[WASHINGTON, D.C.] - U.S. Senator Dick Durbin (D-IL) today introduced legislation to allow large and small businesses to negotiate directly with credit card companies to reduce the interchange fees that are charged on every credit card transaction.

“Higher interchange fees for businesses mean higher costs for retailers and consumers,” said Durbin. “Every time you make a purchase with plastic, the bank that issued your credit card gets a cut of the sale amount.  American businesses and consumers are getting nickled and dimed by the big banks, who end up making billions from these hidden fees.  Interchange fees need to be fairly and transparently negotiated between the merchants and the credit card companies who represent the banks’ interests so working Americans don’t get shortchanged.”

Interchange fees are supposedly charged in order to cover the cost of processing a credit card transaction.  However, reports show that the cost of credit card processing is steadily decreasing in the United States, while interchange fees continue to rise. High interchange fees are yet another way that banks and credit card companies take a bite out of consumers’ wallets, along with high interest rates and other fees imposed on credit card holders that have contributed to a recent surge in credit card default rates.

There is no meaningful competition or negotiation involved in the setting of interchange fees, as major card companies like Visa and MasterCard simply set non-negotiable interchange fee rates for all the banks and retailers that participate in their card systems. These rates result in increased revenue for the card issuer but drain the bottom lines of retailers and raise prices for consumers.  Retailers are forced to abide by these fees, because credit and debit cards are used for over 40% of all transactions in the United States and most retailers cannot stay in business if they do not accept these cards.

Visa and MasterCard control over 70% of the U.S. credit and debit card market, and collected an estimated $30 billion in interchange fees in 2007.  Late last month, Durbin, along with Senators Snowe, Kohl and Specter, sent letters to both companies asking for a detailed explanation of the process by which they set their interchange fee rates.  A copy of the letter can be found below.  Unfortunately, in their response the card companies again failed to adequately explain how they decide what interchange rates to charge.

Durbin’s Credit Card Fair Fee Act of 2008 would safeguard consumers and retailers by preventing credit card companies from using their market power to charge unfair fees through an unfair process.  Recognizing that certain widely-used electronic payment systems have become nearly as important to our consumer economy as cash, the bill would ensure that retailers have access to these electronic payment systems at fair rates and terms.

Under Durbin’s bill, retailers would be able to engage in collective negotiations with the providers of any electronic payment system with significant market power (i.e., 20% or more of the credit and debit card market) over the fees and terms for access to that system.  If the retailers and providers do not reach a voluntary agreement on fees and terms, the matter would be brought before a panel of three expert judges appointed by the Department of Justice Antitrust Division and the Federal Trade Commission.

These judges would investigate the fees, terms, and overall market conditions for electronic payment systems.  The judges would then order a mandatory settlement conference, and if the settlement conference failed to result in an agreement between the retailers and providers, the judges would conduct a hearing where each side would present their final offer of fees and terms.  The judges would then select the offer that most closely represented the fees and terms that would be negotiated in a fair and competitive market.  The judges’ decision would govern access to the electronic payment system for a period of 3 years, but could be superseded at any time by a voluntary agreement concluded between retailers and providers.

U.S. House Judiciary Committee Chairman John Conyers (D-MI) and Rep. Chris Cannon (R-UT) introduced companion legislation, also titled The Credit Card Fair Fee Act of 2008, in the House earlier this year.

Text of the letter appears below:


May 23, 2008

Joseph W. Saunders
Chairman and Chief Executive Officer
Visa Inc.
P.O. Box 8999
San Francisco, CA 94128-8999

Dear Mr. Saunders,
      
We write in regard to the interchange fee rates that are established by your company for credit and debit card transactions involving your branded cards.  Interchange fees have been the subject of considerable Congressional interest in recent months.  To better inform our understanding of how you establish interchange fees for your network, we ask that you provide us with documentation detailing both the methodology and the specific data that your company uses to set interchange fee rates.  We request that you provide this information no later than June 3.

As you know, when a consumer uses a credit or debit card to make a purchase from a retailer, the banks and credit card companies involved in the transaction charge a number of fees that are passed on to the retailer and ultimately to the consumer.  The interchange fee is one such fee; it is a fee charged by the card-issuing bank to the retailer’s bank, and it is typically passed on from the retailer’s bank to the retailer as a component of the retailer’s merchant discount fee.  Interchange rates are frequently set as a percentage of the sale amount plus a flat fee, and can vary by transaction category.  For example, an interchange fee for a certain type of transaction might equal 1.75 percent + $0.10.  An estimated $42 billion in interchange fees was collected by issuing banks in 2007, and this amount is expected to increase in the years to come. 

Even though interchange fees are collected by issuing banks, the fee rates are set by credit and debit card companies like yours.  It is assumed that interchange fee rates are set in part to ensure that issuing banks can cover their costs in processing and authorizing card transactions, including the costs of ensuring data security, safeguarding against fraud, and hedging against the risk of consumer nonpayment.  However, it is unclear how much of the amount collected in interchange fees is devoted to covering such costs, and how much is used for other purposes such as marketing, rewards programs that benefit certain cardholders, and issuer profit.  A recent analysis by Diamond Management and Technology Consultants estimated that only 13 percent of collected interchange fee amounts are used to pay for the costs of transaction processing, and that the majority of interchange fee amounts are actually used for customer rewards programs, issuer profits, and other unspecified issuer costs.

Transparency with regard to the uses toward which interchange fee revenue is devoted would be useful to Congress as it considers the interchange issue.  We therefore request that by June 3 you provide documentation identifying: (1) an itemized list of the costs that your issuing institutions bear in processing transactions made with your branded cards; (2) specific data on the amount of those costs per transaction; (3) the methodology you use to set interchange fee rates, including the relationship between your issuing institutions’ transaction costs and the interchange fees you have established for those transactions; and (4) any other information in your possession regarding other purposes to which your issuing institutions devote interchange fees besides covering transaction costs.

Given that credit and debit cards are used for approximately 40 percent of all purchases, it is important that Congress fully understands the costs and fees imposed within the credit and debit card systems so we can ensure that these systems will continue to function effectively for all participants.  We look forward to your response and the information you provide. 

Sincerely,
Dick Durbin
U.S. Senator