S. HRG. 111–845 OVERSIGHT OF FEDERAL PAYMENT OF INTER- CHANGE FEES: HOW TO SAVE TAXPAYER DOL- LARS 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 U.S. GOVERNMENT PRINTING OFFICE 57–097 PDF WASHINGTON : 2011 For sale by the Superintendent of Documents, U.S. Government Printing Office, http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202–512–1800, or 866–512–1800 (toll-free). E-mail, [email protected]. 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 officio) DANIEL K. INOUYE, Hawaii (ex 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 (II) CONTENTS 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 Accept- ance, 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 Inter- change 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 Serv- ices, 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 (III) IV Page Durbin Amendment Slows Deceptive Practices That Increase Prices for Con- sumers ................................................................................................................... 52 Increased Consolidation of Card-issuers Harms Consumers More Broadly ....... 53 The Credit Card Oligopoly Also Allows Issuers to Use Anti-consumer Prac- tices 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 TAX- PAYER DOLLARS