HB 171-INTERCHANGE FEES: TAX & GRATUITY  3:32:46 PM CO-CHAIR FIELDS announced that the next order of business would be HOUSE BILL NO. 171, "An Act relating to interchange fees on tax and gratuity; and relating to the Alaska Unfair Trade Practices and Consumer Protection Act." 3:33:06 PM CO-CHAIR FIELDS opened public testimony on HB 171. 3:33:21 PM MICHAEL CERVATES, Owner, The Banks Alehouse, testified in support of HB 171. He stated that interchange fees are charged on tax and gratuities. He reported that there is no sales tax in Fairbanks, but that there is an alcohol tax. He noted that he pays for the interchange fees and does not take it out of his workers' tips. He noted that, since COVID-19, both the cost of food and labor have increased for his restaurant. He stated that profit margins for restaurants typically sit between 1 and 2 percent. He echoed a prior hearing, noting that interchange fees constitute between 70 and 90 percent of the overall fees charged by a credit card. He reported that his restaurant, at 70 percent of the total fees, loses approximately $53,900 in interchange fees [annually]. He remarked that that number was roughly equivalent to three full-time employees. He stated that he would be able to invest money lost from interchange fees back into his business or his community. 3:37:11 PM GLENN GROSSMAN, Payments Consultant, Electronic Payments Coalition, testified in opposition to HB 171. He stated that he was a professor of finance by trade. He stated that the modern electronic payment system was robust and efficient, noting that all merchants could accept payments from vendors of their choice. He stated that merchants receive efficiency, and fraud protection as benefits. He stated that interchange fees cover the cost of the aforementioned. He asserted that businesses could cover the cost of interchange fees in other ways, such as offering discounts through cash transactions or charging a credit card surcharge fee. He noted that the proposed legislation had not been implemented in any other state. He asserted that most businesses would need at least 10 years to "break even" in order to update their point-of-sales systems were HB 171 to become law. He asked committee members to take into consideration consumer convenience, commerce for merchants, and the cost of enactment on small businesses. He asserted that the proposed legislation would place the burden on small businesses, and that large retailers would benefit. 3:40:12 PM REPRESENTATIVE SADDLER asked about the profit margin for banks. He noted that the profit margins for restaurants and retailers are approximately 1 to 2 percent. MR. GROSSMAN responded that banks do not profit from interchange fees and asserted that banks actually lose money on interchange fees. He noted that the only way a bank can generate profit in credit card business is to have customers "revolve on their debt." REPRESENTATIVE SADDLER asked for confirmation that banks lose money on credit cards. MR. GROSSMAN replied that banks lose money unless customers revolve debt. He stated that banks only profit on balances and not paid on monthly statement for credit cards. MR. GROSSMAN, in response to an additional question from Representative Saddler, stated that interest rate varies based on client or cardholder and issuer. 3:43:36 PM CO-CHAIR FIELDS asked the largest members by market share of the Electronic Payments Coalition. MR. GROSSMAN stated that banks are largest issuers of credit cards and stated that the interchange fees go back to the banks, such as Capital One, Bank of America, JP Morgan Chase, which he noted were the largest issuers. He commented that credit unions and community banks are also issuers and face the same economics as large banks. CO-CHAIR FIELDS asked how much Capital One, Bank of America, and JP Morgan Chase collect in interchange fees from Alaska. MR. GROSSMAN replied that he did not have that data. He further noted that information was private to the institutions. 3:45:31 PM MR. GROSSMAN, in response to a question from Representative Saddler, replied that he was a professor at Grace College, in Winona Lake, Indiana. REPRESENTATIVE SADDLER asked if Mr. Grossman was employed by the Electronic Payments Coalition. MR. GROSSMAN stated that he was a subject matter expert, noting that he worked in electronic payments for nearly 20 years. He stated that he acted more in the capacity of a consultant to the Electronic Payments Coalition. 3:46:41 PM DOUG LADENBURGER, Director of Treasury Management, Northrim Bank & Alaska Banker Association (ABA), testified in opposition to HB 171. He asserted that the proposed legislation would introduce an inefficient and unmanageable process for local businesses and financial institutions. He noted that 99 percent of businesses in Alaska were small businesses who employed over 50 percent of the state's private workforce. He asserted that, were HB 171 to become law, businesses and service providers would be required to implement timely and costly new point-of-sales solutions. He asserted that this requirement could tank small businesses. He asserted that transactions through cash or check could be more expensive than interchange fees on a credit card transaction. He cautioned that, were HB 171 to become law, there could be unexpected errors resulting in "unexpected fees and compliance challenges." He further cautioned that e-commerce businesses may not want to conduct business in Alaska. He offered his belief that the process for credit card transactions was effective, efficient, and secure and additionally argued that HB 171 "would disrupt the process for small businesses and our local financial institutions." 3:49:43 PM REPRESENTATIVE SADDLER asked for the definition of a point-of- sale solution and asked whether implementation would be a one- time cost. MR. LADENBURGER explained that point of sales would be whatever equipment or system a business uses to accept and process credit cards, noting that there is a wide variety of systems. He noted that e-commerce only requires a computer for transactions. He asserted that HB 171 would create a requirement that a small business would need to implement a system that would separate the tax and the gratuities. He opined that HB 171 would cause many difficulties for businesses and local financial institutions because it is attempting to force change on an automated system. REPRESENTATIVE SADDLER asked how consumers would know the difference. MR. LADENBURGER replied that, if a business decided not to implement a new system, they might require consumers pay for their goods and services with a credit card and the tax and/or gratuities with a check or cash. REPRESENTATIVE SADDLER commented that Mr. Ladenburger was presuming that businesses would entirely abandon credit card sales, which he opined was "realistic and hard to believe." 3:52:20 PM CO-CHAIR FIELDS opined that the notion that machines or software would be unable to differentiate between a charge and a tip was implausible. 3:52:36 PM MARK BURGESS, President & CEO, Credit Union One, testified in opposition to HB 171. He stated that Credit Union One provides financial services for over 96,000 members in Alaska, noting that Credit Union One recently opened branches in Wasilla and Kotzebue. He noted that they would be opening a branch in Skagway and remarked that Credit Union One was the only option credit union option for the communities of Skagway and Kotzebue. He stated that similar legislation has been introduced 72 times in 31 states since 2006, passing in only one state Illinois. He further stated that the federal district court granted an injunction against that act in Illinois in December [2024], finding that it is likely to violate the National Banking Act and would not apply to federally chartered banks and credit unions. He asserted that the proposed legislation would then only apply to state-chartered banks and credit unions. He emphasized that Credit Union One is the only state-charted credit union in Alaska and asserted that the proposed legislation would impose increased costs and leave state- chartered institutions at a disadvantage when competing with federal institutions. He asserted that HB 171 would create, at best, a two-tiered system for banks and credit unions, and encouraged committee members to vote no. 3:54:14 PM CO-CHAIR FIELDS asked how much money from interchange fees is going to large banks versus small local unions. MR. BURGESS responded that he did not have that data. 3:54:41 PM TIM SULLIVAN, President, Alaska Credit Union League, testified in opposition to HB 171. He explained that the Alaska Credit Union League was composed of nine Alaska credit unions that provide financial services for over 500,000 Alaska residents. He explained that credit unions are member-owned financial institutions and do not have shareholders. He explained that, for credit unions, fees are used to cover credit union operations and provide products and services for members. He stated that fraud protection was a critical service that was covered by interchange fees. He stated that merchants are not responsible for fraud, and under the Fair Credit Billing Act, the cardholder is only responsible for a maximum of $50. He remarked that most card issuers offer zero liability policies on their cards. He reported that credit card fraud in 2025 was estimated to be approximately $12.5 billion, much of which would be returned to consumers due to the "efforts and infrastructure paid for and built by credits unions and banks through interchange fees." He stated that the Alaska Credit Union League was opposed to HB 171. 3:56:02 PM REPRESENTATIVE SADDLER asked whether customers have the ability to influence rates of interchange fees. MR. SULLIVAN replied that the financial provider and the vendors/restaurants, not the cardholder members, decide interchange fees. REPRESENTATIVE SADDLER asked whether it would be possible for card providers to charge only a fee for fraud protection. MR. SULLIVAN replied that percentages have not increased in approximately 10 years. He stated the reason that credit card companies have been increasing their collection of fees is due to people using their credits with more frequency. REPRESENTATIVE SADDLER illustrated his question with a scenario, asking if someone has $100 restaurant bill, would it cost more for the credit card provider to run card with a 1 percent tip versus 25 percent tip. MR. SULLIVAN replied that it is the same flat percentage rate. 3:58:59 PM CO-CHAIR FIELDS, after ascertaining that there is no one else who wished to testify, closed public testimony on HB 171. 3:59:09 PM REPRESENTATIVE COULOMBE asked the sponsor to comment on the credit union issue. She wondered if they could amend the bill to avoid federal litigation. 3:59:43 PM REPRESENTATIVE ELAM responded that he has heard small businesses throughout the country are trying to fight back against interchange fees. He opined that banks have a big voice. He could not guarantee that HB 171 would not go to litigation. He stated that other credit unions and banks within the state of Alaska are profiting from tax collection and tips and thus profits made from taxes and tips would decrease. He commented that small businesses would no longer be tax collectors. He further stated that small businesses would not lose any money from the actual sale of their goods and merchandise. 4:01:26 PM CO-CHAIR FIELDS commented, "Big banks will fight tooth and nail to keep money flowing into big banks." 4:01:36 PM REPRESENTATIVE COULOMBE stated that she has heard big banks warning that consumers would lose reward programs and fraud protection should HB 171 become law. She further stated that she had businesses' best interests in mind and wanted to see the full picture. CO-CHAIR FIELDS requested a breakdown of what different credit card fees pay for. REPRESENTATIVE COULOMBE remarked that it was unclear how what percentage of the interchange fees were going towards services like fraud protection. [HB 171 was held over.]