Every week, 2,000 - 3,000 Second District residents write to me about the issues pending before Congress, and I work hard to respond to each person as promptly and thoughtfully as possible. On this "Letter of the Week" blog, I highlight constituent letters that are of general interest. If you'd like to share your own views, please feel free to e-mail me at any time!

Dear Nancy,

I am writing today because we need action on credit card interchange fees.
These fees raise the prices of nearly everything I buy, but I have no idea
how much the fees are when I use my cards. Consumers have a right to know
so we can make informed decisions when we buy.

It makes no sense to me that interchange fees in the United States are
higher than in many other nations. We have the best technology and the
most transactions so the fees ought to be lower here than in other places.

Clearly something is wrong with these fees, and I hope you'll do something
about it by supporting the Credit Card Fair Fee Act (HR 5546) to help
change this broken, unfair system.

Jesse from Lynn Valley, KS.

Dear Jesse,

Thank you for contacting me regarding interchange fees and H.R. 5546, the Credit Card Fair Fee Act. I am continuing to research and evaluate this issue, and I hope you will continue to reach out to share your perspective.

I have been learning a lot about interchange fees in the last few months. I have heard from dozens of bankers on one side and retailers on the other, and I have been doing my own research as well. It turns out that the Federal Reserve Bank of Kansas City is the leader in research on this topic, and I felt a little surge of Midwestern pride at that.

I use credit cards all the time, but, until this issue came up, I had never given much thought to how they work and how they generate profits. According to Federal Reserve surveys, three quarters of American families have credit cards, and about half of them follow the advice and pay them off every month. With a no-annual-fee card and no balance to pay interest on, these families are basically able to use their credit cards without paying for them. It's a free loan.

Obviously, the credit card issuers aren't in business to give away money for free. In addition to the money they collect in fees and interest from cardholders who don't pay on time, credit card companies get money from retailers every time the card is used. When Ralph uses his credit card at John's store and buys $10 worth of stuff, John doesn't get $10 from the card company. In this country, he typically gets about $9.80. That slice that the card company keeps is sometimes called an interchange fee, and it has stirred a great deal of conversation recently.

The driver of all of this discussion is H.R. 5546. This bill would create the positions of three Electronic Payment System Judges who would form a panel charged with determining rates and terms for credit cards over a three-year period. Providers and merchants would also be authorized to engage in voluntary negotiated access agreements.

One thing surprised me about H.R. 5546. It was referred to the Judiciary Committee but not the Financial Services Committee. This was done because the bill is structured as a response to illegal collusion, and the Judiciary Committee's Antitrust Task Force has expertise in that area. That makes sense, and I will look forward to seeing their analysis, but I also hope to see the Financial Services Committee review the bill. The collapse of Bear Stearns this March offered a reminder of how fragile our financial markets can be, despite their size. Our financial system is deeply interconnected, and we always need to remember that small changes in one part can cause big disturbances across the system. I feel more comfortable making changes to the financial system if I know the Financial Services Committee has had the opportunity to analyze the risks.

In analyzing this bill, I will ask several questions. Whenever I consider any proposal for government to intervene into markets, I always want to know whether there is actually a problem that needs a response, and whether the proposal actually represent the best response. I will investigate those issues, but I will also ask three basic questions:

How will it affect Kansas consumers? Even though we have a large, mature credit system, the United States has the highest interchange fees in the world. This bill is designed to drive those fees down to a level more in line with other developed economies. How would that affect Kansas consumers? Would they see lower prices at the store? Would they find that their credit cards suddenly carried annual fees or charged higher interest rates? Just because our system is different from other countries' doesn't necessarily mean that it is worse for our consumers. But it also doesn't mean it can't be improved. I need to continue to do research on what matters most to Kansans.

How will it affect Kansas Banks? The vast majority of credit cards are issued by a few huge banks like Citibank, Chase, and Washington Mutual. However, for Mastercard and Visa cards, there's a second bank involved in the transaction – a "merchant bank" that represents the retailer. The card-issuing bank sets the interchange fee, and most of the money goes to covering fraudulent charges, paying for rewards programs, other operations and profit. A small portion goes to the merchant bank. The text of H.R. 5546 is not clear as to whether it would affect the fee paid to the merchant bank or would only reduce the fees collected by card-issuing banks. I will be much more concerned about legislation that squeezes the small merchant fee collected by local Kansas banks than legislation that reduces only the large fees that go to a few giant banks on the coasts.

How will it affect Kansas retailers? Since interchange fees are calculated as a percentage of the sale, they have moved up just as swiftly as prices have. When gasoline went from $1.00 to $4.00 per gallon, interchange fees went from 2 cents to 8 cents per gallon. Gas stations and convenience stores are feeling the squeeze. Other retailers struggling with soaring prices, like grocery stores, are seeing the same thing. Small mom-and-pop stores have either had to absorb the cost or stop accepting credit cards. This bill would offer short-term relief to all retailers, but I want to make sure I think through the long-term effects. So many of the problems we're facing today could have been avoided if Congress would have just taken the time to think through the long-term effects of what it was doing. I have one major concern about the long-term effect of H.R. 5546: the possibility that large retailers will be able to negotiate bigger cuts in fees and gain an advantage over small business. Too much of what gets done in Washington gets done for the benefit of big business. On this issue and all others, I want to make sure I'm working to redirect the benefit to the small businesses that hold our communities together.

I'm sure I'm not alone in saying that, until a couple years ago, I had never heard of interchange fees. Today, soaring prices and a slowing economy have brought interchange fees out of obscurity, and I hear people talking about them everywhere I go in Kansas. I want to make sure we carefully examine the issues at hand and look ahead at the long-term effects that a change to the current system could have.

The Judiciary Committee approved H.R. 5546 with members from both parties voting in support and in opposition. It is not clear what the next step is. Should it come to a vote, I will certainly take your thoughts on this issue into consideration. Again, thank you for writing to me and please do not hesitate to contact me again if I can do anything else to help.

Very truly yours, 

Nancy Boyda
Member of Congress