U.S. House of Representatives, Committee on Financial Institutions, Subcommittee on Financial Institutions and Consumer Credit, “Financial Services Issues: A Consumer’s Perspective”. September 15, 2004

Mr. Chairman and Members of the Subcommittee:

Thank you for the opportunity to provide written testimony on the important issues surrounding consumers and financial services. The Food Marketing Institute’s (FMI) member grocery wholesalers and retailers consider themselves to be the purchasing agent of the consumer, a responsibility we take very seriously. Our members are always looking for ways to provide our customers with the best product, the best value, and the best customer service

Some of our customers like the flexibility of being able to pay with credit or debit cards in addition to cash and check. In this incredibly competitive business, no one wants to lose a customer. So supermarkets increasingly have begun to accept these new forms of payment. As the number of supermarkets accepting credit and debit cards has grown, the rates merchants and therefore customers are charged for these transactions has also grown – dramatically! Indeed, the Tower Group reported in 2003 that grocery/supermarkets account for more than half of all PIN-based debit transactions and 59% of all signature-based debit transactions. At the same time, the cost of accepting these cards has been skyrocketing, often exceeding the 1% average net profit margin of a typical grocery store. Consider these facts and their impact on consumer prices in a business with a 1% profit margin.

•      The cost of electronic payments is one of the fastest growing and least controllable costs of doing business.
•      There have been 11 credit/debit rate increases in the last 12 months with still more expected this year.


•      PIN debit fees are up 267% since 1999.


•      Electronic payments volume has increased over 500% from 1989 to 2000, and continues to grow dramatically. In all other parts of our business as volume increases over an existing network, costs per item decrease.


•      Card association (VISA/MasterCard) operating rules and regulations prohibit merchants from passing costs directly to consumers or giving them notification of fees paid by merchants on the transaction. Consumers have no knowledge of these hidden fees and thus cannot modify behavior.


•      Card associations collected $29.2 billion in 2003 on interchange, which is paid directly to the issuing bank.
•      Increases are just as significant, if not more significant, for debit than credit because of the proportion of the growth in debit transactions and lack of risk/cost to the financial institutions of a debit transaction as available funds are simply being transferred between two accounts.


•      Airline miles/rewards drove credit usage; financial institutions are expanding miles/rewards to signature debit as the rates for debit increase with the goal of increasing signature debit usage.


•      Debit and credit fees are now calculated using a similar pricing model, although they are very different products – both now include a percentage charge plus a flat fee.


•      The current interchange fee model is inverted from normal competitive market models – more volume means more cost; volume cannot be used to lower costs; merchant fees are invisible to consumers.

This is by no means a problem confined to this country. Central banks, legislative bodies and regulatory agencies around the world have been examining the impact of these fees on consumers and consumer prices and exploring methods of regulating these growing fees. Several countries including the United Kingdom, Australia, Israel and the European Union have initiated actions such as caps on fees, changes in operating rules, antitrust/fair trade investigations, regulation of the allowed components of fees, studies and legislation. With fees that are higher than any of these international competitors, U.S. merchants and U.S. consumers are at a competitive disadvantage unless similar actions are considered in this country.

FMI commends this committee for looking at the consumer’s perspective in financial services issues. We also commend the Congress and the Federal Reserve for initiating a study of debit card transactions and fees. We ask this Committee to continue its legislative review and analysis of this very concerning issue.

Thank you.

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FMI conducts programs in research, education, industry relations and public affairs on behalf of its 2,300 member companies — food retailers and wholesalers — in the United States and around the world. FMI’s U.S. members operate approximately 26,000 retail food stores with a combined annual sales volume of $340 billion — three-quarters of all food retail store sales in the United States. FMI’s retail membership is composed of large multi-store chains, regional firms and independent supermarkets. Its international membership includes 200 companies from 60 countries.