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We're used to thinking of American corporations fighting one another, competing for market share and consumer dollars. But every now and then, often unbeknownst to us, they band together.
That's happening right now, as many companies strike back against credit cards. Striking a loud blow is the "Merchants Payment Coalition," which comprises many industry groups, each of which in turn comprises lots of companies. One member, the National Retail Federation (NRF), includes companies such as:
- Abercrombie & Fitch (NYSE: ANF )
- Best Buy (NYSE: BBY )
- Yum! Brands
- Whole Foods (Nasdaq: WFMI )
- Sears Holdings (Nasdaq: SHLD )
- Harley-Davidson (NYSE: HOG )
Together, the coalition's members employ 50 million workers.
What's the beef?
What's their gripe with credit cards? Well, you may know that when you charge something at a store, the store pays a little fee to your credit card company -- that's the "interchange fee." The thing is, it's not such a little fee. It's set by credit card networks like Visa (NYSE: V ) and MasterCard (NYSE: MA ) and is typically around 2% of your purchase, and it can be even higher than that, depending on what type of card you use.
Think about it: If you charge $300 at your local home improvement store for some cans of paint and painting supplies, the retailer might have to fork over $6 to your card company. (The fee is charged on your whole transaction, including any sales tax -- not just on the products or services you bought.) If your total credit card bill for the month is $2,000, you may have generated $40 that gets split between the bank that issued your card and the card networks. If you charge $24,000 per year, as many of us do, that's $480 for the credit card companies, from just one person or household! The NRF estimates that the total interchange fees collected in 2008 added up to about $48 billion. That's a lot, no?
The retailers think so. And I see their point. After all, retail in general isn't a high-margin business. As solid a company as Best Buy has been over many years -- its stock has risen an eye-popping average of 28% per year over the past 20 years -- it sports a net profit margin of just 2.2%. Sears' margin recently was just 0.1%. Whole Foods' was 1.4%. For companies with tiny margins, a 2% cut off the top is a big deal.
Well, the thing is that retailers -- especially those with low margins -- can't afford to take the cost of interchange fees out of their profits. To stay in business with lean profit margins, the only way they can cover a 2% fee is to pass it on to their customers. What that means is that the prices you pay are often a little higher than they might otherwise need to be.
Of course, if you have a card with perks like cash rebates or frequent flier miles, then your bank basically shifts some of its revenue from those fees to you. If interchange fees were to disappear, you could also expect many reward cards to go away as well.
What to do
Congress is looking into all kinds of reforms for the credit card industry right now, as it focuses on what will be good for consumers. We can support that effort by letting our representatives know our thoughts -- and we can support an examination of interchange fees, too.
Learn more in our Credit Center and in these articles: