpayer is getting the best 
value possible.
    At my request last year, the Appropriations Committee 
directed the Financial Management Service (FMS) within the 
Treasury Department to provide a report on potential cost 
savings that the Federal Government could receive if FMS were 
able to effectively negotiate changes to the interchange fees 
and operating rules established by the card networks. The 
report concludes that Treasury could save an estimated $36 
million to $39 million per year in taxpayer dollars if Treasury 
were able to negotiate terms with the card networks.
    We have invited the Treasury Department here to discuss 
this report and explain what terms they seek to negotiate with 
the card networks.
    We are also pleased to be joined today by representatives 
of Amtrak, which also incurs significant interchange fees, as 
well as the Government Accountability Office (GAO), which 
issued a report on Federal payment of interchange fees in 2008.
    On our second panel, we will have representatives from 
Visa, the U.S. Public Interest Research Group, and we will also 
hear from one of my constituents, Wendy Chronister, who grew up 
in my neighborhood and who operates several convenience stores 
in central Illinois and faces these fees every day.
    Today's hearing is not to debate whether credit and debit 
cards can bring benefit to the Federal Government and other 
accepters of cards. We all agree that cards do provide benefits 
like convenience, electronic recordkeeping, and a lighter 
wallet. Instead, this hearing is about whether the current 
system of fees and rules that Visa and MasterCard have 
established are necessary to achieve those benefits. We will 
discuss how increased competition and an end to unrestrained 
fee increases will help improve the system and actually save 
taxpayer dollars.
    I would like to now turn to my ranking member, Senator 
Collins, for any remarks she would like to make.

                   STATEMENT OF SENATOR SUSAN COLLINS

    Senator Collins. Thank you, Mr. Chairman, and thank you for 
calling this oversight hearing on the issue of the Federal 
Government's payment of interchange fees on credit and debit 
cards.
    I must say when you first brought this issue up when we 
were discussing our legislation, I had no idea how pervasive 
the use of credit and debit cards were within the Federal 
Government. The fact is hundreds of executive branch agencies, 
as well as legislative agencies and the judiciary, accept 
credit and debit cards as payments for goods and services 
provided by the Federal Government. From the Defense Department 
commissaries, to the U.S. Mint, to the national parks, all 
types of Federal agencies accept credit and debit cards.
    And as you pointed out, Mr. Chairman, the use of those 
cards is growing. In fact, this is an area where I see a real 
age difference. I am sure you have found, as I have, that our 
younger staff members carry no cash and use debit cards for 
everything.
    Because of concerns that the Federal Government may be 
paying excessive interchange fees associated with the use of 
those cards, this subcommittee required the Financial 
Management Service at the Department of the Treasury to provide 
a comprehensive report on issues associated with the rates, 
fees, and types of card payments, and the methods by which 
transactions are processed.
    The Treasury Department witness today will discuss the new 
report issued by the FMS.
    As the use of credit and debit cards by consumers continues 
to grow, Federal entities' acceptance of these cards can be 
expected to grow as well. We look forward to receiving more 
detailed information on those transactions so that we will be 
in a better position to evaluate just whether the best 
interests of taxpayers are being served in these transactions.
    For that reason, to assist us, I am particularly looking 
forward to the testimony of the GAO. I understand that the GAO 
has done some analysis of the payment of fees by a number of 
Federal entities and quasi-Federal entities such as Amtrak and 
the Postal Service. I hate describing them as Federal entities, 
particularly the Postal Service, because that reinforces the 
view that they are getting these huge Federal subsidies, which 
they are not in the case of the Postal Service.
    According to a 2008 GAO report, the cost of these fees to 
the Federal Government at that time was more than $400 million, 
and I understand we will get some updated data today.
    As evidenced by the appearance of our second panel, as well 
as the chairman's remarks, the issue of interchange fees is not 
limited to the Federal Government. In fact, the chairman 
successfully offered one of the very few bipartisan supported 
amendments to the financial reform bill, calling on the Federal 
Reserve to establish reasonable fees for debit card 
transactions for institutions with more than $10 million in 
assets. That threshold was intended to exempt smaller banks and 
credit unions across the country. Some of these smaller 
institutions, however, from my State have expressed concerns to 
me about whether the amendment gives the Federal Reserve the 
flexibility it needs to ensure that all the costs that smaller 
institutions incur in providing card services are fully taken 
into account in setting interchange fees.
    I am looking forward to hearing the testimony from Visa 
because I am interested to learn whether credit card companies 
will develop separate fees and rules for smaller versus larger 
institutions.
    And finally, like the chairman, I am interested in hearing 
the views of consumer advocates and retailers. I must say 
convenience stores throughout my State have repeatedly talked 
to me about the burden of these fees, particularly when an 
individual is coming in and only buying a cup of coffee. And a 
lot of times, the profit from that sale goes to the interchange 
fees.
    This is a difficult issue to deal with, but I also know 
that financial institutions, particularly smaller institutions, 
really rely on the fee income generated by these cards.
    So it is my hope today that we will able to fill in some of 
the blanks and come to a better understanding, and I appreciate 
your leadership, Mr. Chairman.
    Senator Durbin. Thanks, Senator Collins.
    Our first panel includes our first witness, Gary Grippo. 
Gary is the Deputy Assistant Secretary for Fiscal Operations 
and Policy at the Department of the Treasury, provides advice 
and recommendations on a broad range of Government fiscal 
affairs, including cash management, financial and housing 
stability programs.
    Prior to this appointment, Mr. Grippo served as Assistant 
Commissioner for Federal Finance for the Financial Management 
Service, a bureau of the Department of the Treasury, where he 
managed the Government's revenue collection systems and 
depository banking relationships.
    He studied at Harvard University and the London School of 
Economics.
    Our second witness is Alicia Cackley, Director of Financial 
Markets and Community Investment at the U.S. Government 
Accountability Office. She manages several teams of analysts 
doing program evaluation and policy research on a broad range 
of issues, including consumer protection, financial literacy, 
and homelessness. Ms. Cackley received her Ph.D. in economics 
from the University of Michigan and has been with the 
Government Accountability Office for 20 years.
    The third witness on the panel is Janet Langenderfer, the 
Senior Director of Credit Cards with the National Railroad 
Passenger Corporation, also known as Amtrak. She has been with 
Amtrak for 6 years and had extensive experience in the credit 
card industry. She has an M.B.A. from George Washington 
University and a B.A. in business and economics from the 
University of Maryland.
    My thanks to all the members of the panel.
    Mr. Grippo, we are going to let you start off. Your written 
statement will be a part of our record, and if you could take 5 
minutes and summarize it, we will ask some questions after we 
are finished hearing from the entire panel.

STATEMENT OF GARY GRIPPO, DEPUTY ASSISTANT SECRETARY 
            FOR FISCAL OPERATIONS AND POLICY, 
            DEPARTMENT OF THE TREASURY
    Mr. Grippo. Well, thank you, Chairman Durbin, Ranking 
Member Collins, and other members of the subcommittee. I am 
pleased to be here to testify about the Federal Government's 
costs of accepting credit and debit cards for collecting 
Federal revenue.
    The Federal Government is among the largest entities that 
accept payment by credit and debit card. My statements today 
reflect the interests of the Federal Government acting as a 
participant in the card payment system and are not offered from 
the perspective of a regulator or policymaker commenting on 
financial regulatory reform.
    The Treasury Department centrally collects and deposits all 
Federal revenue on behalf of 228 Federal agencies. In fiscal 
year 2009, the Treasury processed 391 million collection 
transactions, totaling $2.86 trillion in gross Federal revenue. 
These transactions include collections for taxes, duties, fees, 
fines, sales of goods and services, leases, loan repayments, 
among many other transactions.
    Credit and debit cards are an important mechanism for 
processing many of these collections, and Federal agencies 
increasingly rely upon them to deliver Government services, 
operating over 4,300 point-of-sale locations that accept cards.
    Cards afford citizens and businesses with a convenient 
means of interacting with their Government, and examples 
include, some of which have already been cited, the Department 
of Education accepting payment for various student loan fees, 
the National Park Service for park entrance and camping fees, 
the Federal Communications Commission (FCC) for radio operator 
licenses, the Centers for Medicare and Medicaid Services for 
individual Medicare premiums, the Federal Bureau of 
Investigation (FBI) for Freedom of Information Act document 
fees, the VA medical centers for insurance copayments from 
veterans, Defense commissaries for the purchase of groceries by 
service members, and Customs and Border Protection for customs 
duties paid by citizens arriving at airports.
    Last year, Federal agencies collected $8.6 billion through 
80 million credit and debit card transactions. These 
transactions have been steadily increasing, with an average 
annual growth rate of over 15 percent over the last 5 years.
    However, cards are by far the most expensive mechanism to 
process Federal collections. In fiscal year 2009, the Treasury 
spent $116 million on interchange and card network fees. By 
contrast, it cost the Treasury only $66 million to operate the 
electronic Federal tax payment system which processed $1.9 
trillion in tax collections through wire transfers and 
electronic funds transfers.
    Moreover, the average per transaction cost of cards is more 
than twice that of other collection mechanisms. Last year, for 
example, the average card transaction cost $1.45, while the 
average cost of processing a paper check that was mailed to a 
Federal agency cost 60 cents.
    The cost structure of cards for the Federal Government can 
be summed up with this statistic. Cards collections represent 
three-tenths of 1 percent of total Federal revenue but 
constitute 20 percent of total collection costs. Credit card 
interchange fees are the largest component of these costs, with 
an average effective rate of 1.9 percent for all Federal credit 
card collections.
    As mentioned, the Treasury and not each Federal agency pays 
for these card costs, and because these card costs are borne 
centrally by the Treasury, the mechanism for paying them 
differs from the commercial model. Normally a commercial 
merchant pays its card fees by means of a discount to its 
transactions such that a merchant charged card fees of 2 
percent on a sales transaction of $100 would result in a 
deposit of $98 to the merchant with $2 withheld to cover the 
fees. When a Federal agency accepts payment for a $100 
transaction with a $2 fee, however, the agency will receive a 
deposit at par for $100 and the Treasury will be separately 
billed for a $2 fee. Those card fees for agencies across the 
Government are borne by the general fund of the Treasury and 
any reductions to card costs would go directly to reducing the 
Federal deficit.
    As a steward of taxpayer money, the Treasury has for some 
time been concerned about the relatively high cost of the 
Federal Government's card transactions and has taken several 
actions in recent years to help manage these costs. For 
example, the Treasury may not offer the option of card 
collections to an agency starting up a new Federal program when 
the average transaction amount may be too high and result in 
exorbitant costs to the Treasury.
    These kinds of actions, while prudent and helpful in 
containing costs, do not address the level of interchange rates 
or the manner in which they are set, and while the Treasury 
does benefit relative to some commercial merchants from special 
interchange rates afforded only to Government entities, these 
rates are established unilaterally and are not applied to most 
transactions.
    Although the Treasury has held discussions with card 
networks in attempts to reduce the Federal Government's card 
costs, it has been unable to negotiate real reductions in rates 
and must choose between paying the prescribed rates or not 
accepting cards under a given Federal program. Simply denying 
the public the option of making a payment by card, however, is 
not viable in many cases since it would mean turning away 
citizens that have tendered a card for a sensitive or essential 
Government service and instructing them to return with a check 
or cash.
    As mentioned, the conference report to the fiscal year 2010 
Consolidated Appropriations Act directed the Treasury to 
identify potential cost savings to the Federal Government if 
the Treasury were able to effectively negotiate changes in fees 
and operating rules imposed by card networks.
    In our response to the conference report, we indicated that 
one potential solution to consider was providing the Treasury 
with a mechanism to restrict or opt out of accepting cards for 
particular transactions without incurring a penalty from a card 
network if processing the transaction would be contrary to the 
public interest.
    For example, one mechanism may include granting Treasury 
legal authority to establish new standards for processing 
public financial transactions, similar to the authority the 
Treasury currently holds to establish standards for 
depositories that hold public money. Any such mechanism would 
not permit the Treasury to compel a card network or a member 
institution to reduce its fees or to provide services to the 
Government. Such a mechanism, including any new legal 
authority, would be targeted simply to allow the Treasury to 
establish standards for removing transactions from the 
restrictions of card network rules and to process them through 
some other payment mechanism.
    The widespread limitation of card transactions would be 
neither the likely nor the desired result from this authority 
since the Federal Government would still have every incentive 
to let citizens pay by card. However, having the ability to opt 
out of certain transactions based on cost could allow the 
Treasury to negotiate pricing terms on behalf of the taxpayer 
from a more equitable position since the Treasury would have 
the credible option of avoiding outlying costly card 
transactions.
    As we consider potential solutions, we are certainly 
mindful of the complex legal and business issues associated 
with the Treasury's conduct in the payments marketplace, but if 
the Treasury could effectively negotiate costs and certain 
processing rules with card payment providers, we believe that 
significant savings could be achieved. Although cards would 
still be the Treasury's highest cost collection mechanism, the 
Treasury could reduce the Federal Government's per-transaction 
cost by an estimated 45 cents to 49 cents, equating to $36 
million to $39 million in reduced annual interchange fees.
    I thank you for the opportunity for having this discussion 
and look forward to questions.
    [The statement follows:]

                   Prepared Statement of Gary Grippo

    Chairman Durbin, Ranking Member Collins, and members of the 
Subcommittee, thank you for inviting me to testify about the Federal 
government's costs of accepting credit and debit cards to collect 
Federal revenue.
    The Federal government is among the largest entities that accepts 
payments by credit and debit card. My statements today reflect the 
interests of the Federal government acting as a participant in the 
national payment card system, and are not offered from the perspective 
of a policy maker commenting on financial regulatory reform or on the 
interests of commercial participants in the larger economy.

                    OVERVIEW OF FEDERAL COLLECTIONS

    The Treasury Department, through its bureau the Financial 
Management Service (FMS), centrally collects and deposits all Federal 
revenue on behalf of all Federal agencies. In fiscal year 2009, through 
a network of over 125 banks acting as financial agents to the Federal 
government, the Treasury processed 391 million collection transactions 
totaling nearly $2.86 trillion in gross revenue. These transactions 
include collections for taxes, duties, fees, fines, sales of goods and 
services, leases, and loan repayments, among many other types of 
transactions. The largest customer of these centrally provided 
collection services is the Internal Revenue Service for individual and 
corporate income taxes, but 228 other agencies rely on the Treasury for 
collection and deposit services.
    To process these collections, the Treasury maintains an 
infrastructure that allows individuals and organizations around the 
world to make payments to any Federal agency. This infrastructure uses 
all the settlement mechanisms available in the U.S. payments system, 
including wire transfers, Automated Clearinghouse (ACH) entries, credit 
and debit cards, checks and other paper drafts, and cash, as well as a 
number of cross-border payment mechanisms. The Treasury's collections 
infrastructure also includes some of the largest cash management 
systems in the world, such as the Electronic Federal Tax Payment System 
(EFTPS), which in fiscal year 2009 processed $1.9 trillion in tax 
collections though wire transfers and ACH entries from 11.5 million 
businesses and individuals enrolled in EFTPS. The Treasury maintains 
extensive government-wide customer service capabilities to help Federal 
agencies process the collections required under their programs, and to 
assist with the accounting and reconciliation of transactions.
    The Treasury has several objectives in managing this global 
collections infrastructure. One objective is to minimize collection 
float and to settle funds into the Treasury's main account at the 
Federal Reserve as soon as possible after a transaction is authorized 
or initiated. Another goal is to process transactions at the lowest 
possible cost, while recognizing that in some cases transaction costs 
are driven by the statutory requirements of a Federal agency's program 
and may not be discretionary. A third requirement is, of course, to 
timely and properly account for and report on the millions of 
transactions processed through the infrastructure. In measuring these 
goals, the Treasury monitors several important metrics, including the 
percentage of transactions conducted electronically versus through cash 
and checks, and the unit cost of collections, both by the cost per 
transaction and the cost per dollar collected.

          USE OF CREDIT AND DEBIT CARDS IN FEDERAL COLLECTIONS

    Credit and debit cards are an important part of the Treasury's 
collections service, and Federal agencies increasingly rely upon them 
to support Federal programs and deliver services. Cards help meet the 
Treasury's cash management objectives by improving the accuracy and 
timeliness of Federal collections through the displacement of cash and 
checks. Cards afford citizens and small businesses with a convenient 
means of transacting with their government, particularly online at 
Federal agency web sites. Through a commercial bank acting as a 
financial agent to the Federal government, the Treasury allows Federal 
agencies to accept American Express, Discover, MasterCard, and Visa 
credit and debit cards, as well as PIN-based debit cards. Over 200 
Federal agencies operating 4,350 point of sale locations currently 
accept cards. Examples of Federal programs for which cards are accepted 
include the Federal Communications Commission for radio operator 
licenses, the Centers for Medicare and Medicaid Services for individual 
Medicare premiums, the Federal Bureau of Investigation for Freedom of 
Information Act document fees, and the U.S. Mint for coin sales. In 
fiscal year 2009, Federal agencies collected $8.6 billion through 80.3 
million credit and debit card transactions. Mirroring trends in the 
larger economy, the number of card transactions with Federal agencies 
has been steadily increasing, with an average annual growth rate of 
over 15 percent over the last 5 years. Note that these statistics do 
not include the U.S. Postal Service and non-appropriated Federal 
instrumentalities that manage their banking relationships outside of 
the Treasury.

                 COST OF PROCESSING FEDERAL COLLECTIONS

    The Treasury pays for the Federal government's collections 
infrastructure and bears the costs of processing transactions on behalf 
of Federal agencies, in part because only the Treasury or its 
designated agent banks, and not Federal agencies or their contractors, 
may legally hold public money. This centralized model ensures that the 
Federal government has the most efficient systems to take advantage of 
economies of scale, helps the Treasury enforce government-wide 
standards for financial transactions, and allows the Treasury to better 
manage the revenue side of government's daily cash position. In fiscal 
year 2009, the Treasury spent $561 million on the Federal government's 
collection and deposit infrastructure, which includes expenditures to 
pay for transaction and service fees to process collections received or 
authorized by mail, by phone, over-the-counter, over the Internet, and 
through banking networks.
    Credit and debit cards represent the most expensive component of 
the infrastructure, costing $116 million in interchange and card 
network fees, with an average transaction cost of $1.45, in fiscal year 
2009. By contrast, EFTPS cost the Treasury $65.7 million to process 101 
million income tax transactions, for an average transaction cost of 
$0.65, and the Treasury's general lockbox network, which processes 
paper check collections for all Federal agencies, cost $22.4 million to 
process 37 million items, for an average transaction cost of $0.60. 
Card collections represent only 0.31 percent of total Federal revenue, 
but 20 percent of total collections costs. Interchange fees charged by 
card networks are the largest component of these card costs, with an 
average rate of 1.9 percent across all Federal credit card collections 
transactions in fiscal year 2009. In contrast to a continuing decline 
in the unit cost of other collection mechanisms, moreover, this credit 
card interchange rate has remained relatively constant for many years.
    As stated earlier, the Treasury and not each Federal agency pays 
for credit and debit card fees. Because these costs are borne centrally 
by the Treasury, the mechanism for paying them differs from the 
commercial model. Normally, a commercial merchant pays its card fees by 
means of a discount to its transactions. For example, if a merchant is 
charged card fees of 2 percent, a sales transaction of $100 would 
result in a deposit of $98 to the merchant when the card transaction 
settles, with $2 withheld to cover the fees. When a Federal agency 
accepts a card payment for a $100 transaction with a 2 percent card 
fee, however, the agency will receive a deposit at par of $100 and the 
Treasury will be separately billed for a $2 fee. Card fees for agencies 
across the Federal government are borne by the general fund of the 
Treasury, and any reductions to card costs would go directly to 
reducing the Federal deficit.
    As a steward of taxpayer money, the Treasury has for some time been 
concerned about the relatively high cost of the Federal government's 
card transactions, and has taken several actions in recent years to 
help manage these costs. In fiscal year 2006, when the Treasury 
solicited re-bids for government-wide card acquiring services, overall 
cost was the most important factor in selecting an acquiring bank. In 
2005, the Treasury issued a bulletin to Federal agencies instructing 
them to limit their card collections to cashflows that consisted only 
of individual transactions less than $100,000, since several agencies 
were accepting cards under programs with individual transactions that 
could range in size from under $100 to over $1 million. The Treasury 
has also entered into agreements with Federal agency Chief Financial 
Officers to establish goals and metrics for reducing an agency's 
collections costs by moving transactions to more efficient mechanisms, 
such as ACH, when it can be done without impairing the agency's ability 
to deliver services under a program. In some cases, moreover, the 
Treasury will not offer the option of card collections to an agency 
implementing a new Federal program when the average transaction amount 
is too high and would result in exorbitant costs to the Treasury. Last, 
for PIN-based debit card transactions, the Treasury minimizes costs 
through technology that ensures transactions are routed through the 
processing network with the lowest effective rate for a transaction.

                        THE ISSUE OF CARD COSTS

    These actions, while prudent and helpful in containing costs, do 
not address the core issues of the level of interchange rates and other 
mandatory fees paid by the Federal government, and how the card 
networks establish these charges. While the Treasury does benefit, 
relative to some commercial merchants, from special interchange rates 
offered only to governmental entities in some instances, these rates 
are established unilaterally and are not applied consistently across 
transactions and payment networks. And although the Treasury has held 
direct and indirect discussions with the card networks over the years 
in attempts to reduce the Federal government's card acquiring costs, 
rates have never been open to negotiation. Thus the Treasury, acting 
strictly as an acceptor of payment cards and not as a regulator or 
public policy maker, has been unable to realize acceptable reductions 
in its interchange rates and must choose between accepting cards at the 
prescribed rates or not accepting cards as a payment mechanism for a 
given Federal program.
    Denying the public the option of making payment by card, however, 
is not viable in most cases, since it would mean turning away citizens 
and businesses that have tendered a card and instructing them to return 
with cash or check to pay for sensitive or essential government 
services, such as a small business paying a fee to the Patent and 
Trademark Office, a veteran making an insurance co-payment to a VA 
Medical Center, or a medical clinic paying the Department of Health and 
Human Services to research a physician in the National Practitioner 
Data Bank. Moreover, card transactions are crucial to the delivery of 
many government services on-line, where other payment mechanisms may 
not be feasible. As a matter of both public policy and customer 
convenience, citizens are, of course, increasingly interacting with 
their government over the Internet, with on-line card transactions 
growing 22 percent in fiscal year 2009.

                    NEGOTIATING NEW RATES AND TERMS

    The Conference Report to the fiscal year 2010 Consolidated 
Appropriations Act directed the Treasury ``to report to the House and 
Senate Appropriations Committees . . . on the potential cost savings 
and other benefits to the Federal Government if [the Treasury] were 
able to effectively negotiate (1) changes in the rates and fees 
assessed by card networks and (2) modifications to the rules and 
regulations of the card networks which restrict the Federal 
Government's ability to determine the types of card payments it accepts 
and the methods by which its transactions are processed.'' If we accept 
the premise in the Conference Report--that the current structure of the 
payment card system has not afforded the Treasury an opportunity to 
negotiate appropriate prices--then one potential solution to consider 
is providing the Treasury with a mechanism to restrict or opt out of 
accepting cards for particular transactions, without incurring a 
penalty from a card network for violating the rule to accept all cards, 
if processing the transactions would be contrary to the public interest 
due to unduly high cost. For example, one mechanism may include 
granting the Treasury legal authority to establish new standards for 
processing public financial transactions, similar to the authority the 
Treasury currently holds to establish standards for depositories that 
hold public money.
    Any such mechanism should not permit the Treasury to compel a card 
network or member institution to reduce fees, to make special changes 
in rules or fee structures, to provide any services to the government, 
or to enter into any agreements with the government. Such a mechanism, 
including any new legal authority, would only apply prospectively and 
could be targeted to simply allow the Treasury to establish standards 
for removing transactions from the cross restrictions in card network 
rules and to process them through another payment mechanism without 
enjoining any parties. The widespread restriction of card transactions 
would be neither the likely nor the desired result from such authority, 
since the Federal government would still have every incentive from 
other quarters to let citizens pay by card. However, having the ability 
to opt out of certain transactions based on cost, which may include 
options provided under new legal authority, would allow the Treasury to 
negotiate pricing terms on behalf of the taxpayer from a more equitable 
position, since the Treasury would have the credible option of avoiding 
card transactions where the expense to the taxpayer clearly outweighs 
any benefits. Any such negotiations for new pricing terms would be 
conducted separately with each card network on a bilateral basis.

                         POTENTIAL COST SAVINGS

    As we consider potential solutions, there are difficult legal and 
business questions that must be carefully assessed. Nevertheless, I can 
provide an outline of several goals the Treasury may seek to achieve if 
the Treasury could reasonably negotiate costs and certain processing 
rules with card payment providers. We believe that significant cost 
savings could be achieved, but also underscore that we are mindful of 
the complex issues associated with the Treasury's conduct in the 
payments marketplace. The following terms represent the types of 
approaches the Treasury could pursue.
    First, the Treasury could negotiate to establish a simplified 
framework for interchange rates. For example, the Treasury might 
negotiate to create one interchange rate that the government would pay 
to card networks for all credit transactions, and a separate single 
interchange rate the government would pay to networks for all debit 
transactions. The rates would apply regardless of how a transaction is 
tendered (e.g., card present versus card not present), the type of card 
used (e.g., rewards versus non-rewards), or the type of Federal 
collection (e.g., sale of goods, loan repayment, fine, etc.). These 
uniform rates would displace the current complex of rate categories 
applied to Federal agency transactions.
    Second, the Treasury could seek to have the option of establishing 
a maximum transaction amount above which an individual credit card 
transaction would not be allowed. Above certain dollar amounts, credit 
cards are simply not an appropriate payment mechanism under most 
Federal programs, especially when the Treasury can process the 
transaction at considerably less expense with any other paper or 
electronic payment mechanism.
    Third, Treasury could attempt to negotiate reasonable limits or 
mutually acceptable rules on the card networks' unilateral right to 
raise or institute new fees. Such reasonable limits are important not 
only for reasons of equity, but also to ensure that any reductions that 
the Federal government may realize in total interchange costs are not 
offset by increases in other mandatory card network fees.
    Fourth, Treasury could pursue the right to establish and collect a 
processing fee from an individual card holder to defray the Treasury's 
cost of processing a particular transaction. Such a fee would not be 
used in most cases or with Federal programs with broad public 
participation, but might be charged in those cases where the cost of 
unique transactions should be reasonably borne by the individual card 
holder receiving some special benefit and not by the general taxpayer. 
The amount of the fee would be limited to the cost to the Treasury 
imposed by a card network for the transaction, and would be deposited 
into the Treasury as a miscellaneous receipt.
    These types of changes in the rate structure and processing rules 
could be implemented within the current card processing infrastructure, 
in a manner that is straightforward for issuers, acquirers, and card 
networks. Although cards would still be the Treasury's highest cost 
collection mechanism, we believe changes like these could allow the 
Treasury to reduce the Federal government's per transaction card cost 
by an estimated $0.45 to $0.49, which would equate to $36 million to 
$39 million in reduced annual interchange fees based on fiscal year 
2009 transaction volume.

                               CONCLUSION

    Mr. Chairman, these remarks are offered from the perspective of the 
Federal government acting in the role of a service provider that 
accepts cards, and in response to the direction from the House and 
Senate Appropriations Committees in the fiscal year 2010 Conference 
Report. They are not offered from the perspective of a policy maker or 
regulator with responsibility for the commercial payments system. 
Moreover, I wish to highlight the difference between a Federal agency 
accepting cards and a commercial merchant accepting cards. With few 
exceptions, Federal agencies that accept cards are not engaged in sales 
for profit, in competitive or market based activities, or even in 
traditional non-profit activities, but are delivering inherently 
governmental services to execute Federal law. The strategy I have 
outlined to reduce the Federal government's card costs is based on this 
unique role and applies to the interest of the general taxpayer, and 
not necessarily to merchant interests or any other special interest. 
While currently there is a larger public policy debate on interchange 
fees in the broader economy, with many competing interests among banks, 
merchants, and payment companies, the Treasury's financial managers 
have a responsibility to conduct fiscal operations as efficiently as 
possible and to pursue arrangements that afford the lowest costs to the 
general taxpayer. Toward this end, we welcome dialogue with all users 
and providers of payment card services.
    I thank you for allowing this discussion on the Federal 
government's cost of accepting credit and debit cards, and look forward 
to taking your questions.

    Senator Durbin. Thanks a lot, Mr. Grippo.
    Well, the bad news is that while you were testifying and 
elucidating us on this particular subject, the bells were going 
off to announce two rollcalls, which Senator Collins and I have 
to answer. So I think I am going to stick around and try to 
make sure that all three of you get a chance to testify, if I 
can, at least Ms. Cackley, and then we are going to take a 
recess because we will have to both go to the floor and vote 
and return. I cannot predict how long the recess will be, but 
in the range of 20 to 30 minutes I guess is pretty reasonable. 
So that is the circumstance and forgive us for this, but it was 
not our doing. Some higher-ups.
    Senator Collins. Wait a minute. Are you not in the 
leadership?
    Senator Durbin. Well, now wait a minute. Do not get carried 
away.
    Ms. Cackley.

STATEMENT OF DR. ALICIA PUENTE CACKLEY, DIRECTOR, 
            FINANCIAL MARKETS AND COMMUNITY INVESTMENT, 
            GOVERNMENT ACCOUNTABILITY OFFICE
    Dr. Cackley. Mr. Chairman, Ranking Member Collins, I am 
pleased to be with you today as you examine issues related to 
the interchange fees that Federal entities pay for accepting 
credit and debit cards. As credit and debit card use have 
become more popular, the costs of accepting these cards have 
been rising. In particular, the level and growth of interchange 
fees has become a growing concern.
    My comments this afternoon are based on findings from two 
GAO reports. The first, issued in 2008, examined the impact on 
Federal entities of accepting and using credit and debit cards, 
and the second, issued in 2009, dealt with the issue of 
interchange fees for all merchants.
    My remarks will cover three key areas discussed in those 
reports: first, the amounts of revenue that Federal entities 
have collected using credit and debit cards and the costs of 
such acceptance; second, efforts such entities have made to 
reduce their interchange fee costs, including negotiations; and 
third, the extent to which certain card network rules affect 
card acceptors' ability to reduce interchange fee costs.
    In summary, as the volume of Federal entities' card payment 
revenues have increased, so have their associated costs. In 
fiscal year 2007, Federal entities collected a total of more 
than $27 billion in revenues through credit and debit card 
transactions and reported paying at least $433 million in 
merchant discount fees, the majority of which was the 
interchange fee associated with Visa and MasterCard 
transactions. More recently, total card acceptance costs grew 
from $182 million in 2007 to $204 million in fiscal year 2009 
for the U.S. Postal Service and Amtrak and from $101 million in 
2007 to $116 million in 2009 for the Department of the 
Treasury's Financial Management Service. Federal entity 
officials told us that they were concerned about these rising 
costs, but that there were also benefits to accepting credit 
and debit cards, including more satisfied customers, fewer bad 
checks and cash thefts, and improved operational efficiency.
    At the same time that they are acting as cards acceptors, 
Federal entities also use credit and debit cards to purchase 
supplies and pay for employee travel and transportation 
expenses. In fiscal year 2009, card purchases by Federal 
entities totaled more than $30 billion. Federal entity 
officials told us that benefits of card use include lower 
administrative costs compared to previous purchasing methods, 
as well as the potential for rebates of a small percentage of 
the purchase price. Such rebates totaled approximately $255 
million in fiscal year 2009.
    As card acceptance has become more common, Federal entities 
have worked to control their associated fees. The card networks 
offer interchange fees for Government transactions that are 
lower than those for many other merchants, and FMS requires the 
banks processing these transactions to monitor them to ensure 
they receive the lowest interchange fee for which they are 
eligible. In addition, some Federal entities have attempted to 
negotiate directly with the card networks to lower interchange 
rates for their transactions with limited success. However, 
officials at some of the entities with whom we spoke said that 
they did not believe they could negotiate effectively with the 
largest card networks, MasterCard and Visa, for lower 
interchange fees, partly because they felt that they could not 
refuse to accept cards from these networks. Similarly, our more 
recent work has indicated that non-Federal merchants also have 
had little success in negotiating lower fees with the card 
networks.
    Certain card network rules, generally known as anti-
steering rules, are a major factor in limiting these 
negotiations. These rules include honoring all cards, no 
surcharging, and no discrimination, which means Federal 
entities and merchants cannot turn away or charge more for more 
costly types of credit and debit cards. Without the leverage of 
being able to differentiate between cards or take other actions 
to steer customers toward lower-cost forms of payment, Federal 
entities and merchants are unable to use their influence with 
the networks to encourage them to lower interchange and other 
fees or to offer more lower-fee cards. In contrast, 
representatives of issuers and card networks told us the 
network rules are designed to promote the wide acceptance of 
their cards and ensure that their cardholders have a positive 
experience with the card.
    Based on our 2008 and 2009 work, the increasing level of 
interchange fees appears to be a significant concern for both 
Federal entities and merchants in general. Although various 
options have been debated for lowering interchange fees, 
removing the anti-steering rules could allow Federal entities 
and merchants to send signals to cardholders about which cards 
increase merchant acceptance costs, which could improve 
leverage in negotiating their payment costs with the networks. 
If interchange fees for merchants were lowered, consumers might 
benefit from lower prices for goods and services, but proving 
such an effect is difficult.
    In addition, lower interchange fee revenues for card 
issuers could prompt them to increase cardholder costs, offer 
less generous rewards, or curtail cardholder credit 
availability, although card use would continue to have various 
benefits to Federal entities and consumers even if such changes 
occurred.
    Mr. Chairman, this concludes my prepared statement. I would 
be happy to respond to questions.
    [The statement follows:]

              Prepared Statement of Alicia Puente Cackley

CREDIT AND DEBIT CARDS: FEDERAL AGENCIES BENEFIT FROM CARD ACCEPTANCE, 
       BUT HAVE LIMITED ABILITY TO CONTROL INTERCHANGE FEE COSTS

                             GAO HIGHLIGHTS

Why GAO Did This Study
    Federal entities-agencies, corporations, and others-are growing 
users of credit and debit cards, as both ``merchants'' (receiving 
payments) and purchasers. Federal entities, like other merchants that 
accept cards, incur fees--called merchant discount fees--to process 
card transactions. For Visa and MasterCard transactions, a large 
portion of these fees--referred to as interchange fees--goes to the 
card-issuing banks. This statement addresses (1) the amounts of revenue 
that Federal entities have collected using credit and debit cards and 
the costs of such acceptance, (2) these entities' efforts to reduce 
their interchange fee costs, including negotiations, and (3) the extent 
to which card network rules affect these entities and other card 
accepters' ability to reduce interchange fee costs. The information for 
this statement was drawn from Credit and Debit Cards: Federal Entities 
Are Taking Actions to Limit Their Interchange Fees, but Additional 
Revenue Collection Cost Savings May Exist (GAO-08-558) and Credit 
Cards: Rising Interchange Fees Have Increased Costs for Merchants, but 
Options for Reducing Fees Pose Challenges (GAO-10-45). GAO analyzed 
data on accepting and using cards from the Department of the Treasury 
(Treasury), Amtrak, the Postal Service, and General Services 
Administration (GSA); and interviewed non-Federal merchants, card 
networks, banks, academics, and others. GAO also obtained updated 2009 
revenues and costs from Treasury, Amtrak, and the Postal Service, and 
purchases from GSA.
What GAO Found
    As Federal entities' card revenues have increased, so have their 
associated costs. In fiscal year 2007, Federal entities collected more 
than $27 billion in revenues through credit and debit card transactions 
and reported paying at least $433 million in merchant discount fees, 
which include the interchange fees associated with Visa and MasterCard 
transactions. Since GAO originally reported in 2008, total card 
acceptance costs for the U.S. Postal Service and Amtrak grew from $182 
million in 2007 to $204 million in fiscal year 2009. Card costs for 
Treasury's Financial Management Service (FMS) grew from $101 million to 
$116 million during this same period. Federal entity officials told us 
that the benefits of accepting cards include more satisfied customers, 
fewer bad checks and cash thefts, and improved operational efficiency. 
In addition to accepting cards, Federal entities also use cards to make 
purchases for supplies or employee travel expenses, and these purchases 
totaled about $30 billion in fiscal year 2009. Federal entity officials 
noted that using cards provides a variety of benefits, including lower 
administrative costs and rebates of a small percentage of the card 
purchases that they make, which totaled about $255 million in 2009.
    Federal entities have worked to control the costs associated with 
card acceptance fees. Card networks already offer interchange rates for 
government transactions that are lower than those for many other 
merchants' transactions, but Treasury also requires the banks that 
process Federal entities' card transactions to ensure that these 
receive the lowest interchange rates for which they are eligible. Some 
Federal entities have attempted to negotiate with the card networks to 
lower interchange rates applicable to their transactions, but with 
limited success. Similarly, GAO's more recent work indicated that non-
Federal merchants have also experienced little success in negotiating 
with card networks to lower these fees.
    Various card network rules have been a major factor limiting 
Federal entities' and merchants' ability to negotiate lower interchange 
fees. Each of the major card networks--Visa, MasterCard, American 
Express, and Discover--have various card acceptance rules that prohibit 
card accepters from imposing surcharges on cards, refusing to accept 
certain cards--such as rewards cards with higher associated interchange 
fees, or establishing minimum or maximum charges. Although various 
options have been debated for lowering interchange fees, merchants and 
others GAO interviewed most supported removing certain card network 
rules. If interchange fees were lowered, card users might benefit from 
lower prices for goods and services, but lower interchange revenues for 
card issuers could prompt them to increase cardholder costs, offer less 
generous rewards, or curtail cardholder credit availability--although 
consumers and Federal entities could still enjoy various other benefits 
of using cards, such as convenience and efficiency.
    Mr. Chairman and Members of the Committee: I am pleased to be here 
today to discuss issues relating to the extent to which Federal 
entities accept payments from credit and debit cards and the associated 
costs, including interchange fees. Each time a consumer uses a credit 
card to make a purchase, a portion of the sale--known as the merchant 
discount fee--is deducted and distributed among the merchant or Federal 
entity's financial institution, the financial institution that issued 
the card, and the card network that processed the transaction. The 
majority of this amount generally is called the interchange fee and 
goes to the financial institution that issued the card, which reported 
using the revenues from these fees to cover their costs of maintaining 
card programs. More specifically, I will discuss recent work we have 
conducted related to these fees, including (1) the amounts of revenue 
that Federal entities have collected using credit and debit cards and 
the costs of such acceptance, (2) efforts such entities have made to 
reduce their interchange fee costs, including negotiations, and (3) the 
extent to which card network rules affect card accepters' ability to 
reduce interchange fee costs.\1\
---------------------------------------------------------------------------
    \1\ See Credit and Debit Cards: Federal Entities Are Taking Actions 
to Limit Their Interchange Fees, but Additional Revenue Collection Cost 
Savings May Exist, GAO-08-558 (Washington, D.C.; May. 15, 2008), and 
Credit Cards: Rising Interchange Fees Have Increased Costs for 
Merchants, but Options for Reducing Fees Pose Challenges, GAO-10-45 
(Washington, D.C.; Nov. 19, 2009).
---------------------------------------------------------------------------
    In summary, we reported in 2008 that as the volume of Federal 
entities' card payment revenues have increased, so have their 
associated costs. In fiscal year 2007, Federal entities collected a 
total of more than $27 billion in revenues through credit and debit 
card transactions and reported paying at least $433 million in merchant 
discount fees, which include the interchange fees associated with Visa 
and MasterCard transactions.\2\ Federal entity officials told us that 
the benefits of accepting cards include more satisfied customers, fewer 
bad checks and cash thefts, and improved operational efficiency. In 
addition to accepting cards, Federal entities use cards to purchase 
supplies and pay for employee travel and transportation expenses. Card 
purchases by Federal entities totaled more than $27 billion in fiscal 
year 2007. Since we originally reported, total card acceptance costs 
for the U.S. Postal Service and Amtrak grew from $182 million in 2007 
to $204 million in fiscal year 2009. Card costs for the Department of 
the Treasury's Financial Management Service (FMS) grew from $101 
million to $116 million during this same period. Federal entity 
officials told us that benefits of card use include lower 
administrative costs when compared with the slower, more labor-
intensive purchasing methods previously used. Furthermore, Federal 
entities obtain rebates of a small percentage of the card purchases 
that they make, which totaled approximately $175 million in fiscal year 
2007, and grew to $255 million in fiscal year 2009. Although receiving 
various benefits, Federal entities using cards to make purchases have 
had to implement controls and procedures to prevent misuse.
---------------------------------------------------------------------------
    \2\ Dollar values on the costs and revenues associated with card 
acceptance for fiscal years 2005 through fiscal year 2007 are current 
values and have not been adjusted for inflation.
---------------------------------------------------------------------------
    As card acceptance has become more common, Federal entities worked 
to control the associated fees. The card networks already offer 
interchange rates for government transactions that are lower than those 
for many other merchants' transactions. Additionally, FMS, which 
processes the card transactions for numerous Federal executive, 
legislative, and judicial branch agencies and other Federal entities, 
requires the banks that process its card transactions--known as 
acquiring banks--to monitor how transactions are processed to ensure 
that these transactions receive the lowest interchange rates for which 
they are eligible. Some Federal entities have attempted to negotiate 
with the card networks to lower interchange rates for their 
transactions, with varying success. Similarly, our more recent work 
indicated that non-Federal merchants also have experienced little 
success in negotiating lower fees with card networks.
    Card network rules restrict their abilities to differentiate among 
the cards they accept or take other actions and are a major factor 
limiting the leverage that Federal entities and merchants have to 
negotiate lower interchange fees. Each of the major card networks--
Visa, MasterCard, American Express, and Discover--have card acceptance 
rules--generally known as anti-steering rules--that limit the options 
that Federal entities and merchants have for accepting or denying 
cards, including prohibiting them from: imposing surcharges on cards; 
refusing to accept certain cards--such as rewards cards with higher 
associated interchange fees; or establishing minimum or maximum 
charges.
    According to merchants and some academic researchers, these rules 
constrain the ability of Federal entities and merchants to limit the 
costs of credit card acceptance. For example, by not being able to 
charge more for credit cards generally, for a particular network's 
cards, or for higher interchange fee cards, these entities are unable 
to steer customers towards lower-cost forms of payment or recoup some 
of their costs for higher-cost cards. In addition, without the ability 
to influence customers' payment choices, these entities are unable to 
use their influence with the networks to encourage them to lower 
interchange and other fees in general, or offer more lower-fee cards. 
In contrast, representatives of issuers and card networks told us that 
the network rules are designed to promote the wide acceptance of their 
cards and ensure that their cardholders have a positive experience with 
the card.
    Although various options have been debated for lowering interchange 
fees, removing the anti-steering rules appeared to receive the most 
support from the large and small merchants and merchant trade 
associations with whom we spoke.\3\ Removing these rules could allow 
merchants to send signals to cardholders about which cards increase 
merchant acceptance costs, which also could improve merchants' leverage 
in negotiating their payment costs. The ability to charge more for or 
refuse certain cards also could cause cardholders using rewards cards 
to be more aware of and to bear more of the cost of the rewards from 
which they benefit. If interchange fees for merchants were lowered, 
consumers could benefit from lower prices for goods and services, but 
proving such an effect is difficult. Lower interchange fee revenues for 
card issuers could prompt them to increase cardholder costs, offer less 
generous rewards, or curtail cardholder credit availability.
---------------------------------------------------------------------------
    \3\ See GAO-10-45. The merchants and associations also supported 
restricting interchange fees with a cap or other limit.
---------------------------------------------------------------------------
                         SCOPE AND METHODOLOGY

    To examine the benefits and costs associated with Federal entities' 
acceptance of cards, we analyzed data for executive, legislative, and 
judicial branch agencies; government corporations; and other Federal 
instrumentalities that accept credit and debit cards for payment. FMS 
processes the card transactions for the majority of executive, 
judicial, and legislative branch agencies and Federal commissions, 
boards, and other entities and pays the associated fees for these 
entities. We also reviewed data from several Federal entities for which 
FMS does not settle transactions: Amtrak, the U.S. Postal Service, and 
others.\4\ To determine the impact on Federal entities of using cards 
to make purchases, we reviewed policies and procedures developed for 
the General Services Agency (GSA) card program that Federal entities 
can use to make purchases (known as the SmartPay program), collected 
and analyzed data on card use from GSA, and reviewed our prior reports 
and interviewed officials from five entities that were among those with 
the highest volume of card use in fiscal year 2006. To learn about the 
impact of interchange fees on other merchants, we conducted interviews 
with more than 80 organizations, including U.S. Federal banking and 
other regulators, academic researchers, and industry participants. We 
also interviewed and obtained information from regulatory officials in 
Australia. For this statement, we also obtained updated 2009 revenues 
and costs from FMS, Amtrak, and the Postal Service, and purchases from 
GSA. We conducted the work on which this statement is based from June 
2007 to May 2008, from May 2009 to November 2009, and in June 2010 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives.
---------------------------------------------------------------------------
    \4\ These other entities included nonappropriated fund 
instrumentalities (NAFI) of the Department of Defense and Department of 
Homeland Security which operate retail stores or recreational 
facilities for the military. The data we collected from Federal 
entities were the best data available; however, because of limitations 
in and differences among the record keeping of the entities, the data 
may not be complete for all years, may treat some costs inconsistently, 
and in one case contain estimated, rather than actual, values. We 
reviewed the data for completeness and accuracy and determined that 
none of these limitations materially affect the findings we report.
---------------------------------------------------------------------------
    FEDERAL ENTITIES RECEIVE NUMEROUS BENEFITS ASSOCIATED WITH CARD 
       ACCEPTANCE, BUT ALSO PAY INTERCHANGE FEES AND OTHER COSTS

    The volume of revenues accepted through credit and debit card 
payments was growing for the group of Federal entities we reviewed. 
Data on revenues that Treasury's FMS collects show that while credit 
and debit card transactions accounted for 0.23 percent of the total 
Federal government revenues FMS collected in fiscal year 2007, its card 
collections had grown by almost 28 percent in 2 years--from 
approximately $5.5 billion in fiscal year 2005 to almost $7.1 billion 
in fiscal year 2007 (in current dollars). Revenues that the U.S. Postal 
Service and Amtrak--which have their own arrangements for processing 
their transactions--collected on credit and debit cards grew from $9.3 
billion in 2005 to $11.5 billion by 2007. As shown in table 1, the card 
revenues from these organizations and various other Federal entities 
from which we collected data grew from $22.3 billion in 2005 to $27.1 
billion by 2007.

TABLE 1.--CREDIT AND DEBIT CARD REVENUES COLLECTED AND MERCHANT DISCOUNT
          FEES PAID BY FEDERAL ENTITIES, FISCAL YEARS 2005-2007
                          [In current dollars]
------------------------------------------------------------------------
                            Credit and
                            debit card       Merchant         Average
Fiscal                       revenues      discount fees     merchant
 year        Entity          collected     paid (dollars   discount rate
                            (dollars in    in millions)      (percent)
                             billions)          \1\
------------------------------------------------------------------------
  2005 FMS                        $5.5             $70            1.26
       NAFIs (all)                 7.5             128            1.72
       U.S. Postal                 9.3             143            1.54
        Service and
        Amtrak
                       -------------------------------------------------
             Total                22.3             341            1.53
                       =================================================
  2006 FMS                         6.3              89            1.41
       NAFIs (all)                 8.3             139            1.67
       U.S. Postal                10.4             160            1.54
        Service and
        Amtrak
                       -------------------------------------------------
             Total                25.0             387            1.55
                       =================================================
  2007 FMS                         7.1             101            1.43
       NAFIs (all)                 8.5             150            1.75
       U.S. Postal                11.5             182            1.58
        Service and
        Amtrak
                       -------------------------------------------------
             Total                27.1             433            1.60
------------------------------------------------------------------------
       \1\ We use the term ``merchant discount fee'' throughout this
         report to refer to the card acceptance fees paid by Federal
         entities. For FMS, the merchant discount fees are not
         ``discounted'' from the amount of the card payment. Instead,
         FMS settles card transactions ``at par,'' and all costs
         associated with card acceptance are paid separately.

       Source: GAO analysis of Federal entity data.

       Note: Not all entities from which we collected data operate on
         the Federal fiscal year of October 1-September 30; therefore,
         the data presented for fiscal years represent some costs
         associated with dates that fall outside of the Federal fiscal
         year.

    As the volume of revenues from card payments have increased, so 
have the total amounts of merchant discount fees paid by the Federal 
entities from which we collected data. These Federal entities reported 
paying almost $433 million in merchant discount fees in fiscal year 
2007 (see table 1). This figure represents an almost 12 percent 
increase over the amount paid in fiscal year 2006 and an almost 27 
percent increase over fiscal year 2005. The average merchant discount 
rate increased about 4 percent from fiscal year 2005 to fiscal year 
2007. Since we originally reported, total card revenues for the U.S. 
Postal Service and Amtrak rose to $12.4 billion and those for FMS rose 
to $8.6 billion in fiscal year 2009; the card acceptance costs for the 
Postal Service and Amtrak grew to $203.7 million and for FMS to $116 
million.
    Among the entities included in our review, Amtrak, FMS, and the 
Postal Service provided data specifically showing the amount of 
interchange fees associated with their Visa and MasterCard transactions 
(their acquiring banks provide them with these data).\5\ The three 
entities paid approximately $205 million in interchange fees during 
fiscal year 2007, out of a total of $218 million in merchant discount 
fees specifically for MasterCard and Visa transactions.\6\ These 
interchange fees accounted for the majority of total merchant discount 
fees these entities paid for accepting all card types. As card revenues 
and merchant discount fees increased for the three entities, so did the 
interchange fees they paid. Interchange fees increased by almost 36 
percent, from almost $151 million in fiscal year 2005 to $205 million 
in fiscal year 2007 (in fiscal year 2006, they were $179 million).
---------------------------------------------------------------------------
    \5\ Merchants (or Federal entities) enter into relationships with 
acquiring banks to provide card processing services for Visa or 
MasterCard (or both).
    \6\ This estimate for interchange fees paid includes fees 
associated with debit transactions using personal identification 
numbers (PIN) as well as MasterCard and Visa credit and signature debit 
transactions. We were not able to determine the portion of the PIN 
debit interchange fees that were specifically paid for Visa and 
MasterCard PIN debit transactions. It is possible that some of the PIN 
debit transactions reported by these entities were routed through other 
debit networks and, therefore, are not necessarily Visa and MasterCard 
transactions. Also, some Federal entities included quarterly fees paid 
to Visa and MasterCard in the interchange fees figures they reported; 
therefore, our estimated interchange fee amount includes these fees.
---------------------------------------------------------------------------
    In our most recent report on interchange fees issues, we reported 
that non-Federal merchants also were experiencing increasing card 
acceptance costs, which they largely attributed to increased volumes of 
payments being made by consumers with cards, but also as a result of 
customers' increased use of rewards cards. Staff from these merchants 
expressed concerns that the increasing use of rewards cards was 
increasing merchants' costs without providing the commensurate benefits 
of increased sales.
    For some payments made using cards, the government does not bear 
merchant discount costs.\7\ For example, consumers can pay their income 
and business taxes to the Internal Revenue Service (IRS) using cards. 
IRS has agreements with two private third-party entities to process 
payments for individuals or businesses that choose to use a credit or 
debit card to make a tax payment. The private entities charge a 
convenience fee of 2.49 percent of the total tax payment, a portion of 
which covers the merchant discount fees the entities pay to their 
acquiring banks. In fiscal year 2007, these merchant discount fees 
totaled about $47.5 million for approximately $2.4 billion in tax 
payments, an 85 percent increase in tax payments made with credit and 
debit cards from fiscal year 2005.
---------------------------------------------------------------------------
    \7\ We did not include such transactions in compiling the total 
merchant discount fees paid by Federal entities for card acceptance. 
Instead, we provide this information as an example of additional fees 
that are paid by consumers for card acceptance associated with 
government payments.
---------------------------------------------------------------------------
    In addition to the interchange and processing fees that make up the 
merchant discount fee, Federal entities face other costs associated 
with the acceptance of credit and debit cards. While FMS pays the 
merchant discount fees associated with card transactions for entities 
for which it settles transactions, it does not pay for the costs 
associated with equipment and software; these costs are the 
responsibility of the entities. For example, entities must pay for 
point-of-sale terminals, keypads for PIN debit card transactions, 
computers, modems, and printers, and pay for their installation and 
maintenance. Other costs of accepting cards include complying with 
industry security standards, training employees to process and 
reconcile card transactions, and experiencing losses associated with 
fraudulent use of cards. However, some entities provided information 
that indicated these additional costs were not significant compared to 
merchant discount fees.

  FEDERAL ENTITY OFFICIALS CITED VARIOUS BENEFITS FROM ACCEPTING CARDS

    The ability to accept credit and debit cards provides a variety of 
benefits to Federal entities, including greater customer satisfaction 
and improved internal operations. Officials at several Federal entities 
noted that card acceptance helped to ensure that the Federal entities 
would remain competitive with private-sector organizations. Federal 
officials with whom we spoke mentioned benefits such as improved 
customer satisfaction with their organizations because consumers liked 
to use their cards for convenience, credit card reward programs, and 
security reasons. Accepting cards also has enabled entities to conduct 
business through the Internet, which can reduce labor costs associated 
with sales and also can provide greater convenience to customers. For 
example, officials from the U.S. Mint stated that about 50 percent of 
their sales occurred through their Web site. Some entities also stated 
that the ability to accept cards has increased their sales volume.
    Federal entity officials also noted that accepting cards reduced 
the amount spent on processing other forms of payment. By accepting 
cards, Federal entities incurred less expense in transporting cash, 
lower losses from theft of cash, and had fewer bad check expenses. For 
example, officials at the Department of the Interior noted that cash 
transport costs could be high for some remote parks and wildlife 
refuges. Several Federal officials also stated that accepting cards has 
reduced the costs associated with processing checks, and that funds 
were deposited in accounts faster when customers use credit or debit 
cards than when they used checks. Additionally, Amtrak officials told 
us that accepting cards on trains for ticket, food, and beverage sales 
resulted in fewer instances of employee theft of cash.
    Finally, many officials cited that card acceptance improved 
internal operations. For example, officials at the Department of the 
Interior stated that payments made by credit cards result in a more 
streamlined bookkeeping approach because card sales involved less 
paperwork (for reconciliation) than other payment forms. Defense 
Commissary Agency (DeCA) officials also stated that they believed that 
the labor associated with reconciling sales declined as a result of the 
reduced cash volume. The officials mentioned additional operational 
efficiencies, including reductions in costs and exposure to fraud and 
errors from misplacing or miscounting cash and checks. Some officials 
stated that the efficiencies gained as a result of card acceptance 
allowed them to reallocate staff to different and more productive uses. 
For example, officials at the Department of the Interior explained that 
accepting cards at automated kiosks allowed them to reallocate some 
staff that used to collect entrance fees. Amtrak officials also stated 
that customers' ability to purchase tickets using cards, especially 
through the Amtrak Web site, has reduced their labor costs.
    The Federal entities we contacted were not able to provide 
comprehensive data on any cost savings from accepting cards. We 
identified various government, academic, and industry studies that 
compared the cost of processing for different forms of payment; 
however, many of these studies found that precise estimates were 
difficult to calculate. Additionally, while most of the studies we 
reviewed found cash to be the least expensive payment form to process, 
the methodologies used in the studies were not consistent and the data 
contained in many of them were outdated.\8\
---------------------------------------------------------------------------
    \8\ David B. Humphrey and Allen N. Berger. ``Market Failure and 
Resource Use: Economic Incentives to Use Different Payment 
Instruments,'' in The U.S. Payment System: Efficiency, Risk and the 
Role of the Federal Reserve: Proceedings of a Symposium on the U.S. 
Payment System Sponsored by the Federal Reserve Bank of Richmond, ed. 
David B. Humphrey, (Boston: Kluwer Academic Publishers, 1990). D.D. 
Garcia-Swartz, R.W. Hahn, and A. Layne-Farrar, ``The Move toward a 
Cashless Society: Calculating the Costs and Benefits,'' Review of 
Network Economics, 5, no. 2 (2006). D. Humphrey, M. Willesson, T. 
Lindblom, and G. Bergendahl, ``What Does It Cost to Make a Payment,'' 
Review of Network Economics, 2, no. 2, (2003).
---------------------------------------------------------------------------
CARD USAGE BY FEDERAL ENTITIES PROVIDES NUMEROUS BENEFITS, BUT CREATES 
                           CONTROL CHALLENGES

    In addition to accepting cards as payment, Federal entities are 
also users of credit cards. More than 350 Federal entities participate 
in GSA's SmartPay program--which provides purchase, travel, and fleet 
cards for these entities to use. Federal entities pay no direct costs 
for the general use of cards. According to card network officials, the 
banks that issue cards to Federal entities are compensated in part by 
the interchange fees they receive when a government entity or employee 
uses a card to make a purchase. In fiscal year 2007, Federal entities 
used cards to purchase more than $27 billion in goods and services, and 
since we originally reported this amount has grown to $30 billion as of 
fiscal year 2009. Most of this spending occurred using purchase cards, 
which account for nearly 70 percent of total Federal entity card 
spending, while travel card use accounts for about one-quarter of card 
spending, and fleet card use about 5 percent.
    Card use by Federal entities is expected to continue growing as the 
entities identify additional ways of using cards and use new payment 
technologies. For example, officials from the Department of Veterans 
Affairs (VA) told us that they have been working with the bank that 
issues the department's purchase cards to find new ways to increase 
card usage. For example, in 2003 they developed a process for making 
payments through the card system to non-VA medical providers for 
services to veterans who were unable to visit a VA center for medical 
care, reducing the number of checks they issued and increasing the 
number of electronic payments they made and the rebates they received 
for using their cards. Additionally, officials stated that VA has been 
reviewing its purchase records to attempt to shift more purchasing to 
vendors that accept cards. Similarly, the U.S. Army has developed an 
automated payment system that uses purchase cards for most of the $400 
million per year it pays schools and other institutions for soldiers' 
tuition assistance. GSA officials also expect the new products and 
services that will be available under the SmartPay 2 program--the 
follow-on to SmartPay--will lead to increases in overall card spending. 
These products include prepaid cards, contactless cards, and cards in 
foreign currencies.\9\
---------------------------------------------------------------------------
    \9\ A prepaid card is one that is programmed to have a monetary 
value, and charges to that card cannot exceed the balance. Contactless 
cards store data on a microchip embedded in the card, which can be read 
by passing the card in front of a special card reader.
---------------------------------------------------------------------------
    According to Federal entity officials with whom we spoke, 
administrative cost savings are one of the primary benefits associated 
with card usage--compared with procurement methods that cards partially 
replaced, such as purchase orders, imprest funds, and blanket purchase 
agreements. For example, obtaining goods or services under a purchase 
order system requires that a purchase request be filled out and 
approved, then sent to a procurement office, which issues it to a 
vendor. However, when government entities use a card, cardholders can 
purchase goods or services directly, review their statements at the end 
of the billing cycle, and forward the statements to approving 
officials. Officials from the Department of Agriculture said that if 
cards were not used, staff would need to complete purchase orders for 
the 1.5 million transactions per year that currently are made using 
purchase cards. Officials from the Department of Homeland Security 
estimated that the department would require from four to five times the 
current number of staff to operate its travel card program if the 
agency paid for travel expenses without cards. In addition, officials 
at the Department of Agriculture stated that new tools, such as an 
automated process to reset charge card passwords, might further reduce 
the costs of administering their program.
    Federal entities receive another benefit of card use through 
rebates from the banks that issue their cards. Rebate amounts, after 
adjusting for inflation, had almost doubled since fiscal year 2002 to 
$175 million in fiscal year 2007, and were $255 million in fiscal year 
2009. Rebate amounts to Federal entities are based on a number of 
factors, mainly the volume of net spending on cards and how quickly 
balances on the cards are paid. GSA establishes a minimum rebate rate 
that Federal entities should receive, but entities can negotiate with 
their issuing banks for additional amounts. From 1998 through 2007, the 
minimum rate was 6 basis points of the net volume of spending on the 
cards, while under SmartPay 2, the minimum rebate rate increased to 8 
basis points. A GSA official stated that typically in Federal entities' 
negotiations with issuing banks, the rebate rate is increased as an 
incentive for an entity to choose a particular bank to issue its cards. 
According to the GSA official, some entities have negotiated for 
specialized services rather than increased rebate amounts, and GSA 
encourages entities to examine their programs holistically when 
negotiating terms. Federal entities differ in how they use their 
rebates. Two of the Federal entities we spoke with return the rebates 
directly to the location that originated the relevant transaction, one 
adds the rebates into general income for the entity, and one other 
allocates rebates to a working capital fund for initiatives of general 
benefit to the entity.
    Officials at the Federal entities with whom we met cited only a few 
drawbacks associated with the use of cards, although officials from 
some entities mentioned the risk of fraud and misuse. These officials 
told us that the risk of fraud or abuse was less than or equal to that 
under previously used procurement systems. Although instances of fraud 
and misuse on cards may be infrequent, we and several inspectors 
general have reported internal control weaknesses in charge card 
programs at Federal entities and instances of fraud and abuse. For the 
most part, fraud and misuse can be limited through strong internal 
controls in card programs of Federal entities. GSA and the Office of 
Management and Budget (OMB) have issued guidance on internal controls 
intended to reduce the risk of misuse of cards. For example, GSA 
develops guidance through training courses for Federal entities and 
publishes guidelines for oversight and information on detecting misuse 
and fraud. Additionally, OMB has issued several memorandums related to 
oversight of card programs. Finally, officials from some of the Federal 
entities told us that the tools and data that their card-issuing banks 
provided helped them reduce the risk of misuse of cards by enabling 
them to track and limit the types of purchases made on the cards.

   FEDERAL ENTITIES HAVE WORKED TO REDUCE CARD ACCEPTANCE COSTS, BUT 
  EFFORTS TO NEGOTIATE LOWER INTERCHANGE FEES HAVE HAD LIMITED SUCCESS

    As card acceptance has grown, Federal entities have used several 
methods to manage their costs and reduce the fees associated with card 
transactions. First, both Visa and MasterCard have a designated 
merchant category for Federal entities, in which the interchange rates 
are lower than those for many other merchant categories. As long as 
Federal entities' transactions meet all applicable processing 
requirements--for example, they must be submitted for final settlement 
in a timely manner--the entities are charged the interchange rate 
applicable to those merchant categories. For example, as of April 2008, 
if transactions met all applicable processing requirements, government 
entities accepting a MasterCard consumer credit card as payment would 
pay an interchange fee of 1.55 percent of the transaction amount plus 
$0.10, and for a Visa consumer credit card, 1.43 percent plus $0.05. 
(In comparison, the interchange rate for a MasterCard general purpose 
consumer credit card transaction at some fast food stores is 1.90 
percent.) In some cases, card transactions at Federal entities can be 
assessed a lower rate. For example, FMS officials told us that DeCA 
transactions qualify to be processed using the interchange rate for the 
supermarket merchant category, which can range from 1.27 percent to 
1.48 percent plus $0.05 for MasterCard general purpose consumer credit 
card transactions, depending on the volume of card transactions 
processed.
    Because the method in which the card is accepted, transaction 
volume, and other factors can affect interchange rates, many Federal 
entities have taken steps to ensure that the acceptance and processing 
procedures they follow result in the most advantageous interchange 
rates applying to their transactions. For example, Amtrak officials 
explained that by replacing card machines (which embossed paper 
receipts) with wireless card terminals on trains, they were able to 
significantly reduce the interchange rates that applied to transactions 
made on trains, because the electronic transaction qualified for a 
lower interchange rate than the paper transactions. Moreover, FMS 
officials explained that their acquiring bank was responsible for 
monitoring how card transactions were processed and the interchange 
rates assessed. The bank provides FMS with daily and monthly reports 
that provide various levels of detail on the interchange fees paid. 
Both the bank and FMS officials review these reports to identify 
instances in which transactions may have been charged a higher 
interchange rate--known as a downgrade--because they were not processed 
under the requirements necessary to qualify for a lower rate.
    Several Federal entities have attempted to control fees associated 
with card acceptance by expanding their ability to accept PIN debit 
card payments. PIN debit transactions generally are assessed lower 
interchange rates than ``signature'' debits, and therefore some Federal 
entities are beginning to put in place the technology necessary to 
accept these transactions. While Federal entities would have to 
purchase the equipment needed to process PIN debit transactions (for 
example, PIN pads), one entity told us that the much lower interchange 
rates associated with PIN debit transactions justified the investment. 
An FMS official stated that the only entity for which it processes card 
transactions that currently can accept PIN debit cards is DeCA; 
however, as entities undergo equipment upgrades, FMS works with them to 
identify equipment that may lower overall collection costs. For 
example, one Federal entity has been developing a new terminal system 
for card collections, and as part of this process, FMS has encouraged 
the entity to implement a system that can process PIN debit 
transactions. Additionally, some of the military NAFIs with which we 
spoke adopted technologies for accepting PIN debit cards, stating that 
they too recognized the cost savings associated with these 
transactions.

    FEDERAL ENTITIES HAVE HAD LIMITED SUCCESS IN NEGOTIATING LOWER 
                         INTERCHANGE FEE COSTS

    Federal entities have acted to reduce card acceptance costs by 
negotiating with their acquiring banks for lower merchant discount 
rates or with card networks for lower interchange rates. Some of the 
Federal entities we reviewed have realized card acceptance savings by 
negotiating new acquiring bank services contracts. These entities were 
able to negotiate lower rates for the processing component of the 
merchant discount rate applied to their transactions. For example, by 
signing a new acquiring bank agreement, one Federal entity received a 
substantial reduction in the processing fee component of its merchant 
discount rate. Also, to obtain a more favorable merchant discount rate 
for their transactions, officials from some of the military service 
NAFIs have been working together to try to negotiate a lower merchant 
discount rate with American Express on the basis of the volume of 
transactions they provide to that company.
    Officials at some of the entities with whom we spoke stated that 
they did not believe they could negotiate effectively with the largest 
card networks--MasterCard and Visa--for lower interchange rates. One of 
the primary ways of negotiating lower rates would be to refuse to take 
a particular network's card. However, many of the Federal entity 
officials told us that consumers expect to be able to use cards to make 
payments, and some stated that they did not think they could stop 
accepting cards. For example, Amtrak officials stated that customers 
paying with cards accounted for about 85 percent of their sales and 
that if they did not accept cards, ridership would decline 
significantly. Some Federal entities stated that they have attempted to 
negotiate, but have had varying levels of success:
  --FMS officials told us that they tried to negotiate lower 
        interchange rates with both Visa and MasterCard by stating that 
        some factors that were included in rate determinations did not 
        necessarily apply to Federal government transactions. For 
        example, FMS officials argued that the Federal entities that 
        participate in the Card Acquiring Service pose less risk than 
        other merchant types and that there is no risk of delinquency 
        on the part of the Treasury. FMS officials stated that their 
        negotiations were not successful and that they were not able to 
        negotiate lower interchange rates.
  --Officials from the Postal Service also explained their attempts to 
        negotiate with the card networks. They stated that they 
        believed lower interchange rates should be applied to their 
        transactions for the following reasons. First, the Postal 
        Service estimated that it has been one of the top U.S. 
        merchants in terms of card transaction volume. Second, it poses 
        less risk of fraud than some other merchants because most of 
        its transactions are face-to-face. Third, the Postal Service 
        operates a large retail network with 35,000 offices, self-
        service terminals, mail and phone orders, and a Web site that 
        receives approximately 30 million hits per month and provides a 
        great amount of visibility for the networks. Fourth, the Postal 
        Service has its own law enforcement agency that investigates 
        instances of fraud, including fraudulent use of cards where 
        merchandise travels through the mail. These investigations 
        result in the recovery of merchandise as well as stolen card 
        data and in some cases the arrest of international criminals to 
        the benefit of the credit card industry. They noted that the 
        benefit of such services to the card networks were not 
        reflected in the interchange rates for Postal Service 
        transactions. The officials did state that they have had some 
        limited success in negotiations, resulting in some small cost 
        savings.
  --Officials from another Federal entity told us that they have had 
        some success in receiving funds from one of the networks as a 
        result of a joint marketing program. The funds could be used to 
        reduce interchange costs or for additional marketing efforts; 
        however, confidentiality agreements bind the details of the 
        negotiations, which are considered proprietary information. The 
        officials explained that negotiations of this type are not 
        typical of Federal entities because of the limited marketing 
        opportunities available to most government entities.
    Although some Federal entities have had some success in negotiating 
lower interchange rates for their transactions, whether additional 
opportunities exist for further reductions in interchange rates is 
unclear. According to officials of MasterCard and Visa, factors they 
consider when setting interchange rates include whether the industry or 
sector represents a new market for credit and debit cards. According to 
these officials, government payments are a market in which they hope to 
increase card acceptance and transaction volumes; thus, the interchange 
rates that they set for government transactions are lower than those of 
many other merchant categories. Additionally, officials at MasterCard 
and Visa told us that opportunities exist for merchants, including 
Federal entities, to negotiate for lower interchange rates. For 
example, the MasterCard officials cited an instance in which, in 
response to rapidly rising gasoline prices, they worked with gasoline 
merchants to develop a cap on the interchange fees for petroleum 
purchases. Officials from both networks explained that they have staff 
dedicated to developing customized arrangements with merchants and that 
these negotiations involve identifying mutually beneficial 
arrangements. We found it difficult to assess whether Federal entities 
could negotiate rate reductions based on their relative transaction 
volume or aggregate card revenues, because we could not identify any 
publicly available data we could use to determine how the Federal 
government's total transaction volume or aggregate card revenues 
compared with other large merchants.

    MERCHANTS SIMILARLY HAVE HAD LIMITED SUCCESS IN REDUCING THEIR 
                         INTERCHANGE FEE COSTS

    In our most recent report on interchange fee issues, we reported 
that merchants had had similar difficulties in negotiating lower 
interchange fee rates. We found that merchants did have greater ability 
to lower the processing fee portions of their merchant discount fee as 
the result of greater competition among banks offering such services. 
Increased competition for acquiring services provides merchants with 
considerable choice and opportunities to negotiate and lower some card 
acceptance costs. Hundreds of financial institutions and other firms 
compete as acquirers to provide card processing services. Merchants of 
varying sizes that we interviewed reported that they have multiple 
acquiring banks and processors competing for their business and have 
been able to lower the acquiring fee portion of their merchant discount 
fees in recent years.
    Although merchants have reported success in negotiating their 
acquiring costs, several of the merchants we interviewed told us that 
their ability to lower their interchange fee costs--which represents 
the bulk of their card acceptance costs--was limited. These merchants 
generally paid the rates listed in the Visa and MasterCard networks' 
default interchange fee schedules. Although the ability to refuse to 
accept Visa and MasterCard should provide merchants with the leverage 
to negotiate lower interchange fees, merchants reported that they could 
not refuse to take such cards because of customer demand. For example, 
some merchants told us that if they did not accept credit cards from 
Visa or MasterCard, their sales would decrease and they would lose 
business to competitors that did accept those cards. Without this 
ability, merchants told us that they generally have not been very 
successful in obtaining meaningful reductions in Visa and MasterCard 
interchange fees. According to staff from Visa and MasterCard, their 
networks are willing to negotiate with merchants. For example, 
officials from one network told us that their network has negotiated 
with merchants with sales that represented 26 percent of their overall 
processing volume. Only one of the large merchants we interviewed told 
us that their company had received a limited and temporary reduction in 
their interchange fee costs as a result of negotiations with Visa or 
MasterCard following the settlement of a lawsuit.
card network rules are a major factor limiting card accepters' ability 

                  TO NEGOTIATE LOWER INTERCHANGE FEES

    Card network rules also limit the leverage that Federal entities 
and merchants have to negotiate lower interchange fees. Each of the 
major card networks--Visa, MasterCard, American Express, and Discover--
has various card acceptance rules--generally known as anti-steering 
rules--that limit the options that card accepters have for accepting or 
denying cards.\10\ These rules include:
---------------------------------------------------------------------------
    \10\ Not all of the networks have each of these rules, but if a 
merchant accepts cards from each of these networks, they are subject to 
all of them. Visa, MasterCard, and American Express have posted some of 
their rules on their Web sites; Discover's rules are not available 
online.
---------------------------------------------------------------------------
  --no surcharges--card accepters may not impose a surcharge on 
        consumers for the use of credit cards or cards with higher 
        interchange fees;
  --honor all cards--card accepters are required to accept all credit 
        cards within a network's brand;
  --no discrimination/differentiation--card accepters may not 
        differentiate between credit cards within a network nor 
        discourage the use of cards within a network;
  --no minimum or maximum charges--card accepters may not impose a 
        price floor or price ceiling on credit card transactions; and
  --preferred treatment--card accepters may not direct consumers away 
        from or to a certain network's cards.
    Some academic researchers and merchant representatives argue that 
these rules constrain card accepters' ability to limit the costs of 
credit card acceptance. For example, without the ability to surcharge 
for credit cards generally, for a particular network's cards, or for 
higher interchange fee cards, card accepters, including Federal 
entities, are unable to steer customers towards lower-cost forms of 
payment or recoup some of their costs for higher-cost cards. In 
addition, without the ability to influence customers' payment choices, 
card accepters are unable to use their influence with the networks to 
encourage them to lower interchange and other fees in general, or offer 
more lower-fee cards. In contrast, representatives of issuers and card 
networks told us that the network rules are designed to promote the 
wide acceptance of their cards and ensure that their cardholders have a 
positive experience with the card.
removal of anti-steering rules seen as improving merchants' ability to 
negotiate with card networks, but impact of lower interchange rates on 

                          CONSUMERS IS UNCLEAR

    Although various options have been debated for seeking to lower 
interchange fees, removing the networks' anti-steering rules was one of 
the options that appeared to receive the most support from the large 
and small merchants and merchant trade associations with whom we 
spoke.\11\ Removing the anti-steering rules appears to have various 
advantages, including providing merchants with the ability to send 
signals to cardholders about which cards increase merchant acceptance 
costs, a change that could improve merchants' leverage in negotiating 
their payment costs. Merchants' ability to surcharge or refuse certain 
cards also could cause cardholders using rewards cards to be more aware 
of and to bear more of the cost of the rewards from which they 
currently benefit. This option also may require the least intervention, 
as merchants could decide whether to add surcharges or refuse certain 
cards based on their customer mix.
---------------------------------------------------------------------------
    \11\ See GAO-10-45. The other option that was most supported was 
restricting interchange fees with a cap or other limit.
---------------------------------------------------------------------------
    Merchants told us that they have faced increased costs from 
accepting credit cards in recent years, partly because of the 
increasing number of customers using credit cards and partly because of 
the increase in average interchange fees, particularly for higher-fee 
rewards cards. With lower card acceptance costs, merchants may pass on 
their interchange fee savings through lower prices to consumers; 
however, the extent to which they would do so is unclear.\12\ 
Representatives of merchants we interviewed told us that they generally 
passed any increased costs--including the costs of accepting credit 
cards--to their consumers through higher retail prices. Thus, all their 
customers may be paying higher prices for goods and services, whether 
using a credit card or not.
---------------------------------------------------------------------------
    \12\ For example, Federal Reserve economists told us that the 
extent to which merchants would pass on their interchange fee savings 
likely would depend on the competitiveness of the markets in which the 
merchants operate.
---------------------------------------------------------------------------
    If interchange fees were lowered for merchants, consumers could 
benefit from lower prices for goods and services, but proving such an 
effect is difficult. For example, Australian regulators estimated that 
capping interchange fees in their country resulted in lower interchange 
fees for their merchants by about 1.1 billion Australian dollars for 
the period of March 2007 through February 2008. They acknowledged that 
providing conclusive evidence of the extent to which these savings have 
resulted in lower retail prices was difficult because so many factors 
affect prices at any one time. Moreover, the degree of savings depended 
on whether or not merchants were increasing their prices because of 
higher interchange fee costs. Some merchant representatives we 
interviewed told us that merchants would take different steps to 
improve customer service if interchange fees were lowered, such as 
hiring more employees. Customers also might not experience lower prices 
if merchants' overall costs did not decrease. Several industry 
participants speculated that if merchants were allowed to refuse 
higher-cost cards, merchants would lose sales from customers using 
premium credit cards. Network and issuer officials told us such 
customers spend more than customers using basic credit cards. A study 
of the Australian reforms by several economists reported that because 
the actual decrease in merchant costs was very small, merchants may 
have hesitated to lower prices, especially when their other costs might 
have been changing.\13\
---------------------------------------------------------------------------
    \13\ See Howard Chang, David S. Evans, and Daniel D. Garcia-Swartz, 
``The Effect of Regulatory Intervention in Two-Sided Markets: An 
Assessment of Interchange-Fee Capping in Australia,'' Review of Network 
Economics, 4, no. 4 (December 2005).
---------------------------------------------------------------------------
    Lowering interchange fee revenues for issuers could prompt issuers 
to increase cardholder costs or curtail cardholder credit availability. 
In Australia, issuers reduced rewards and raised annual fees following 
that country's interchange fee cap. In addition, with less interchange 
fee income, representatives of smaller issuers such as community banks 
and credit unions told us that they likely would not offer rewards 
cards and therefore would be unable to compete with larger issuers. One 
credit union official told us that the credit union could not offer 
credit cards because of the expense involved with running such a 
program. In addition, representatives of credit unions and community 
banks we interviewed said that they benefited from a network system 
that developed interchange rates to attract both merchants and issuers. 
Allowing merchants to refuse certain cards or negotiate rates directly 
with the issuers would eliminate smaller institutions from the process. 
Representatives of larger issuers told us that with less revenue from 
interchange fees, they would consider reducing the amount of credit 
they make available to cardholders. Australian officials reported that 
since their reforms were instituted, the number of credit card accounts 
in Australia has continued to increase and smaller credit unions have 
remained in the credit card business, albeit with some of their 
operations outsourced.
    Banks' lower interchange fee revenue and the removal of certain 
anti-steering rules could also negatively affect Federal entities. For 
instance, a GSA official told us that banks facing reduced interchange 
fee revenue might reduce the amount of rebates Federal entities receive 
for using purchase cards. In addition, he said that the ``honor all 
cards'' rule ensures universal acceptance of GSA purchase cards--an 
important consideration for timely purchase of goods for first 
responders.
    Although interchange fees are not regulated at the Federal level in 
the United States, these fees and card network rules, including the 
anti-steering rules, have been the subject of various actions by 
foreign regulators, the Department of Justice (DOJ), and private 
litigation. The Federal Reserve, under the Truth in Lending Act, is 
responsible for creating and enforcing requirements relating to the 
disclosure of terms and conditions of consumer credit, including credit 
cards, but because interchange fees are paid by merchants' banks and 
not directly assessed to consumers, such fees are not required to be 
disclosed to consumers. Although not specifically regulating credit 
card interchange fees, DOJ and the Federal Trade Commission have 
jurisdiction over credit card networks and issuers as part of enforcing 
U.S. antitrust laws or the Federal Trade Commission Act. In 1998, DOJ 
sued Visa and MasterCard for alleged antitrust violations regarding, 
among other things, how these networks' rules in effect prevented 
issuers from issuing cards on competitors' networks.\14\ DOJ officials 
reported that they currently have another investigation under way 
involving potentially anti-competitive network rules such as those that 
prevent merchants from steering customers to other forms of payment, 
levying surcharges for card transactions, or discriminating against 
cards by type. DOJ staff told us they have requested information from 
American Express, Discover, MasterCard, and Visa as part of this 
investigation. They were not able to provide an estimate for when any 
formal action resulting from the investigation, if any, might occur. 
Interchange fees and other card network practices also have been the 
subject of private lawsuits. Since the mid-1980s, various lawsuits 
alleging problems with interchange fees and other card network 
practices have been litigated or remain pending.
---------------------------------------------------------------------------
    \14\ See United States v. Visa U.S.A., Inc., 344 F.3d 229 (2d Cir. 
2003), aff'g, 163 F. Supp. 2d. 322 (S.D.N.Y. 2001), Cert. Denied, 543 
U.S. 811 (2004).
---------------------------------------------------------------------------
    In addition, as of September 2009, more than 30 countries have 
acted or are considering acting to address competition or card cost 
concerns involving payment cards.\15\ Some actions taken by these 
countries include:
---------------------------------------------------------------------------
    \15\ Federal Reserve economists and others report that these 
countries include Argentina, Australia, Austria, Brazil, Canada, Chile, 
Colombia, Denmark, Finland, France, Germany, Hungary, Israel, Italy, 
Mexico, New Zealand, Norway, Panama, People's Republic of China, 
Poland, Portugal, Romania, Singapore, South Africa, South Korea, Spain, 
Sweden, Switzerland, Turkey, and the United Kingdom, as well as the 
European Commission. See Terri Bradford and Fumiko Hayashi, 
``Developments in Interchange Fees in the U.S. and Abroad,'' Payment 
System Research Briefing (Federal Reserve Bank of Kansas City: April 
2008); and GAO-08-558.
---------------------------------------------------------------------------
  --regulating relationships between merchants, issuers, and card 
        networks, such as prohibiting card networks from imposing 
        certain rules on merchants;
  --establishing maximum interchange fees or capping average 
        interchange fees;
  --allowing more institutions to enter the credit card market by 
        changing the requirements to allow more institutions to qualify 
        to act as an issuer or acquirer; and
  --conducting investigations into the functioning of the payment card 
        market, including legal antitrust proceedings.
    Federal agencies accept cards and pay the associated costs. They 
also use cards and obtain various benefits as a result. Efforts to 
reduce interchange fees by addressing anti-steering rules could lower 
Federal entities' interchange fee costs. If interchange fees were 
lowered, consumers and Federal entities might benefit from lower prices 
for goods and services, but lower interchange revenues for card issuers 
could prompt them to increase cardholder costs, offer less generous 
rewards, or curtail cardholder credit availability, although consumers 
and Federal entities could still enjoy various other benefits of using 
cards, such as convenience and efficiency.
    Mr. Chairman and Members of the Committee, I appreciate the 
opportunity to discuss these critically important issues and would be 
happy to answer any questions that you may have. Thank you.

    Senator Durbin. Well, thanks. We are going to have some 
questions, but it is going to be a little while.
    Ms. Langenderfer, if I can beg your indulgence here, I am 
going to run off to vote and then return and hold this 
subcommittee in recess for approximately 20 minutes. So I thank 
you all for your understanding.
    Well, the subcommittee will resume now that Senator Collins 
and I have returned from casting our votes, another pair of 
identical votes I am sure. Right.
    Senator Collins. It was. This is scary.
    Senator Durbin. It is scary.
    So, Ms. Langenderfer, thanks for waiting. The floor is 
yours.

STATEMENT OF JANET LANGENDERFER, SENIOR DIRECTOR OF 
            CREDIT CARDS, FINANCE DEPARTMENT, NATIONAL 
            RAILROAD PASSENGER CORPORATION (AMTRAK)
    Ms. Langenderfer. Thank you. Good afternoon. Thank you for 
the opportunity to present this testimony.
    My name is Janet Langenderfer. I am the Senior Director of 
Credit Cards in the Finance Department at Amtrak. I work for 
the treasurer and have responsibility for everything having to 
do with customer payments made by credit and debit cards. I am 
here today to discuss how the proposed financial reform 
legislation may benefit Amtrak and its customers.
    Amtrak sold more than $1.8 billion worth of tickets, food, 
and beverages to customers traveling between 500 stations 
located in 46 States in fiscal year 2009. Our customers used 
credit or debit cards for more than 90 percent of those 
purchases. As a result, our systems processed approximately 30 
million transactions.
    Clearly, Amtrak customers want to pay with cards, and 
therefore it is critical that Amtrak continue to offer as many 
payment choices as possible.
    A customer swipes his card, and like magic it is supposed 
to work, but it is not magic. It is a financial transaction 
created by Amtrak to be entered into the banking system, 
bringing with it all of the rules and regulations of any other 
banking transaction.
    My job at Amtrak is to make sure that every customer's 
credit or debit card transaction is processed quickly, 
accurately, securely, and cost effectively.
    The legislation proposed by Senator Durbin addresses 
certain direct costs for payment card acceptance that will 
benefit Amtrak and its customers. However, the total cost of 
accepting payment cards results from a complex structure of 
both direct and indirect costs.
    In fiscal year 2009, Amtrak paid more than $33 million to 
outside companies to process $1.6 billion worth of card 
transactions. This calculates to 2.27 percent and is 0.11 
percent more than what we paid in 2008.
    As you may know, every credit and debit card transaction is 
priced independently based upon the type of card used, the 
sales channel used, and the technical properties associated 
with the transaction. Our April 2010 statements for the four 
major credit card brands contained more than 200 different 
rates. We work aggressively to analyze our monthly statements, 
looking for opportunities to cut our costs, and you can see 
that our fees are based on a really complicated rates matrix.
    We have also worked with each of the payment card brands, 
to the extent possible, to qualify for the best category of 
rates. We have been more successful with some brands than with 
others. Under the proposed legislation, we will have the 
opportunity to encourage a customer to use our lowest-cost 
card, thereby lowering our overall costs. This would likely 
create an environment that would encourage competition among 
the various brands to negotiate rates that are more favorable. 
I would see this as a benefit to Amtrak, to its customers, and 
to the taxpayer at the end of the day.
    As customers ourselves, we can all appreciate what it means 
to have a purchase processed quickly and accurately. In order 
to have a consistent process, the payment card companies 
establish card processing rules, including requirements for 
technology, how to issue receipts, how to handle returns and 
refunds, how to prevent fraud, and many more.
    It is the responsibility of Amtrak's management team to 
make sure that our front-line employees and our electronic 
systems incorporate all of these rules into our own policies 
and procedures so that each purchase is seamless to the 
customer. But following the rules is not easy and the 
transactions do not always get processed quickly and 
accurately.
    Security has always been a high priority at Amtrak. 
Everyone understands that payment transactions must be handled 
carefully and theft of payment card information is scary. From 
our perspective, payment card security is viewed in two general 
categories: fraud prevention and compliance with the payment 
card industry (PCI) data security standards, often called PCI. 
Amtrak has spent close to $4 million on IT projects 
specifically to meet PCI compliance so far. However, there is 
no separate financial accounting for the significant amount of 
staff time spent on PCI-related issues such as contracts, 
policies, and procedures.
    Amtrak works to prevent fraud through a series of industry 
best practices. As a result of recent efforts, we have reduced 
losses from 0.5 percent in 2001 to 0.04 percent in 2007. It has 
remained at 0.04 percent through 2009 even though sales on 
payment cards have increased by 50 percent during the same 
period. These are laudable numbers, but they come with hidden 
costs, increased interchange fees, more customer service costs, 
and potentially lost revenue from customers who do not want to 
be inconvenienced.
    In conclusion, Amtrak accepts debit and credit cards from 
customers for almost all of our sales. The cost of accepting 
these cards are difficult to manage due to the complexity of 
the rate structure and the rules established by the payment 
card companies.
    The legislation proposed by Senator Durbin puts us in the 
position to offer our customers the choice to use a payment 
type that provides them and Amtrak with the best combination of 
service and cost. With that opportunity, Amtrak will be able to 
negotiate with each payment card company on an equal footing 
for pricing that is appropriate for selling train tickets, 
food, and beverages and for rules that are geared to our 
organization and our customers.
    Thank you for the opportunity to testify today. I will be 
happy to entertain any questions.
    [The statement follows:]

                Prepared Statement of Janet Langenderfer

    Good afternoon and thank you for the opportunity to provide this 
testimony. My name is Janet Langenderfer. I am the Senior Director of 
Credit Cards in the Finance Department at Amtrak. I work for the 
Treasurer and have responsibility for everything having to do with 
customer payments made by credit and debit cards.

                              INTRODUCTION

    I am here today to discuss how we believe the proposed financial 
reform legislation may benefit Amtrak and its customers. Amtrak sold 
more than $1.8 billion worth of tickets, food, and beverages to 
customers traveling between 500 stations located in 46 States in fiscal 
year 2009. Our customers use a credit or debit card for more than 90 
percent of those purchases; and as a result, our systems process 
approximately 30 million authorization requests, sales and refund 
transactions each year. Clearly, Amtrak's customers want to pay with a 
credit or debit card, and therefore it is critical that Amtrak continue 
to offer them as many payment choices as possible.
    Customers expect their card to simply work when using it at Amtrak; 
they do not realize that Amtrak is actually creating a financial 
transaction that will be entered into the banking system--bringing with 
it all of the rules and regulations of any other banking transaction. 
Controls and consistency are necessary to protect the security and 
integrity of the system. However, it is challenging to understand the 
rules established for the financial transactions we are trying to 
support.
    The total cost of accepting payment cards results from a complex 
structure of direct and indirect costs. The Amendment proposed by 
Senator Durbin incorporates language that addresses certain direct 
costs for payment card acceptance that will reduce the cost of these 
transactions and therefore benefit Amtrak and its customers. The 
remainder of my testimony will demonstrate some ways that payment card 
transaction rules impact Amtrak and its customers today.

              THE DIRECT AND INDIRECT COSTS OF ACCEPTANCE

    In fiscal year 2009, Amtrak paid more than $33 million to outside 
companies to process $1.6 billion worth of payment card transactions. 
To provide a frame of reference, this is a ``blended rate'' of 2.27 
percent and is 0.11 percent more than what we paid in fiscal year 2008.
    As you may know, every single transaction is priced independently 
based upon the type of card used, the sales channel used, and the 
technical properties associated with the transaction. Our April 2010 
statements for the four major card brands contained more than 200 line 
items. We work aggressively to analyze our monthly statements, looking 
for opportunities to cut our costs. But the savings do not show big 
returns; one effort in fiscal year 2009 saved us about $2,500; another 
one $200. On the other hand, as customers have moved (with society as a 
whole) from traditional travel agencies to the Internet, sales on 
Amtrak.com have saved us more than $50,000 each year just in payment 
card fees.
    You can see that a company like Amtrak pays its payment card fees 
based on a complicated rates matrix applied to each transaction. We 
have worked with the payment card brands to the extent possible to 
qualify for the best category of rates. We have been more successful 
with some brands on this than with others. Under the proposed 
legislation, we have the option to encourage a customer to use our 
lowest-cost card, thereby lowering our overall costs significantly. 
This would likely create an environment that would encourage 
competition among the various brands to negotiate more favorable rates. 
I would see this as a benefit to Amtrak, to its customers, and to the 
taxpayer at the end of the day.
Example of Debit Card Customer Challenge
    Here is an example of indirect costs we incur related to the 
application of the payment card contractual rules rather than the 
direct costs we pay. A customer makes a reservation and offers a debit 
card to pay for it. For one reason or another, the transaction is not 
completed. It could be because there were not enough funds available in 
the account, or because the transaction did not pass the Amtrak fraud 
prevention screens, or because the customer changed his or her mind 
about which train to take. In any event, Amtrak will work with the 
customer to either use another form of payment or hold the reservation 
until the customer is able to complete the payment. When this occurs, 
Amtrak sends an automated payment reversal transaction to the payment 
card company so that the customer's money is not held by the bank and 
unavailable for his or her use.
    However, banks do not always apply the reversal transaction to the 
account immediately and the customer does not have access to his or her 
funds. The customer will request our help, but only the bank can 
release the money. As you can imagine, this is a significant 
inconvenience for our customer and it is very costly for Amtrak.

                     FAST AND ACCURATE TRANSACTIONS

    My job at Amtrak is to make sure that every customer's credit or 
debit card transaction is processed quickly, accurately, securely, and 
cost-effectively. I think as consumers ourselves we can all appreciate 
what it means to have our purchase processed quickly and accurately. 
The payment card company rules also include technology requirements 
(hardware, software, and telecommunications), and regulations regarding 
how to issue receipts, how to handle returns and refunds, how to 
prevent fraud, and many more. And by the way, each company generally 
sends out its own update every 6 months. It is the responsibility of 
Amtrak's management team to make sure that our front-line employees and 
our electronic systems incorporate all of these rules into our own 
policies and procedures so that each purchase feels seamless to the 
customer. But following the rules isn't easy and transactions don't 
always get processed quickly and accurately.
    I'd like to provide a specific example on this topic that may not 
be familiar to everyone. Amtrak has some large corporate customers who 
use one credit card for many employees traveling on the trains. During 
the course of a month, there are many sales, refunds, and exchanges for 
travel between the same two cities--the train number and the price are 
the same. In an effort to improve data sharing between travel companies 
and their customers, the payment card companies began requiring that 
additional data regarding each transaction be submitted within the 
payment transaction record--every time. The concept is great; however, 
the implementation is very difficult, and the transaction fees are some 
of the highest. In the past, inconsistent application of the rules has 
led to challenges where customers are not receiving the information 
that Amtrak has sent; creating some of the problems the program was 
designed to fix. This demonstrates the need for full life-cycle data 
accuracy and prompt delivery to all transaction participants.

                   SECURITY COSTS AND CONSIDERATIONS

    When it comes to security, everyone understands that payment 
transactions must be handled carefully and theft of payment card 
information is scary to everyone. While we focus a great deal on 
prevention, the Amtrak Police Department, a nationally recognized 
agency, has a dedicated fraud investigation unit focused solely on 
credit card fraud. Together our company does everything we can to keep 
all of Amtrak's and our customer's data secure. This involves a major 
ongoing investment in information technology which is neither simple 
nor inexpensive--but security has always been a high priority at 
Amtrak.
    We look at security in two general categories: fraud prevention and 
compliance with the Payment Card Industry Data Security Standards, 
often called ``PCI''.
Fraud Prevention
    At the macro level, fraud prevention is managed through a payment 
card company process where a bank may reverse a customer's purchase 
after Amtrak has already been paid for it. For example, if you report 
your card stolen and it is later fraudulently used to purchase a ticket 
on Amtrak.com with a valid approval by the credit card issuer, you 
would not be charged for the ticket but Amtrak would! According to 
payment card company rules for a ``Card Not Present'' environment, 
Amtrak is held responsible because as ``the merchant'', we cannot prove 
who was using the card at the time of the transaction.
    More than 70 percent of Amtrak passengers now elect to purchase 
their tickets through Amtrak's card-not-present sales channels (rather 
than going to the ticket counter). Today Amtrak has few options for 
avoiding a fraudulent transaction at one of its card-not-present sales 
channels and therefore, if the bank will not guarantee a card's 
validity, we do not accept it. We require that the customer come to the 
station and complete the transaction there. This is much more costly 
for Amtrak, and very inconvenient for the customer.
    Amtrak works to prevent fraud through a series of industry best 
practices. As a result of recent efforts, we have reduced chargeback 
losses from 0.5 percent in fiscal year 2001 to 0.04 percent in fiscal 
year 2007. It remained at 0.04 percent through fiscal year 2009 even 
though sales on payment cards have increased by 50 percent during that 
same period and despite the fact that more customers are using card-
not-present channels. These are laudable numbers--but they come with 
hidden costs, increased interchange fees, more customer service costs, 
and potentially lost revenue from customers who do not want to be 
inconvenienced in this manner.
Payment Card Industry Data Security Standards--``PCI''
    The PCI standards, for anyone familiar with them, are like many 
other standards--continually evolving. Formal changes are announced 
every 2 or 3 years and interpretations are published more often. To 
date, Amtrak has spent close to $4 million on IT projects specifically 
to meet PCI compliance; however, there is no separate financial 
accounting for the significant amount of staff time spent on PCI-
related issues such as revising contracts, policies, and procedures.
    I offer one final example to demonstrate the issue. As you can 
imagine, Amtrak has contracts with tens of thousands of vendors. This 
includes vendors who build train engines, those who process card 
payments, and those who write software. According to the PCI standards, 
Amtrak is required to re-negotiate its contracts to include new 
language regarding PCI security, where the vendor is responsible for 
any violation of the PCI standard whether they are aware of it in their 
own system or not. Needless to say, the investment in the process to 
modify these contracts has not been easy--and yet it is part of our 
jobs and we haven't tracked the costs separately.

                               CONCLUSION

    In conclusion, Amtrak accepts debit and credit cards from customers 
for almost all of our sales. The costs of accepting these cards are 
difficult to manage due to the complexity of the rate structure and the 
rules established by the payment card companies. The amendment proposed 
by Senator Durbin addresses certain direct costs for payment card 
acceptance. It puts us in the position to offer our customers the 
choice to use a payment type that provides them and Amtrak with the 
best service and cost combination. With that opportunity, Amtrak will 
be able to negotiate on an even basis with each payment card company 
for pricing that is appropriate for selling train tickets, food and 
beverages. It will also allow us to negotiate on the topic of rules 
that will help our customers.
    We believe that the provisions of Senator Durbin's Amendment are 
reasonable, and we support it.
    Thank you.

    Senator Durbin. Well, thanks for your testimony.
    Let me digress before I get into the substance of this and 
say that as I listened to Mr. Grippo and Ms. Langenderfer and 
Ms. Cackley as well talk about the refusal of Visa and 
MasterCard to negotiate with our Federal Government, for some 
reason I remembered a scene from my favorite movie, ``Dr. 
Strangelove'', when Lionel Mandrake needed some change to make 
a long distance call because they thought there was going to be 
a nuclear war and he didn't have change. And it was suggested 
that he shoot up the Coca Cola machine and take the change and 
use it to avoid a nuclear war. And Keenan Wynn, who was playing 
Colonel Bat Guano, said to him, you're going to have to answer 
to Coca Cola if you do that.
    It seems like things are similarly upside down here where 
we have the Federal Government with literally millions, if not 
billions, of dollars in transactions unable to negotiate when 
it comes to the fees that they are going to pay on credit 
cards? Stick with me for a minute, Mr. Grippo. It seems like we 
have some bargaining power under most circumstances here to 
make sure that taxpayers get a break. What is missing?
    Mr. Grippo. I think under many circumstances, the Federal 
Government has lots of purchasing power as a consumer in the 
marketplace. But if you look at the overall numbers, which 
total to, let us say, $3.5 trillion of credit and debit card 
collections in this economy, our $8.6 billion may not be enough 
to exercise any purchasing power here. And in fact, the Federal 
Government card volume really is not enough when it is 
considered in the larger context of the economy.
    Senator Durbin. So what chance do the Qik-n-EZ convenience 
stores in central Illinois have if $8 billion does not get you 
to the table with Visa and MasterCard?
    Mr. Grippo. Well, I think they are in the same boat as all 
other merchants, which is, by and large, they are presented 
terms through their acquiring banks from the card associations 
and they do their best in accepting those terms.
    Senator Durbin. Our research says that Visa has 122 
different interchange fee arrangements. So it is not as if they 
do not look around and shop around.
    Is there any indication--do any of you have any indication 
that the amount that is being charged to the Federal Government 
reflects the reasonable cost of collection, fraud, default? Is 
there anything that you can point to, for example, at Amtrak 
where you can say, well, there is a reason why we pay? What is 
the number that you gave us here? 2.27 percent on every 
transaction with a credit card and debit card. Is there 
anything that you can point to that says, well, that is because 
of default or fraud or something?
    Ms. Langenderfer. Senator, I cannot give you an exact 
answer. There is a big range of rates. I will give you one 
example. I have looked at our most recent statement, and I have 
debit card transactions that range from 0.97 percent to almost 
5 percent for debit cards.
    Senator Durbin. On the interchange fees.
    Ms. Langenderfer. Interchange fees.
    Senator Durbin. So they range from less than 1 percent to 5 
percent.
    Ms. Langenderfer. Yes.
    Senator Durbin. And the reason?
    Ms. Langenderfer. I do not know.
    Senator Durbin. It is just an arbitrary decision by the 
credit card company?
    Ms. Langenderfer. I would imagine there are transaction 
details that are different, and I would imagine that the type 
of debit card that was used would be different, but I cannot 
tell on the face of it.
    Senator Durbin. So it appears that some card networks in 
other countries have been more successful than the United 
States of America. On April 27, the Wall Street Journal 
reported that Visa Europe agreed to lower the debit card fees 
it would charge in nine European countries, as well as for 
cross-border European Union transactions. MasterCard had 
reached a similar agreement last year.
    Also, according to the April 2008 report issued by the 
Federal Reserve Bank of Kansas City, banks have reached 
agreement with foreign governments to reduce interchange fees 
in Israel, Mexico, and Switzerland.
    Mr. Grippo, why is it that other governments can negotiate 
with Visa and MasterCard but the Government of the United 
States of America, where they are nominally part of, cannot 
negotiate?
    Mr. Grippo. Well, I think in most, perhaps all, of the 
examples you mentioned, those countries were acting as 
regulators through their competition authorities' negotiating 
agreements to reduce rates across the general economy. I do not 
believe they were governments acting as purchasers of banking 
services to negotiate lower rates for the government itself.
    Senator Durbin. So the plot thickens. It appears that our 
failure to assume a power or responsibility when it comes to 
these fees ties our hands with these two giants, Visa and 
MasterCard. And in other countries where they have assumed a 
regulatory relationship--incidentally, for the record, who 
regulates interchange fees in the United States?
    Mr. Grippo. To my knowledge, there is no Federal regulatory 
power over interchange rates. It is a matter of contract among 
the parties.
    Senator Durbin. I think you are right.
    Senator Collins.
    Senator Collins. Thank you, Mr. Chairman.
    Mr. Grippo, I want to follow up by getting a better 
understanding of whether Federal agencies try to negotiate the 
interchange rates that they are paying. Does Treasury try to 
negotiate the rates?
    Mr. Grippo. The Treasury negotiates the rates on behalf of 
all the agencies for a variety of reasons, including the fact 
that the Treasury is the one legally that is processing the 
collection and taking the deposit. And we do try to negotiate, 
as best we can, with the card associations primarily through 
our acquiring bank, although directly with the card networks in 
some cases. And there are cases where we may be successful in 
negotiating a lower charge for a particular type of transaction 
or categorization, or in the definition of an interchange 
category, but in directly negotiating the rates, the level of 
rates, and the manner in which they are set, we really have not 
had much success in realizing any reductions.
    Senator Collins. That surprises me, given the amount of 
transactions that the Federal Government is doing. If it were 
individual agencies trying to negotiate the rate, I could 
understand that they might not have sufficient clout to do so, 
but if Treasury is negotiating the rates across the board, why 
are you not having more success, for lack of a better word? You 
could go through different banks. Correct?
    Mr. Grippo. We could go through different banks, but any 
bank we went through would be subject to the same card 
association rules.
    Senator Collins. So does this get back to the point that 
the chairman made that you have two big issuers who control 80 
percent of the market?
    Mr. Grippo. It does get back to the fact that there is one 
set of rules, and while we very aggressively compete to select 
an acquiring bank, and the fees that we pay that particular 
bank for their particular services are very competitive, as 
good as anyone can get, the interchange fees and other card 
network fees that are established by the associations and 
merely passed through the bank we happen to be dealing with are 
not something that the acquiring bank controls and not 
something we negotiate directly with the acquiring bank.
    Senator Collins. Your report, which came out earlier this 
week, notes that the Treasury could seek to negotiate a maximum 
rate that would be a flat, fixed percentage of all transaction 
dollars. First of all, is that being done now, or is that a 
recommendation?
    Mr. Grippo. This is a recommendation. One of the themes of 
the report is that if the Treasury were able to change the 
status quo--and what we recommend is some mechanism, perhaps 
new legal authority, that allows us to opt out of certain 
transactions that may be cost prohibitive. If we have such a 
mechanism, that would put us on a more equal negotiating 
footing to directly negotiate what those rates were. Then we 
would pursue this concept of a uniform rate or a flat rate that 
would apply to all credit or all debit transactions. This would 
help simply by eliminating the complexity of dozens of 
categories which, frankly, we have to aggressively monitor to 
make sure that they are applied correctly to our transactions.
    Senator Collins. Ms. Cackley, I can see why Treasury would 
like the simplicity of one fixed rate for all transactions, 
regardless of whether it's a personal identification number 
(PIN) or a signature debit, for example. But do different 
transactions not have different costs?
    Dr. Cackley. Different transactions could have different 
costs definitely, depending on whether they are transactions 
with a card that is presented or a transaction over the 
Internet. There could be different processing costs. But the 
interchange fees, as they are currently set, are not directly 
connected to the cost of the transaction itself, although they 
can vary by the perceived risk of the merchant.
    Senator Collins. Which has been the chairman's point and 
why he wants the Federal Reserve to look at setting reasonable 
and proportional rates.
    But I am wondering--and my time has expired. So just 
quickly, what do you think of the Treasury's recommendation 
that there should be a flat, fixed rate? The reason I am 
somewhat concerned about that is it seems to me with a debit 
card, you have less of a chance of a default because the money 
is presumably taken immediately from the individual's account. 
Therefore, I would think debit charges should be lower than if 
someone is using a credit card.
    Dr. Cackley. The idea of having a different rate for a 
debit card versus a credit card is something that has already 
been suggested and actually is already true.
    But when we did our work on interchange fees, looking at 
the different kinds of ways to try to lower interchange fees 
for all merchants, capping the fees was certainly one of the 
options that we considered and that has some merit.
    Senator Collins. Thank you, Mr. Chairman.
    Mr. Grippo. If I could just comment, Senator Collins. In 
our report, we do in fact make that distinction, and when we 
talk about a flat rate or a uniform rate, there would be one 
for credit and a separate for debit to reflect those different 
risks and costs.
    Senator Collins. Right, though you treat different kinds of 
debit cards alike, whether they are a PIN card or a signature 
card.
    Mr. Grippo. That is right.
    Senator Durbin. I have asked Senator Nelson if I could ask 
a couple questions before I give the floor to him.
    Ms. Cackley, in your testimony you say that MasterCard has 
set a Government interchange rate of 1.55 percent plus 10 cents 
per transaction. You also note that MasterCard gives 
supermarkets a 1.27 percent interchange rate. Your testimony 
says that most Government transactions do not qualify for the 
lower rate given to supermarkets, even though Federal 
Government transactions have far less risk than a merchant 
transaction. Can you explain why supermarkets are getting a 
better deal than Federal agencies and Federal taxpayers on 
interchange rates?
    Dr. Cackley. Senator, I believe that the interchange rate 
for supermarkets was set somewhat lower in order to attract 
supermarkets and persuade them to start accepting credit and 
debit cards because that was not something that supermarkets 
did originally, and so having a lower rate was a way to bring 
them into the market.
    Senator Durbin. But $8 billion worth of buying power in the 
Federal Government is not enough to entice them to give the 
taxpayers a similar break?
    Dr. Cackley. Apparently not.
    Senator Durbin. So let me ask one last question. There is 
something called a SmartPay program, the General Service 
Administration's (GSA) SmartPay program. I have got one, and 
this is a credit card given--an official credit card for 
official expenses given to Members of Congress and other 
Federal employees. And this is interesting because in this 
case, the Federal Government is not accepting credit cards. The 
Federal Government is issuing credit cards to be used by their 
employees, and a different world has emerged.
    As your testimony notes, Ms. Cackley, there are Federal 
agencies participating in the GSA SmartPay program that receive 
rebates from the card-issuing banks. The rebates can be 
substantial. GSA is able to get back these rebates because 
card-issuing banks are competing with one another to get GSA's 
card business and because GSA negotiates with banks and 
comparison shops to get the best deal possible. In other words, 
competition in a card-issuing market works to the Government's 
benefit in the GSA case.
    So, Ms. Cackley, is there any opportunity for Government 
agencies to negotiate with or comparison shop between card-
issuing banks with regard to the interchange rates the 
Government pays those banks when it accepts their credit cards?
    Dr. Cackley. The Government does negotiate the rebates that 
they get for----
    Senator Durbin. This is when they issue cards. I say when 
they accept cards.
    Dr. Cackley. But when they accept cards, they do not have 
the ability to negotiate in the same way.
    Senator Durbin. It seems that there is something missing in 
the equation when there is no competition.
    Senator Nelson.
    Senator Nelson. Thank you, Mr. Chairman.
    I know that you called the hearing to discuss the Federal 
Government's payment of interchange fees, but I would like to 
turn briefly to a question about the impact of interchange fee 
regulation on State prepaid debit card programs.
    We have heard from some States. And I would like to know 
how the regulation of the debit card interchange fees will 
impact prepaid debit card programs that are used by the States 
such as the State of Nebraska, my home State, to disburse 
Government benefits and assistance, which has apparently been 
happening for some period of time. I remember as Governor, when 
we set the program in place, we called them Smart Cards. So 
perhaps you can--first of all, Mr. Grippo and then Ms. Cackley.
    Mr. Grippo. Well, it is, I know, a very important question. 
Any change to the balance of interests in the payment card 
system across merchants, banks, the associations, and users is 
a delicate matter. And certainly the regulation of debit card 
interchange rates will impact all of those participants.
    At the Treasury, we have not taken a position on Senator 
Durbin's amendment to the regulatory reform bill that would go 
to directly regulating debit card fees. So I do not want to 
offer thoughts that would support or oppose that.
    Senator Nelson. No, I understand. If you could just explain 
what you believe the impact would be without taking a position 
on it--on the States and what would happen in terms of their 
costs, their charges.
    Mr. Grippo. In general terms, I would say that it would 
cause State governments with benefit cards to have to 
renegotiate the terms of their card agreements with their 
issuing banks. I could not comment on the extent to which they 
would have to do that, but clearly, if the underlying cost 
structure changed due to new regulation of the fees, then the 
end users, including State governments, would have to 
renegotiate some of their terms with the banks.
    Senator Nelson. Do you think they gain leverage or do they 
lose leverage?
    Mr. Grippo. I do not know, Senator. Frankly, I am not sure 
how the direct regulation of debit card fees would play out and 
how all of the different actors would respond. I do not know.
    Senator Nelson. Thank you.
    Ms. Cackley.
    Dr. Cackley. Senator, we did not do work on the electronic 
benefit transfer (EBT) cards directly, but we do know a little 
bit about which cards are not currently impacted by interchange 
fees. The Supplementary Nutrition Assistance Program cards are 
not now affected by interchange fees. I think that we would 
have to do more work in order to answer the rest of your 
question.
    Senator Nelson. Well, I think it is an important point for 
us to consider because raising the cost to the States is not an 
intended consequence. So I think it would be very helpful if we 
could get more information in connection with that because the 
last thing we need to be doing is raising their costs at a time 
that they are coming to us asking for more help on Medicaid.
    Do you have any initial thoughts, even prior to the 
research, as to what the impact would be?
    Dr. Cackley. I think, as Mr. Grippo said, there are so many 
actors that it would be difficult for me to speculate until I 
had done the research.
    Senator Nelson. But do you think it would be a good idea to 
be able to do some research on that to give us some 
enlightenment?
    Dr. Cackley. I think we could certainly look into it for 
you, sir.
    Senator Nelson. Okay.
    Senator Durbin. Senator Nelson, thank you for raising that 
issue and thank you for calling me personally on this because 
after we passed the amendment, you brought to my attention that 
this was a concern based from your experience as Governor of 
your State and what you had heard since. And I wanted you to 
know that we are working on an amendment that will specifically 
carve out these government types of cards so that they would 
not be affected by anything related to the private sector. I 
think it is a special case situation, and I am on your side on 
this one. I am glad you brought it to my attention. Thank you 
for doing that.
    Senator Nelson. Thank you, Mr. Chairman. Thank you.
    Senator Durbin. Senator Collins? Nothing further?
    Thank you to this panel. Appreciate your testimony and your 
patience while we were in recess voting and all those things.
    I would like to ask the second panel to please, if they 
would, come to the table.
    The first witness in the second panel, who is taking a seat 
now, is Bruce Sullivan. He is Vice President and head of 
Government services for Visa, Incorporated. And prior to his 
tenure at Visa, Mr. Sullivan worked for the Department of 
Defense for 33 years and received numerous awards for his 
expertise and accomplishments in the Federal acquisition arena. 
Mr. Sullivan, thank you for being here.
    Our next witness is Ed Mierzwinski. He is the Consumer 
Program Director of the U.S. Public Interest Research Group 
(PIRG), the nonpartisan and nonprofit federation of State 
public interest research groups. State PIRGs are nonprofit, 
nonpartisan, consumer, environmental, and government watchdog 
groups with over 500,000 members. Mr. Mierzwinski has been a 
consumer advocate with PIRG for over 20 years authoring major 
reports on a wide variety of issues relating to financial 
reform, identity theft, product safety issues.
    And Wendy Chronister, who is the President and Chief 
Executive Officer of Chronister Oil Company. Her company 
currently owns and operates 11 Qik-n-EZ convenience stores 
located in central Illinois and employs approximately 150 
people. She grew up in my hometown of Springfield where her 
father founded Chronister Oil Company. She has extensive 
experience in venture capital and private equity, graduated cum 
laude from Dartmouth and magna cum laude from the University of 
Illinois College of Law in Champaign. Thank you for joining us 
too.
    Mr. Sullivan, we will make your written testimony part of 
the official record and we would like to give you 5 minutes to 
summarize it or to raise some highlights. The floor is yours.

STATEMENT OF BRUCE SULLIVAN, VICE PRESIDENT AND HEAD OF 
            GOVERNMENT SERVICES, VISA INC.
    Mr. Sullivan. Thank you very much. Chairman Durbin and 
Ranking Member Collins, thank you for inviting me here today to 
discuss Federal payment of interchange fees and how electronic 
payments are saving taxpayer dollars.
    My name is Bruce Sullivan. I am Vice President and head of 
Government services for Visa. In this capacity, I work with 
issuing banks and Federal agencies participating in GSA's 
SmartPay program. I also work with the FMS in introducing new 
payment technologies for them to use with Federal agencies on 
their programs.
    As a former public servant, I am acutely aware of the need 
to both reduce costs and increase efficiencies within the 
Government.
    As a global payments network, Visa provides a platform for 
business and Government efficiency. Our products provide 
extraordinary value to all participants in the payment chain by 
facilitating commerce, reducing operational costs, and 
expanding the availability of electronic payments to the 
Nation's unbanked. In return, this reduces overall costs to 
taxpayers.
    That is why Government agencies increasingly are embracing 
electronic payment products. To highlight this, the GAO 
reported that the U.S. Government saved close to $2 billion in 
2006 just from the efficiencies gained from the use of the GSA 
purchase cards.
    Just this week, the Treasury announced plans to modernize 
Government and eliminated outdated wasteful processes to create 
savings for taxpayers, distributing most benefits from the 
Government to consumers via direct deposit or prepaid cards. 
This eliminates the need for paper checks. This change is 
estimated to save the Government more than $300 million in its 
first 5 years.
    Electronic payments are also an effective tool for ensuring 
governments and underserved consumers have ready access to 
funds in moments of crisis each and every day. Following 
Hurricane Katrina, Louisiana used purchasing cards to purchase 
and pay for vital supplies, everything from generators to sun 
screen.
    Forty-seven States use or are in the process of 
implementing debit and credit cards for disbursing essential 
benefits such as supplemental child support and unemployment, 
saving State governments and their taxpayers hundreds of 
millions of dollars in the process.
    Interchange is what helps make these programs work. 
Interchange is not revenue to Visa. Rather, it is a transfer of 
value from the merchant's bank to the cardholder's bank. 
Interchange is but one component of the total cost of 
acceptance a Government merchant or enterprise faces when 
arranging with an acquiring bank to accept cards for payment.
    As issuer revenue, interchange supports an issuer's 
significant investment in providing cardholders with access to 
the payment system. Issuer interchange helps many Federal and 
State agencies enjoy a no-cost proposition when it comes to 
using prepaid products to disburse benefits to beneficiaries, 
thereby allowing the unbanked to keep more of their wages 
instead of paying high check cashing fees.
    Federal Government agencies have benefitted tremendously 
from accepting payment cards as well. It is a more efficient 
and less costly method of payment than cash or check. The 2008 
GAO report on the cost and benefits of accepting payment cards 
concluded that by accepting cards, Federal entities realize 
benefits, including more satisfied customers, fewer bad checks 
and cash thefts, and improved operational efficiencies.
    For more than 14 years, the majority of Government-oriented 
merchant category codes have qualified for one of Visa's lowest 
interchange rates. Visa has also created new, unique 
interchange rates for select types of Government transactions. 
Importantly, the level of Visa interchange rate applied to the 
Government sector transactions has remained essentially flat 
over the last decade.
    Both Federal and State governments have decided that 
distributing government benefits on payment cards is an 
important tool to both minimize costs and expand their ability 
to offer a convenient and efficient method of distribution to 
the Nation's unbanked and underserved. And by using GSA 
purchasing travel cards to eliminate paper-based processes, 
agencies have saved billions of dollars in reduced annual 
expenses, and military and civilian personnel can respond 
faster to military deployments, natural disasters, and national 
emergencies.
    In conclusion, electronic payments, whether used by 
Federal, State, or local governments for disbursing benefits, 
making purchases, or accepting purchases, promote efficiency, 
reduce costs, and save taxpayer dollars.
    Visa looks forward to our continuing discussion with the 
Government on how Visa can be a valued partner in maximizing 
the benefits of electronic payments for U.S. taxpayers. Thank 
you very much.
    Senator Durbin. Thanks, Mr. Sullivan.
     [The statement follows:]

                  Prepared Statement of Bruce Sullivan

                              INTRODUCTION

    Chairman Durbin, Ranking Member Collins and distinguished members 
of the subcommittee, thank you for inviting me here today to discuss 
Federal payment of interchange fees and how electronic payments are 
saving taxpayer dollars.
    My name is Bruce Sullivan, and I am Vice President and Head of 
Government Services for Visa Inc. In this capacity, I work with issuing 
banks and Federal agencies participating in the General Services 
Administration's SmartPay program and I work with the Department of the 
Treasury's Financial Management Service on new payment technologies 
available for use by Federal agencies.
    Prior to joining Visa 7 years ago, I proudly served our country in 
both military and civilian capacities for more than 33 years. As a 
retired public servant, I am acutely aware of the need to both reduce 
costs and increase efficiencies within the government due to declining 
budgets. Throughout my career, I tirelessly fought for the elimination 
of waste, fraud and abuse at the Department of Defense and continue to 
do so in my position at Visa.
    Visa Inc. is pleased to testify before the Subcommittee on 
Financial Services and General Government to discuss how interchange 
enables programs that help Federal, state and local government 
agencies, our nation's most vulnerable citizens and, ultimately, all 
taxpayers.
    As a global payments network, Visa provides a platform for business 
and governmental efficiency, consistently delivering a highly reliable, 
secure and innovative system over which a wide range of payment 
products and services can be delivered to both those accepting Visa for 
payment and those seeking to pay with Visa. Visa has been the Federal 
government's primary provider of these services for over a decade. We 
believe our products provide extraordinary value to all participants in 
the payment chain by facilitating commerce across the United States and 
global economies, reducing operational costs and expanding the 
availability of electronic payments to the nation's unbanked. Visa is 
proud to be a partner of both the Federal and state governments in 
pursuing these goals.
    For many years, government agencies have increasingly embraced 
electronic payment products as a cheaper, more secure and more 
convenient alternative to cash, checks and purchase orders. These 
products include GSA Purchasing cards as well as Federal and state 
benefits disbursement programs--all of which have been shown to provide 
tremendous savings and efficiencies for both the government and, in 
turn, U.S. taxpayers. Indeed, the U.S. Government Accountability Office 
(GAO) reported that the U.S. government saved close to $2 billion in 
2006 just from the efficiencies gained from use of GSA Purchasing 
cards.
    Just this week, the Department of the Treasury announced plans to 
modernize government and eliminate outdated, wasteful processes to 
create savings for taxpayers: distributing most benefits from the U.S. 
Government to consumers via direct deposit or pre-paid cards, thus 
eliminating the need for paper checks for all benefits payments.
    By switching from inefficient paper forms of payment to digital 
currency, the Director of the Office of Management estimates the 
Federal Government will save more than $300 million over the first 5 
years, and more than $120 million each year thereafter. As the Director 
noted in a blog posting, ``this is a win-win for the American public 
because it makes government more convenient and cost-effective. This is 
precisely the type of smart, streamlined improvement that this 
Administration is committed to making across government to boost 
efficiency and modernize how we do business.''
    But electronic payments provide far more than just cost savings--
they are also an incredibly effective tool for ensuring that our 
nation's most under-served consumers have access to ready funds, both 
in moments of crisis and, indeed, each and every day. For example, 
following Hurricane Katrina, Louisiana's Department of Environmental 
Quality (DEQ) used Visa Purchasing cards to pay for vital supplies--
everything from generators to sunscreen. As another important example, 
47 states use or are in the process of implementing the use of debit or 
prepaid cards for disbursing essential benefits such as supplemental 
child support and unemployment, saving state governments and their 
taxpayers hundreds of millions of dollars in the process.
    As explained below, Federal and state governments--and ultimately 
taxpayers--receive tremendous value from electronic payments. These 
benefits are evident both when a government agency or enterprise 
chooses to accept cards for payment, and when it provides them to its 
employees or others as a way to pay, or to receive funds.
    Visa is committed to ensuring that our nation's Federal, state and 
local governments are able to maximize these benefits through programs 
customized to their unique needs. We appreciate the opportunity to 
detail these efforts and continue an important dialogue with the 
government, both on these effort's successes as well as how they can be 
expanded.

                          WHAT IS INTERCHANGE?

    The term ``interchange'' is often misunderstood, but it is 
important to recognize both what it is and, just as importantly, what 
it is not. Interchange is not revenue to Visa; rather it is a transfer 
of value from a merchant's bank to the cardholder's bank. Visa sets 
interchange to maximize the participation in its network, seeking out 
the largest level of Visa issuance to cardholders and Visa acceptance 
by merchants. Visa has no interest in setting the level of interchange 
too high (which might lead to lost acceptance) or too low (which could 
lead issuers to put other payment products in the hands of 
cardholders). Please let me repeat: Visa receives no revenue from 
interchange.
    Interchange is also but one component of the cost of acceptance a 
merchant, or a government agency or enterprise, faces when arranging 
with an acquiring bank to accept cards for payment. Typically, each 
agency that accepts cards for payment pays a ``merchant discount 
rate,'' which may include interchange and the acquirer's own expenses 
and return on investment. The level and structure of the merchant 
discount rate paid by an agency or enterprise is entirely a function of 
its acceptance contract with its chosen acquiring bank. Visa has no 
role in that negotiation.
    As issuer revenue, interchange supports an issuer's significant 
investment in providing cardholders with access to a national and 
global payment system, and investing in developing and supporting 
payment innovations that ultimately benefit both the government and 
U.S. taxpayers. Issuer interchange helps many Federal and state 
agencies enjoy a no-cost proposition when it comes to using Visa 
prepaid products to disburse benefits to eligible beneficiaries--
because issuers get paid a small fraction of the value of the 
transaction when recipient of government benefits use their cards, they 
are able to provide those cards at no cost to the government. And, in 
some cases, Federal or state agencies may earn financial rebates from 
the use of Visa products by their employees--rebates provided by the 
issuer, supported by the interchange revenues that issuer receives. 
Interchange revenue is also a major component of driving financial 
inclusion to the unbanked, allowing employers to deliver payroll cards 
to their low income, unbanked workers at little or no cost. Prepaid 
payroll programs allow the unbanked to keep more of their wages instead 
of paying high check-cashing fees and having the risk of carrying 
significant amount of cash.

         GOVERNMENT BENEFITS FROM ACCEPTING ELECTRONIC PAYMENTS

    Federal government agencies have benefitted tremendously from 
accepting payment cards as a more efficient and less costly method of 
payment than cash or check. Indeed, the GAO released a report in 2008 
on the costs and benefits of accepting payment cards and concluded 
that: ``By accepting cards, Federal entities realize benefits, 
including more satisfied customers, fewer bad checks and cash thefts, 
and improved operational efficiency.'' The day-to-day, routine costs 
that are minimized through electronic payments do not often receive 
much attention or discussion. But all that paper is expensive to 
handle, expensive to collect and expensive to track. It is challenging 
to determine all the direct and indirect costs of paper-based payments, 
including losses on lost or bad checks, pilferage of cash, errors in 
record keeping and slower receipt of funds. These are, however, 
incredibly important savings at the end of the day--savings that 
ultimately benefit U.S. taxpayers. Some examples of specific agency 
benefits identified in the GAO report included:
  --Reduction of cash-associated expenses.--By accepting cards, Federal 
        entities incurred less expense in transporting cash, lower 
        losses from theft of cash, and had fewer bad check expenses. 
        For example, officials at the Department of the Interior noted 
        that cash transport costs can be high for some remote parks and 
        wildlife refuges. Several Federal officials also stated that 
        accepting cards has reduced the costs associated with 
        processing checks, and that funds are deposited in accounts 
        faster when customers use credit or debit cards than when they 
        use checks.
  --Improved internal operations and more streamlined bookkeeping 
        through reduced paperwork.--For example, officials at the 
        Department of the Interior stated that payments made by credit 
        cards result in a more streamlined bookkeeping approach because 
        card sales involve less paperwork (for reconciliation) than 
        other payment forms.
  --Reduced labor costs.--Accepting cards also has enabled entities to 
        conduct business via the Internet, which can reduce labor costs 
        associated with sales and also can provide greater convenience 
        to customers. For example, officials from the U.S. Mint stated 
        that about 50 percent of their sales occurred through the 
        Mint's Web site.
  --Re-allocation of staff to more productive uses.--Officials at the 
        Department of the Interior explained that card acceptance at 
        automated kiosks allowed them to reallocate some staff that 
        used to collect entrance fees to more productive tasks. Amtrak 
        officials also stated that customers' ability to purchase 
        tickets using cards, especially through the Amtrak Web site, 
        has reduced their labor costs.
  --Reduced fraud and errors from miscounting or losing cash and 
        checks.--Additional operational efficiencies mentioned by 
        officials included a reduction in costs and exposure to fraud 
        and errors from misplacing or miscounting cash or checks.
  --Fewer instances of employee theft.--Amtrak officials told us that 
        accepting cards onboard trains for ticket and food and beverage 
        sales resulted in fewer instances of employee theft of cash.
  --Improved customer satisfaction.--Agencies reported that card 
        acceptance improves customer satisfaction with their 
        organizations because consumers like to use their cards for 
        convenience, credit card reward programs, and security reasons.
    In a time of a declining workforce and budget dollars, agencies are 
able to leverage these benefits and make people that might otherwise be 
behind the counter more productive, resulting in a friendlier, more 
responsive and less costly government.\1\ Ultimately, as noted by 
Amtrak, payments are ``a win-win'' for customers and employees'' \2\
---------------------------------------------------------------------------
    \1\ A second GAO report--released just about 6 months ago--reported 
that private-sector retail merchants realized the same benefits from 
card acceptance: incremental sales, faster and more certain payments, 
fewer bounced checks, and reduced cash handling. Also, merchants use 
electronic payments to speed and automate checkout, and expedite 
credits or merchandise returns.
    \2\ March 28, 2007 Amtrak Press Release.
---------------------------------------------------------------------------
    Visa recognizes that government payments represent a major area of 
mutual opportunity and, for that reason, has consistently sought out 
ways to ensure that the interchange applied to government transactions 
on its major product sets is attractive for broad acceptance. For more 
than 14 years, Visa has allowed transactions from the majority of 
government-oriented merchant category codes to qualify for one of its 
most attractive interchange rates on consumer credit and debit 
transactions, its ``emerging segments'' rate (this rate appears as 
``CPS-Retail 2'' on Visa's published rate sheet, which is posted online 
with all Visa interchange rates at Visa.com).
    Visa has also created new, unique interchange rates for the 
government sector, or for select types of governmental transactions, as 
part of its ongoing efforts to expand acceptance and grow the volume of 
governmental transactions going over the Visa network. For example, 
only GSA cards receive a special large ticket interchange rate, 
available with fewer restrictions compared to the equivalent non-GSA 
Purchasing card large ticket interchange rate, and only tax payment 
transactions may qualify for a unique flat debit interchange rate.\3\
---------------------------------------------------------------------------
    \3\ Again, these rates may be found as part of Visa's published 
rate sheet posted online at Visa.com.
---------------------------------------------------------------------------
    Importantly, the level of the Visa interchange rate applied to 
government sector transactions has remained essentially flat over the 
past 10 years. Looking at all Visa payment methods from 1999 through 
2009, volume (i.e., cardholder usage) in governmental categories has 
increased by almost 600 percent over the past 10 years, to roughly $25 
billion in 2009. Visa interchange applied to these transactions grew 
over this period, in line with volume growth, to roughly $392 million. 
The resulting percentage, or volume-weighted interchange rate, of 1.57 
percent is just over 3 percent higher than it was in 1999--an 
exceptionally low level of change when one considers all of the ways in 
which the value of access to the Visa system increased over that 10 
year period, including access to more cardholders, improved system 
reliability, and increased speed of authorization and settlement, among 
other enhancements.
    When looking just at Visa debit products over this same timeframe, 
Visa volume has increased almost 2,000 percent since 1999--a remarkable 
growth rate reflecting the increasing adoption of electronic payments 
by governments as a method of acceptance and by cardholders as their 
preferred method of payment. At the same time, the effective 
interchange rate on these transactions has actually declined by 5 
percent. Visa believes these figures are a compelling testimonial to 
its efforts to ensure that the government maximizes the benefits of 
card acceptance while minimizing its costs.
    In their ``Report on Credit and Debit Interchange and Other Fees,'' 
the Financial Management Service (FMS) indicated that they accounted 
for $8.6 billion in government payment volume across all networks in 
their fiscal year 2009, and $116 million in interchange and other 
fees--which would equate to a merchant discount fee of 1.35 percent. 
Interchange is only one component of the merchant discount fee, 
therefore interchange would be an amount less than the 1.35 percent 
computed from FMS figures.
    Visa welcomes the additional feedback from the FMS provided as part 
of their own testimony to this hearing, just as we welcome engagement 
and feedback from any and all merchants and other Federal and state 
government agencies accepting Visa. We are eager to engage directly 
with the FMS so that we can discuss each element of their report and 
request in more detail, and determine what adjustments Visa might make 
to its interchange rates and structure in order to maximize the joint 
opportunity for more Visa volume processed in a more cost-effective 
manner for the U.S. government and ultimately U.S. taxpayers.
    While the FMS' comments were not directed at Visa alone, Visa 
certainly recognizes many of the issues raised--including the need for 
any new solutions to be both operational and financially viable for 
participants across the entire payment system including acquirers, 
issuers and processors. Ultimately, for any solution to work for all 
stakeholders there must be a business case for each: for acquirers (who 
must implement any new changes on behalf of their merchant), for 
networks (who are interested in expanding and improving network 
volumes) and issuers (who seek to increase payment transactions while 
reducing costs and improving cardholder value). And all of this is in 
the context of a highly competitive environment for each.
    While we are still absorbing and thinking through the full range of 
implications of each specific element of their proposal, a few points 
are worth making here:
  --First, the ``government segment'' or even the volume within FMS is 
        not a singular agency, but instead represents thousands of 
        agencies covering a very broad range of possible transaction 
        sizes and types (government-to-government payments, everyday 
        commissary purchases, admissions and other transactions at 
        national parks, U.S. Mint eCommerce sales, traffic and court 
        fines, etc.). When the USPS and Amtrak are included, the range 
        expands further to include postage stamps, larger-scale 
        packaging and mailing invoices, and railway tickets (in a 
        variety of modes, including onboard trains, at kiosks, and via 
        the Internet). Sometimes consumers prefer to pay for these 
        things with credit, and sometimes with debit, differences 
        reflected in each agency's own payment mix and customer base. 
        And many of these differences are reflected in the current Visa 
        interchange structure, to the merchant's benefit.
  --Second, while Visa is happy to discuss the potential merits of a 
        singular interchange rate for credit or debit transactions, 
        such a structure creates the potential for an interchange rate 
        that will be lower on some portion of today's volume, but may 
        be higher on some portion as well. This becomes increasingly 
        likely when moving away from a variable structure (e.g., 
        interchange is a percent of the total transaction amount) and 
        toward a fixed structure (e.g., the interchange is always the 
        same, regardless of transaction size). And as a result, a 
        singular interchange rate could have detrimental impacts on 
        acceptance of electronic payment transactions in specific 
        situations, e.g., rate is too high to effectively promote small 
        dollar transactions.
  --Third, FMS has raised some issues in regard to certain of Visa's 
        rules, including the requirement that merchants accept Visa for 
        payments of all amounts and the prohibition on cardholder 
        surcharges. Visa has adopted these rules to protect all 
        cardholders, including government cardholders. While FMS, in 
        its capacity as a payment card acceptor, might appreciate the 
        ability to set transaction maximums or surcharge customers, 
        allowing such anti-consumer practices would hardly seem to be 
        in the interest of the government as a card user. Government 
        purchasing cards would be far less useful if merchants could 
        set maximum transaction sizes, and the government could face 
        hundreds of millions of dollars of surcharges on its own 
        purchases. Allowing minimum transaction sizes and surcharges 
        would also disadvantage users of government benefit cards.
    Regardless of any open issues, Visa would like to engage FMS 
directly and explore ways in which Visa might address their core issues 
in such a way that also remains viable for all other participants in 
the transaction. As the FMS said itself, ``The desired outcome would be 
not to reject any transactions . . .'' While our business and system 
connections are to issuers and acquirers, Visa has a good history of 
engaging merchants directly and, when mutually viable terms can be 
found, customizing interchange and other elements of our network 
parameters to work better for a given merchant's business model. We 
would very much like to have that opportunity with the FMS and the 
broader Federal government.

                 GOVERNMENT BENEFITS FROM CARD ISSUANCE

    Both Federal and state governments have decided that their issuance 
of payment cards is an important tool to both minimize costs and expand 
their ability to offer a convenient and efficient method of 
distributing benefits to the nation's unbanked and under-served, both 
for their everyday expenses but also for an essential method of 
commerce during both national and international crises.
    Additionally, over 350 Federal agencies use GSA purchasing and 
travel cards to eliminate paper-based purchasing processes as well as 
to eliminate the need for advance travel payments.\4\ These cards have 
saved billions of dollars in reduced annual expenses and have enabled 
military and civilian personnel to respond faster to military 
deployments, natural disasters and national emergencies. These 
essential government programs are detailed below.
---------------------------------------------------------------------------
    \4\ As noted by the U.S. General Services Administration, 
``estimated administrative savings for the purchase card alone is $1.7 
billion per year ($70 per transaction) when used in place of a written 
purchase order.''
---------------------------------------------------------------------------
Government Distribution of Benefits to the Unbanked and Under-Served
            State Benefits Electronic Payment Programs
    Almost every state in the nation has concluded that electronic 
distribution of government benefits both saves taxpayers money and, 
just as importantly, ensures that the unbanked have equal, quick and 
convenient access to funds. As mentioned, 47 states are using or are in 
the process of implementing electronic payments in the form of debit 
(or prepaid) cards for supplemental child support and unemployment 
benefits. Just like in the Federal sector, state budgets have endured 
significant cuts and continuing this trend would cause a lasting impact 
on critical services for their most vulnerable citizens. Visa believes 
the thoughts from Dennis McKinney, Treasurer of the State of Kansas, 
hits this point home: ``The move to digital technology, including their 
prepaid debit card usage, with less reliance on the issuance of paper 
checks has been one key step to reducing costs while preserving funds 
for services for those most in need of assistance.'' Visa, too, 
believes that these programs have offered significant benefits both to 
state governments and the constituencies they serve.
    As Treasurer McKinney noted in his letter to Senator Christopher 
Dodd and Representative Barney Frank on June 4, 2010:
  --``Electronic disbursement of benefits offers significant cost 
        controls for the state, ranging from the obvious savings in 
        paper and postage to the elimination of hidden costs for 
        carrying `undisbursed collections' in the form of un-cashed 
        checks that must be accounted for and reported to Federal 
        regulators. It also prevents problems that occur when a 
        criminal counterfeits a state check--cheating the merchant who 
        accepts the counterfeit and hampering honest citizens who 
        subsequently have difficulty cashing legitimate state checks. 
        Electronic disbursement also improves service to citizens by 
        giving them quick access to state benefits and eliminating mail 
        delays and disruptions due to address changes, inclement 
        weather or catastrophic events. Families, whether banked or 
        unbanked, benefit from having access to ATM withdrawals and 
        teller withdrawals while eliminating the expense of check 
        cashing fees. Electronic disbursement also protects benefit 
        recipients from theft of support checks from mailboxes, 
        wallets, and purses.''
  --``Finally, recipients of these debit cards no longer have to worry 
        about being displaced in the event of natural disasters or 
        national emergencies as their benefits travel with them. As 
        seen in the aftermath of Katrina, many people receiving 
        government benefits by checks had no way of obtaining those 
        benefits (in fact the post office was closed) and the 
        beneficiaries had to rely on various Federal agency personnel 
        to provide them with some form of government relief hastily put 
        together . . . and we all remember the fraud and waste that 
        occurred from that effort.''
            Federal Benefits Electronic Payment Programs
    Like state governments, the Federal government has also embraced 
the convenience and cost-savings associated with the distribution of 
government benefits through electronic payments.
    For example, the Department of the Treasury is currently using 
prepaid debit cards to distribute social security and supplemental 
security income payments to hundreds of thousands of citizens under its 
Direct Express program. Although originally designed for the unbanked, 
this program is open to anyone who receives these benefits, providing 
citizens with a convenient and more efficient alternative to paper 
checks and saving the Federal government the cost of check 
distribution. This program also allows the unbanked to avoid costly 
check-cashing fees, essentially providing them an additional 3 percent 
of benefits by avoiding fees which average above 3.24 percent, 
according to a 2008 study by The Brookings Institution.\5\
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    \5\ The Brookings Institution, Banking on Wealth: America's New 
Retail Banking Infrastructure and Its Wealth-Building Potential, p.13.
---------------------------------------------------------------------------
    Deputy Assistant Secretary for Fiscal Operations & Policy 
recognized these efficiencies in his 2008 testimony before the House 
Committee on Ways and Means, Subcommittee on Social Security:
  --``Electronic payments provide real and meaningful savings not only 
        to the government and the taxpayer but also to the financial 
        industry. For Treasury, it costs approximately 98 cents to 
        issue a check versus 10 cents to issue an electronic payment. 
        When this 88 cents per item savings is multiplied over the 
        millions of Federal payments issued annually, and as recipients 
        convert from checks to electronic payments, the savings can 
        become substantial.''
    Today, Financial Management Services is looking to migrate roughly 
4 million unbanked social security recipients to the Direct Express 
card by 2013. In fact, as mentioned above, just this week the Treasury 
Department announced that it intends to move most government payments 
to direct deposit or, in the case of the unbanked, to prepaid cards. 
The government estimates that this will cut about $48 million in 
postage costs and will save taxpayers approximately $303 million in the 
first 5 years.
General Services Administration (GSA) SmartPay Program
    The General Services Administration (GSA) SmartPay program provides 
purchase, travel, fleet and integrated card programs to over 350 
Federal agencies and departments. The SmartPay program enables agencies 
to reengineer their purchasing, financial and logistics business 
processes by implementing a commercial payment process used by millions 
across the globe. The travel program has saved millions by eliminating 
the need for advance travel payments and has allowed military and 
civilian personnel to respond faster to military deployments, natural 
disasters and national emergencies. The GSA purchasing card has 
streamlined commercial low dollar purchases and saves the government an 
average of $70 for every purchase. Repair times and equipment down 
times are shorter, as the individuals needing parts/supplies can order 
them and pay for them immediately. The programs are offered with state-
of-the-art technologies to both military departments and civilian 
agencies. In fact, a web-based cardholder statement review and approval 
system with electronic feeds to supporting finance and accounting 
systems was fielded by the issuing banks to the Department of Defense 
as early as 2000--years before online banking was available to 
consumers.
    The GSA travel card programs have also provided tremendous savings 
by helping to eliminate administrative tasks and expense. For the 
Department of Homeland Security, the use of travel cards has eliminated 
the need for 75 percent of the staff that would be necessary for a 
paper-based system. The Department of Agriculture has also saved staff 
expenses through new automated electronic payment tools.\6\
---------------------------------------------------------------------------
    \6\ Credit and Debit Cards, GAO Report 08-558, p. 42-43.
---------------------------------------------------------------------------
    An additional benefit received by government agencies from the 
issuance of electronic payments cards is the receipt of rebates from 
the card issuing bank. These rebates are only possible because of 
interchange fees. Federal agencies use these rebates in several ways; 
some return the rebates directly to the Federal agency where the 
purchase was made, others invest the rebates to fund specific agency 
initiatives. In 2008, for example, rebates totaled $187 million.
    Finally, Federal agencies receive a variety of additional benefits 
associated with electronic payments. In particular, government 
transactions typically have detailed data about the items purchase--or 
line item invoice details. By analyzing electronic purchase data 
patterns, the government is able to identify opportunities for 
negotiating strategically-sourced contracts, thereby reducing the cost 
of items being purchased by the government. Transparency also allows 
the government to identify misuse of funds; indeed, the GAO stated that 
without the use of the cards, instances of misuse may never have been 
identified.

                               CONCLUSION

    Electronic payments--whether being paid by government employees or 
beneficiaries, or paid to governmental agencies or enterprises--promote 
efficiency, reduce costs and save taxpayer dollars. Electronic payments 
increase transparency and accountability within the government by 
facilitating better record-keeping and reporting of how and where 
government funds are spent. Electronic payments also provide a critical 
point of access to the financial system for the nation's unbanked, 
lower-income taxpayers and citizens at large. And we believe that 
electronic payments will continue to innovate and expand in their 
efficiency, offering taxpayers even more benefits as additional 
programs are implemented and adopted--so long as the industry has a 
business case for ongoing investment and innovation.
    While the exact total amount of cost savings to the United States, 
state and local governments of card acceptance and issuance has not 
been determined, we know from the GAO's past work that Federal savings 
alone are measured in the billions of dollars. Certainly, Visa believes 
the overall value of Visa acceptance far exceeds the cost. Reductions 
in paper-based processes, labor costs, reduced fraud, and errors from 
miscounting or losing cash and checks allow government entities to 
reallocate staff to more productive uses, reducing costs and increasing 
the quality of service and efficiency to the taxpayers. Electronic 
payments also allow for a more accessible government, in moving tax and 
other payments from over the counter to the Internet, thereby reducing 
the time it takes to transact with government.
    Interchange, as transaction-based revenue that goes to the issuers 
of a particular payment product, is integral to the health of the 
payment system, and ongoing expansion of benefits and innovation in the 
services provided by the issuers that participate. Cash and check are 
cost items--and costly to banks that handle and process them, just as 
they are to those that accept cash and check for payment. The growth, 
stability and efficiency of the Visa payment system is thanks, in part, 
to the bank's business case for ongoing investment in improving their 
portion of the system. Visa, as the operator of the central ``network 
switch,'' is equally invested in ensuring our own portion of the value 
chain is as secure, and sound, and innovative as the others, and that 
we continue to refine our system to keep it viable and competitive in 
the eyes of our customers.
    As noted, we welcome the feedback from the FMS as to how the 
interchange portion of their costs of acceptance could be simplified 
and streamlined, and are committed to demonstrating our willingness to 
be flexible and set interchange in such a way that it balances the 
needs of the FMS and the government agencies they support, alongside 
the needs of our acquirer and issuer clients who collectively 
participate in each transaction.
    Visa looks forward to our continuing discussion with the government 
on how Visa can be a valued partner in maximizing the benefits of 
electronic payments for U.S. taxpayers.

    Senator Durbin. Mr. Mierzwinski.

STATEMENT OF EDMUND MIERZWINSKI, CONSUMER PROGRAM 
            DIRECTOR, U.S. PUBLIC INTEREST RESEARCH 
            GROUP
    Mr. Mierzwinski. Thank you, Chairman Durbin, Senator 
Collins. I am Ed Mierzwinski of the U.S. Public Interest 
Research Group.
    All consumers pay more at the store and more at the pump 
because of unfair, nonnegotiable, nontransparent merchant 
interchange fees imposed by the card networks. If you take the 
numbers from just a few years ago, because I can do the math in 
my head, just a few years ago, 50 percent of all transactions 
were plastic and 50 percent were cash. Now the merchant 
witnesses at this hearing and at other hearings will say it is 
much closer to 70 or 80 percent are plastic, but if you just 
take 50 percent of transactions have a 2 percent interchange 
tax, that means merchants are raising their prices an average 
of 1 percent across the board for all customers, including cash 
customers. Since interchange is highest for rewards cards, 
rewards credit cards in particular, that means cash customers 
and checking account customers with low-cost debit cards are 
subsidizing the most affluent credit card customers.
    So the subsidies are going in the wrong direction. The fees 
are nonnegotiable, and the merchants are angry. And as we found 
out today with the reports from the Government investigators, 
the Government is unable to negotiate these fees as well. It is 
not just consumers. It is not just merchants. It is also the 
Federal Government that pays too much in nonnegotiable, 
nontransparent interchange fees.
    It is my view, U.S. PIRG's view, that consumers always win 
with greater transparency, and the Durbin amendment 
accomplishes two goals.
    First, I want to point out that the Durbin amendment to the 
Wall Street reform legislation that is currently in conference 
is a rifle shot approach. I think that is useful. You address 
part of the problem. Through a Federal Reserve reasonable 
proportional test, you would attempt to lower the cost of 
interchange on debit. Then that would be an incremental change. 
I see no reason for the catastrophes that the industry is 
claiming will occur because of your amendment. You are not 
going after the entire marketplace. You are going after part of 
it. I think that is a very smart way to go about it.
    Second, you address the unfair practices that the card 
associations impose on the retailers who are unable to offer 
their customers discounts without being threatened with 
thousands of dollars a day in fines and penalties. I think it 
is very important that we have greater transparency and we 
improve the way the system works. The two parts of the Durbin 
amendment I think work very well in that regard.
    I also commend you for including the provision in the 
amendment that says that merchant minimums do not apply to 
debit cards, which partly addresses the issue of an EBT 
customer who just needs a gallon of milk and does not need to 
spend $15 on other unnecessary purchases. Those minimums would 
only apply to cards that are credit cards.
    Now, I personally feel that merchants will be careful about 
how they use the powers that you have given them in the 
amendment because they have to respond to their customers as 
well. So I think you are giving them the opportunity in the 
marketplace to advise customers on lower forms of payment that 
will benefit them, that will benefit cash customers, and that 
will ultimately result in those benefits being passed on.
    I cannot tell you how much of those benefits will be passed 
on, but I can tell you this. Merchants are in a competitive 
retail marketplace. Card networks are not. The courts have 
found that card networks have market power. It is clear that 
individual merchants do not have the kind of market power that 
the card networks have. So I think your amendment is a very 
thoughtfully crafted amendment and will do a great deal to move 
this process forward.
    The other thing is that I support your views, as in your 
colloquy with Senator Nelson, that there should be a carve-out 
for EBT programs. I do not think that the way that the banks 
have negotiated with governments is necessarily fair. On the 
one hand, governments are paying hundreds of millions, if not 
billions, of dollars in interchange fees. On the other hand, 
the banks come in as if they are white knights, which they are 
not, and say, we can offer you a good deal on EBT programs. 
Ultimately the taxpayer is paying some way or another, but the 
best solution in the short run is, as you have proposed, to 
have that carve-out.
    I want to take one quick moment of personal privilege to 
also say that I want to commend you, Senator Durbin, on your 
leadership on the originally named, I believe, the Financial 
Credit Product Commission, which is now the Consumer Financial 
Protection Agency. You took Professor Warren's idea, along with 
Representative Delahunt. It is now in both parts of the bill. 
We are fighting over how strong it will be, but ultimately 
consumers will benefit tremendously from your leadership. We 
will finally have a regulator that does not advise consumers 
that they cannot do anything because the banks told them they 
could not do anything. We will have a regulator with one job, 
protecting consumers.
    Thank you.
    Senator Durbin. Well, thank you. I appreciate your kind 
words.
    [The statement follows:]

                Prepared Statement of Edmund Mierzwinski

    Chairman Durbin and Ranking Member Collins, members of the 
Subcommittee on Financial Services and General Government, thank you 
for the privilege of testifying today on the important subject of 
credit card interchange fees. I am Consumer Program Director of the 
U.S. Public Interest Research Group, the nonpartisan and nonprofit 
federation of state PIRGs.\1\ As an advocate for consumers we welcome 
the opportunity to discuss issues regarding interchange fees imposed on 
merchants by credit card networks.
---------------------------------------------------------------------------
    \1\ The United States Public Interest Research Group (U.S. PIRG) 
serves as the federation of and the Federal lobbying office for the 
state PIRGs. State PIRGs are nonprofit, nonpartisan consumer, public 
health and good government watchdog groups with over 1 million members 
around the United States. U.S. PIRG places a special emphasis on 
predatory financial practices and financial education and maintains a 
website at www.truthaboutcredit.org for consumers to obtain nonpartisan 
information and fact sheets about credit card company practices. Recent 
major PIRG reports on credit card practices include the following: 
Characteristics of Fair Campus Credit Cards (April 2008); The Campus 
Credit Card Trap: A Survey of College Students and Credit Card 
Marketing (March 2008); Graduating Into Debt: A Survey of On-Campus 
Credit Card Marketing In Maryland (2004); Deflate Your Rate: How To 
Lower Your Credit Card APR (2002) and The Credit Card Trap: How To Spot 
It, How To Avoid It (2001). www.uspirg.org or www.truthaboutcredit.org.
---------------------------------------------------------------------------
    A primary purpose of my organization is to advocate on behalf of 
all consumers for a fair and competitive marketplace. We regularly 
advocate before state and Federal regulators and legislators on both 
consumer protection and competition policy issues in the credit card 
marketplace.\2\ We have also launched a major campaign on over 40 
college campuses around the country against unfair credit card 
marketing practices.\3\
---------------------------------------------------------------------------
    \2\ For example, see my recent testimony before the House Judiciary 
Committee on interchange fees, available at http://judiciary.house.gov/
hearings/pdf/Mierzwinski100428.pdf, (28 April 2010), the Financial 
Services Committee, on interchange fees (8 October 2009), available at 
http://www.house.gov/apps/list/hearing/financialsvcs_dem/
fchrCC_100809.shtml; on financial regulatory reform (16 July 2009) 
available at http://www.house.gov/apps/list/hearing/financialsvcs_dem/
fchr_071809.shtml and on consumer financial protection (24 June 2009) 
available at http://www.house.gov/apps/list/hearing/financialsvcs_dem/
hrfc_062409.shtml. Also, on whether unfair consumer credit card 
practices lead to bankruptcy before the House Subcommittee on 
Commercial and Administrative Law on bankruptcy and credit card debt (2 
April 2009), available at http://judiciary.house.gov/hearings/
hear_090402_1.html.06243.
    \3\ See http://www.truthaboutcredit.org.
---------------------------------------------------------------------------
                                SUMMARY

    The Durbin interchange amendment to the Restoring American 
Financial Stability Act,\4\ takes important steps to end unfair and 
anti-competitive practices in the credit and debit card marketplace. As 
shown in the reports released today, excessive, non-transparent and 
non-negotiable interchange fees even harm the Federal government and 
that harms taxpayers.
---------------------------------------------------------------------------
    \4\ The bill was originally S. 3217 and was re-numbered H.R. 4173 
on passage and for conference consideration.
---------------------------------------------------------------------------
    For the past 3 or more years I have testified before Congress and 
presented a simple message: the deceptive and anticompetitive practices 
of the two credit card associations--Visa and MasterCard--have injured 
both consumers and merchants for many years. That message still rings 
true.
    Interchange fees are hidden charges paid by all Americans, 
regardless of whether they use credit, debit, checks or cash. Put 
another way, all consumers pay more at the store and more at the pump 
because of the non-transparent, non-negotiable, non-competitive 
interchange fee system. These fees impose the greatest hardship on the 
most vulnerable consumers--the millions of American consumers without 
credit cards or banking relationships. These consumers subsidize credit 
card usage by paying inflated prices for many goods and services. These 
prices are inflated by the billions of dollars of anticompetitive 
interchange fees, which are used to subsidize rewards programs, 
promotions, and riskier credit underwriting for credit card users. And 
unfortunately, those credit card interchange fees continue to 
accelerate, because there is nothing to restrain Visa and MasterCard 
from charging consumers and merchants more.

       THE NEW GAO AND TREASURY STUDIES AND THE DURBIN AMENDMENT

    Information provided to your committee by the U.S. Treasury 
Financial Management Service (FMS) and the Government Accountability 
Office (GAO) re-affirms their previous findings. Even the Federal 
government, in many ways one of the biggest merchants, pays hundreds of 
millions of dollars or more in non-negotiable interchange fees.
    In response to this and other problems with interchange, you 
proposed the Durbin interchange amendment to the Restoring American 
Financial Stability Act. It would provide the Federal Reserve Board 
with authority to set fees for debit interchange that are reasonable 
and proportional, rather than based on what the card networks call 
``value'' but really means ``whatever they want and think that they can 
get.''
    Your amendment also responds to certain unfair practices in the 
card network contracts that prohibit merchants from offering otherwise 
legal discounts or setting minimums for transactions to offset the high 
cost of interchange. In consideration of Wall Street reform, we have 
talked about the need to reform the shadow markets of over-the-counter 
derivatives and hedge funds--interchange is yet another shadowy market 
in need of reform. As Louis Brandeis said, ``Sunlight is the best 
disinfectant, electric light the best policeman.'' By allowing 
merchants to educate consumers about this marketplace, the Durbin 
amendment will improve transparency and force better practices by the 
card networks. By allowing the Federal Reserve to act, the amendment 
will alleviate the market's lack of competition that has resulted in 
U.S. merchants paying the highest interchange fees in the world.
    The Durbin amendment does not accomplish everything that the 
merchants seek in order to obtain redress in this market. Instead, it 
takes a rifle shot to some of the worst industry practices but will not 
change the entire interchange fee system. It will have a positive 
effect. But in addition, because it is incremental, there is simply no 
way it could be as disruptive as its opponents claim. While the Durbin 
amendment is being implemented and its effects reviewed, the Congress 
will have the time to determine what additional changes are needed to 
interchange practices.
    The amendment's primary focus is on the area of most rapid 
interchange growth--debit transactions. Just a few years ago, debit and 
credit (plastic) transactions combined surpassed the volume of cash and 
check transactions. Yet, in House testimony this year, a small merchant 
testified that, already, 80 percent of his convenience store 
transactions were plastic. The most rapid growth in the interchange 
marketplace has been the substitution of debit for cash transactions. 
So, merchants are facing a system where--on the one hand, despite 
technological advance, the rate of interchange has not declined--while 
on the other the volume of interchange has increased rapidly. The 
merchants, and their customers, cannot win.
    Reasonable and proportional.--The first part of the amendment 
requires the Federal Reserve to issue a rule assessing whether debit 
interchange is ``reasonable and proportional,'' and to determine 
whether debit card transactions are similar to checking transactions, 
which clear ``at par.'' The amendment exempts all small bank and credit 
union institutions from its requirements.
    Anti-Competitive Practices.--The second part of the amendment 
addresses anti-competitive card network rules that merchants find 
unfair. The merchants tell me that when they attempt to offer a legal 
(under the Truth in Lending Act) discount for cash--the networks accuse 
them instead of using prohibited and ``disguised'' surcharges. This is 
not an empty accusation as it comes with the threat of multi-thousand 
dollar per day fines and penalties.
  --First, the Durbin amendment allows merchants to offer consumers 
        discounts for use of lower cost payment networks and lower cost 
        forms of payment.
  --Second, the Durbin amendment, in credit card transactions only, 
        allows merchants to set nondiscriminatory minimums or maximums 
        for transactions to offset the high cost of interchange.
    Why Credit Cards Only.--Unbanked and under-banked consumers are 
increasingly receiving Federal, state and local benefits on prepaid 
debit cards through programs known as Electronic Benefits Transfer or 
EBT. This important provision will ensure that a parent using an EBT 
debit card needing one item, such as a gallon of milk, will not need to 
purchase, for example, $15 worth of additional, unnecessary goods.
    Along with other consumer groups, U.S. PIRG has long been concerned 
that despite all the taxpayer benefits provided to the insured banking 
system--from taxpayer-guaranteed deposit insurance to the Federal 
Reserve discount window and even to bailouts--banks have either chosen 
to ignore or been unwilling to provide the un- and under-banked with 
reasonable-cost accounts. Consequently, many have become victims of the 
fringe banking system--payday lenders, rent-to-own stores, check 
cashers, etc.\5\ According to a mammoth 2009 survey by the FDIC, ``up 
to 10 percent of American families are unbanked and that a substantial 
share of the population may be under-banked.'' \6\
---------------------------------------------------------------------------
    \5\ See Mierzwinski, Edmund. 2008. The Poor Still Pay More. Trial 
Magazine, Journal of the American Association for Justice, 44 
(September): 40-49.
    \6\ News release, 5 February 2009, ``FDIC Releases First National 
Survey of Banks' Efforts to Serve the Unbanked and Underbanked,'' 
available at http://www.fdic.gov/news/news/press/2009/pr09015.html, 
(last visited 4 June 2009).
---------------------------------------------------------------------------
    EBT programs, and other emerging innovative, prepaid debit card 
products--because of lower electronic transaction costs--have emerged 
as important bridges to allow the unbanked to become banked, where they 
can open deposit accounts and grow their assets and savings. Studies 
have shown that with the cushion of just a small savings account of as 
little as $500, under-banked families can avoid the wealth-depleting 
practices of payday lenders in the event of a family emergency. 
Building the assets of un- and under-banked families is an important 
policy goal.
    So, although I believe that the government cross-subsidy issues in 
interchange are complex, and that the Durbin amendment will actually 
save governments substantial sums of money that they are paying to bank 
networks, it makes sense to consider a carve-out for government EBT 
programs, some of which have been designed around bank claims that 
interchange fee revenues are the key offset to costs that the 
governments would otherwise pay. Such a carveout should not, however, 
apply to poorly-designed government programs that allow the bank or 
other vendor to impose a harsh fee structure on benefits recipients.
    The opponents of the legislation may suggest that consumers will be 
harmed from the enactment of the legislation because if fees are set to 
be ``reasonable and proportional'' then banks will claim that they will 
no longer be able to provide allegedly attractive rewards programs or 
will otherwise change fee structures adversely. Even if that were 
true--and it is not--that should not drive the Conference Committee's 
evaluation of the Durbin Amendment. Rewards programs are not a ``free 
gift'' given by banks. Rather, all consumers pay for rewards in the 
form of higher prices for the goods they purchase everyday. Indeed, 
card issuers actually account for reward programs in their public 
financials as reductions in interchange income. Only a small portion of 
cardholders actually receive rewards and the portion they receive is 
very modest compared to what cardholders pay in interchange. But most 
important, the most vulnerable consumers, those without credit cards, 
receive nothing from interchange, and subsidize the supposedly ``free 
gift'' of rewards programs for more affluent consumers.
    Further, any system that allows sellers to control the terms of 
trade in anti-competitive ways--prohibiting discounts or prohibiting 
advising customers so that they can understand the differences between 
the costs of a rewards credit, plain old classic credit, debit, check 
or cash transaction--is a non-transparent system. Consumers always 
benefit from transparency. Is there a situation where they have not?

                           FURTHER DISCUSSION

    None of the alternatives to legislation is particularly likely to 
resolve the fundamental competitive concerns in this market. The 
rapidly accelerating interchange fees appear to be a clear exercise of 
market power by Visa and MasterCard. In the past year alone the total 
amount of interchange fees collected has reached $48 billion after 
years of constant increases. This is a staggering number given the fact 
that retail sales have suffered as a result of the recession. Did 
consumers benefit from this rapid increase? Did cash customers benefit? 
Obviously not. Did credit card customers benefit? Did rewards programs 
improve substantially? Were there greater benefits to cardholders in 
some fashion? We doubt it.
    Based on our experience in these and other markets we believe there 
are two essential elements to a competitive marketplace: information 
and choice. Accurate and transparent information is necessary for 
consumers to make accurate choices. When information is readily 
available consumers can make choices, effectively compelling firms to 
compete for their purchases. And choice is a necessary element too. 
Absent choice, the discipline of the market will be lost.
    The credit card market lacks both choice and adequate information. 
From a consumer's perspective it lacks choice because it is an 
oligopolistic market in which a small set of card-issuers dominate the 
market and establish a set of deceptive practices that harm consumers. 
From a merchant's perspective it lacks choice because merchants have no 
alternative but to accept the card associations' cards even when the 
associations significantly increase prices.
    Markets don't work when there are hidden fees and rules--and no one 
hides fees and rules better than the credit card companies. Credit card 
markets lack the information necessary for both consumers and merchants 
to make informed choices. The markets lack adequate information for 
consumers to detect the fraudulent and exploitative practices of many 
card-issuers. For merchants, the markets lack adequate information 
because the associations prevent merchants from accurately informing 
consumers of the costs of credit card acceptance or attempting to 
direct them to more efficient and lower priced payment mechanisms. 
Moreover, the banks and associations engage in other deceptive 
practices to increase the interchange problem. Since the costs of 
accepting cards are passed on in the overall costs of goods, all 
consumers--affluent, working-class, and poor--ultimately pay these 
hidden charges. Low-income Americans, most without bank affiliations, 
are paying more for goods and services to fund credit card company 
programs for which they are not even eligible.

                      INTERCHANGE AND ITS EFFECTS

    We present six main points:
  --All consumers, even those who pay with cash and checks, pay more at 
        the store and more at the pump because these interchange fees 
        are passed on in the overall cost of goods sold.
  --The significant increases in interchange fees signal a broken 
        market. Visa and MasterCard have tremendous market power, which 
        allows them to dictate the terms of trade: merchants have no 
        choice but to accept Visa and MasterCard products on the 
        sellers' terms. It is not surprising that interchange fees have 
        increased significantly and are much higher in the United 
        States than other countries.
  --The card associations' rules prevent merchants from informing 
        consumers on the costs of payment and limit the ability of 
        merchants to direct consumers to the safest, lowest cost, and 
        most efficient forms of payment.
  --In addition, both the associations and banks engage in a variety of 
        deceptive practices to drive consumers to higher-cost forms of 
        payment.
  --Neither the card-issuance or card network markets are competitive. 
        Because of lax merger policy the card-issuance market has 
        become an oligopoly. Ten banks account for approximately 90 
        percent of the issuance market. Interchange and consumer fees 
        have increased as concentration has increased to alarming 
        levels.
  --Finally, this oligopolistic concentration has allowed issuers to 
        engage in a variety of unfair and anti-consumer practices.
         interchange fees force consumers to pay higher prices
    The interchange fee system is hidden from consumers and the public. 
The card associations do not disclose publicly their fees or the basis 
for these fees. Some public reports maintain that, on average, 
interchange fees cost merchants 2 percent or more of each transaction 
on a credit or signature debit card. In 2009, credit card interchange 
fees alone cost merchants and consumers an estimated $48 billion.\7\
---------------------------------------------------------------------------
    \7\ Foer, Bert. ``Our $48 Billion Credit Card Bill.'' New York 
Times. April 20, 2010.
---------------------------------------------------------------------------
    Like all other costs incurred by merchants, interchange fees are 
included--at least in part--when pricing goods and services. Card 
associations may suggest that interchange fees fund attractive rewards 
programs. Setting aside the question of the dubious value of these 
programs, many consumers with credit cards do not use them and those 
without credit cards receive no benefits.\8\ Over 27 percent of 
Americans do not have credit cards. For these consumers, interchange 
fees are especially pernicious and regressive.\9\ These low-income 
Americans subsidize interchange fees for ``services'' that they are not 
eligible to use. No charge could be as regressive as one in which low-
income consumers receive no benefits.
---------------------------------------------------------------------------
    \8\ We seriously doubt consumers receive anything close to $42 
billion in benefits through rewards programs. Some of the interchange 
fees undoubtedly fund industry marketing efforts, such as the more than 
5 billion annual mail solicitations consumers receive for credit cards. 
Moreover, credit card issuance is a tremendously profitable line of 
business. According to the Federal Reserve, it is consistently the most 
profitable line of banking.
    \9\ U.S. Census Bureau, Statistical Abstract 2006, Table 1176.
---------------------------------------------------------------------------
    The Hispanic Institute, an organization that educates Hispanic 
Americans on a number of issues, released a report last November titled 
``Trickle-Up Wealth Transfer: Cross-subsidization in the payment card 
market'' that details the findings of a study the Institute conducted 
on American consumers. They found that those Americans who do not 
benefit from credit card rewards pay in excess of $1 billion annually 
to subsidize those awards, which typically accrue to higher-income 
consumers, as a result of the higher prices consumers pay because of 
interchange fees.\10\ This imbalance makes it clear that interchange 
fees are no friend to the vast majority of consumers. In the report, 
the Hispanic Institute recommends policies or regulatory actions to 
remedy this tax on low-income consumers, including those that would 
lower interchange fees and thus reduce the wealth transfer that occurs 
as a result of the higher costs card issuers pass on to all 
consumers.\11\
---------------------------------------------------------------------------
    \10\ In a recent study, the GAO also cites this issue: ``Consumers 
who do not use credit cards may be worse off by paying higher prices 
for goods and services.'' Government Accountability Office. ``Credit 
Cards: Rising Interchange Fees Have Increased Costs for Merchants, but 
Options for Reducing Fees Pose Challenges.'' November 2009.
    \11\ The Hispanic Institute. ``Trickle-Up Wealth Transfer: Cross-
subsidization in the payment card market.'' November 2009. http://
www.thehispanicinstitute.net/files/u2/Trickle-
Up_Wealth_Transfer_Paper.pdf
---------------------------------------------------------------------------
    The regressive nature of this charge is exacerbated because 
interchange fees are assessed as a proportion of overall sales. For 
example, when gas prices averaged $1.87 per gallon in 2004, interchange 
fees totaled about $12.5 million per day. In 2005, gas prices averaged 
about $2.75 per gallon nationally: credit card companies then made 
$18.4 million a day. These companies made an additional $2.2 billion 
per year simply because of rising gas prices.\12\ This problem will 
increase if gas prices continue to increase. It is difficult enough for 
low- and moderate-income consumers to afford skyrocketing gasoline 
prices without having to pay additional fees that are passed on to 
them.
---------------------------------------------------------------------------
    \12\ Margaret Webb Pressler, ``Card Companies Are Filling Up at the 
Station,'' in Washington Post. 25 September 2005: pg. F01.
---------------------------------------------------------------------------
          INCREASES IN INTERCHANGE FEES SIGNAL A BROKEN MARKET

    Credit card interchange fees were intended to compensate card-
issuers for certain costs, such as the costs of issuance, fraud, risk 
of loss, float and processing. Yet as all these costs have decreased in 
the past decade credit card interchange fees have increased. According 
to the Food Marketing Institute (FMI), these fees have increased over 
20 percent in the past few years even though all the costs of card 
processing and issuance have fallen. The United States appears to be 
the only country in which credit card interchange fees are increasing 
and it has far higher fees that almost any other industrialized 
country. FMI projects that these fees will increase 22 percent 
annually.\13\
---------------------------------------------------------------------------
    \13\ Food Marketing Institute, ``Hidden Credit Card Fees: The True 
Cost of a Plastic Marketplace'' (February, 2006).
---------------------------------------------------------------------------
    In a competitive market, prices would fall when costs decrease. In 
the credit card market, the opposite happens. The card associations may 
say that they need to increase interchange fees to compete for the 
loyalty of card issuers. What about merchants and consumers? Merchants 
certainly have no choice but to accept Visa or MasterCards.
    In the recent Department of Justice antitrust litigation against 
Visa and MasterCard, the Second Circuit Court of Appeals determined 
that both associations had market power because merchants were 
compelled to accept these cards even in the face of a significant price 
increase. Almost all merchants are forced to accept Visa and 
MasterCard's terms, no matter what the interchange rates or contractual 
terms. Armed with this market power, credit card companies can, and do, 
increase interchange fees without suffering any repercussions.\14\
---------------------------------------------------------------------------
    \14\ A recent GAO report reads, ``Our own analysis of Visa and 
MasterCard interchange rate schedules shows that the interchange rates 
for credit cards have been increasing and their structures have become 
more complex, as hundreds of different interchange fee rate categories 
for accepting credit cards now exist.'' Government Accountability 
Office. ``Credit Cards: Rising Interchange Fees Have Increased Costs 
for Merchants, but Options for Reducing Fees Pose Challenges.'' 
November 2009.
---------------------------------------------------------------------------
    Are these substantial interchange fees necessary? Examples outside 
the United States suggest this is not the case. As a recent European 
Commission decision detailed, numerous countries operate payment 
systems without the use of interchange fees. In those countries the 
ultimate costs of these systems is modest and the systems operate quite 
efficiently. In an effort to head off the European Commission's 
antitrust proceedings against them, Visa Europe recently announced that 
they would be slashing transaction fees on debit cards by fully 60 
percent, down to just 0.2 percent--a small fraction of the interchange 
fees here, and a clear sign that the fees here are artificially 
inflated. Visa Europe certainly isn't cutting rates below what it will 
cost them to remain profitable.\15\
---------------------------------------------------------------------------
    \15\ PaymentsSource. ``Bulletin: Visa Europe Agrees To Cap Intra-
regional Debit Interchange Rate.'' April 26, 2010.
---------------------------------------------------------------------------
    Another example is the debit market in Canada. In that market, 
there are no interchange fees. Even without interchange, there is 
higher debit card usage and merchant acceptance than in the United 
States. Some consumers pay direct fees for debit card use but because 
those fees are transparent there is active competition to reduce those 
fees. Ultimately everyone in Canada pays less for the cost of payment 
services.\16\
---------------------------------------------------------------------------
    \16\ Gordon Schnell and Jeffrey Shinder, ``The Great Canadian Debit 
Debate,'' Credit Card Management, May 2004. http://
www.constantinecannon.com/pdf_etc/TheGreatCanadianDebit.pdf.
---------------------------------------------------------------------------
    New Zealand has also taken action to reduce interchange fees and 
enhance competition between credit card issuers. The country's Commerce 
Commission ultimately settled with both Visa and Mastercard to set 
maximum allowable interchange fees, imposing caps at 2 percent or lower 
for all categories of purchases.\17\
---------------------------------------------------------------------------
    \17\ See ``Visa New Zealand Domestic Maximum Interchange 
Reimbursement Fees,'' http://www.visa-asia.com/ap/nz/mediacenter/
factsheets/interchange.shtml and ``Interchange Fees: MasterCasd 
Domestic Purchase Transactions Interchange Fees for New Zealand,'' 
http://www.mastercard.com/nz/merchant/en/interchangefees/index.html.
---------------------------------------------------------------------------
    There is a great deal of debate about the impact of reductions in 
interchange fees in Australia, but a careful, neutral analysis of that 
debate demonstrates that the reduction in interchange fees ultimately 
benefited consumers in the reduction of card costs, greater innovation, 
and greater competition leading to lower interest rates. Several years 
ago the government mandated a reduction in interchange fees in 
Australia from 0.95 percent to 0.55 percent (both rates far lower than 
the current rates in the United States). It was recently reported that 
fees to merchants were 1.1 billion Australian dollars lower from March 
2007 to February 2008 as a result.\18\ Reducing interchange has also 
spurred innovation, leading the card issuers to offer new types of 
cards such as no-frill cards with lower fees and lower interest rates. 
The Federal Reserve Bank of Australia (RBA) found an overall benefit to 
society because consumers received better pricing signals, creating an 
incentive for them to use the most efficient forms of payment.
---------------------------------------------------------------------------
    \18\ Government Accountability Office. ``Credit Cards: Rising 
Interchange Fees Have Increased Costs for Merchants, but Options for 
Reducing Fees Pose Challenges.'' November 2009.
---------------------------------------------------------------------------
    While a study funded by MasterCard found no benefit to consumers 
from the reduction of interchange fees in Australia, the Federal 
Reserve Bank of Australia vigorously disputes this finding.
    As the members of the Committee recognize, interchange, like any 
other credit card policy, affects different groups of consumers 
differently. In fact one of the strongest reasons for attacking the 
interchange fee problem is that the costs of interchange are borne by 
all consumers: thus, cash paying customers, many of whom are not 
eligible for credit cards, effectively subsidize the attractive rewards 
programs for far more affluent consumers. In considering efforts to 
solve the interchange fee problem, protecting these consumers must be 
the first priority of this Committee.
    The evidence from Australia seems relatively clear: cash paying 
customers benefit from the reduction in interchange:
      The Board acknowledges that the reforms have not affected all 
        parties equally. In particular, those who use EFTPOS and cash 
        are more likely to have been made better off as a result of the 
        reforms than those who use credit cards extensively and pay 
        their balances off by the due date. Previously, this latter 
        group was receiving significant benefits, partly at the expense 
        of the former.\19\
---------------------------------------------------------------------------
    \19\ Reserve Bank of Australia, Reform of Australia's Payment 
System: Preliminary Conclusions of the 2007/08 Review (April 2008).
---------------------------------------------------------------------------
    For those individuals holding credit cards, there are general 
benefits in lower interest rates and card fees. And for transactors 
(those who pay off their balance on time) there was a slight decrease 
in benefits, as rewards programs have been reduced, but these programs 
only benefit some users. In the United States, where interchange fees 
are considerably higher, the potential savings for each consumer could 
be far greater.
    The opponents of a competitive interchange fee market may suggest 
that any reduction in interchange fees must result in an increase in 
other fees such as annual fees or late fees. This argument overstates 
any legitimate concern. A reduction in interchange fees will only 
result in an increase in other fees to the extent that the credit card 
market is not competitive. If the market is in fact competitive, it 
will instead result in banks striving for greater efficiency by 
reducing their costs or by simply having reduced profit margins. Cost 
cutting could come in a reduction of the blizzard of promotional 
mailings sent out by banks on a daily basis. It could also come from a 
reduction in rewards programs. To the extent that rewards programs are 
scaled back, however, it will mean that banks must compete in terms of 
interest rates and other fees, thereby benefiting consumers. In the 
United States, lower interest rates are the most important criteria for 
most consumers to use when determining their choice of cards and reform 
that improves those rates will be an important consumer benefit, even 
if there is some reduction of rewards programs.

  DURBIN AMENDMENT SLOWS DECEPTIVE PRACTICES THAT INCREASE PRICES FOR 
                               CONSUMERS

    As we suggested earlier, accurate and complete information serves a 
critical role in making sure the forces of competition work. As the 
government does not regulate or compel disclosure of credit card 
interchange fees, most consumers have no idea that they exist and that 
they are paying for services that they may not even use. In fact, Visa, 
MasterCard and the card issuing banks engage in a variety of practices 
to prevent well-informed consumers from exercising their choices.
    First, as the Durbin amendment recognizes, Visa and MasterCard 
rules prevent merchants from disclosing fees to their customers or 
attempting to steer consumers to lower-priced payment options, such as 
cash or online debit cards. They cannot charge a distinctive price or 
surcharge based on payment options. They cannot attempt to direct 
consumers to lower priced credit cards or to other cheaper payment 
systems such as cash, checks and online debit.\20\
---------------------------------------------------------------------------
    \20\ We note that the standard canned industry response is that 
``nothing in our rules prevents cash discounts from being offered.'' 
This argument is both irrelevant and only technically correct. For a 
merchant that wishes to accept credit cards, but does not want to 
accept high-cost premium cards, the ability to offer a cash discount is 
irrelevant. And for merchants that wish to steer customers to other 
payment options, the ability to cash discount (from Federal and state 
law) is rendered largely useless by card association regulations that 
require separate price markings for each product with the higher 
interchange price and the lower cash price makes cash discounts very 
hard to offer. Fuel is a relatively simple example, but even there with 
a variety of different octane grades and products (gasoline, diesel, 
etc.) card association rules can make discounting more difficult than 
it ought to be. And if it is difficult for fuel, imagine the logistical 
difficulties created for offering cash discounts at a convenience store 
with a thousand different items, let alone a grocery store with 
thousands of different items for sale. The card associations may not 
technically prohibit cash discounts, but they do what they can to make 
sure it does not happen very often.
---------------------------------------------------------------------------
    Second, card associations and banks use misleading marketing to 
encourage consumers to use their credit cards or signature debit cards 
as frequently as possible. Reward incentives, such as frequent flier 
miles, are designed to seem as though customers are paid to use these 
cards. In reality, these consumers and other consumers are simply 
paying for those rewards.
    This lack of disclosure is especially problematic with the efforts 
of the card associations to ``convert'' cardholders from regular credit 
cards to so-called ``premium cards'' such as the Visa ``Signature'' or 
the MasterCard ``World'' cards. These cards have a significantly higher 
interchange fee than traditional cards, among the highest of all 
interchange fees. For example, a premium card may cost merchants well 
over 2 percent compared to 1.6 percent for a traditional card. These 
premium cards focus only on the highest-income consumers. However, they 
offer minimal additional benefits. Consumers do not realize that 
everyone else pays higher prices on goods and services when they 
themselves use a premium card and consumers are wholly unaware that 
converting to a premium card will ultimately cost all consumers more. 
Nor, as stated above, can merchants refuse to accept these cards or 
attempt to direct consumers to lower priced cards through differential 
pricing. These premium cards are simply a scheme to substantially 
increase hidden interchange fees.
    Third, although merchants can't surcharge or use differential 
prices to direct consumers to the most efficient and lowest priced 
payment options, banks do have that power. Not surprisingly, they use 
it to direct consumers to less efficient, higher cost options. The 
debit card market illustrates this problem. Signature based debit is 
more expensive and less secure than online debit because online debit 
transactions are instantaneous. Online debit has a far lower rate of 
fraud. Online debit transaction interchange fees are capped at fixed 
levels; they only cost merchants between $0.17 and $0.50 per 
transaction.\21\ Conversely, credit and signature debit cards cost 
merchants up to 2 percent of the entire transaction, no matter how 
large. Instead of promoting online debit which is safer and less 
costly, banks increasingly surcharge consumers seeking to make these 
transactions with penalty fees of as much as 50 cents a 
transaction.\22\ Consumers are paying more for a less safe and more 
costly product.\23\ These penalties effectively steer consumers to the 
less efficient, less secure, more costly signature debit product. While 
the use of online debit cards is the best option for both consumers and 
merchants, deceptive and manipulative tactics ensure the most expensive 
payment possible is used.
---------------------------------------------------------------------------
    \21\ November 2004, Federal Reserve Board, Report to the Congress 
on Disclosure of Point-of-Sale Debit Card Fees, See Figure 4, page 14 
available at http://www.Federalreserve.gov/boarddocs/rptcongress/
posdebit2004.pdf.
    \22\ A 2003 NYPIRG report found that 89 percent of the banks 
surveyed assess a fee for online debit PIN-based transactions. The 
average fee assessed is 70. The fees ranged from 10 to $1.50. See 
``Pricey Plastic: A NYPIRG Report and Survey of Plastic Card Fees,'' 
2003, available at http://www.nypirg.org/consumer/cards/debit.html 
(last visited 18 July 2007). While a Federal Reserve study found 
substantially lower numbers of banks imposing PIN debit fees, it found 
fees in the same range: ``At sampled institutions that charge fees for 
PIN debit, the fees range from roughly $0.10 to $2 per transaction 
(figure 5). The median (and mean) fee is approximately $0.75.'' See 
``Report to the Congress on the Disclosure of Point-of-Sale Debit 
Fees,'' November 2004, Federal Reserve Board of Governors, available at 
http://www.Federalreserve.gov/boarddocs/rptcongress/posdebit2004.pdf.
    \23\ All plastic is not created equal. Congress should also upgrade 
the weak consumer and anti-fraud protections applicable to debit, ATM 
and stored value cards (regulated under the Electronic Fund Transfer 
Act and Regulation D) to the higher standard credit cards are subject 
to (that of the Truth In Lending Act and Regulation Z). But within the 
debit card universe, PIN-based online transactions are more secure than 
offline signature based transactions.
---------------------------------------------------------------------------
    These examples show that card associations and banks use some of 
the same deceptive practices against merchants as we have seen them use 
against consumers for years. Not only do the merchants suffer as a 
result, but consumers, unwittingly, do too. The Durbin amendment's 
provisions on anticompetitive practices aim a rifle shot right at these 
problems and will let sunlight into what has been a dark room.
    Not surprisingly, outside the United States, where these 
anticompetitive practices are not permissible, online (PIN) debit is 
the most preferred form of debit. Online debit is a far safer and more 
secure product, with a much lower incidence of identity theft than 
signature debit or credit cards. Where market forces are not restrained 
and consumers can make fully informed choices, the lower-priced, more 
efficient product prevails.

  INCREASED CONSOLIDATION OF CARD-ISSUERS HARMS CONSUMERS MORE BROADLY

    The credit card issuing market has become significantly more 
concentrated over the past few years as numerous card issuers have 
merged. For example in the past few years we have seen mega-mergers 
such as Bank of America's acquisitions of Fleet and MBNA. The top ten 
card issuers now have over 90 percent of the market, and the level of 
concentration has increased from an HHI of about 1,100 in 1998 to an 
HHI of over 1,800 today, a level that the Department of Justice Merger 
Guidelines define as highly concentrated. Unfortunately the Department 
of Justice has not challenged any of these mergers and there is little 
to suggest that concentration in this market will not continue to 
increase dramatically.
    Of course, we expect the card associations and their members to 
suggest that the credit card issuance market is un-concentrated and 
vigorously competitive.\24\ But the facts are to the contrary. There 
have been numerous antitrust suits alleging that card issuers and the 
associations have colluded over fees, exchange rates, and important 
contractual terms.\25\ While concentration has increased dramatically 
over the past 7 years, interchange fees, other fees charged to 
consumers, deceptive practices, and interest rates have increased 
significantly. Although the parties to these mergers suggested that 
there would be significant efficiencies from these mergers, consumers 
have seen few, if any, benefits. After years of consolidation the bad 
news for consumers is clear: an oligopolistic market which is a fertile 
environment for collusion, higher prices, more hidden fees, and more 
deceptive practices.
---------------------------------------------------------------------------
    \24\ In testimony in 2005 Timothy Muris testified that ``[n]o 
[card] issuer has market power, and issuers respond to increases in 
interchange fees by enhancing card benefits to consumers.'' We doubt 
that Visa and MasterCard or card-issuers act as benevolent monopolists, 
but in any case there is no systematic study to suggest that increased 
interchange is passed on to consumers in greater benefits. Even if this 
allegation was substantiated, it would still be true that all 
consumers, including those who do not use credit cards pay for those 
``increased benefits.''
    \25\ In 2006, Visa, MasterCard and several card-issuing banks 
settled an antitrust suit for $336 million alleging they had fixed the 
credit card foreign currency exchange rates. Other litigation involves 
alleged collusion by card-issuers over credit card late fees and over 
limit fees (In re Late Fee and Over Limit Fee Litigation, Civ. No. C-
07-0634 SBA (N.D. Cal.)) and alleged collusion by card-issuers and 
networks requiring the use of mandatory arbitration provisions (Ross v. 
Bank of America, N.A. et. al. Civ. No. 05-07116 (S.D.N.Y.)).
---------------------------------------------------------------------------
    Congress has taken on financial reform as a response to the laundry 
list of reckless practices in financial markets. The very existence of 
interchange fees explains the perverse incentives that may have 
encouraged card-issuing banks to engage in indiscriminate lending 
rather than curb credit risk. Banks and the card companies profit from 
these fees regardless of the consumer's ultimate ability to fulfill 
their debt obligations, and thus have an immediate incentive to issue 
cards and encourage a high volume of transactions.\26\ This undermines 
the safety and soundness of the entire financial system.
---------------------------------------------------------------------------
    \26\ Adam Levitin, Associate Professor of Law, Georgetown 
University Law Center. Testimony before the U.S. House of 
Representatives, Committee on the Judiciary, Subcommittee on Commercial 
and Administrative Law. Hearing: Consumer Debt--Are Credit Cards 
Bankrupting Americans? April 2, 2009.
---------------------------------------------------------------------------
  THE CREDIT CARD OLIGOPOLY ALSO ALLOWS ISSUERS TO USE ANTI-CONSUMER 
                     PRACTICES AGAINST CARDHOLDERS

    Last May, President Obama signed into law the Credit Card 
Accountability, Responsibility and Disclosure Act \27\, which addresses 
a number of deceptive practices credit card companies regularly engage 
in at a high cost to consumers. That legislation gave the Fed authority 
to ensure that certain credit card penalty fee practices are 
``reasonable and proportional,'' \28\ which is similar authority to 
that of the Durbin amendment, which is simply a necessary complement to 
the CARD Act's provisions, which ban credit card companies from a 
number of practices.
---------------------------------------------------------------------------
    \27\ The Credit CARD Act, H.R. 627, became Public Law 111-24.
    \28\ See Section 102(b) of Public Law 111-24. The reasonable and 
proportional rules became final yesterday. See Federal Reserve press 
release of 15 June 2010, http://www.Federalreserve.gov/newsevents/
press/bcreg/20100615a.htm (last visited 15 June 2010).
---------------------------------------------------------------------------
    There is no question, of course, that the current bank regulators 
will not adequately enforce the Durbin amendment, if it becomes law. We 
also need to enact a strong independent Consumer Financial Protection 
Bureau and restore the right of states to enact stronger consumer laws 
and the right of their Attorneys General to enforce both Federal and 
state laws against both state and nationally-chartered banks.
    We also need to restore full private rights of action to enforce 
laws. Encouragingly, both the Senate and the House-passed versions of 
Wall Street reform give the CFPB/A broad authority to ban forced 
mandatory arbitration clauses that limit consumer rights to enforce the 
law, although the House language is preferred.
    The fact that credit card companies freely engaged in such a wide 
range of deceptive and unfair practices that resulted in higher costs 
to consumers without being wholly rejected by market forces suggests 
that Visa and MasterCard have simply enjoyed market power. The 
oligopolistic market structure of the card-issuance market facilitates 
these deceptive and onerous practices. The ability of these dominant 
card-issuers to impose these terms is derived from the tight oligopoly 
that the largest issuing firms maintain in the marketplace. There is a 
clear lack of competition in the card network market. Visa and 
MasterCard have the ability to prevent many of these practices through 
their regulation of card-issuers. Yet these associations--which are 
aggressive in regulating merchants (e.g., preventing them from offering 
cash discounts that the Durbin amendment would instead encourage)--are 
timid when it comes to restricting the deceptive practices of their 
bank members. If there was active competition in the card network 
market one would expect Visa and MasterCard would compete in trying to 
self-regulate and stop these anticonsumer practices. Similarly, if 
there were not substantial entry barriers one might expect a more 
consumer friendly card network to arise. But the dominance of Visa and 
MasterCard and the substantial entry barriers effectively protect these 
deceptive and anti-consumer practices.

                               CONCLUSION

    In the past some of the defenders of interchange fees have claimed 
that ``[i]f consumers understood the threat that the merchants' 
campaign [against interchange] poses to the plastic in their wallets, I 
suspect that we would see nothing less than a revolt.'' This claim 
could not have been more wrong. If consumers understood the existence 
or the dimensions of the hidden, shadow-market fees assessed by the 
banks and associations, they would truly rebel. Credit card companies 
make billions of dollars each year through interchange fees, which 
ultimately all consumers must pay, including the millions of Americans 
without credit cards. Low-income cash-paying customers subsidize an 
inflated rewards program that benefits only a small portion of 
cardholders. The credit card market lacks the critical foundations of 
healthy competition--choice and adequate information. As a consumer 
advocate, I am gravely concerned about the fairness and legality of 
bank schemes to increase credit and debit card fee income.
    We applaud you for recognizing the problem and proposing thoughtful 
legislation that offers the promise of remedying the interchange fee 
problem. Along with other consumer groups, we hope to work with you on 
this and other efforts to protect consumers from anticompetitive 
tactics in this vital market.
    Thank you for considering this testimony. I welcome your questions.

    Senator Durbin. Ms. Chronister.

STATEMENT OF WENDY CHRONISTER, PRESIDENT AND CHIEF 
            EXECUTIVE OFFICER, CHRONISTER OIL COMPANY 
            (d/b/a/ QIK-n-EZ CONVENIENCE STORES), 
            SPRINGFIELD, ILLINOIS
    Ms. Chronister. Thank you, Senator Durbin, for inviting me 
to speak today and share with you my views on interchange, 
specifically as they relate to our business and our customer.
    As you already said, I am the CEO of Chronister Oil 
Company. It is a company founded by my father in 1967. Today we 
operate 11 convenience stores throughout central Illinois, 
Springfield and the surrounding communities, under the trade 
name Qik-n-EZ. We sell fast food, packaged food, beverages, 
other convenience store items, and we have from 4 to 13 fuel 
dispensers at each of our stores and sell E-85 at each of our 
stores.
    I truly appreciate the opportunity to give this testimony 
and tell you the dramatic impact that interchange fees have on 
our business. And I will show you why Mr. Mierzwinski--pardon 
if I butchered your name--is correct, that this is about our 
customer.
    We are in the business of convenience. The convenience 
store business is wildly competitive today. Our competitors 
include big boxes such as Wal-Mart or Meyer's. They include 
drug stores like Walgreen's and CVS. They include liquor 
stores, cigarette shops, grocery stores, and fast food shops 
like McDonald's and their 99 cent coffee. And what that means 
for us is that the old notion of convenience stores where you, 
as a consumer, would go in and be happy to pay more for the 
convenience or the immediate necessity of the item is not the 
business that we are in today.
    Qik-n-EZ will survive only if we have repeat customer 
traffic, and the only way to have repeat customer traffic is to 
deliver value every day to our customers.
    For the first 5 months of this year, our sales actually 
increased 17 percent compared to the same time last year, but 
do not let that fool you. That was primarily all the rise in 
fuel prices. Our gross profits actually declined 17 percent in 
the same period last year, and out of our gross profit we pay 
operating expenses.
    So where do credit card and debit card fees fit into this 
scheme? They are our second largest operating expense, behind 
labor, in front of utilities.
    I am going to take a minute to describe my stores in 
particular because it puts it a better perspective. Our stores 
average 5,000 square feet. We have at least 22 cooler doors. We 
have big canopies, lots of light. In other words, we have big 
utility bills. And we are trying to make investments to become 
more energy efficient. That is expensive. But our utility bills 
are sizeable. Our utility bills were less than 40 percent of 
the credit card fees we paid last year.
    With respect to labor, that is our largest cost. In our 
industry, we are in the high end in labor. We believe people 
are the most important thing in our business. We pay our people 
well. We want it to be careers, not a job. So this is about 
being able to continue to do that as well. Nevertheless, our 
credit card fees represented anywhere from one-half to two-
thirds of that cost throughout the year.
    Now, everybody who is in the retail business and is still 
in the retail business knows that over the last couple of 
years, you have had to really focus on your expenses and trim 
costs where you could. With respect to labor, you can manage 
schedules and you can have predictable costs associated. With 
respect to utilities, you can make a decision to become more 
energy efficient and make the investment. With respect to other 
suppliers, you can go out and bid and get competitive pricing 
and have predictable costs. But for our second largest expense, 
credit card expense, we can do nothing, and in fact, we get 
faxed a notice of increase in price. Sometimes we get it in the 
mail, and we can do nothing.
    So you actually stole my words, Senator Durbin, because if 
the Federal Government cannot negotiate against MasterCard and 
Visa and their member banks, how can I as the operator of 11 
convenience stores in Springfield, Illinois do something about 
it? That is a problem and that is why I am here today.
    One of the most expensive items that we sell is a full 
gallon of fuel. You have to understand where fuel fits into our 
sales to understand the whole picture as well. Fuel sales 
represent 63 percent of our total sales. Gas is very 
competitive. I said we had to deliver a value proposition every 
day to our customer. That means with gas the only thing I can 
do is sell cheaper gas. We do price surveys at every one of our 
stores four to five times a day and our competitors do the same 
on us. So, believe me, we are competitive on fuel.
    Nevertheless, while the consumer thinks that as gas prices 
are going up on the street, maybe the retailer is making more 
money. In fact, when they rise rapidly, we are generally losing 
profit. Profit is measured in cents per gallon over the cost. 
It is not measured in percentages. Ironically as the price of 
fuel has gone up this first 5 months, our credit card fees go 
up while our profit goes down.
    You know, I talked about the expenses and things we can 
manage, and it is reflected in the results. Our labor is about 
the same this year as it was last year overall. Our utility 
bills have gone up about 2 to 3 percent, and our credit card 
fees have increased 43 percent this year.
    I have talked a lot about our business, but it is also 
about our customer. And you have to understand our customer 
today. Our customer does not impulse buy anymore. Our customer 
plans. They make lists. For us to be successful, they need to 
want to come to our store and get a good value, and we have to 
be able to offer it.
    For our customer, debit and credit cards are a new form of 
currency. 70 percent of our sales were with credit cards or 
debit cards this year.
    Now, I will say that I do not think that MasterCard and 
Visa and member banks should just give us credit cards or allow 
us to accept them for free. I just simply think that they 
should be subject to the same kind of competitive environment 
that anyone of our other suppliers is and that we are. To the 
extent that we can reduce any costs whatsoever, it will be felt 
by our customer. I agree with Mr. Mierzwinski. Our business is 
so competitive that that has to be the result, and frankly, I 
hope one of our competitors does not pass on that savings 
because we will get their customers.
    So thank you again for inviting me to speak today. This is 
an issue that is extremely important to us. I thank you for and 
wholly support the amendment that you made to the financial 
reform bill that was passed by the Senate last month.
    [The statement follows:]

                 Prepared Statement of Wendy Chronister

    Chairman Durbin, Ranking Member Collins, and Members of the 
Subcommittee on Financial Services and General Government, thank you 
for inviting me to share my views on interchange fees. I am the 
President and CEO of Chronister Oil Company. We own and operate 11 
convenience stores in Central Illinois under the trade name ``Qik-n-
EZ''. Interchange or ``swipe'' fees constitute the second largest 
operating expense in our stores. As is the case for all of our 
competitors and other merchants, including the Federal government, 
unlike other operating expenses, we have no ability to negotiate these 
expenses. We operate in an extremely competitive environment. We 
measure our ability to make a profit by cents. Approximately 70 percent 
of our sales in the first 5 months of this year were credit card 
transactions. The interchange fees associated with accepting credit and 
debit cards are a significant cost of operating a convenience store. We 
currently cannot negotiate these costs. As a result, the real cost of 
the interchange fees is borne by the consumer because they inflate the 
prices of the products we sell. I fully support the Durbin Amendment in 
the financial reform bill passed by the Senate because this is 
legislation that truly is for the consumer and what is good for the 
consumer is good for retail business and ultimately for the economy.

                                OVERVIEW

    Our company is based in Springfield, Illinois. My father founded 
Chronister Oil Company in 1967. Our convenience stores are located in 
Springfield, Illinois and surrounding towns. In addition to beverages, 
prepared and packaged foods and a broad range of other convenience 
store items, each of our locations has between 4 and 13 fuel dispensers 
and each location sells E-85. We purchase ethanol and store it at our 
bulk plant facility where we splash blend with conventional fuel before 
distributing to our store locations. In addition to supplying our own 
stores, we distribute finished product to other retail locations as 
well as commercial and farm distribution businesses, among others.
    Today, the convenience store industry as a whole includes 
approximately 145,000 stores in the United States, a decline of 3-4 
percent from last year. The convenience store industry sells nearly 80 
percent of the gasoline in the nation and employs about 1.7 million 
workers. It is truly an industry for small businesses and one-store 
operators own more than 60 percent of convenience stores.
    Indeed, the convenience store industry has engaged in petition 
efforts in convenience stores throughout the country during the past 
year. It is my understanding that 5.5 million consumers have signed 
petitions in favor of swipe fee reform, a number that exceeds the 
number of signatures delivered to Congress on any legislative policy 
proposal. The Senate paid attention to this outpouring of support when 
it passed Senator Durbin's Amendment to the financial reform bill with 
a bipartisan vote of 64-33. I am hopeful that the conference committee 
reconciling the House and Senate versions of that bill will maintain 
Senator Durbin's language and provide some relief to my industry and 
our customers.
the impact of runaway credit card fees on my convenience store business
    In 2008, the total cost of credit card fees paid by our industry 
was reported at $8.4 billion while convenience store gross profit was 
reported to be $5.2 billion. Based on these statistics, credit card 
fees alone were responsible for the loss in the number of convenience 
stores across the country. However, I am here to speak to the impact 
which credit and debit card expense has on our business and the 
operations of our convenience stores. Credit and debit card fee reform 
is important for the consumer and therefore good for the convenience 
store business.
    The convenience store industry is a highly competitive one. We are 
in the business of convenience. However, we do not compete with 
convenience stores alone for customers. Rather, inside our stores, we 
compete with big box stores such as Wal-Mart and Meijer's, quick serve 
restaurants including McDonald's, drug stores such as Walgreens and 
CVS, liquor stores and cigarette shops and other convenience store 
chains. Each of these retailers is competing for the same customer that 
we are and we overlap product offerings with each of them. Each of 
these retailers, like us, is in the business of convenience in one way 
or another. Despite the fact that we cannot obtain the same cost 
structure as a big box retail outlet, we have to compete with that same 
big box for the customer. Indeed, the notion that a consumer will 
accept significantly higher price point at the convenience store 
because it is a one-time convenience is outdated and not true. The only 
way we can be successful is by offering repeated value to customers who 
will return and will make a Qik-n-EZ store part of their destination on 
a routine basis. To accomplish this, we must deliver value to our 
customers. Providing a good experience is essential but not enough. We 
have to be competitive on price.
    It is important to understand where credit and debit cards fit in 
the scheme of our store operations. For the first 5 months of this 
year, our total fuel sales have increased by approximately 17 percent 
over the first 5 months of 2009 due to the higher cost of fuel and 
corresponding higher prices. However, our company's overall gross 
profit has declined 17 percent.
    Out of our gross profit we pay operating expenses--our top three 
expenses are labor, credit card fees and utilities, in that order. In 
the first 5 months of this year, our labor expense remained about the 
same as the same period last year, our utilities increased 
approximately 3 percent and our credit and debit card expense rose 43 
percent.
    Our only operating expense that exceeds credit card expense is the 
cost of labor. All but two of our stores are open 24 hours a day and, 
even at the slowest times, we never have fewer than two persons on duty 
in a store. We are proud to pay our employees well and, even at the 
entry level, significantly above minimum wage. We have always offered a 
full benefit package and 401(k) opportunities to all of our employees. 
Still, credit card fees are approximately two-thirds of our total store 
labor expense.
    Our stores average 5,000 square feet and are much larger than the 
average size convenience store according to industry statistics. In 
most of our stores, we have at least 22 cooler doors per store, large 
canopies with many lights over our fueling stations and neon signs, we 
have cold winters and hot summers--in other words, we have high utility 
costs 24 hours a day. In fact, we are trying to make investments in our 
stores to make them more energy efficient--but this is an expensive 
proposition. Nevertheless, despite utility inefficiencies, our utility 
bills overall for the first 5 months of this year are less than 40 
percent of our credit card expense.
    During the first 5 months of this year, fuel sales accounted for 
approximately 63 percent of our sales. On the street, we have to be 
competitive. Everyone who sells fuel is measuring their gross profit by 
cents per gallon over cost. We check our competitor's street prices 
multiple times per day to ensure that we are competitive since 
consumers have no loyalty when it comes to purchasing fuel. Generally, 
during a period of rising prices, the cents per gallon profit for us is 
declining. Ironically, during the same time, our credit card expense 
per gallon is rising. On average, we estimate that we pay approximately 
half of our gross margin per gallon of fuel sold to credit card fees.
    Consumers are using credit cards and debit cards to make purchases 
more and more frequently. The rising cost of fuel and the increasing 
number of people who use credit are the primary drivers behind this. 
For the first part of this year, nearly 70 percent of our sales were 
card purchases. Approximately one-quarter of our card use was debit 
cards, the remainder being credit cards. And, over the last few years 
alone, interchange fees have grown more rapidly and significantly than 
all of our other expenses. In contrast to other expenses, we have 
absolutely no control over interchange fees. For example, we could 
change employee schedules if we needed to reduce labor cost; invest in 
new technology to reduce utility expenses; and we put our business and 
health insurance needs out for competitive bid yearly to help keep 
those expenses at a manageable (or at least predictable) level. With 
respect to credit and debit card expense, we are faxed a notice of an 
increase in fees and it is what it is. If we didn't take credit cards, 
we could not compete and would certainly go out of business. We have no 
ability to negotiate fees and we are powerless to deal with these cost 
increases. Yet, given the competitive landscape we are in, we have an 
increasingly smaller pot out of which to pay them. Costs that cannot be 
controlled have a far broader, negative impact on the business than do 
other costs.
    This rise in credit card charges does not take into account the fee 
increases that Visa announced effective in July. I do not know the full 
impact of this yet; however, one company in our association estimates 
that these hikes will result in a 5.9 percent increase in card fees 
convenience stores will pay on fuel sales alone. And these increases 
are not for interchange--they relate to the myriad of other fees the 
card companies charge merchants, such as the Assessment Transaction 
Fee, Partial Authorization Fee, Zero Floor Limit Fee, and various debit 
card fees. Depending on the market dynamics, this could wipe out the 
entire cents per gallon gross profit at any given time.

                   BACKGROUND ON THE DURBIN AMENDMENT

    I understand that the Durbin Amendment will accomplish the 
following, each of which will benefit the consumer:
    First, the Durbin Amendment will give the Federal Reserve the power 
to write rules ensuring that swipe fees on debit cards are ``reasonable 
and proportional'' to the cost of processing. This is, in fact, an 
overly generous standard for the card industry. Check transactions, for 
example, cost banks more to process than debit transactions but 
interchange fees have been completely prohibited on check transactions 
since the early part of the last century. The check system has been an 
efficient means of conducting commerce in the United States during all 
of that time and it is long overdue for debit transactions--which are 
simply electronic check transactions--to be treated in a similar way.
    Second, the Durbin Amendment will allow merchants to give their 
customers discounts when they use cards from a network with lower fees 
or use forms of payment that are cheaper for the merchant. That means 
that I could give my customers a discount if they use a Discover Card 
(or Visa, MasterCard or American Express) if that card network is 
cheaper. Alternatively, our stores could offer customers a discount for 
paying by a debit card or cash, check or other means may be less 
expensive for our company to accept. This simply means that credit card 
networks will compete with one another, just like we have to compete 
with other retailers selling the same products that we sell.
    Smaller banks have raised the concern that the cards which they 
issue will be treated differently than cards issued by significantly 
larger banks. However, it is my understanding that the Durbin Amendment 
will not allow a merchant to differentiate prices to the consumer based 
on the card-issuing bank. Therefore, the concerns raised by smaller 
banks are not well founded.
    Third, the Durbin Amendment will allow merchants to set a minimum 
or maximum amount for a transaction using a credit card. This is 
necessary because each card transaction has a fixed fee portion in 
addition to a percentage fee. For many small dollar transactions, that 
fixed fee part of the transaction (which can be 10 to 25 cents) may be 
more than the profit margin I would have earned on the sale. For some 
products, in fact, such as newspapers, the fixed fee on the card can 
sometimes exceed my cost of purchasing the product (such as on papers I 
sell for 25 or 50 cents). While the Durbin Amendment does not prevent 
our company from experiencing operating losses, the amendment would 
allow us the basic ability to protect my business from a guaranteed 
loss.
    As a retail marketer and operator of convenience stores, I am in 
favor of the Durbin Amendment and its focus on reforming credit and 
debit card fees so that credit card companies and their member banks 
are required to compete in the same way that any other supplier of 
services is required to compete. This is good for consumer and will 
ultimately benefit the economy.

                   CONSUMERS WILL BENEFIT FROM REFORM

    Economics shows that in a functioning market, lower business costs 
will mean lower prices and higher costs will mean higher prices. I 
understand that those opposed to credit card fee reform complain that 
the Durbin Amendment does not include a stipulation the retailers will 
pass on cost savings to consumers. I can only speak to the convenience 
store business. I cannot imagine that the consumer would not benefit. 
As I previously described, our business is highly competitive and 
consumer habits have changed. Peoples' preconceptions about convenience 
stores as an expensive place to purchase products out of convenience or 
necessity are generally of a business model that existed long ago. 
Today, we are competing for the same customer that many other types of 
retail are seeking. This customer is no longer an impulse buyer but 
rather plans ahead and makes lists and doesn't spend the extra dollar 
if it is not necessary or the product can be purchased elsewhere at a 
lower cost. Already, we frequently lose money on products such as a 
gallon of milk, a cup of coffee, a hot dog or a case of popular beer 
because we have to price these products competitively in order to 
maintain a consistent customer count in the store. If we cannot 
maintain the customer traffic we cannot stay in business.
    When it comes to selling fuel, we would always like to be the 
lowest price on the street if we can maintain a sufficient profit 
margin and we are always trying to be. No one wants to purchase fuel, 
it is a necessity and the consumer looks for a consistently low price. 
It is not surprising that the Department of Energy, for example, 
conducted a study of retail gasoline pricing and found that 100 percent 
of cost increases and 100 percent of cost reductions were passed 
through to consumers in gas prices.
    The current interchange fee system in the United States fools 
consumers by hiding the large interchange fees that are built into 
their purchases. One of the other witnesses here today, Ed Mierzwinski, 
of U.S. PIRG, has stated: ``Interchange fees are hidden charges paid by 
all Americans, regardless of whether they use credit, debit, checks, or 
cash. These fees impose the greatest hardship on the most vulnerable 
consumers--the millions of American consumers without credit cards or 
banking relationships. These consumers basically subsidize credit card 
usage by paying inflated prices--prices inflated by the billions of 
dollars of interchange fees.'' In addition, the Consumer Federation of 
America, Consumer's Union, and Consumer Action have all submitted 
Congressional testimony criticizing the current system of interchange 
fees because it is not fair to consumers and Americans for Financial 
Reform, which counts these and many more consumer groups as its 
members, has endorsed the Durbin Amendment.
    The Hispanic Institute published an economic report on interchange 
fees and wrote in a letter to Senators endorsing the Durbin Amendment: 
``[W]e found definitively through economic analysis of transaction and 
pricing data that consumers do currently pay interchange fees in the 
prices of the things they buy and when those fees are lower merchants' 
prices are correspondingly lower as well. This is proof, backed by 
economic data, that those who argue against reform by saying consumers 
will not benefit are wrong. Consumers will unequivocally benefit from 
reform.''
    Experience around the world demonstrates that consumer card reform 
ultimately results in a benefit to consumers. It is my understanding 
that every country in the world that has begun and completed a full 
review of credit and debit fees has enacted reforms designed to further 
regulate the card system. More than 20 countries, including, among 
others, Great Britain, Australia and the European Union have taken 
action that has benefited their consumers.
    The Reserve Bank of Australia issued the following statement based 
on its finding that savings from card fees reform were in fact passed 
on to consumers:

    ``One issue that has attracted considerable attention since the 
reforms were introduced is whether the cost savings that merchants have 
received from lower merchant service fees have been passed on to 
consumers in the form of lower prices for goods and services than would 
otherwise have been the case. The [card] schemes argue that there has 
been no, or little, pass-through, while the merchants argue that the 
cost savings have been passed through. The Bank's estimate is that over 
the past year, these cost savings have amounted to around $1.1 billion 
. . . . This judgment is consistent with standard economic analysis 
which suggests that, ultimately, changes in business costs are 
reflected in the prices that businesses charge.'' \1\
---------------------------------------------------------------------------
    \1\ Reform of Australia's Payment System: Preliminary Conclusions 
of the 2007/2008 Review, Reserve Bank of Australia, at 23.

    The European Commission also found that interchange fees harm 
consumers. In December 2007, the Commission held MasterCard's 
multilateral interchange fee illegal and Competition Commissioner 
Neelie Kroes said that interchange ``inflated the cost of card 
acceptance by retailers without leading to any advantage for consumers 
to retailers. On the contrary, consumers foot the bill, as they risk 
paying twice for payment cards. Once through annual fees to their bank. 
And a second time through inflated retail prices . . . .'' Kroes 
concluded that MasterCard's interchange ``acts like a `tax on 
consumption' paid not only on card users but also by consumers using 
cash and cheques.''
    Economists with the Kansas City Federal Reserve Bank appear to 
agree with consumer groups on some of the problems with the current 
system for consumers. In a 2006 working paper titled ``Payment Card 
Rewards Programs and Consumer Payment Choice,'' they wrote that rewards 
programs and the accompanied merchant fee structure might work as tools 
that distribute income from low-income earners to high-income earners.
    The Durbin Amendment allows merchants such as our company to give 
their customers discounts (either for using a cheaper card network or a 
cheaper form of payment like checks or cash). Currently our contracts 
with Visa and MasterCard prohibit us from giving these types of 
discounts to our customer. It also means that they can agree on the 
rules and impose them on us and prohibit us from offering discounts to 
our customers. As consumers have picked up the use of debit cards, Visa 
and MasterCard have joined together again to impose significant fees on 
their use, out of proportion to the costs of providing a debit card. 
Once again, we have no power to negotiate, as we have to accept these 
credit and debit cards to stay in business.
    It is slightly hypocritical for these credit card companies to 
argue that we would not pass on a discount opportunity to our customer 
and it also reflects a lack of understanding of the convenience store 
business. As a marketer of convenience store items and fuel, we are 
constantly looking for opportunities to deliver value to our customers. 
In fact, our entire marketing plan is based on how to deliver value to 
the consumer, especially in this economy. We welcome the opportunity 
despite the complexity it brings to our marketing programs. To the 
extent that interchange fees are reduced as a result of competition 
among the credit card companies and/or the requirement of 
reasonableness and to the extent we can offer discount pricing to 
reflect those reduced fees, our customers will have increased spending 
capacity.
    It is equally hypocritical for the card industry to suggest that 
the reduction in credit and debit fees due to competition or the 
requirement that they be reasonable must mean higher credit card fees. 
Credit card fees in their entirety are not a zero sum game in which the 
card industry has the legal or constitutional right to earn a certain 
total amount of revenue. The point is absurd when one considers that 
interchange fees in the United States have tripled since 2001. Credit 
card fees on cardholders were not cut by a third during that time; in 
fact, consumer card fees have continued to rise hand in hand with the 
increasing cost of interchange fees. This argument is simply a 
reflection of the consumer card industry's insatiable hunger for fees 
aided by their unfair and deceptive practices in charging them.
    Indeed, the European Commission's Directorate of Competition 
reviewed this claim and found, ``There is no economic evidence for such 
a claim. First, the inquiry's data suggests that in most cases card 
issuers would remain profitable with very low levels of interchange 
fees or even without any interchange fees at all. Second, the 
international card networks have failed to substantiate the argument 
that lower interchange fees would have to be compensated with higher 
cardholder fees.''

           THE DURBIN AMENDMENT WOULD BRING REASONABLE REFORM

    As I understand it, the Durbin Amendment is not about driving 
credit card companies out of business. It is not about requiring credit 
card companies and banks to provide a service at no cost to the user of 
that service. I recognize the valuable service debit and credit cards 
provide for merchants and consumers and know that our company will 
continue to pay for the ability to accept credit and debit cards.
    The Durbin Amendment means that the credit card companies will be 
subject to a little of the same competition that we are subject to. If 
one of them is willing to provide a more attractive rate, we can 
promote it. If a consumer wants to pay cash or use a debit card, we can 
offer that consumer a more attractive price because the costs 
associated with these types of payments should be less. In effect this 
allows the consumer to decide how to spending his or her money and know 
something about the cost impact of that decision. If one beer company 
were to offers a more competitive pricing strategy on its products than 
another beer company, we could pass this savings on to our consumer 
through a promotion and we do.
    In addition to credit cards, debit cards have become the currency 
of our customers. The Durbin Amendment provides for Federal Reserve 
regulation of debit card interchange fees. Debit cards mean that a 
customer is spending money that he or she has in their checking 
account. Their use seems to have increased in popularity as people have 
reined in reckless credit card spending. In addition, the costs 
associated with processing debit cards are less than that of processing 
a check and must be less than a credit card since there are no credit 
losses associated with a debit card. While a debit card is less costly 
for all constituencies and encourages greater fiscal responsibility by 
users, the card companies and member banks have the ability and have 
agreed to impose significant fees on the retailer or other merchant--
just because they can. A retailer can approach multiple vendors and 
negotiate costs when acquiring goods to offer for sale to its 
customers. In contrast, a convenience store operator has no choice but 
to accept the fees imposed by the consumer card companies and accept 
debit cards.
    In addition to interchange fees, we pay processing fees and fees 
associated with maintaining accounts at local banks. And, of course, 
credit card companies will still charge consumers an array of interest 
charges and fees. While credit card companies will not like reform, 
they will continue to have many avenues to recover costs, compete, and 
make profits.
    Bank and credit card companies have suggested that the Durbin 
Amendment will push the risk of fraud onto financial institutions. This 
is the first time that I have heard financial institutions admit that 
they don't cover the risk of fraud today. While they often talk about 
their ``payment guarantee,'' the ugly truth is that financial 
institutions push most of the risk of fraud onto merchants--while 
simultaneously charging a company such as ours a huge fee. The Durbin 
Amendment does not change the credit card companies' rules that allow 
them to push most of the fraud risk onto merchants. All it does is make 
sure the banks cannot take the same fraud costs out of merchants 
twice--once through charge backs and once through interchange fees. 
Again, the Amendment ensures that fees on big bank debit cards will be 
reasonable and allows consumers to get discounts and doesn't change the 
treatment of fraud one way or another.
    Bank and credit card companies also argue that the Durbin Amendment 
will shift costs from big box stores to consumers. We don't operate a 
big box store. I was particularly concerned when research by the GAO 
found that large businesses against which we now compete have an 
advantage over small retailers like our company in the current system. 
Our company pays a higher interchange fee rate now than do our big box 
competitors. Small business needs this reform to survive and have the 
same advantage and opportunity to offer value to customers as their 
competing big business. Reform will actually help small businesses more 
than large businesses because debit rates will have to be related to 
the banks' actual cost of issuing them--not to the size of the market.
    What small business retailers are fighting for is simply to have 
reasonable fees and the right to give their customers a discount. The 
fact that credit card giants prohibit merchants from giving consumers a 
discount for using a cheaper card brand (such as a Discover Card rather 
than a Visa) and prohibit merchants from giving discounts if they use a 
cheaper type of payment (like checks rather than credit) cannot be 
defended. Discounts for consumers are good things and the card giants 
want to prohibit them in order to hide their fees so they can keep 
raising them without anyone noticing. This doesn't protect consumers at 
all. I am proud and appreciative to know that Senator Durbin, 
representing my state, has taken the lead in exposing the credit card 
companies unfair system and trying to change it. Reform will give real 
help to Main Street businesses like mine and give a boost to our 
economy that will help everyone.

                               CONCLUSION

    I am speaking in support of the Durbin Amendment because it is the 
right answer for the consumer and the survival of retail business. I am 
privileged to operate a business and to serve my community in central 
Illinois as a retailer. We employ approximately 150 people and 
therefore are responsible for 2-4 times that number. I have a 
responsibility to our employees to stay in business and to our 
customers to provide exceptional value and service.
    Our business is highly competitive. We focus our efforts on 
delivering value to a customer that will result in customer loyalty. We 
look at our margins in terms of penny profits, out of which we have to 
cover and manage operating expenses. We have no ability to negotiate 
credit and debit card fees that account for the second largest 
operating expense and far exceed every expense other than the cost of 
labor. Yet we are in the business of convenience and cannot stay in 
business unless we offer our customers the ability to use credit and 
debit cards--today, debit and credit cards are a form of currency with 
our customer. The Durbin Amendment requires the credit card companies 
to be competitive and allows us to deliver an option to our customers. 
The amendment requires interchange fees be related to the actual cost 
of providing them and that they are reasonable. There is no question 
that the consumer will benefit from this as we are in the business of 
providing the best value to our customers. There is no question that 
competition will rein in the unrestrained increases in interchange 
fees. There is no question that this alone will help retailers in the 
convenience store industry to survive because it will lower the cost 
for which they can deliver retail to the consumer. Accordingly, for all 
of the reasons set forth above, I strongly support the Durbin 
Amendment.

    Senator Durbin. Thank you, Ms. Chronister. Your story 
really tells the human side of this for us all in terms of a 
small business in a competitive environment and the problems 
faced because of these charges on credit cards.
    Mr. Sullivan, if I went into McDonald's and ordered a 
Pepsi, I am sure the clerk has been instructed, because I have 
heard it over and over again, to remind me that they just sell 
Coca Cola. They do not sell Pepsi. And they do that, of course, 
to protect their own franchise and their arrangement with Coca 
Cola.
    So under current law, could I have a business that just 
takes Visa cards and not MasterCards?
    Mr. Sullivan. I am not aware of laws, sir, that would bar 
the issuance or acceptance of one card versus another.
    Senator Durbin. Not laws, but rules of your company.
    Mr. Sullivan. Visa, as far as selections of lower cost card 
types--first of all, merchants can and do negotiate total 
acceptance costs----
    Senator Durbin. Good. Hold on because, Ms. Chronister, tell 
me about your negotiation with Visa at Qik-n-EZ. How did you 
negotiate your interchange fees? Did you use your lawyers, or 
did you do that personally?
    Ms. Chronister. I am not sure how I would negotiate with 
this.
    Senator Durbin. You have not negotiated with them?
    Ms. Chronister. No. I am not sure how we would do it. I do 
not mean to be sarcastic, but I am sure I could find an 800 
number. I am not sure who I would talk to.
    Senator Durbin. So the 43 percent increase in your 
interchange fees this year were not negotiated increases.
    Ms. Chronister. No. We do not have any control over these 
expenses. I asked my controller to give me some background on 
the raises that we have incurred. I can look at some data. And 
her response--I am not sure I liked it, but--was I do not 
really keep track of this because we cannot do anything about 
it.
    Senator Durbin. So, Mr. Sullivan, you heard the testimony 
from the Department of the Treasury and now from Ms. 
Chronister. There is no negotiation going on.
    Mr. Sullivan. Mr. Grippo did testify that he did negotiate 
total acceptance costs with the acquiring banks, and merchants 
can do that.
    And there has been negotiations. We talked about the 
Defense Commissary Agency. They do, in fact, get--it is a 
Government agency--the grocery rate. The U.S. Postal Service 
does have negotiated rates with the Government as do a few 
other Federal agencies.
    Senator Durbin. So would you give me an idea of the volume 
of credit card transactions--I am talking credit and debit--
through Visa with the Federal Government that you think have 
been subject to negotiated interchange fees?
    Mr. Sullivan. I do not have those numbers with me, but I 
would be happy to submit them to you, sir.
    Senator Durbin. I wish you would.
    [The information follows:]

    When including all Federal Government merchant payment 
volume, 66 percent of payment volume and 73 percent of 
transactions receive a preferential Visa interchange rate. This 
covers all payment volume processed through Treasury's 
Financial Management Services (FMS) as well as other Government 
agency payment volume processed through non-FMS acquiring 
relationships. These payment volumes include the payment 
volumes covered under the negotiated rates listed below as well 
as the preferential interchange rates made available to 
Government merchants, i.e., Visa Government-to-Government 
interchange rate, Visa Emerging Segments rates for Government 
transactions, and other GSA-specific interchange rates applied 
to payment volume from Federal Government merchants.

    Senator Durbin. And I hope you will take a look at Mr. 
Grippo's testimony because he said--and I refer you to pages 3 
and 4--``And although the Treasury has held direct and indirect 
discussions with the card networks over the years in attempts 
to reduce the Federal Government's card acquiring costs, rates 
have never been open to negotiation.''
    Mr. Sullivan. I will comment I have been at Visa 7 years, 
and when Mr. Grippo was at FMS, I do not recall him ever asking 
Visa to negotiate rates. Now, not to say he had not talked to 
other people, but the Government has negotiated rates and for 
the benefit of the Government.
    In addition, we talked about--you talked about the SmartPay 
program, sir. When a bank competes for that contract with the 
General Services Administration, there are two important 
evaluation criteria which determine who wins that contract. The 
first one is price. By law, rightfully so, Government agencies 
have to consider price in award of contracts. The second 
critical component was card acceptance.
    Senator Durbin. Mr. Sullivan, I am going to draw a 
distinction here which I think you will accept. We were talking 
about those who use credit cards to pay Government expenses as 
opposed to those cards issued by Government agencies. It is 
clear that the cards issued by Government agencies like the one 
I showed earlier was a subject of competition, and as a result, 
there are rebates being paid and there are some benefits coming 
back to the Federal Government. But when it comes to the 
acceptance of cards to pay for everything from the Veterans 
Administration to Amtrak, I think Mr. Grippo is correct, and I 
am going to give you a chance, if you will, please, to provide 
us with information related to negotiations by your company 
with Federal agencies to establish interchange fees.
    [The information follows:]

    I can confirm that the following Government agencies 
receive a beneficial interchange rate on Government 
transactions, two of which are negotiated rates: United States 
Postal Service (USPS); Sallie Mae; and Defense Commissary 
Agency (DeCA).

    Senator Durbin. I would like to ask you this question too. 
Is Joseph Saunders still the CEO of Visa?
    Mr. Sullivan. Yes, sir, he is.
    Senator Durbin. I wrote to Mr. Saunders last December and I 
asked him whether Visa would commit to working with U.S. 
regulators on ways to reduce interchange rates on transactions 
across the country. Mr. Saunders replied on Visa's behalf and 
said ``We do not believe regulation is appropriate or 
necessary.'' That was his letter to me.
    So, Mr. Sullivan, in November 2009, the Government 
Accountability Office found that ``regulators in other 
countries have worked with Visa and MasterCard to voluntarily 
reduce their interchange rates. For example, on April 27, the 
Wall Street Journal reported that Visa Europe agreed to cut by 
60 percent the debit interchange rates it charges in nine 
European countries and for cross-border EU transactions. The 
highest debit rate in those countries is now 0.2 percent. 
However, in April, at the same time Visa was reducing debit 
interchange rates in Europe, Visa raised many of the 
interchange rates that it charges for U.S. PIN debit 
transactions by approximately 30 percent. Most of these U.S. 
debit fee rates are significantly higher than the 0.2 percent 
charged in Europe.''
    So my question to you, why is Visa voluntarily reducing 
interchange rates in Europe and other countries while raising 
them in the United States?
    Mr. Sullivan. Senator, those decisions are outside of my 
expertise. I could not comment. I do not know the decisions or 
the circumstances that surround that.
    Senator Durbin. I will tell you there is one circumstance 
that does surround it. In the European situation, there is a 
government regulation that brings Visa and MasterCard to the 
table. And as Mr. Saunders said, he does not believe that 
government regulation is appropriate or necessary. I would say 
to him it works pretty well in Europe and it is not working 
very well here for our businesses and for our Federal 
Government.
    Ms. Chronister, do you think it is fair that Visa is 
raising the interchange rates they charge in America while 
voluntarily lowering the fees in Europe?
    Ms. Chronister. No, certainly not. I guess I am glad you 
asked me the question. I do not think there should be 
interchange fees on debit, period, for that matter. I think of 
debit as an electronic check, and the Federal Reserve for 80 
years has said you cannot have interchange fees on checks. I 
certainly suspect--but I do not know for certain--that a debit 
card costs less to process than a check.
    Now, with respect to Europe, the way I understand it, the 
merchants go together and they went and they talked about it, 
and they did not have a hard time getting them to drop it to 
0.02 percent. And that is why we are here today. Right?
    Senator Durbin. That is what this Government is supposed to 
be about.
    Mr. Mierzwinski, when you try to draw comparisons between 
the cost of processing of a credit card transaction and a debit 
card transaction, is there not an inherent difference?
    Mr. Mierzwinski. I think you are exactly right, and that is 
why I think your amendment goes after the important problem 
that debit cards are being treated as if they are credit cards 
when really they are a substitute for checks, not a substitute 
for credit.
    The banks first tried to take--and were pretty successful 
at taking debit and moving it from the lower-cost PIN platform 
owned by local banks to the higher-profit, higher-cost national 
Visa and MasterCard credit card networks. This is the 
difference between PIN or signature, or they say credit or 
debit. At the register, what they mean, debit means PIN and 
credit means signature. They were first successful at moving 
debit to a higher-cost platform. Now they are moving cash to 
debit, and it is clearly a substitute for checks. And I agree 
with the merchants that it is much more like a check.
    Senator Durbin. So, Mr. Sullivan, do you disagree? Do you 
think that credit and debit interchange rates should be the 
same, or is there less of a risk to Visa from a debit card than 
a credit card?
    Mr. Sullivan. Sir, I came here prepared to talk about 
Government acceptance and use of cards in the Government. I am 
unknowledgeable to answer that.
    Senator Durbin. Well, then I am going to ask you another 
question which probably will elicit the same answer. If Ms. 
Chronister wanted to put in her convenience stores that she 
would prefer cash transactions and would give a 2 percent 
discount for cash or would say no credit cards for amounts 
under $2--let us say that--is that prohibited by the rules of 
Visa today for her to do that?
    Mr. Sullivan. She could offer a cash discount, I mean, a 
discount for people who want to pay with cash. She can use a 
terminal that steers individuals to lower-cost cards as well 
such as PIN. So merchants can do those. That is not against 
Visa operating regulations.
    Senator Durbin. Did you know that, Ms. Chronister?
    Ms. Chronister. No. I do not know if we have a different 
agreement, but I am not sure that that is actually true for us.
    Also, I just want to say again that when we're talking 
about these debit cards and these fees, at the end of the day, 
these will get back--these do go back to the customer. Maybe it 
is just my perspective as the operator of 11 convenience stores 
and recognizing the competition and the competitive environment 
we are in, but it will go back to our customer. And the reason 
why that is good for me is because when our customer has more 
dollars to spend, that is good for our business and it enables 
us to survive.
    Senator Durbin. Thank you.
    Mr. Sullivan, you heard the earlier question I asked of Ms. 
Cackley from GAO about the interchange fees charged to the 
Government which I believe I can find here, but I think it was 
$1.55. This was the MasterCard situation. So it may not be your 
situation.
    But can you tell me if there is a difference in the charge 
on interchange fees by Visa to the Federal Government as 
opposed to the fees that are charged to supermarkets? I used 
the illustration of MasterCard where it is $1.55 and 10 cents 
for the Government, and yet supermarkets are $1.27. Do you know 
if the Federal Government is paying a higher interchange fee to 
Visa than other commercial customers?
    Mr. Sullivan. I can tell you because I know Defense 
Commissary does pay the grocery rate. So they are paying the 
same as grocery stores. I do not know, and I believe the postal 
interchange rates are confidential. If I did know, I could not 
tell you. But I do not know really what they are.
    Senator Durbin. Are the commissary rates negotiated?
    Mr. Sullivan. We negotiated with Defense Commissary, yes, 
for those rates.
    Senator Durbin. The interchange fee is negotiated with----
    Mr. Sullivan. Yes. Yes, sir.
    Senator Durbin [continuing]. Your company. All right.
    And can you tell me what that is? Do you know what the 
charge is, the interchange fee, for the commissaries?
    Mr. Sullivan. What I understand is it is the grocery rate 
which is the commercial rate.
    Senator Durbin. And what about Amtrak? Do they negotiate 
their interchange fee with your company?
    Mr. Sullivan. To my knowledge, if I do not know if they 
have negotiated or attempted to negotiate, sir.
    Senator Durbin. I am not sure if they have or not, but I do 
not think they have.
    But anyway, you are going to provide me with information 
about the actual negotiations that are taking place----
    Mr. Sullivan. Yes, I will.
    Senator Durbin [continuing]. In terms of these fees. All 
right.
    [The information follows:]

    I can confirm that the following Government agencies 
receive a beneficial interchange rate on Government 
transactions, two of which are negotiated rates: United States 
Postal Service (USPS); Sallie Mae; and Defense Commissary 
Agency (DeCA).

    Ms. Chronister. Senator Durbin.
    Senator Durbin. Yes?
    Ms. Chronister. There might be some confusion. You know, 
there are so many different fees and costs surrounded by the 
credit cards and debit cards that we pay. We are able to 
negotiate with our processor, and maybe that is some of the 
negotiation you are talking about. But interchange fees 
represent 80 to 90 percent of the total credit card and that is 
what we are concerned about today, not these processing fees. 
So just in case we were----
    Senator Durbin. That is a good point. Can we distinguish 
that point, Mr. Sullivan? Are you saying--I know there is a 
processing fee and an interchange fee. Are you saying that 
interchange fees are being negotiated here with the Federal 
Government?
    Mr. Sullivan. Within the Government? Yes, sir.
    Senator Durbin. I see.
    Mr. Sullivan. You know, Mr. Grippo did say he did have 
negotiations, in fact, very strict negotiations for his 
acquiring services contract, but in addition to Treasury 
negotiating total costs, several Federal agencies have 
successfully negotiated a reduction in cost of interchange with 
Visa.
    Senator Durbin. And you are going to provide us with some 
examples of that, some evidence of that, please?
    Mr. Sullivan. Yes, sir.
    Senator Durbin. Thank you.
    Mr. Mierzwinski, before I ask Ms. Chronister, I am going to 
ask you to kind of make a general statement looking at this 
from the consumers' viewpoint which your organization focuses 
on here. As we take a look at these increases in the charges 
associated with credit and debit cards and the increased 
incidence of the use of these cards, can you tell me what you 
think the impact will be if this continues unabated on consumer 
cost and costs of living?
    Mr. Mierzwinski. Well, I think it is a broken market, and 
that is clearly the problem here. These prices are going up 
even though technology improvements suggest that the prices 
should be going down, even though there are two other competing 
networks that really cannot compete because these two biggest 
networks have so much market power they are dictating the terms 
of trade. So I think ultimately it is going to be bad for 
consumers. Prices should not go up in a competitive 
marketplace. They should decline. Consumers should have choices 
and consumers should have information.
    Yet, the operating rules, as I understand them from being 
told by many merchants I have spoken with, when they do, in 
fact, try to offer legal cash discounts--under the Truth in 
Lending Act, cash discounts have been legal for years and 
years--the operating rules--they come in with a hammer and they 
say, oh, you are offering a discounted surcharge. We are going 
to charge you thousands of dollars a day.
    So merchants and consumers and the Government will all 
benefit if we can impose some competition in this marketplace, 
some transparency, some information, some choice. I think that 
all of us will benefit with lower prices and more choices.
    Senator Durbin. Ms. Chronister, let me ask you to close on 
that note because I would guess, having been to your 
convenience stores and looked at all the different products 
that you offer, that there was competition for those who wanted 
shelf space, wanted to sell their soda pop or whatever it 
happened to be, and that you as a retailer picked the best 
value you thought for your customers and tried to get your 
suppliers to keep their prices as competitive as possible. So 
is there any other part of your store, other than this dealing 
with the credit cards, where you face this dearth of 
competition?
    Ms. Chronister. No. Certainly you are correct. If a beer 
company suggests that they have a good cost for us on 
something, we will put that out in front on sale and pass that 
directly on to the consumer because that is our value 
proposition to the consumer. Even if their competing brand does 
not offer it, we are not going to drop their price.
    We are asking to do the same thing, and your amendment 
would allow us to do the same thing with MasterCard and Visa. 
We could say, if we were able to negotiate better costs with 
MasterCard, your price is more attractive if you use your 
MasterCard versus Visa, the same with cash versus credit or 
debit versus credit. To me, they are another supplier, and as I 
said, we need to pay them but they need to be held in a 
competitive environment.
    Senator Durbin. Well, we all are very proud of our free 
market economy, but at the heart of it, there is competition, 
and I think that is what this hearing has been about.
    Mr. Sullivan, you are a brave man to come and appear before 
a Durbin subcommittee, and I appreciate your being here. I 
really do. Thank you very much for being here. I am looking 
forward to the follow-up information that you promised.
    Mr. Mierzwinski, thank you, and to my neighbor, Wendy 
Chronister, thank you. Glad you are here.
    Ms. Chronister. Thank you, Senator.

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Durbin. If there are any questions that are going 
to be sent to the witnesses, I hope they will respond in a 
timely fashion.
    [The following questions were not asked at the hearing, but 
were submitted to the witnesses for response subsequent to the 
hearing:]

                   Questions Submitted to Gary Grippo
               Questions Submitted by Senator Jon Tester

    Question. In Ms. Puente Cackley's testimony, she describes the 
substantial rebates that Federal Agencies received in return for making 
purchases using credit cards, totaling $255 million in fiscal year 
2009. What are the rebates that Federal Agencies receive used for? Are 
there any regulations with respect to how these funds may be used? Is 
there any reason why they are not returned to the Treasury to offset 
the cost of interchange fees? What would the impact of higher 
interchange rates be on the rebates that Federal Agencies currently 
receive?
    Answer. The GSA SmartPay program, which is not administered by the 
Treasury, provides charge cards to Federal agencies to purchase general 
supplies and services. The Treasury manages a wholly separate program 
that allows Federal agencies to accept cards from the public as payment 
for fees, fines, sales, donations, and other revenue transactions. 
Under the GSA contracts with GSA SmartPay card issuers, Federal 
agencies receive refunds based on their net charge volume, and the 
refunds are returned to the appropriation funds that earned them. From 
these appropriation funds, Federal agencies may use the refunds for 
activities consistent with their statutory missions, such as purchasing 
additional supplies or funding upgrades of administrative systems. The 
refunds are governed by a number of laws and regulations, including 
Office of Management and Budget Circular A-123, Appendix B, Chapter 7, 
entitled ``Refund Management,'' and Treasury Financial Manual, Volume 
1, Part 4, Section 4530, entitled ``Refund of Contractual Costs,'' in 
addition to Federal appropriations law. These refunds are not unique in 
that Federal agencies may receive or qualify for refunds and rebates 
under many other types of Federal contracts.
    Because the Federal card payment contract and the Federal card 
collection program are managed by different agencies, using different 
authorities, with services from different banks, and because Federal 
agency purchase card activity is generally legally and programmatically 
separate from the revenue collection programs, the Federal agency 
refunds generated by card payments are not transferred to the Treasury 
to defray the cost of card collections. Moreover, the Federal agencies 
that earn the majority of refunds are likely different from the 
agencies that incur the most interchange fees. Applying refunds earned 
by one agency to offset the interchange cost of another agency could 
reduce the use of purchase cards and therefore raise the administrative 
costs of the Federal procurement process.
    Changes in interchange rates would not have a direct impact on the 
refunds that Federal agencies currently receive under the terms of 
existing GSA SmartPay contracts. However, lower interchange rates could 
result in a request from GSA SmartPay banks to renegotiate the 
contracts to reduce refunds paid to Federal agencies. In addition 
refund rates could change when the GSA SmartPay contracts are re-
competed, but this is not likely to occur in the short term because the 
current contracts have a potential performance period of 8 years 
remaining.
    Question. In your testimony and in Treasury's Report to the 
Subcommittee you discuss the importance of negotiating: ``terms that 
are straightforward for issuers, acquirers and card networks to 
implement, and that do not make Federal government transactions an 
exception process for the global industry.'' Can you explain what you 
mean when you say ``an exception'' to the industry? Are you concerned 
about Federal government transactions being treated differently and if 
so, why?
    Answer. In this context, ``exceptions'' refers to technical 
requirements that may necessitate systems or software changes solely to 
process transactions with the Federal Government. Such exceptions could 
not only cause operating problems for the industry, since many systems 
are shared by thousands of participants to process transactions in a 
common manner, but also could make it more difficult and more costly 
for the Treasury to engage a collection bank, which would not be 
inclined to significantly change its systems for one customer. 
Legislation designed to reduce the Federal Government's interchange 
rates should not require the card industry to make significant 
technology changes to process Federal Government transactions 
differently from other commercial transactions.
    Question. In your testimony, you discuss the utility of 
streamlining the many different interchange rates that Federal entities 
pay. How would streamlining rates impact the cost of processing these 
transactions? What would be the impact on Federal entities of a two 
tiered system of interchange rates like the one included in Senator 
Durbin's interchange amendment where different interchange rates would 
apply to transactions based on the size of the issuer?
    Answer. We believe that reducing the number interchange categories 
would serve to lower the Federal Government's costs for several 
reasons. Most important among these reasons is that the complexity of 
categories, and the multiple fee levels within those categories, 
frequently serves to ``downgrade'' transactions into higher rates based 
on how a transaction is identified or reported. To give a simple 
example, the manner in which the tax status of a transaction is 
identified could result in the application of a higher interchange 
rate, even though tax status should not be relevant to a Federal agency 
transaction. The multiplicity of categories also makes it more 
difficult to negotiate genuine rate reductions because, regardless of 
the best rate that may be negotiated for a transaction type, any number 
of variables would allow a card network to shift a specific transaction 
into a higher rate category.
    A system of two-tiered rates, such as the one embodied in Senator 
Durbin's interchange amendment, should not affect the Federal 
Government as an acceptor of cards, since it would not change a Federal 
agency's internal systems or processes. Under the current model, the 
Federal Government already is charged different rates based on 
interchange categories and levels within those categories; adding tiers 
would be no different. The operational effect of a two-tiered model, if 
any, would occur in the central routing and processing systems of the 
card networks and the card issuers.
    Question. Mr. Grippo, in your testimony, you state that ``having 
the ability to opt out of certain transactions based on cost . . . 
would allow the Treasury to negotiate pricing terms on behalf of the 
taxpayer from a more equitable position.'' Under a two-tiered system of 
interchanges rates, would Federal entities be inclined to opt out of 
higher cost transaction if they could?
    Answer. In deciding whether to opt out of transactions, Federal 
agencies would assess the overall interchange costs associated with a 
given program, activity, or operating location and determine whether 
cards were a cost effective method of collection. That is, an agency 
would not review its costs on a transaction-by-transaction basis and 
opt out of individual transactions based on the tier or rate associated 
with the card issuer; rather, the agency would opt out by establishing 
a policy not to accept cards, regardless of the card issuer, for groups 
or types of transactions based on the overall costs to a program, 
activity, or operating location. Under a two-tiered system of 
interchange rates, Federal agencies might be less inclined to opt out 
of transactions than under the existing system, because the overall 
interchange costs of a two-tiered model likely would be lower than the 
current single-tier system.
                                 ______
                                 
              Questions Submitted to Alicia Puente Cackley
                Question Submitted by Senator Ben Nelson

    Question. How do you foresee the regulation of debit card 
interchange fees impacting prepaid debit card programs used by States 
to disburse government benefits and assistance?
    Answer. Although various States are using prepaid Visa or 
MasterCard debit cards for unemployment or other State cash benefits, 
very few are using them for food and nutrition assistance payments 
because of program funding and cost considerations. The food and 
nutrition programs generally are excluded from the Dodd-Frank Wall 
Street Reform and Consumer Protection Act of 2010 provisions governing 
Federal Reserve regulation of interchange fees for debit transactions. 
In addition, the Food and Nutrition Act of 2008 provides that no 
interchange fees shall apply to electronic benefit transfer 
transactions for Supplemental Nutrition Assistance Program payments. 
(Public Law 110-246, title IV, Sec. 4115(a)(9) (codified at 7 U.S.C. 
2016(h))). Retailers are also eligible to obtain free processing 
equipment and accept these payments at no cost to them.
    Similarly, a provision in the Dodd-Frank Act exempts debit cards 
and prepaid cards \1\ provided for use only in a Federal, State or 
local government-administered payment program from the cards that will 
be subject to any rules regarding the reasonableness of fees that the 
Federal Reserve is tasked with creating under that law, which should 
preclude the impact of any lower interchange fees resulting from that 
act from affecting issuers' willingness to participate in such programs 
with States. However, States' use of Visa or MasterCard debit cards for 
these programs does not eliminate the costs associated with 
administering a benefits program, but instead shifts who bears some of 
these costs from the State to the merchants that accept the cards and 
pay the associated interchange fees.
---------------------------------------------------------------------------
    \1\ This exemption applies unless the card is a general use prepaid 
card for which the following fees may be charged (1) an overdraft fee, 
and (2) a fee for the first withdrawal of the month from an automated 
teller machine.
---------------------------------------------------------------------------
                                 ______
                                 
               Questions Submitted by Senator Jon Tester

    Question. In your testimony, you describe the substantial rebates 
that Federal Agencies received in return for making purchases using 
credit cards, totaling $255 million in fiscal year 2009. What are the 
rebates that Federal Agencies receive used for? Are there any 
regulations with respect to how these funds may be used? Is there any 
reason why they are not returned to the Treasury to offset the cost of 
interchange fees? What would the impact of higher interchange rates be 
on the rebates that Federal Agencies currently receive?
    Answer. According to information we collected for our 2008 report, 
Federal entities differ in how they use their rebates. Two of the 
Federal entities we spoke with return the rebates directly to the 
location that originated the relevant transaction, one adds the rebates 
into general income for the entity, and the other allocated rebates to 
a working capital fund for use in various initiatives.
    The Office of Management and Budget and the Treasury Department 
issue guidance for covered agencies' use of rebates.\2\ According to 
the manager of the General Services Administration, entities comply 
with the guidance by, among other things, returning their card rebates 
to the appropriation or account from which they were expended, and 
using rebates for any legitimate purchase by the appropriation or 
account to which they were returned. The manager of the General 
Services Administration stated that if Federal entities were required 
to remit these rebates to Treasury they might have less incentive to 
use purchase cards.
---------------------------------------------------------------------------
    \2\ OMB Circular 123-A, Appendix B, Ch. 7, and Treasury Financial 
Management Manual Sec. 4530.
---------------------------------------------------------------------------
    If interchange rates were changed, the amount of rebates that 
government agencies receive could also be affected. The manager of the 
General Services Administration purchase card program told us that 
banks facing reduced interchange fee revenue might reduce the amount of 
rebates Federal entities receive for using purchase cards. However, 
government agencies have identified other benefits to using cards, 
including estimated savings from avoiding manual and paper-based 
acquisition processes that exceed the total rebate amounts. As a 
result, potentially lower rebate amounts may not reduce the willingness 
of government agencies to continue to use purchase cards.
    Question. In your testimony, you discuss the utility of 
streamlining the many different interchange rates that Federal entities 
pay. How would streamlining rates impact the cost of processing these 
transactions? What would be the impact on Federal entities of a two 
tiered system of interchange rates like the one included in Senator 
Durbin's interchange amendment where different interchange rates would 
apply to transactions based on the size of the issuer?
    Answer. Our testimony noted that both Visa and MasterCard have a 
designated merchant category for Federal entities that provides for 
interchange rates that are lower than those for many other merchant 
categories. However, like other merchants that accept cards, the actual 
interchange rate paid can vary across this category depending on the 
type of card accepted or how it is processed. Our November 2009 report 
noted that one way to mitigate the impact of interchange fee reductions 
on smaller issuers was to exclude them from reductions or reduce rates 
on only selected types of cards that smaller issuers may not issue as 
frequently.\3\ If the level of interchange rates were to vary by size 
of issuer--with cards issued by larger issuers carrying lower rates and 
those from smaller issuers carrying higher rates, then the costs of 
card acceptance by Federal entities would likely change based on the 
extent to which Federal entities accept cards issued by larger issuers 
versus smaller ones. Given that most cards are issued by larger 
issuers, this likely means that Federal entities would experience 
reductions in their card acceptance costs.
---------------------------------------------------------------------------
    \3\ GAO, Credit Cards: Rising Interchange Fees Have Increased Costs 
for Merchants, but Options for Reducing Fees Pose Challenges GAO-10-45 
(Washington, D.C.; Nov. 19, 2009).
---------------------------------------------------------------------------
                                 ______
                                 
                Question Submitted to Janet Langenderfer
                Question Submitted by Senator Jon Tester

    Question. In your testimony, you discuss the utility of 
streamlining the many different interchange rates that Federal entities 
pay. How would streamlining rates impact the cost of processing these 
transactions? What would be the impact on Federal entities of a two 
tiered system of interchange rates like the one included in Senator 
Durbin's interchange amendment where different interchange rates would 
apply to transactions based on the size of the issuer?
    Answer. In my June 16, 2010, testimony, I stated: ``Our April 2010 
statements for the 4 major card brands contained more than 200 
different rates. We work aggressively to analyze our monthly 
statements, looking for opportunities to cut our costs, and you can see 
that our fees are based on a complicated rates matrix.''
    This example was used to illustrate the size of the problem. While 
the number of rates charged is difficult to manage, the bigger problem 
is the complexity of the rates. In fact, the interchange rates applied 
to Amtrak's transactions are ambiguous and mired in complicated 
technicalities. The critical issue is that the large number of 
different rates and the complexity of those rates--applied to 
approximately 15 million transactions per year at Amtrak--makes the 
effort to reduce interchange rates extremely difficult. Significantly 
fewer rates with more direct qualifications (the ``streamlining'' to 
which you refer) would make it possible--and economic--for Amtrak to 
determine which transactions are receiving the most favorable rates and 
how to get better rates for those transactions that are not.
    When one looks at the rates listed on the web sites of the credit 
card companies, it may appear that there are only three primary factors 
used to determine the rates: merchant type; card product code (such as 
debit card, corporate card, rewards card, etc.); and method of data 
entry (such as Internet, automated self service, etc.).
    Additionally, the sites show that in certain select categories, 
there are also discounts for large volumes, but this does not apply to 
Amtrak.
    Much more difficult to discern from the published charts are the 
long list of technical requirements needed for each transaction to 
qualify for the lowest rate within its parameters. While some of the 
parameters (such as merchant type or product code) are determined at 
the time of the transaction, many of the technical details are not.
    In order to be charged the lowest rate for a particular 
transaction, all of the data must be submitted correctly by the 
merchant. However, once that data is sent to the credit card company, 
the merchant has no ability to control the integrity of the data it has 
submitted.
    The only indication that anything has gone wrong is when one looks 
at a statement (at earliest a day later) which may show that a higher 
rate was charged for ``technical reasons.'' Sometimes the technical 
reasons can be traced back to a cause and the error can be fixed for 
future transactions that may contain that error. Other times, no 
explanation can be found.
    On one occasion, after much persistence by Amtrak, the source of 
one such technical problem was found and corrected. The error was not 
made by Amtrak but by the credit card company itself. And yet, Amtrak 
over-paid thousands of dollars in interchange fees over a 2-year 
period.
    The lack of clarity and trace-ability of the interchange rates is 
by far the most pressing challenge for Amtrak. Interchange rates that 
are based on ambiguous, opaque technical criteria are the true source 
of higher costs for Amtrak.

                         CONCLUSION OF HEARING

    Senator Durbin. The hearing of this subcommittee will stand 
recessed.
    [Whereupon, at 4:35 p.m., Wednesday, June 16, the hearing 
was concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

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