The credit card pound of flesh

Interchange fees paid by merchants to the biggest banks cost more than employee health care. But don't expect Congress to do anything about it.

By Andrew Leonard
Published May 18, 2009 2:29PM (EDT)

Adam Levitin points out an astonishing fact at Credit Slips. Home Depot pays more in credit card interchange fees than it does for health care for its workers.

Interchange is The Home Depot's third largest operating cost. And this is from a company that gets comparatively low interchange rates just by being large. Interchange is costing large, sophisticated merchants more than health care.

Every time a customer uses a credit card to purchase something, the retail merchant pays an interchange fee to the credit card issuer. Levitin reports that in the U.S. total interchange fees added up to $48 billion last year. He theorizes that lowering the maximum interchange fee allowable would provide a "nice" stimulus to the economy -- without adding to government expenses.

Don't hold your breath. The amendment proposed last week by senators Dick Durbin, D-Ill., and Kit Bond, R-Mo., to the credit card reform bill that would have allowed retail merchants to give discounts to consumers that did not use credit cards was directly targeted at the interchange problem. And as I wrote last week, opposition from the banking lobby means that amendment is going nowhere, from no less an authority than Senator Chris Dodd, D-Conn.

Yes, the bankers own the Senate. But it's not as cut-and-dried as sheer corruption. The five top issuers of credit cards are JPMorgan Chase, Citigroup, Bank of America, Capital One and HSBC. Two of those five banks have already been kept afloat by the government at great expense. But with American credit card defaults hitting record highs in April, their financial position may get considerably worse as the economy continues to contract. If the credit card reform bill took a chunk out of the $48 billion those banks are raking in from interchange fees, wouldn't we be just making the problem out of how to keep these already teetering giants from going right off the edge even worse?

No easy answer there, unless you're content with the possible scenarios that would result from just letting the big banks fail. But from the consumer side, the way forward seems clear. Americans now owe $960 billion on their credit cards. Maybe we should stick to cash for a little bit.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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