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Prepared Statement of The Honorable Cliff Stearns The Law and Economics of Interchange Fees
Subcommittee on Commerce, Trade, and Consumer Protection Good Morning. I'd bet that everyone in this hearing room today has a credit or debit card. Surveys show that a typical adult in the U.S. carries several credit cards. In the U.S. alone, credit cards, ATM cards and debit cards accounted for almost 42 billion transactions worth almost $3 trillion in 2004. And for those who don't have plastic, you are either showing great financial discipline or maybe you just love the feel of crisp dollar bills in your pocket. Although electronic payment is now commonplace - now outpacing check transactions - I think it's safe to assume very few consumers understand or are even aware of the electronic payments network, the transactions involved, or the related fees - the focus of today's hearing. People just seem to like the convenience of paying by credit card, gathering more reward miles, and enjoying membership that, for many, does have its privileges. The convenience of having credit available and accepted almost everywhere frequently trumps any concern about fee structures, particularly when how those structures actually work are found in the obscure fine print, or in just as obscure law review articles. The fees that help fund this convenience for consumers are known as "interchange fees." Simply put, interchange fees are fees that merchants pay for access to the extensive, global electronic payments infrastructure that has been built up over the last few decades. Interchange fees are calculated as a percentage of a purchase transaction that banks, in turn, collect from merchants participating in the electronic payments network. This is also known as the "merchant discount." In an efficient market, these interchange fees should represent the costs of participating in the electronic payments system as well as other factors like the premium and cost savings achieved from not having to keep large amounts of cash on hand. The interchange fee is part of the terms of the credit card agreement made with the merchant. Because it is a percentage, the size of the interchange fee increases with the amount of the transaction. Therefore, as we saw in the aftermath of the Hurricanes last year, if a merchant charges his customers more, the associated increase in the interchange fee will correspond to the price increase. This becomes a bit more complicated when a merchant makes a certain margin based on the current cost of a bulk commodity, like gasoline, and the interchange fee starts to eat into that margin when the costs of that product go up. This is basic economics and, at least in theory, the terms associated with this scenario should be transparent and agreed to freely. With that in mind, the Committee's focus, in my opinion, shouldn't be on what parties contractually agree to regarding fees, it should be on ensuring that the market is given the freedom to function properly and efficiently distribute costs and benefits. As we have seen during the oil crisis in the 1970s with its gas lines and rationing, imposing price or fee caps will inevitably lead to shortages, more costs, and certain inconvenience to consumers. Therefore, I think our examination of this issue should start with a better understanding of the antitrust and anti-competitive concerns raised to determine if we are dealing with a system that involves collusion and anti-competitive market power or one that involves transparency and choice. I must say that I have not seen strong evidence that the electronic payments system is suffering from market failure; in fact, the system appears to be thriving and consumers seem to like access to low cost credit to fund purchases. But a healthy free market also assumes the players are playing fair and choice is plentiful. Some contend that is not the case with interchange fees because, in part, as electronic payments grow, costs should come down. They point to data showing that interchange fees have actually increased not decreased, as economies of scale would predict. Others charge that big credit card companies have monopolistic power and can strong arm merchants into accepting their terms. On the other hand, those contentions are countered with the fact that these cost increases are due to the risks associated with the growing percentage of the U.S. population that has access to and is taking advantage of cheap credit. I'm not entirely sure who's right, and I look forward to hearing the elements of each case from our panel of experts today so we can better draw our own conclusions. Again I'd like to thank everyone for joining us today, especially former FTC Chairman Tim Muris. The Committee appreciates the panel's testimony today and its assistance in helping us learn more about this important issue. Thank you.
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