Vermont
‘Mom and Pop’ Store Owner
Tells Leahy Panel Of
Struggles Confronting Small Businesses
In The Face Of Escalating Credit Card Fees
…Steady Rise
In Hidden Fees Are Squeezing Small Business Owners
And
Consumers In Vermont And Across The Nation
WASHINGTON (Wednesday, July 19) –
Kathy Miller, the “mom” from the mom and pop grocery in Elmore,
Vt., told the Senate Judiciary Committee Wednesday that her
family-run business is being steadily squeezed by the continuing
rise in hidden fees charged to businesses by large credit card
companies.
In poignant testimony, Miller, a
fifth-generation Vermonter and co-owner of The Elmore Store,
told the panel that these hidden fees present a real and growing
financial burden especially on small, independent businesses
like the one she has run with her husband Warren – a Vermont
state representative – and her daughter Kelly, for the last 24
years. Miller was appearing before the Judiciary Committee at
the invitation of Senator Patrick Leahy, D-Vt., the panel’s
ranking Democratic member.
“I would like to ask you on your
next ride home to look and see how many vacant store fronts
there are in your small downtowns,” Miller told the committee.
“Just this last winter alone four closed within a 50 mile radius
of us. Some days I feel like I should just turn in my keys –
but too many people count on us. Elmore is a town of 850
people. We are the hub of the community – when someone needs
something, who do you call? ‘Mom’ or ‘Pop’ at the Elmore Store.
We are just trying to keep our doors open.”
The controversy involves charges
of anti-competitive and anti-consumer practices of the two
largest credit card companies and banks in assessing these
interchange rates, said Leahy. These “interchange rates,” which
the banks affiliated with Visa and MasterCard charge for every
credit card transaction, are secretly set by the banks, and
retailers are not allowed to negotiate over the fees. These
rates also are hidden from public view, though they are paid by
retailers on each credit card transaction that consumers make.
Last year alone, American
consumers paid Visa and MasterCard around $30 billion in
interchange fees, according to Miller.
Below is Senator Leahy’s opening
statement from the hearing and Miller’s testimony.
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Statement Of
Sen.Patrick Leahy,
Ranking Member, Committee On The Judiciary
Hearing On “Credit Card Interchange Fees: Antitrust Concerns?"
July 19, 2006
First, I must thank Vermont State
Representative, Warren Miller, and his wife, Kathy, for making
the trek down from Elmore, Vermont, in order to be here today.
I am always glad to see Vermonters here, and especially so when
they are able to help us on the Committee as we struggle with
the problems confronting businesses and individuals across the
country. Kathy, I look forward to hearing from you, and know
that you are speaking for many of the small businesses that make
Vermont prosper.
Few of us outside the business and
banking communities had probably heard much about interchange
fees until recently. Those fees, which retailers pay to the
banks that process credit card transactions, are ultimately paid
by consumers. We are here today because questions are being
raised over whether those fees are too high, and whether they
are too high because the associations of banks that handle
credit cards are behaving unfairly in the marketplace. Just
this week, the European Union’s Competition Authority announced
that unless Visa and MasterCard change those fees, they will
face an antitrust action. This is not an issue that we can
ignore.
Retailers tell me that interchange
fees represent an increasingly large portion of their costs of
doing business. They tell me that they are compelled to raise
their prices, and shift some of that cost burden onto their
customers. They tell me that all of their customers are harmed,
whether they pay by cash or check or debit or credit card,
because of the fees that force them to raise prices. They tell
me that they have no choice but to accept credit cards – and the
fees that go along with them – as more and more customers expect
to be able to charge their purchases. And they tell me that the
entire fee process is utterly opaque; they have not seen the
rules for the interchange systems, and cannot decipher the
complicated billing schemes of the credit card companies.
Credit cards do bring many
benefits to both retailers and consumers – greater access to
consumer purchasing power, more rapid payments, and increased
payment options for consumers. And certainly, interchange
services are necessary, valuable, and worth paying for. But 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. We need to take a closer
look.
The livelihood of many Vermonters
depends greatly on the success of our small businesses. I do
not want interchange fees to force smaller businesses, like the
village grocery store run by the Millers in Elmore, to take a
net loss in order to both accept credits cards and sell the ice
cream cones, and cups of Green Mountain Coffee that have helped
make their store a Vermont treasure.
# # # # #
(Testimony
of Kathy Miller, co-owner of The Elmore Store)
Kathy
Miller, Co-Owner,
The Elmore Store, Elmore, Vermont
Senate Judiciary Committee
'Credit Card Interchange Rates: Antitrust Concerns?'
July 19, 2006
Mr. Chairman, Senator Leahy and
Members of the Senate Judiciary Committee: Good morning. I
would like to say thank you for allowing me to testify today. My
name is Kathy Miller and I, along with my husband Warren and
daughter Kelly, am the owner of the Elmore Store in Elmore, VT.
I am also here today as a past chair of the Vermont Grocers
Association and on behalf of the Food Marketing Institute which
represents our nation’s supermarkets and grocery stores.
We appreciate you holding this
hearing and for the opportunity to provide testimony on credit
card interchange fees and the antitrust issues they raise. We
are pleased that light is finally being shed on the
anti-competitive and anti-consumer practices of the credit card
companies.
This is the store that we have
owned and operated now for 24 years. I am a 5th
generation Vermonter with deep roots in Elmore, VT. I am the
“Mom” part of the operation. Warren, sitting behind me, is
“Pop.” Warren was elected to the state legislature in Montpelier
4 years ago. We are not only committed to our store, but our
community and the state of Vermont as well.
You may wonder why we do what we
do – 7 days a week – 96 hours a week – 364 days a year – to be
honest, some days we ask ourselves. But we believe that we can
and do make a difference to the people and community that depend
on us. My concern as a small independent store may seem small to
you, but it is a huge burden for us and very real. Credit card
fees are collectively set by the card associations and we have
no control over them. They are not negotiable and cannot be
added on to the consumer’s bill. We cannot set minimum amounts
to swipe credit and debit cards, that is against the Visa and
MasterCard operating rules, I am told. The fees keep increasing
to us and our profit margin sinks down even lower.
Last year in our store, 2005, we
did $58,500 worth of plastic transactions. The credit card fees
to us (out-of-pocket) were $4,400. Each time a customer swipes
their card it costs us, 2.65% + 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 + 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.
In our store, we have 2 gas pumps
that we own – not subsidized by any big petroleum company. When
the price of gas goes up, so does the amount of interchange we
pay. Because the fee is a percentage rate plus a flat fee, the
banks make more and I must pay more, even though their costs for
processing the transaction are still the same.
Last year alone, American
consumers paid Visa and MasterCard around $30 billion in
interchange fees. These fees are set collectively, in secret, by
VISA and MasterCard member banks, who then charge them to
merchants. These fees are not negotiable. It doesn’t matter
which bank issues the card, the fee is the same and the retailer
has no choice but to pay it. Of course, consumers don’t realize
they are paying the fee because merchants are effectively
prohibited from informing their customers about them. These fees
are reflected in the price of every product purchased at the
front end of our store whether or not the customer pays with a
credit card. FMI members have seen their costs for these fees
rise on average 700 percent in the past 10 years. These
increases have occurred despite the fact that the technology
infrastructure is already in place and the volume of
transactions has grown exponentially, providing economies of
scale. In other areas of my business or any business, as
technology advances and volume increases, prices go down, or at
least remain stable. But that is not the case with interchange
fees because there is no competition.
Since I told my customers I was
going to Washington, DC to testify on this issue – I can’t even
tell you how many of my customers were unaware of the hidden
fees. They swipe their cards and think all is “free” because
there is “no charge” to them at all. Obviously we lose money on
many small transactions and too much on others – so we have to
raise prices – because we can’t absorb it all. In the grocery
business, we compete by lowering prices, not raising them. I am
not a lawyer, but I know this is a huge problem that retailers
across the U.S. --
large and small --
are facing, so I ask that you look into this matter seriously.
We have streamlined our business to reduce costs as best we can
– maintenance doesn’t get done as it should, less money goes out
in payroll, but we just can’t keep absorbing these fees and
survive.
But those rules don’t seem to
apply to VISA and MasterCard and to the banks that issue cards.
One reason is that, MasterCard and VISA have undisputed market
power, with over eighty percent of the card marketplace. To the
extent they compete with each other, it is a perverse
competition. They compete to get banks to issue their cards. The
way they do that is by providing them with higher interchange
fees, by raising prices.
In fact, the member banks get to decide collectively
on the level of the interchange fee.
Since merchants and ultimately
consumers have no choice but to pay the fees, there is no
constraint on this cycle of increasing fees. As a result, in the
plastic card world, the normal competitive model does not exist.
In the plastic card world, as costs go down, fees are driven
continually upward without explanation. Interchange fees in this
country are among the highest in the developed world. You will
hear from other witnesses about what antitrust authorities
elsewhere have concluded about interchange. But we don’t need
someone in the European Union or the United Kingdom or Australia
to tell us that something is clearly wrong with the functioning
of this market and it needs to be corrected.
Plastic has become the predominant
currency in the U.S. economy. More than half the transactions in
U.S. stores are paid with a credit or debit card and card
companies have positioned themselves to get a percentage of
every one of these transactions.
The average supermarket industry
profit margin last year was 1.16 percent. That means a profit of
$1.16 on a $100 transaction. The interchange paid to the bank
that issued the card on that same transaction is more than that!
And when the price of food or gas goes up, so does interchange.
Because the fee is a percentage rate + a flat amount, the banks
make more, even though their costs are still the same. There is
something wrong with this picture.
The reality is that interchange is
used to subsidize VISA and MasterCard’s expensive marketing
programs and promotional schemes that benefit only the most
privileged few. These include gold-plated reward
programs that only the elite consumers qualify for, a blizzard
of direct mail offers pushing cards on those who already have
them or those who do not want them, and multi-million dollar
event sponsorships designed to push consumers into using the
most expensive forms of plastic payment.
Every consumer,
including those paying with cash, pay for these programs without
knowing it.
In conclusion, interchange fees in
this country reflect a market in which the normal, competitive
forces are not working. This flawed market results in
interchange
fees that are not cost related, and which are
intentionally kept hidden from consumers. As a result, consumers
do not have the information they need to make sound economic
decisions about their payment choices.
I would like to ask you on your
next ride home to look and see how many vacant store fronts
there are in your small downtowns. Just this last winter alone
four closed within a 50 mile radius of us. Some days I feel like
I should just turn in my keys – but too many people count on us.
Elmore is a town of 850 people. We are the hub of the community
– when someone needs something, who do you call? “Mom” or “Pop”
at the Elmore Store. We are just trying to keep our doors open.
I thank this Committee for shining
some light on anti-competitive interchange fees and the impact
they have on our business and on consumer prices.
I would be
pleased to answer your questions.
Thank you.
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