Bankruptcy

Home Depot Spends More on Interchange than on Health Care

By Adam Levitin

I was bowled over by a figure in The Home Depot's presentation at the Chicago Fed?s 2009 Payment Systems Conference this week:  The Home Depot paid more in interchange than for employee health care last year.  That?s astounding.  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.  And the value it gives is questionable:  The Home Depot's interchange costs have risen 16% in recent years, while purchase volume has increased 10%. 

I?ve previously argued that making interchange rates competitive would result in savings for consumers.  But as The Home Depot pointed out, reduced interchange rates could benefit consumers in other ways:  cutting interchange costs in half (as happened in Australia after the Reserve Bank of Australia mandated at-cost weighted average and allowed surcharging), would put another 5 full-time employees on the floor of every Home Depot store.  Not only would that make customers? shopping experience a lot better (and faster), but it would also generate an awful lot of jobs.

Just to play this out on the back of the envelope:  $48 billion in interchange last year, according to the Merchants' Payments Coalition.  If interchange dropped from around 1.8% to .5% on average (.5% is what it is in Australia; MasterCard recently agreed to .3% for cross-border interchange in Europe), that's around a 70% drop.  That'd translate into roughly $34 billion in savings.  Bureau of Labor Statistics estimates that average total cost of employment for an employer of an employee working 50 weeks a year, 40 hours a week at roughly $60,000.  So the cost savings would be equivalent to about 560,000 average jobs.  That's nothing to sniff at, especially these days. 

I don?t want to harp too much on interchange as an employment issue.  If businesses paid lower taxes, they could hire more employees too.  But it is worth underscoring that interchange is a lot like a tax, just not one subject to political control or which is for the public benefit.  And lowering interchange could have the same stimulus effect of a tax break, but without an impact on the federal budget.  Dealing with the interchange issue would be a nice economic stimulus package. 

Full post as published by Credit Slips on May 17, 2009 (boomark / email).