Retailers rely on holiday sales for much of their annual revenues, and unlike in years past, for many, 2008 sales just weren't there. As a result, many retailers are suffering. For example, Macy's, one of America's most venerable department stores, announced plans to eliminate 7,000 jobs, cut its 2009 capital-spending budget by over half, and close 11 stores in nine states. The International Council of Shopping Centers estimates that 73,000 stores may close during the first half of 2009. The overall impact on jobs and the economy from this will be severe.
At the risk of stating the obvious, the recession (if that's what we are still calling it) has hit hard. But there is a not-so-obvious pressure on retailers: interchange fees — the fees credit-card companies charge retailers every time someone uses a credit card at their store.
You may think the fees you pay your credit-card company are a cash cow for them. I am sure they are, but they don't compare to the $48 billion in interchange fees the credit-card companies charged merchants in 2008 — an amount more than the combined total of all late fees, over-the-limit fees and ATM fees credit-card companies charged cardholders in 2008.
With the size of government handouts these days, $48 billion may not sound like much anymore. But $48 billion is still a huge number, especially when it comes from the pockets of retailers and consumers. At Overstock.com, we paid more than $14.5 million in interchange fees in 2008.
I'm not against the credit-card companies making a living. But they routinely agree to increase interchange fees without any justification or transparency. Not only that, but when somebody commits credit-card fraud with one of their credit cards, they push the cost to the retailer — despite one of the stated reasons for the huge interchange fees being to guarantee that retailers get paid. But there is no guarantee; retailers lose these sales dollars because if there is one credo the credit-card companies live by it is this — if they can take money from us, they will.
So why do retailers like Overstock.com put up with this abuse? There is no choice. Retailers are powerless to negotiate with the cabal of credit-card companies. And credit cards are a basic, necessary utility (just like phone service, electricity or Internet connections) for retailers — especially for an Internet retailer. But, unlike with utilities, there is no competitive market or government regulation to check the abusive interchange fees the credit-card companies charge.
Ultimately, it is consumers who pay the $48 billion to the credit-card companies in interchange fees, as retailers pass them along in the price of products.
Perhaps worst of all, these huge interchange fees create an incentive for banks to issue as many credit cards as possible — often ignoring the risk that a consumer may not be credit worthy or able to pay. By the time a consumer digs himself into a credit hole (maybe years down the road), the credit-card company has already collected thousands of dollars of interchange fees on the card. Have you ever wondered why it is so easy for anyone (sometimes even small children and family pets) to get pre-approved credit-card offers? Interchange fees are one reason.
Driving retailers out of business, taking money out of consumers' pockets and creating a credit crisis, the interchange fee is a fee only a banker could love.
Jonathan E. Johnson III is the president of online retailer Overstock.com.