Martin Neal Baily: Reasonable Regulation of Debit Card Fees (Transcript)

Full Coverage: Debit Stakeholders Face Off at PYMNTS.com Durbin Conference

GREGG CASTANO: Good morning, and welcome. My name is Gregg Castano. I’m the President of Business Wire. For those of you who are unfamiliar with Business Wire, we’re the world’s leading commercial newswire service, and we’re also a wholly owned subsidiary of Berkshire Hathaway Corporation.

Business Wire, along with Market Platform Dynamics, are the proud parents of PYMNTS.com, which we started in late 2009. And in that short time period, PYMNTS.com has become the leading source of information and thought leadership on the payments industry worldwide.

PYMNTS.com has also become one of the leading B2B marketing platforms for the payments industry, and it is also your host for this event today.

For the next few hours, I’m sure we’re all going to be having a lively and heated discussion about the regulation of the debit card industry. Merchants are looking forward to their debit interchange fees coming down, while banks are alarmed about the loss of substantial revenues. It isn’t hard to see why many of you in this room probably feel passionate about one side or the other of this issue.

We’re looking forward today to a constructive and respectful discussion among a lot of people, who I’m sure agree on many things, not just – just not the debit card interchange fee issue. So now I’d like to turn this over to David Evans, who is a founder of Market Platform Dynamics, and certainly a well-recognized name in and around the payments industry.

David is an economist, one of the leading authorities on the payment space, and has written and spoken a lot on this, as well as many other topics related to all things payments for nearly two decades. So please welcome David Evans.

DAVID EVANS: Well, thanks a lot, Gregg. Fortunately, no tomatoes have flown so far, so this is a good sign.

As many of you know, I am one of the people who have passionate views on this topic, and I’ve expressed some of those to the Fed, so I guess you could say I’m not a fan of the Durbin Amendment. But I’ve also written, on PYMNTS.com, that the merchants who are complaining about interchange fees are really very important customers of the card issuers and the networks, and whatever happens, the industry really has to do a better job of making both merchants and cardholders happy customers, happy citizens, if you will. That’s really just good business sense.

And as the famous philosopher Rodney King put it, however this debate ends up, consumers and merchants just really all – all just have to get along. That has yet to be satisfied with the payments products they’re getting, and I think that’s one thing we can probably all agree on.

So that’s really enough from me. As the host here today, I’m going to keep my own views pretty much in check. I may need to be tied down at various points, but I’m going to try to stay in check, and really let all of you debate the pros and cons of the regulation.

To get us started, it’s really my great pleasure to introduce our keynote speaker for the day. Martin Neil Baily is a senior fellow at the Brookings Institution, an economist with a PhD from MIT. He’s had a very long career working on economic policy. He was a member of President Clinton’s Council of Economic Advisors from 1994 to 2001, and was the Chairman of the Council for the last three years of the Clinton Administration. Do I have that chronology more or less right, Martin?

MARTIN NEIL BAILY: Not quite, but it’s good enough.

EVANS: OK, well, thank you. Working from his perch at the Brookings Institution, he’s been one of the leading advocates for intelligently reforming financial regulation in this country, and perhaps worldwide. With that, I’m going to turn the podium over to Martin. So, Martin, you can take it away.

BAILY: Thank you. Thank you, David. Let me say, it’s a great pleasure to be here. I am delighted to talk about this issue. This views I express will be mine, not those of the Brookings Institution or anybody else.

Like, I think probably most of you, and many or most Americans, I’ve been carrying a debit card around for quite a long time. I actually hardly remember a time before I had one of those – must have been back in the ’90s or something. And certainly when I was working on financial sector reform and those issues, I never expected that this issue and interchange fees would all of a sudden generate such a huge debate, but here we are.

The Durbin Amendment is part of the Dodd/Frank Act, and I want to say, I’ve been a public supporter of financial reform, as David said, for quite a long time – did quite a bit of work on that issue in the last several years. And I think the Dodd/Frank Act, on balance, was and is a step forward in increasing the stability of the financial sector. But I haven’t supported everything in that Act, and in my judgment, the Durbin Amendment was a mistake. It was not directed at the goal of financial stability. In fact, it takes us in the wrong direction.

Of course, some in Congress have recognized the problems with the Durbin Amendment, and nine senators have introduced a bill to essentially take a timeout. Senator Tester and his colleagues want the bank – federal banking regulators to take a closer look at the debit card business, and how the regulations would affect consumers and others, before deciding what to do.

According to the legislation, the Fed was given until April 21 to devise regulations for debit cards. The Fed put their proposals out for comments just before Christmas of last year.

Today, I’m mostly going to be talking about their proposals for imposing price controls on the debit card business. And I want to start by being transparent. Robert Litan and I sent a paper to the Federal Reserve that provides comments on their price control proposals, and the work on that paper was paid for by a group of large financial institutions that asked us to look at the interchange fee issue.

Now, for most of my time today, I’m going to explain why Bob Litan and I don’t think that the Fed proposals are reasonable. The law says they are supposed to be reasonable, and why we think the best thing for the Fed to do is to leave prices alone for now while they look at things more carefully. We don’t think they need the Tester bill to do this, but we agree that it is better to wait than to blunder ahead in a process that could easily have negative impacts on consumers, small business, the unbanked, small banks, and the economy overall.

Before I get into our reasoning, I thought it might be helpful to start with a bit of background on the debit card, a piece of plastic that’s pretty ubiquitous, and that most people now take for granted. First, the basics.

Banks give debit cards to people that have checking accounts with them. Most banks offer cards that work with one of the PIN networks like STAR, NYCE, or Interlink. Whenever you enter your PIN, that transaction is going over one of those PIN networks, which then pulls money out of your bank account to pay the merchant.

Most of the banks also offer cards that work with the MasterCard or VISA networks. Whenever you sign for something, or give your card number out online or over the phone, the transaction then goes out over the MasterCard or VISA networks, depending on which one the bank is using. Then one of those networks reaches into your bank account to take out the money to pay the merchant.

I’m not sure a lot of consumers understand the complexity associated with how debit cards work, but experience has shown that consumers actually love using these cards. A lot of people like the fact that the money comes right out of their checking accounts, so they aren’t putting things on their credit card. It’s a way of managing money.

Younger people especially seem to like debit cards a lot more than credit cards, and these consumers find that debit cards are a much better way of paying with money in their checking accounts than paying with a check. A recent Fed study found that in 2009, debit cards supplanted checks to become the most commonly used non-cash form of payment. Debit cards accounted for 35% of all transactions – that’s more than everything but cash.

Banks didn’t start making debit cards available to their checking account customers until the mid-’90s. At that time, the networks that operated the ATM machines, such as NYCE, saw an opportunity to allow those people who were now comfortable with taking money out of ATMs by entering their PINs, to extend that same process to places like supermarkets and other retailers. They persuaded merchants to install PIN pads. VISA and MasterCard also saw a great opportunity in getting those customers to pay with their ATM cards, rather than writing paper checks.

Banks were motivated to issue these cards, because they got interchange fees from merchants every time a customer paid with one of their cards. VISA in particular put a lot of marketing muscle into promoting the use of debit cards to pay instead of checks. Let me show you one of the ads from the mid 1990s. And I hope this doesn’t show off my computer skills too badly.

(sound of video playing)

You may recall that Bob Dole’s other big marketing success was Viagra. So clearly, Bob Dole knew a good product when he saw one.

I think that just goes to prove that whenever I put jokes in a speech, it doesn’t work very well, but still, I kind of like the joke. (laughter)

Debit cards became one of the most popular consumer products of all time. Just look at the growth. OK, now I’ve got to go back to the – there we go.

Almost four fifths of American consumers use one of these cards. Debit cards have really started to wean Americans away from writing checks. This is important. People in this country use far more checks than almost any other industrialized country. That’s partly because the Federal Reserve subsidized checks for a good part of this century, good part of the 20th century.

Checks are a low productivity way of making payments and contribute to the demand for paper and the cutting down of forests. Thanks to debit cards, check use has started to fall way down – it fell by 20% between 2006 and 2009, and as I’ll show you in a minute, even the Fed, that pushed checks for so long, now agrees that it’s a good thing to reduce the volume of paper check transactions.

Debit cards have helped lower income households. Our society increasingly operates on the assumption that people have a plastic card they can use to make payments. Things we take for granted, like making purchases online, or booking a hotel room, or an airline ticket, are hard to do without a credit or a debit card. That has been a problem for lower income households who didn’t qualify for credit cards. Over the last decade, many of these consumers have gotten free checking accounts, and with that account, they also received a debit card that they could use at millions of physical and online locations.

The fraction of low income households with cards increased from 45% in 1995 to 67% in 2007. That’s mainly because they got debit cards during that period.

In short, debit cards have been a success story. So how did they get tangled up in the Dodd/Frank Act? That legislation was supposed to be about preventing the next financial crisis.

It’s a fact that consumers did too much borrowing in the years leading up to the crisis, and unfortunately, many of them got over their heads in debt. With home prices falling, they couldn’t avoid bankruptcy or mortgage foreclosure. As the economy recovers from the crisis, we want families to avoid piling up debts on their credit cards in order to avoid a repeat of that very damaging situation.

Debit cards, though, are an important tool that people use deliberately to avoid overspending and overborrowing, something that contributes to their and our overall financial stability. So why is the Fed regulating these cards?

A lot of Fed officials have applauded how the debit card was helping to move the US towards greater electronic payments. They, and a lot of other people, thought that was a good thing, because it is obviously more efficient than paying with paper. In fact, as far as I know, not a single Federal banking or antitrust authority thought that there was any problem that warranted wholesale regulation of this business and the imposition of price controls.

The real answer may surprise you, and is why we are having this debate now. Every time a consumer pays with one of these cards, merchants incur a cost. That’s called an interchange fee. As these cards become more popular, the total amount of money merchants were paying to banks got bigger. Of course, merchants could have stopped accepting the cards, or encouraged consumers to use alternative payment vehicles, but they didn’t do that. Instead, they went to Congress and persuaded Senator Durbin to add an amendment to the Dodd/Frank Act that they hoped would limit the amount of money they had to pay. There was virtually no discussion about the bill, no studies of its impact, or anything else.

But the Senate adopted the amendment, which became Section 1075 of the Dodd/Frank Act. Ironically, both former Senator Dodd and Congressman Frank have spoken publicly against regulating debit card fees. A lot of others have piled on, including FDIC Chair Sheila Bair, the Office of the Comptroller of the Currency, as well as the NAACP and other groups that are concerned about the consequences to their members of shifting costs from merchants to consumers.

So that’s the context for why we’re here today. The rest of my talk will focus on why the proposals the Fed has floated for comments are not reasonable, and should be withdrawn. But before I do that, I think it’s important we recognize that in regulating debit card fees, the Fed is simply doing what Congress has required them to do.

Over the last several months, the Federal Reserve Board itself has expressed uncertainty about the impact of the rules they put forward. Here are some of those quotes.

“Overall, it is hard to anticipate what the overall effect on consumers will be,” said Sheila Bair. Sorry – is that Sheila Bair? No, sorry, that’s the economist Mark Manuszak. Sheila Bair has expressed concern that the Durbin Amendment will result in consumers being pushed into prepaid cards, which she says, quote, “don’t have the same level of protection as debit cards”, unquote, and are, quote, “more difficult for deposit insurance”, unquote.

I mentioned at the outset that there is a bill introduced by Senator Tester to take a pause on this topic. If the Tester bill doesn’t go forward and give the Feds some time to look before it leaps, actually, the Dodd/Frank Act gives the Fed plenty of authority to do the right thing. The Dodd/Frank Act says the Fed’s price regulations of debit are supposed to be reasonable. The Dodd/Frank Act also amends the Electronic Funds Transfer Act, which also says that the Fed has to look at the impact on consumers.

So let me walk you through why Bob Litan and I believe that the Fed’s current proposals are not reasonable, and should be withdrawn.

As a starting point, the Fed has proposed cost-based regulation that’s tied to the average variable cost of processing debit card transactions. The average debit card interchange fee is $0.44 now. Under one proposal, the Fed would cap the fees at $0.12. That’s a 73% reduction. Under another proposal, the Fed would give banks a safe harbor of $0.07, but banks could get fees of up to $0.12 if they could show their costs are higher than the $0.12 figure. At $0.07, that would be about an 84% reduction in fees.

Dick Schmalensee, who’s going to talk later, and his colleagues, have estimated that over the first two years of the regulation as proposed, banks and credit unions would lose between $33 billion and $38 billion. These numbers could be about 30% less than that if small banks and credit unions really do get the benefit of the exemption for banks with assets of less than $10 billion.

The small guys, however, don’t think they will, and they’ve been arguing against Durbin, even though they are exempted from the fee regulations in theory. I’ll come back to that in a minute.

Now, obviously, banks and credit unions aren’t going to just sit still and swallow an over $30 billion loss of revenue for a product they’ve basically been providing free to consumers. So any analysis of whether the Fed’s proposals are reasonable, and how they affect consumers, has to take that into account.

Bob and I argue that the Fed’s regulations are unreasonable for three main reasons. The first problem is that they just seem like a giant step backwards from the electronic age to the paper age. It’s like pushing paper mail over e-mail. The Fed knows this. Its officials have extolled the debit card for helping to wean American consumers from paper checks.

The President of the Atlanta Fed noted in 2006 that, quote, “with rapid growth in the use of credit cards, debit cards, and point of purchase check conversion, our vision of an efficient, predominantly electronic system for payments is in sight.” The President of the St. Louis Fed, back in 2002, argued that “replacing checks with electronic payments is good for the economy.”

While debit cards have already helped to reduce the use of paper checks, we still have a long way to go. As of 2008, people in the United States were writing more paper checks per capita than in ten of the most industrialized countries, including the UK, Canada, Germany, and Japan, according to the data from the Bank of International Settlements.

The Fed’s proposals place the modernization of the payments system at risk. Let me be clear. I’m not suggesting the banks are going to stop providing their customers with debit cards, but they are likely to push these cards less aggressively, and they are likely to take away some of the features that made consumers use these cards so much more than paper checks. In fact, consumers may well be writing checks again for big ticket items.

But it isn’t just checks that consumers are going to be using more of. They are going to be using credit cards more, as banks steer people away from the less profitable debit cards, to the more profitable credit cards, where they get the benefit of higher interchange fees.

Now, for someone like me, who is in favor of financial reform and actually liked a lot of the Dodd/Frank Act, this is a really weird result. We were concerned about people using too much credit, as I said earlier, whether it was for crazy mortgages or too much debt on their credit cards. Debit cards, in contrast, are the responsible man’s plastic. You are only using money you have, it comes right out of your checking account, so if you’re concerned about consumer debt, you want people to be using debit cards more. And as I mentioned earlier, a lot of young people pay mainly with debit, and that’s good.

So it makes no sense for the Dodd/Frank Act to include an amendment that’s going to make debit cards less available for consumers, and it’s going to have the unavoidable consequence to push them towards credit. I think it’s nuts.

Here’s the second reason we don’t believe the Fed’s proposals are reasonable. At the end of the day, the Fed’s regulations are not necessarily going to benefit several of the groups Senator Durbin seemed to be looking out for when he came up with the bill. Senator Durbin said the amendment was all about helping small businesses. In fact, small businesses are probably going to be hurt by the bill. Almost all small businesses of any significance have checking accounts. They are likely to pay more for those checking accounts, since banks are losing much of the revenue they got when those small businesses paid using their debit cards.

I think what Senator Durbin didn’t recognize is that most small businesses don’t sell to consumers, and don’t take debit cards for payments. In fact, only 10% of small businesses are the type of retail businesses that take cards.

Then there are the banks and credit unions with assets of less than $10 billion. The Senate was concerned about them, and exempted them from the fee regulation. I could explain why it’s unlikely they will get the benefits of the exemption, but what – pay attention to what I have to say, don’t they know best?

They’ve got what looks like a huge competitive advantage over large banks. But they, overall, said, thanks but no thanks. They believe they are going to end up getting the same low interchange fees as the large banks.

Fed Chairman Bernanke also expressed his doubts that the small banks and credit unions really get the benefit of the exemption. As Sheila Bair said, although small banks are statutorily exempt from the fee caps set by the Dodd/Frank Act, exemption may be unavailable in practice because of market driven factors not addressed by the Board’s proposals.

The FDIC is concerned about the impact of the Fed’s proposals on the safety and soundness of the small banks, many of whom are still pretty fragile.

Even large merchants may have second thoughts about this legislation. Sure, they’re going to be paying less in interchange fees, but they are also going to be seeing more paper checks and credit cards. They may end up with a less efficient payment system in a few years, and a lot more friction at the point of sale.

The third and most important reason, in our view, that the Fed’s proposals aren’t reasonable is that it sure looks like these proposals are going to harm consumers. Someone has to pay for the debit cards. If merchants are going to pay less, consumers are going to have to pay more. A study by David Evans, Bob Litan and Dick Schmalensee shows that consumers are really going to take it on the chin, at least over the first two years of these regulations. Consumers are going to be paying their banks more for checking, and aren’t going to be getting nearly enough money back from merchants in lower prices to compensate for that.

So, for the reasons I’ve laid out, I view the Fed’s proposals on interchange fees as quite concerning. So what’s the right way forward?

I agree with Senator Tester and the other eight sponsors of the Debit Interchange Fee Study Act, it’s time to press the pause button. The Durbin Amendment was passed at a time when there was a lot of public anger about the financial crisis, and it was passed with very little thought or consideration about its ramifications. The merchants have made their case, which helps the quality of the public debate on this issue.

However, Bob Litan and I conclude that it is not reasonable to impose prices controls on 15,000 banks that would transfer billions of dollars to merchants, and that will ultimately come out of the pockets of consumers. These controls would reduce the availability of debit cards and the efficiency of the payments system, reduce or eliminate the rewards that banks offer on cards, increase consumer fees on cards and checking accounts, and drive many low income families into the unbanked.

Maybe, just maybe, we should do a little bit more studying of the issue. When the Fed says they don’t know how the regulations will affect consumers, or how they will affect community banks, and how they will affect the supply of one of the most popular consumer products, they are signaling, perhaps, the politest form possible, Congress, please let us look into this more before you press the start button.

If the Fed doesn’t get more time, they have discretion under the Dodd/Frank Act, and I believe the obligation, under both the Dodd/Frank Act and the Electronic Fund Act that it amends, to do what’s right for the public. Prices in our economy should almost always be set by the market. It is a very rare case indeed where price controls are justified, and the case for controls in the interchange market is weak or non-existent. Setting a price that differs by about 80% from the prior market price will inevitably distort the industry and ultimately harm consumers.

The Durbin Amendment results from a push by merchants, not from consumers, for whom debit cards have been a hugely success valuable product. If merchants are unhappy with the current market outcome, they can work with one or more of the innovative companies that are developing alternative payments technologies. Competition and innovation are what drives our economy, not government imposed price controls.

For now, the most reasonable interchange fee is the one set by the market. The Fed could, perhaps, put a moratorium on any further increases, which would otherwise leave it at current levels. And it should take the time to study this issue rigorously, and devise reasonable and non-distorting regulations. Let’s not rush into imposing price controls without really thinking through the consequences.

Thank you very much.

EVANS: We have 20 minutes now for questions.

BOB BALDWIN: Good morning. Bob Baldwin, Heartland Payment Systems. I’m interested in your thoughts about how it is that debit – PIN debit rates have gone up. The Fed said it was about $0.07 a ticket in the late ’90s. With a dramatic increase in the supply and usage of PIN debit, why have the prices gone up dramatically in the ensuing period?

BAILY: Remember that a lot of – first of all, there are a lot of costs associated with operating those systems, and with providing the free checking and the other things. I think the choice was made by the banks to really increase the usage, and therefore, offer them to as many people as possible.

You know, in general, in markets, prices go up, and that’s what happens in markets. That’s not a cause, in my view, for imposing price regulations. What exactly is the underlying economics for a $0.07 increase in the 1990s, I don’t have a specific answer to that.

PARTICIPANT: I was interested in your comment about driving the underbanked to the unbanked. Is that because, in your view, that the banks would either decrease the ubiquity of debit cards, or just make them more difficult to use?

BAILY: I think they would probably decrease the availability of them, because they have to make a profit from these cards, so they’re looking to do that.

The other thing that’s made a big difference to the low income people who have moved into the banking sector is, they can get free checking. And so they – or, reduced rate checking. So I think that’s the biggest thing. We want people to have checking accounts, to be part of the banked community. Lots of advantages to the society from that.

And because the banks can make money when people swipe their cards, they don’t have to charge on the checking accounts, and then it becomes attractive for relatively low income people to open checking accounts. So I think that’s the mechanism that I had in mind.

JEFF MANNING: Hi, Martin. Jeff Manning. I’m with Global Economics Group and International Center for Law and Economics. I think it was actually David, at one point, pointed out the possibility that the extent of the price controls, the price caps suggested by the Fed here, would have some pretty deleterious effects for innovation in and around this space, elsewhere in the payments market. I’m curious if you’ve given some thought to that, the implications of this level of price control for innovation in this space.

BAILY: Well, I’d probably pump that one back to David or Dick Schmalensee, but in general, as someone who studies innovation in the economy in a number of areas, imposing price controls like that is certainly not going to be favorable to innovation.

I mean, as I said earlier, if you don’t – if people don’t like these interchange fees, then the market response is to generate innovation to look for an alternative way of doing things. So I think right now, there’s a lot of incentive for innovation. If you just impose a price control, that is surely going to change the market equilibrium and is going to reduce the incentive for innovation, in my judgment.

HENRY PALMER: Good morning. I’m Henry Palmer. I’m an attorney in private practice, in a sole private practice, here in Washington.

I was interested that you indicated that small banks would likely be – not reap the benefits of the Durbin Amendment. The small banks, under the Durbin Amendment… the rules that the Senate is proposing, would not be subject to the interchange caps. They would be able to choose the networks that they wish to have on their cards, presumably two or four, depending on which way the Fed ultimately goes. And all of the significant networks have indicated in one form or another that they will be offering two tiers – one tier for the large banks who are covered, and one tier for the small banks that are not.

You said in your remarks that the small banks themselves have said they were against this. I’m interested to know why you think these provisions, which sound so pro-competitive towards the small banks in the Durbin Amendment, won’t work.

BAILY: Well, I just think they believe, and I think they’re probably right, that an equilibrium with two very, very different prices – I mean, not just slightly different, but completely different prices, is unlikely to prevail. And eventually, they’re going to have to start accepting something that’s much closer to what the regulated banks are accepting.

So, you know, I think the FDIC feels the same way. The banks themselves seem the same way. So I think that’s the best testimony I have. We’d have to see what actually happened, but there’s certainly a concern that they wouldn’t end up getting that money.

PALMER: So despite the fact that they will choose the networks that they wish to put on their cards, and despite the fact that they’re entitled – there’s no regulation, there’s no cap on what they’re entitled to receive, despite the fact that Visa has said it will be one of the networks, you believe that they won’t be able to get that?

BAILY: I don’t think so, over the long run. But you make the alternative case, and we could see. I – haven’t you persuaded them? Why aren’t they hugely in favor of this?

PALMER: I can give you my opinion, but they can only speak for themselves. I think their trade associations have been working very closely with the bankers’ trade associations, and they often carry the water for them.

b: Well, my experience in Washington is that the smaller banks and the community banks are not afraid to push their own views, and often, get different treatment for various things. So I don’t think they’re afraid of disagreeing with large banks. I wouldn’t agree with that.

RONALD MANN: Yes, I – Ronald Mann. I’m from the Colombia Law School. I had the misfortune of sitting on a drafting committee once for UCC where the large banks and the small banks had different views, and the large banks did not get what they wanted.

My question is about the extent to which merchant competition will push the cost savings…

BAILY: Can you speak up just a little bit?

MANN: We can see how competitive things are on the bank side. But the question, whether the merchants will pass savings through to consumers is a hard one, because I think from Australia, it’s hard to tell what’s happened there.

BAILY: Exactly. Exactly.

MANN: And at least some sectors of the merchant industry seem very competitive. I’m thinking of places like grocery stores, or Wal-Mart, and the like. What’s your sense on the blended likelihood of any of this getting passed through in prices, whether we’ll ever be able to see that?

BAILY: Well, I think Australia is probably the best empirical example, where there was no real evidence that this had been passed through to consumers. So that was what happened when they passed this reduction in interchange fees. And remember that grocery stores and other retailers do have other payments options now. They certainly could take cash or other forms of payment, and provide discounts, which they don’t do.

So they’ve been embracing debit cards and credit cards. Even McDonald’s, which is a very small ticket place, has decided in 2004 to enroll in credit and debit cards, because they find it convenient, and their customers find it convenient. So I think there’s a lot of value that the merchants also place on these cards.

MICA: Dan Mica, Dan Mica LLC, representing my own business this time, but I would like to comment on your comment. I represented the credit unions for 15 years, and you’re a lawyer. If we had a law here that said, one, you can’t discriminate, but two, everybody in this room that’s a lawyer can charge only $100 an hour, but you’re exempt, you can charge $500 an hour – you see how the market forces are going to work?

We – credit unions have taken a very, very strong view on their own without being pushed by any banks, by any card companies, that just isn’t going to work. We appreciate the tip of the hat to exempt community banks and credit unions, but we just don’t think it’s going to work.

I would tell you, though, that some of the rhetoric I’ve seen – and I have my own answers, but I’d like to hear yours – is one, $0.44 is the highest charged in the world, and I’d like to hear your comment on that. Second, you talked about competition, and entrepreneurial spirit, but the opponents say, well, this is a monopoly or a duopoly, there’s no choice between Visa, MasterCard, and a few other big ones. How do you respond to those?

BAILY: Well, I was liking your comment a whole lot, so I agree with you, and you put it much more eloquently and knowledgeably than I did in terms of the difficulty of having those two prices.

In terms of a monopoly – well, again, I’m going to punt this a little bit to Dick Schmalensee, who’s coming up later, who’s much more of an expert on antitrust issues than I am. But keep in mind, there’s no – been no Justice Department or FTC ruling that interchange fees are anti-competitive. So there have been, obviously, some private suits brought, and those have been settled or are still ongoing, and that’s an appropriate mechanism to do that.

Keep in mind also that a lot of retailers do have other choices. Not all of them take Visa and MasterCard, and many of them do very well. Costco doesn’t take either one, and does pretty well. So there’s certainly choices that they can make, other than these two networks.

And finally, I think most important, really, is that I don’t think there’s any precedent under U.S. law to deal with an antitrust violation if one were to be found by imposing price controls. That’s not in the mechanism that’s normally used. It’s usually the – that efforts are made to increase the amount of competition, reduce barriers to entry, things of that kind. So if there were a finding of anti-competitive behavior that would be the appropriate response.

EVANS: Question?

MOSHE ORENBUCH: Thanks. Moshe Orenbuch with Credit Suisse. Just a quick comment, and then a question. The comment is that $0.44 really isn’t the highest in the world, because you know, PayPal is a lot higher, and the new system that American Express announced yesterday, after a six-month hiatus, will actually be charging 2.9% plus $0.30, so that’s probably going to be higher, in most cases, than $0.44. Just to put that in context.

My question though, is the – you talked about the likelihood or the possibility that the Fed could actually pull back and really kind of not make a recommendation, or actually recommend that this – could you just discuss and amplify a little bit on that? Is there precedent for that? I mean, how do you think that comes about? Because that’s not a majority view. I mean, I think it’s one that I would love to see, but just – could you talk a little bit about that element? Thanks.

BAILY: I’m not sure I have the regulatory background to elucidate you on that. I’m sure there will be some discussion, that that can be elaborated on in the course of this morning’s proceedings. Let me comment on the other part of your question, or the comment that you made.

I have not done a detailed comparison across a lot of countries as to interchange fees or bank fees or anything else. But I have been involved in cross country studies of banking. And generally speaking, the U.S. has a much more competitive banking system than other countries. In many other countries, banks – typically, there are only a few of them. They are sort of heavily regulated, but it’s more of a cozy oligopoly kind of relationship, where fees for other things tend to be higher, and banks are often, really, quite profitable, as they were in Canada, because of the fact that there’s just not a lot of competition there going on.

So I haven’t done that careful cross-country comparison of interchange fees, but I think it goes to the point, yes, if there are countries where the interchange fees are lower, I’m willing to bet that other kinds of fees are higher, and that’s where the banks are making their money.

EVANS: Thanks very much.

BAILY: I appreciate it.