Banks and credit card companies sparred with consumer advocates and merchant representatives at a Senate hearing on interchange fees, the fees charged to merchants – and ultimately customers – for using credit cards. The hearing was led by Sen. Dick Durbin, Democrat of Illinois, with a panel of witnesses comprised of consumer advocates and executives from banks and credit card companies.
Among those testifying at the hearing, which was held on May 4, 2022, were Laura Karet, CEO of supermarket chain Giant Eagle, Bill Sheedy, a Senior Advisor at Visa, Linda Kirkpatrick, President of North America at MasterCard, Ed Mierzwinksi, Senior Director of the Consumer Program at U.S. PIRG, a consumer advocacy group, Charles Kim, Executive Vice President at Commerce Bancshares, and Doug Kantor, general counsel for the National Association of Convenience Stores.
Opening the hearing, Durbin noted that consumers have paid $794 billion in interchange fees, also known as swipe fees, since the last Senate hearing on the subject in 2006, when the Durbin amendment was passed, which limited retailer fees for debit card processing. Interchange fees, he said, are designed to avoid competitive market pressure. And “they’re a gravy train” for banks and credit card companies. “I strongly support having a disclosure on credit card statements that says how many swipe fees you’ve paid. Consumers don’t know what a swipe fee is, but they would (if there was a disclosure).”
According to Kim, banks and merchants should share in the cost of the system. Banks and credit unions invest billions of dollars into building and securing the payment system. “Merchants contribute by paying a small fee when they use the system to make a sale. That’s interchange,” he said. “Our nation needs to keep up when it comes to technology and security. Interchange fees are an investment in American commerce,” Kim said. This was refuted by Kantor, who noted that “Visa and MasterCard set the terms, which insulates those fees from competitive market pressures to keep them high.” While credit card companies invest some of the revenue in areas like security and fraud protection, they have significant discretion in setting the fees. “We need competition in this market. That’s the bottom line.”
Limit interchange fees
“Other countries limit interchange fees. What lessons can we learn from all of these countries that have decided that interchange fees are too high?” Durbin asked. “Well, those countries know that the credit card system is a market failure,” said Mierzwinksi. “Congress should strengthen the Durbin amendment and expand it to credit cards and lower interchange fees across the board.”
Sen. Chuck Grassley, Republican of Iowa, sought to clarify the relative market power of the major credit card companies. “Do Visa and MasterCard abuse their market power?” he asked. Sheedy responded: “No. Consumers are empowered to shop and merchants benefit.”
Added Kirkpatrick: “The payments system has never been more competitive.” As evidence, she cited the growing number of payment options, including cryptocurrencies, digital wallets and buy now, pay later.
A market system to discipline prices
Kantor countered, “This is not a balancing of the marketplace. There needs to be a market system to discipline prices and we don’t have that here.” Responding to the assertion by the credit card executives that innovation was a key element of interchange fees, he said, “The innovation in technology and payments does not make up for the lack of innovation and the antitrust problem in credit cards.” Karet added, “Every item in our store is individually negotiated. The price is not set unilaterally by the company. MasterCard and Visa are the only vendors we cannot negotiate with. It’s a take it or leave it proposition. I’m not an economist, so I can’t give you the definition of a duopoly, but if it walks like a duck and talks like a duck…”
Sen. Richard Blumenthal, Democrat of Connecticut, asked whether the fees charged by the credit card companies were passed on to consumers. Absolutely responded Kantor. “There’s 100% passthrough in every region of the country, so consumers pay these increases every single day.” Sen. Mike Lee, Republican of Utah, wanted to know if it is anticompetitive for Visa and MasterCard to tell all banks that they’re going to increase interchange fees for merchants. Sheedy said, “Visa sets the interchange fees on its own. We do it with input from the marketplace. The impact of the pandemic on merchants has been important to us. We lowered rates at the beginning of the pandemic. We are not raising rates. The average rate has been flat since 2015.”
The cartel behavior
Sen. Lee continued. “Does it amount to cartel behavior to agree on interchange fees?” he asked. Sheedy responded that “we feel it is highly competitive in that it delivers the same interchange fee to thousands of institutions. We feel the model works very well in a system where you need tens of thousands of institutions.” “For a network effect?” asked Sen. Lee.
“Yes, you need to have a default interchange fee,” Sheedy answered. Sen. Lee wanted to know what would happen to credit card rewards if the system changed. Kim responded that roughly 60% of interchange fees go out in the form of rewards. “And not just to the wealthy. It’s broadly distributed.” “So the banks would still get paid, but get paid less and the rewards programs would be a casualty?” “Yes,” said Kim. Sen. Chris Coons, Democrat of Delaware, noted that the issue isn’t just losing rewards programs, but losing access to credit. “How do issuing banks rely on interchange to offer credit services and what impact would it be if that revenue substantially declined for your bank,” he said.
Said Kim, “I think you’d see smaller banks just go away.” Kantor countered that “we haven’t found the parade of problems around the world that Mr. Kim and his brethren talk about. We haven’t asked for a cap on fee. We think there needs to be competition and market prices.” Sen. Grassley summed up by saying, “There’s a balancing act, and any future action should be carefully considered for (its) possible impact.”