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How Wal-Mart Swiped JPMorgan in $16 Billion Debit-Card Battle

Jennifer Cavallaro, owner of The Bee Hive Cafe, carries plates of food through her cafe in Bristol, Rhode Island, June 27, 2011. Photographer: Victoria Arocho/Bloomberg
Jennifer Cavallaro, owner of The Bee Hive Cafe, carries plates of food through her cafe in Bristol, Rhode Island, June 27, 2011. Photographer: Victoria Arocho/Bloomberg

June 28 (Bloomberg) -- Jennifer Cavallaro’s Twitter feed usually deals with matters like the free-range egg salad she serves at her Beehive Café in Bristol, Rhode Island. On May 17, 2010, she blasted a different message to her followers.

She cited her recent trip to Washington, where she lobbied to cut the average 44 cents that merchants must pay a bank whenever a customer uses a debit card. “Remember I went to DC?” she wrote. “Well believe it or not it worked! New law will cap fees for consumers and businesses soon!!!!”

Cavallaro was a recruit in the retail industry’s surprise victorious assault on one of the most reliable income streams for big banks, worth $16 billion a year. Her message hailed the U.S. Senate’s decision that week to include a cap on debit-card fees in its bill overhauling rules for Wall Street.

Far from ending the matter, the vote touched off one of the most intense lobbying duels in memory as the banking industry, Visa Inc. and MasterCard Inc. sought to kill or delay the debit-card measure. It raged for more than a year, culminating on June 8 when the banks lost a cliffhanger of a vote in the Senate.

The behind-the-scenes story of the swipe-fee war -- reconstructed from public and confidential documents and interviews with more than 30 people in Congress, regulatory agencies and industry -- shows how far the richest interest groups can go when a single decision puts billions of dollars up for grabs.

On one side were retailers large and small, including Wal-Mart Stores Inc., Target Corp. and Home Depot Inc., arguing that they were being gouged. On the other was a financial industry led by JPMorgan Chase & Co. and Bank of America Corp., weakened by public anger over bailouts and bonuses, resisting any government plan to set a price for their services.

Curious Alliances

Together, they deployed more than 500 lobbyists and spent some $30 million, according to people briefed on the expenditures. Their campaigns fanned dissension inside the Federal Reserve and created curious alliances as Tea Party freshmen, Indian tribes, tax activist Grover Norquist and the nation’s biggest teachers union entered the fray.

The retailers flew hundreds of merchants like Cavallaro to Washington; the financial lobby countered with squads from community banks and credit unions. The combatants called on all the tools of public relations: focus groups, TV ads, polls, conference calls with as many as 100 participants -- and at least one outright fabricated story planted in the press.

“Leading up to this vote has been one of the most heated debates and exchanges that many of us in the Senate have seen in our time,” Richard Durbin of Illinois, the chamber’s second-ranking Democrat and the sponsor of the provision to cut the swipe fees, said in his June 8 floor speech.

‘Political Cloud’

The outcome shows “banks still have a political cloud over them in Washington in a huge way,” said Stephen Myrow, a former Treasury Department official who worked on the 2008 financial industry bailout and is now with ACG Analytics Inc., a Washington investment research firm.

“When they flexed their muscle in Washington, large banks had been used to having an impact,” he said. “Now they act like, ‘We’ve taken our lumps, we’ve said our mea culpas, just let us get back to what we do best.’ But the reality is that’s not going to happen again.”

The banks’ failure to win a delay means that a debit-card cap will likely be locked into place tomorrow when the Federal Reserve, charged by Congress with implementing the rule, is scheduled to release its final language. While that may end the Washington debate, the decision will reverberate for consumers, as banks consider whether to recoup the lost revenue by ending free checking accounts and debit-card rewards programs. Still in question is whether retailers will pass some of the spoils of their victory back to shoppers through lower prices.

The Retailers

Retailers have long fumed about the cost of taking plastic. Unlike with checks, banks charge them fees, known as interchange, to process debit and credit card payments. Debit fees average 44 cents per transaction or about $16 billion a year. The amounts are set by Visa and MasterCard, which own the payment networks and pass the money to the banks.

Debit cards, which deduct funds directly from a customer’s checking account, have surpassed checks and credit cards as the most frequent noncash means of payment. Transactions reached 38 billion in 2009, the Federal Reserve has said. Merchants say the fees can be their highest expense after labor. Consumers pay at least some of it in the form of higher prices. Retailers, who have little alternative to working with Visa and MasterCard, say the banks and networks have too much power to charge what they want.

Atmosphere of Outrage

After years of unsuccessful pleas for relief from the courts and Congress, some 20 representatives from big retailers gathered in downtown Washington in July 2009 to discuss whether the time was ripe for another try. It was 10 months since the collapse of Lehman Brothers Holdings Inc. and outrage over bailouts and bonuses had stoked anti-bank sentiment to levels unseen since the Great Depression.

The group was called together by the Retail Industry Leaders Association, which counts Wal-Mart, Target and Home Depot among its members. In a rented conference room, they discussed the result of recent focus groups they’d held in California and Illinois with affluent, politically aware small-business owners and consumers. The results led to a strategy shift and the outlines of the proposal that eventually became the Durbin amendment, according to three people involved with the process.

The focus groups showed that business owners were keenly aware of swipe fees while consumers were “easily confused” by the retailers’ past efforts to explain why they should care, according to an internal report on the research. That led the retail lobby to abandon attempts to educate consumers and instead concentrate on firing up small merchants to lobby their congressional representatives, the people involved said.

Republican Wanted

Within a few months, DCI Group, a Washington-based public affairs firm hired by the retailers, assembled an e-mail list of more than 20 million small-business owners. They arranged 23 meetings between merchants and senators or their aides and held press events in Tennessee, Ohio and Wisconsin -- home to senators on the Banking Committee. The campaign eventually targeted 21 senators in 18 states.

The backing of merchants and a top Senate Democrat like Durbin -- who records show received $16,500 in campaign funds from major retailers and their trade group in 2010 -- wouldn’t be enough, the retailers realized. “Employing a well-known and well-respected Republican lobbyist with strong ties to leadership in both the House and Senate is needed to help stay a step ahead of the banks,” said a “Strategic Overview” drafted by the retail industry group in October 2009.

Quiet Strategy

In January 2010, according to lobbying disclosure forms, the retailers hired Fierce, Isakowitz & Blalock, a Washington-based firm with an all-Republican roster. The team included Mark Isakowitz, a regular on The Hill newspaper’s list of top advocates; Kirsten Chadwick and Kirk Blalock, two former aides to President George W. Bush; and later was joined by Billy Piper, the longtime chief of staff to Senate Minority Leader Mitch McConnell of Kentucky.

By February, with the Senate Banking Committee deep in negotiations over the shape of the financial reform bill, the retail leaders settled on a strategy. They would work quietly, continuing to rely on grassroots contacts with lawmakers. In the meantime, they would stoke anger at their opponents -- by sending packets of negative stories about the banks and card companies to legislative aides and reporters, with sections on “Excessive Compensation” and “A History of Egregious Acts.”

As the retailers anticipated, the banking industry let its guard down.

A Warning

Financial lobbyists had turned back the swipe-fee issue a year earlier during debate over a separate bill dealing with credit cards. Jeffrey Tassey, who led the Electronic Payments Coalition, the main lobbying group on the matter for banks, MasterCard and Visa, warned his members in a late 2009 memo that they were still vulnerable because of “the banking industry’s lack of political credibility” in Washington and “the long term systemic attacks on its political brand.”

“In order to win and drive the retailers from the policy arena we must mount an effort that relies on third parties taking the offensive,” Tassey wrote in the memo.

The financial companies, however, were preoccupied with other threats to profits from the bill that would become the Dodd-Frank Act, including tighter rules on derivatives, capital standards and trading.

‘Stay Away’

In the frenzy, Durbin introduced his interchange amendment. He’d first heard of the issue during a 2006 Judiciary Committee hearing and had been pushing for years to get the matter in front of the chamber. Speaking on the Senate floor May 12, 2010, Durbin told his colleagues that the issue hadn’t gotten far in Congress because of the big players involved. “Some people do not want to touch it: Stay away from it. Don’t bring it up. Well, that is not fair to small businesses,” he said.

The measure required the Fed to determine a “reasonable” fee for merchants to pay banks and sought to open the system to more competition by expanding the number of payment networks retailers could use. To build support, Durbin, 66, agreed to exempt banks and credit unions with assets of $10 billion or less from any fee cut. On May 13, the Senate added the measure to the financial overhaul by a vote of 64-33.

As the Senate and House met to resolve differences between their separate regulatory bills, banking lobbyists remained thinly stretched while the big retailers, now fully aligned with restaurants, grocery and convenience stores and gas stations, could focus on one issue.

Amendment Survives

“We knew the banks, which rarely lose battles on Capitol Hill, would stop at nothing to beat back our gains,” said Katherine Lugar, a top lobbyist for the retail leaders group. “Our low-profile campaign suddenly became very high-profile.”

The Durbin amendment survived intact into the Dodd-Frank Act, which was signed by President Barack Obama on July 21.

The next stop was the Fed. Financial firms figured that the central bank would be more receptive to the potential impact on their business. “There were still people who felt that the Fed was going to save them,” Tassey said in an interview.

Five months later, the Fed stunned the industry -- and the markets. On Dec. 16, it proposed capping swipe fees at 12 cents a transaction. Visa and MasterCard shares plunged more than 10 percent over fears for their business model.

In a letter to Fed Chairman Ben S. Bernanke the next day, Steve Bartlett, president of the Financial Services Roundtable, a trade group for the largest banks, displayed none of the typical deference that the industry gives its main overseer.

‘Shocked and Dismayed’

“I am shocked and dismayed,” wrote Bartlett, a former Republican congressman from Texas. “We expect nothing less than the board’s commitment to remain open-minded.”

In fact, the Fed issued the rule proposal amid internal discord, according to two people with direct knowledge of the matter.

The governors and staff members were upset that Congress decided to drop debit fees in their laps at all, said the people, who spoke on condition of anonymity because Fed deliberations aren’t public. They considered the Durbin amendment poorly drafted, confusing and open to much interpretation, the people said.

The law directed the Fed to “establish standards” for determining whether the interchange fees were “reasonable and proportional to the cost” of processing debit charges.

Much of the Fed’s discussion was driven by a top staff member, Louise Roseman, who oversees payment systems, the people said. Working closely with Fed Vice Chairwoman Janet Yellen, Roseman’s team concluded that a cap was the best option for controlling fees. The 12-cent limit would be less than a third of the average that merchants were paying.

Fraud Costs

Several governors wanted more information before voting on a final plan, the people said. Daniel Tarullo, an Obama appointee, was concerned that the banks’ fraud-prevention costs weren’t being considered, the people said. Elizabeth Duke, a George W. Bush appointee, expressed worries about small banks.

Fed spokeswoman Michelle Smith declined to comment on the process.

At the public meeting Dec. 16, some Fed members had sharp questions for the staff. Bernanke noted that “there’s a presumption that prices will be set by market competition, generally.” Kevin Warsh grilled the staff on why the plan “has us in the price-setting business.”

Tarullo said he shared Warsh’s concerns. “We need to be particularly open-minded” to “comments on how to implement the final rule,” he said.

Bank Comeback

The evidence of a split inside the Fed, combined with Republican gains in the House and Senate in the November elections, encouraged the banks to try for a comeback in 2011.

Shortly after the Fed proposed its 12-cent cap, the banks injected money into the Electronic Payments Coalition. Tassey, the coalition’s head, was told that he and a team from VOX Global, the Washington-based public affairs firm handling the grassroots and public relations campaign, had at least $11 million at their disposal, according to a person familiar with the campaign. It was a reversal from 2010, when the banks had slashed the group’s funding, the person said. The banks also boosted their campaign contributions.

Tassey, a veteran lobbyist who took over the payment coalition in late 2008, countered the merchants by putting ads on Metro trains and buses in the Washington area as well as in Capitol Hill publications. They accused Congress of giving big stores a “gift” of billions of dollars.

Bipartisan Lobby

The coalition employed lobbyists connected with both parties. They included Democrats Gina Mahoney, a former senior aide to House Minority Whip Steny Hoyer of Maryland, and James Flood, a former top aide to Senator Charles Schumer of New York. On the Republican side, the group turned to Clark Lytle & Geduldig, a boutique that includes Deborah Pryce, a former congresswoman from Ohio, and Sam Geduldig, an aide to then-House Majority Whip Roy Blunt of Missouri, now a senator.

To persuade the Fed to modify its rule before issuing final language, the banks deployed a parallel effort. It was led by the Clearing House Association, whose members include JPMorgan, Bank of America and Citigroup Inc. Clearing House Payments Co., the association’s business arm, clears almost $2 trillion of payments daily.

Trade groups representing large and small banks and credit unions joined the Clearing House effort. Their regular conference calls to plot strategy sometimes drew 70 to 100 people from around the country, according to participants.

Fed Visit

In February, the Clearing House sent two in-house lawyers and two lawyers from Sullivan & Cromwell to meet with the Fed’s general counsel, Scott Alvarez, to discuss their opposition to the proposed rule, according to documents on the Fed’s website. Alvarez’s predecessor J. Virgil Mattingly was one of the Sullivan lawyers, as was H. Rodgin Cohen, the firm’s senior chairman and one of the top banking lawyers in the U.S.

The Clearing House group then filed a 65-page comment letter, asserting that the Fed plan would give merchants an “unjustifiable windfall” while threatening the stability of a banking system still teetering from the credit crisis.

The Feb. 22 comment letter was signed by leaders of nine banking associations -- a united front that the industry hadn’t been able to assemble throughout the Dodd-Frank debate. The Independent Community Bankers of America, for example, joined in because it didn’t believe that the law’s exemption for small banks would work in practice.

Camden Fine, the association’s head, wrote community bankers during the Dodd-Frank debate: “Do you really think Wall Street mega firms give a rat’s ass about small banks? Hell no.” Debit fees, however, changed his tune. “The enemy of my enemy is my friend,” he said in an interview.

Tea Party

Reinforced by hundreds of community bankers and credit union executives, the bank lobbyists also worked Congress. While the Republican shift had improved their chances in the House, they needed 24 votes in the Senate to reverse their May 2010 loss. They adopted a two-pronged approach.

Republican lobbyists working for the financial industry told Tea Party and other conservative members in the House and Senate that the swipe-fee cap should be anathema to anyone worried about interference in the market by the government and the Fed, according to congressional aides.

To win support from Democrats, different lobbyists argued that if the banks lost some debit-card revenue they would have to charge more for other services, which would most hurt people with low incomes who have limited access to the banking system.

Wall Street Threats

Lawmakers from both parties pressed Bernanke and Fed Governor Sarah Bloom Raskin on those points at two hearings on Feb. 17. The banking side gained traction when both Fed officials acknowledged doubt about their ability to write the rules effectively and hinted they would welcome more time.

Pushing their case outside Washington, Wall Street leaders went public with threats to cut services.

“We’re going to do a series of things which we don’t want to do,” Charles Scharf, then chief executive officer of JPMorgan’s retail bank, said at the bank’s annual investor day in February. “If you use your debit card on a regular basis, that qualified you for a free account and that’s no longer going to be the case in most cases.”

In March, JPMorgan notified cardholders it would be discontinuing perks on some debit-card programs, including Disney Rewards Benefits, because of a “new law known as the Durbin Amendment.” Durbin’s name was underlined for emphasis.

‘Oh Jamie’

Durbin received copies of the letter from some Illinois constituents and in-state staff members. He was incensed.

“I thought, ‘Oh Jamie, you just crossed the line,’” Durbin said in an interview, referring to Jamie Dimon, the bank’s chairman and chief executive officer.

Howard Opinsky, a spokesman for JPMorgan, declined to comment.

The banks also boosted their argument about the impact on low-income people by trumpeting letters of support sent to lawmakers in March from the U.S. Hispanic Chamber of Commerce, the National Education Association and the Naval Enlisted Reserve Association. The National Association for the Advancement of Colored People sent House Speaker John Boehner a letter supporting a delay; a few weeks later, after receiving complaints from retail interests, the activist group pulled back, sending a “clarification” to the Ohio Republican.

The activist and union groups backing the banks found themselves on the same side as RedState, self-described as the “most widely read right-of-center blog on Capitol Hill.” Republican consultants for the banks encouraged RedState to weigh in, sending over draft articles and talking points, according to a person with direct knowledge of the process.

Calling a Blogger

In March, Erick Erickson, the publication’s editor, posted an article titled, “Durbin and the Federal Reserve Plot to Fix Prices and Harm Consumers.” Congressional staff supporting the bank position handed out dozens of copies at a House briefing shortly thereafter.

Erickson said in an interview he was already at work on the piece when a friend from a public relations firm hired by the banks got in touch with him about the issue and passed along another publication’s article. After Erickson’s story was posted, he said, he was contacted by people who seemed to have a stake in the fight, making him leery of writing more.

In both the House and Senate, lawmakers prepared legislation to delay the rule for as long as two years for more study. The Fed was consulted throughout the drafting, according to two Senate aides involved in the process.

Planted Story

A day before the bills were filed, Politico’s Morning Money, a news summary read by lawmakers, lobbyists and regulatory officials via e-mail around 5:30 a.m. each day, weighed in with a scoop.

“Just asking: Which Senator has referred high-pressured calls he received from retailers lobbying on the Durbin amendment to the Ethics Committee for further investigation?” the March 14 article said. “The nature of the calls: ‘Stay away from the effort to delay Durbin or we will crush you.’”

No such referral ever happened, according to Senate staff members and lobbyists involved in the campaign. It was a story planted by the banking side to put retailers off balance, according to one lobbyist familiar with the strategy.

Ben White, the Politico reporter who writes the newsletter, said in an e-mail that he stands by the item.

Counter Attack

The retail side was in fact moving back into action. They’d watched Bernanke’s and Raskin’s congressional testimony with alarm and by the next day had convened a phone conference with at least 60 lobbyists and retail executives. The tone of the call was one of confusion, participants said.

The merchants’ coalition had filed comments with the Fed, and sent 17 representatives to meet with the central bank’s staff, led by Jeffrey Shinder, a partner at Constantine Cannon LLP who had won two major legal settlements against Visa and MasterCard. Still, Bernanke and Raskin didn’t appear to be embracing their arguments.

Representatives of Wal-Mart, the world’s biggest retailer, were voicing particular concern about possibly losing a fight that the firm had become so invested in winning, according to two people familiar with the company’s response. Greg Rossiter, a spokesman for the Bentonville, Arkansas-based retailer, declined to comment.

The retailers doubled down. In March, they again flew in hundreds of merchants, putting them up at Washington hotels, to tell their lawmakers how much debit-card fees were hurting their businesses in a struggling economy. They held news conferences, wrote opinion pieces and blasted out television and print ads. They passed around support letters from gambling-rich Indian tribes including Connecticut’s Mashantucket Pequots.

Campaign Contributions

“The banks rushed out to an early lead, but I think as soon as we started to get retailers across the country engaged in this discussion in February and March, you saw the momentum slow down a lot for the banks,” said David French, the top lobbyist for the National Retail Federation, another industry trade group involved in the campaign.

From January through May, the political action committees of Target Corp., Best Buy Co., Wal-Mart and Home Depot Inc. made $840,000 in campaign contributions to lawmakers and their political committees, federal election records show. That compares with a total of $541,500 in that period from JPMorgan, Bank of America, Citigroup and Wells Fargo & Co.


Jon Tester wasn’t the obvious senator to take the lead against the fee cap. The 54-year-old Montana Democrat, a third-generation farmer, has no major financial institutions in his state and voted against the $700 billion bank bailout in 2008.

Tester, the first Democrat to win a seat from Montana since 1988, is up for re-election in 2012 in what may be one of the tightest races in the country. If anything, he might have been expected to be on the other side because his lead banking staffer, Ali O’Donnell, used to be director of government affairs at the National Retail Federation.

Instead, Tester, who had voted against Durbin last year, decided to craft a bill delaying the rule. His position triggered an onslaught of political attacks by Montana retail groups saying he was “standing with Wall Street.” A Republican-affiliated group called Americans for Job Security began running radio spots against him.

‘Between Friends’

Tester, since the start of this year, has received $27,450 from the political action committees of the banking and credit union trade groups. Co-sponsoring his bill to delay the debit rule by two years was Senator Bob Corker, a Tennessee Republican who has received $11,500 from the major banking trade groups this year, $10,000 from JPMorgan and $7,000 from Visa and MasterCard.

“This is one of those issues where we have retailers on one side, we have bankers on the other side,” said Corker, who also faces re-election next year and has been the subject of similar attacks at home in radio and television ads. “In the end, we are trying to pick between friends.”

Tester and Corker introduced their bill on March 15. The two-year delay was too long for many lawmakers who interpreted it as a way to kill the rule outright. For weeks, Tester and Corker pushed potential converts, seeking a compromise. Fifteen months? One year? Tester negotiated with one senator on his cell phone while seeding some of his 1,800 acres from a Versatile 875 tractor, according to an aide.

In early June, a bipartisan group of Republicans Corker and Mike Crapo of Idaho plus Democrats Tester, Kay Hagan of North Carolina, Michael Bennet of Colorado and Tom Carper and Chris Coons of Delaware, signed onto language for a six-month delay in the rule, with an option for another six months after a study.

24 Votes

To get the 60 votes it needed, the banking lobby had to peel 24 votes from the original Durbin coalition. While the lobbyists thought Tester’s group was close to the number, they knew they needed a handful more, according to people directly involved in the count.

The retailers worked to hold onto a small group of wavering senators. In the countdown to the final vote, they ran television ads in some of their home states: Maine, for Republicans Olympia Snowe and Susan Collins; West Virginia, for Democrat Senator Joe Manchin; and North Carolina, for Republican Richard Burr. Snowe, Collins and Burr had voted with Durbin in 2010 and were considered on the fence. Manchin, a freshman, also remained undecided.

Last-Minute Calls

The bank side zeroed in on several Republicans, including Scott Brown of Massachusetts, who had been part of the bipartisan talks with Tester.

Lobbyists for the financial industry had approached Grover Norquist, the anti-tax lobbyist, to get involved. On June 7, his group Americans for Tax Reform announced it would “score” the vote -- meaning senators who supported Tester could add to their conservative credentials come election time. Norquist personally contacted a few Republican senators to push them, confirmed Kelly William Cobb, government affairs manager at Americans for Tax Reform, who said the group was happy to help because the fee cap is “bad public policy.”

On the morning of the June 8 vote, Senator David Vitter, a Louisiana Republican who also had sided with Durbin last year, remained undecided. He got on a conference call with more than a dozen home-state retailers. He had a simple question -- could they accept a six-month delay? The answer quickly came back: no.

Vitter and Brown walked onto the Senate floor four hours later and voted against Tester’s proposal. The measure fell six votes short of the 60 it needed for adoption, 54-45.

As the vote proceeded, Jennifer Cavallaro, the 51-year-old Rhode Island café owner, was waiting outside the Capitol Building in the visitor security line. She’d been summoned to Washington again along with other merchants for some last-minute lobbying.

While she got in too late to see the final action, Cavallaro didn’t miss the chance to thank her home state senator, Democrat Jack Reed, who mentioned her -- and the Beehive Café -- in his speech supporting Durbin before the vote.

She said Reed had told her in early 2010 that the retailers didn’t have much of a chance in Congress. He was nearly proven right -- swimming against the political tides, the banks had still managed to rack up 18 of the 24 new votes they needed.

“I was surprised we won, to be honest,” Cavallaro said.

To contact the reporters on this story: Phil Mattingly in Washington at; Robert Schmidt in Washington at

To contact the editor responsible for this story: Lawrence Roberts at

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