WASHINGTON – A July 19 Senate Judiciary Committee hearing examining anti-trust concerns over interchange fees charged by credit card issuers Visa, MasterCard and their member banks included this request from Committee Chairman Arlen Specter (R-PA): Give me a copy of your operating rules.

The hearing on “Credit Card Interchange Rates: Antitrust Concerns?” examined the anticompetitive price-fixing practices of Visa and MasterCard, as well as the issue of transparency regarding the availability of the card companies’ operating rules. On behalf of merchants, committee members heard testimony from NACS 2004-2005 Chairman Bill Douglass, CEO of Douglass Distributing in Sherman, Texas; and Kathy Miller, owner of The Elmore Store in Elmore, Vermont. Both Douglass and Miller provided compelling testimony on how the increase in card fees in recent years is hurting their businesses and ultimately is passed on to their customers as a hidden tax.

“I want to emphasize to this committee that this market is broken and something must be done to fix it. The courts have said that Visa and MasterCard have market power, and I will tell you that the agreements among their member banks to fix and charge the same fees are outrageous. While I am not a lawyer, I know I can’t agree with my competitors about what I will charge because it is against the law. That should be just as true for banks. Not only that, but the only type of competition that does exist is when Visa and MasterCard compete by raising, not lowering, their fees to get more banks to issue their cards. Competition ought to work in the opposite direction,” said Douglass. 

“Over 60 percent of today’s motor fuels sales are paid for with credit or debit cards. That is a staggering number,” Douglass testified, adding, “It means one simple thing: I have to take these cards or I will go out of business. I have no option. And protestations by Visa and MasterCard that merchants do not need to accept cards rings just as hollow as someone saying we could just choose not to have telephone service. It ignores how business is done in this country. Accepting cards is as necessary as having a phone and other basic utilities.”

“The fact that businesses in my industry are paying almost as much to the credit card companies each year as they are making before they pay Uncle Sam gives you a sense of just how broken this market is,” said Douglass. “And even paying all this money, I can’t get a copy of the rates I pay or the rules I must follow. The summaries of the rules on Visa and MasterCard’s Web sites are clearly inadequate--leaving out hundreds and hundreds of pages.” 

Douglass also addressed the growing problem of chargebacks, also known as “Reason Code 96,” where petroleum retailers are denied payment by the credit card companies if they authorize payment beyond a certain amount.

“Exceeding these limits has become more common in recent years. But Visa and MasterCard say somewhere in their hidden rules that if a gas purchase exceeds these pre-approved levels, they can deny payment to the retailer. This is true even if the consumer pays and does not dispute the bill and means that retailers have lost the entire amount of the sale on many of these transactions,” noted Douglass. 

Miller told the committee that high interchange fees not only hurt her business, but the entire community that relies upon her store for products and services in small-town Vermont. “My concern as a small independent store may seem small to you, but it is a huge burden for us and very real,” said Miller in her testimony, noting that as interchange fees continue to increase, her profit margin “sinks down even lower.”

Miller explained to the committee that in 2005 her store made $58,500 worth of plastic transactions. Of that amount, credit card fees cost her business, out-of-pocket, $4,400. “Each time a customer swipes their card, it costs us 2.65 percent, plus 20 cents per sale. For example, if we sell $10 worth of gas, we make 49 cents and pay credit card fees of 26.5 cents plus 20 cents. Or if a bicyclist stops for a bottle of water, it costs 23 cents to swipe the card. You do the math--it hurts,” she said in her emotional testimony.

Prior to hearing witness testimony, Chairman Arlen Specter (R-PA) commented in his opening statement that Americans “live in a plastic world.”

Equally apparent from the senators’ opening statements is the level of engagement that the retailers have had with their senators. Sen. Specter said he had “quite a few complaints from Pennsylvanians” about interchange fees.

Ranking Democrat Patrick Leahy (D-VT) remarked that retailers in his state have expressed concern that interchange fees “represent an increasingly large portion of their costs of doing business,” adding that the entire fee process “is utterly opaque,” that they have not seen the operating rules outlining the interchange systems and “cannot decipher the complicated billing schemes” of the card companies.

“We need to be sure that the cost of accepting credit and debit cards does not outweigh the many possible benefits businesses and consumers should be enjoying. We need to bring more transparency to the entire system,” said Sen. Leahy.

Sen. Chuck Grassley (R-IA) commented that he is “astonished” by how many of his constituents have complained to him about interchange fees, while Sen. Rick Durbin (D-IL) noted that the hearing is “a chance for consumers to have a voice.”

On behalf of the Merchants Payments Coalition (MPC), of which NACS is a founding member, Steven Cannon, president and managing partner of Constantine Cannon, provided testimony on the nature of interchange fees and how they are harmful to retailers and consumers; why interchange fees violate the antitrust laws; and why the card associations’ justifications are insufficient to overcome this illegality.

“The key to understanding the anti-consumer nature of the card systems’ rules is the fact that the higher Visa and MasterCard set the interchange fees, the more money that will flow to their member banks. This pool of funds is available to subsidize marketing efforts, such as reward points or airline miles, by which card issuers promote customers’ use of their credit cards,” said Cannon.

Cannon said that because these “collectively set interchange fees are passed on to merchants by banks that process the merchants’ card transactions,” the merchants must take this cost into account at the register for goods and services sold to consumers. “As a result, even consumers who pay by cash or check subsidize card-issuing banks’ marketing efforts,” he added.

“Let me be clear and unequivocal. What Visa and MasterCard are doing is illegal,” said Cannon. “Every other business in the United States does business without fixing prices, and Visa and MasterCard should too.”

As to whether Congress should take action, Cannon said, “We believe the answer is a resounding ‘yes.’”

On behalf of the credit card companies, committee members heard testimony from card industry representatives who suggested that merchants enjoy great benefits from credit cards, merchants are seeking price caps and what the credit card companies do with respect to setting interchange rates is legal. Those presenting testimony were:

• Visa U.S.A. Executive Vice President, General Counsel and Secretary Joshua R. Floum
• MasterCard Worldwide Group Executive, Global Public Policy and Associate General Counsel Joshua L. Peirez
• Former Federal Trade Commission Chairman and counsel to O’Melveny & Meyers Timothy J. Muris

Echoing Sen. Leahy’s opening statement, “It’s not an issue we can ignore,” Sen. Specter had one final request of Visa and MasterCard: Provide the committee with a copy of your operating rules that merchants have never seen. When told that he would get them, Sen. Specter quipped, “Good, then I can share them with Mr. Cannon.”

NACS Daily will provide additional coverage of the Q&A portion of the Senate Judiciary Committee hearing in Friday’s Washington Report, as well as details as to if and when the operating rules are delivered to the Senate. (At a February 2006 hearing before the House Energy and Commerce Committee’s Subcommittee on Commerce, Trade and Consumer Protection, Muris testified that these agreements are available, but when subcommittee members asked to see a copy, he did not commit to supplying it, calling the information “proprietary.”

To access witness testimonies and committee member statements, click here.