How Credit and Debit Card Usage Contributes to Inflation

Remember way back before 2020 when people used to buy things with cash? Thanks to online shopping, Covid hysteria and lockdowns, for most of us credit and debit cards have become the go-to method of payment for most consumers. Convenient, quick, and widely accepted, these cards are part of our everyday lives, replacing cash in a majority of transactions. However, there’s a hidden cost associated with this convenience that many of us don’t realize: the fees charged by card networks to businesses for processing these transactions. These fees, in turn, have contributed to the rising costs of goods and services, playing a role in inflation.

The Role of Credit and Debit Card Fees

When consumers use a credit or debit card for purchases, the merchant (store) does not receive the full amount of the sale. Credit card companies charge a merchant fee, or swipe fee, for every transaction, often ranging from 1% to 3% of the total purchase. These fees cover various costs for the card networks and banks, including processing the transaction, fraud protection, and cardholder rewards.

While a few cents on the dollar may not seem significant, these fees add up quickly for businesses, especially retailers with narrow profit margins. For example, a grocery store with a 1.5% net profit margin might lose a significant chunk of its earnings to credit card fees, leading them to find ways to recoup that loss.

How Merchants Offset These Fees

To maintain profits, many businesses pass on the cost of credit card fees to their customers. This cost shifting is done in subtle ways:

1. Higher Prices: The most common way for merchants to offset transaction fees is to increase the prices of goods and services. This increase isn’t usually itemized or explicitly stated, but the added costs are baked into the overall price. As a result, all customers, even those paying with cash, end up shouldering part of this burden.
2. Minimum Purchase Requirements: Some businesses require a minimum purchase amount to use credit or debit cards. This policy is a direct reflection of the cost of accepting cards, especially for small-ticket items where the processing fees could completely erode profits.
3. Credit Card Surcharges: In some places, businesses may add an extra fee if you choose to pay with a card instead of cash. This is often presented as a way to cover the credit card transaction fee, but it directly shifts the cost onto the consumer.

The Ripple Effect: How Credit Card Fees Contribute to Inflation

These additional costs are not just an inconvenience for businesses; they play into the larger picture of inflation. Here’s how:

1. Price Increases Across the Economy: As businesses factor in credit card fees into their pricing strategies, the cost of goods and services rises. When these costs are passed down to the consumer, the overall price level in the economy increases, contributing to inflation.
2. Impact on Small Businesses: Small businesses, in particular, feel the pinch from credit card fees because they often operate with razor-thin profit margins. To stay afloat, they have no choice but to raise prices or cut costs, both of which can lead to higher prices for consumers.
3. Wider Margins for Large Retailers: Large retailers may negotiate lower credit card processing fees because of their scale, but they still face significant costs associated with card transactions. They, too, factor in these costs when determining pricing, impacting the entire marketplace.

Large retailers like Walmart pay substantial amounts in credit card fees. For a company the size of Walmart, this adds up to billions of dollars annually. Swipe fees are one of the highest operating costs for retailers, second only to labor. Walmart has even explored alternative payment methods to reduce these costs, such as pay-by-bank options, in an effort to avoid the high fees associated with credit card transactions.

The Role of Rewards Programs

Interestingly, consumer credit card rewards programs—such as cash back, airline miles, and points—can also contribute to inflation. The costs of these rewards are often offset by the fees charged to merchants. In a sense, consumers who use rewards cards are earning benefits at the expense of higher prices for everyone, as businesses pass these costs along to their customers.

The Cashless Society and Inflation

As society increasingly moves away from cash, the prevalence of card payments continues to grow. This trend makes it more difficult for businesses to avoid paying card transaction fees, leading to a constant upward pressure on prices. Some economists argue that the rise of cashless payments has contributed to sustained inflation, especially in industries where margins are already tight, like retail and hospitality.

Possible Solutions

There are ways to mitigate the impact of credit card fees on inflation:

1. Encouraging Cash Payments: Some businesses offer discounts for customers who pay with cash. By bypassing card fees, merchants can save money, which they may pass on to their customers in the form of lower prices.
2. Transparent Surcharging: While controversial, some businesses openly charge a small fee for card transactions to offset their processing costs. This transparency can help consumers make informed decisions about their payment methods.
3. Policy and Regulation: Governments and consumer advocates have occasionally stepped in to limit excessive merchant fees, especially in countries where fees are noticeably higher. Regulation could help balance the scales, particularly for small businesses.

The Credit Card Competition Act of 2023

is a bipartisan bill aimed at increasing competition among credit card networks to potentially lower the transaction fees that merchants pay when customers use credit cards. These fees, known as interchange or “swipe” fees, are typically passed on to consumers through higher prices. Currently, the majority of credit card transactions are processed by the two largest networks, Visa and Mastercard, which hold a dominant position in the market.

The proposed legislation would require large banks to allow merchants more options for processing credit card transactions, giving them the ability to route transactions through alternative networks that may charge lower fees. The hope is that by breaking up this duopoly, the added competition could reduce the costs merchants face, potentially benefiting small businesses and consumers by keeping prices more stable.

However, there is debate about whether the benefits will actually reach consumers. Critics argue that while merchants may save money on fees, there’s no guarantee these savings will be passed on in the form of lower prices. Additionally, some fear that card rewards programs, which are partly funded by interchange fees, could be reduced or eliminated as a result of the act, potentially diminishing the appeal of using credit cards for many consumers.

The legislation is still under consideration, and its final impact on consumers, businesses, and the credit card industry is yet to be determined. For now, both proponents and opponents are urging consumers to get involved and express their views to lawmakers.

This bill is seen as a significant move to reshape how credit card transactions are processed and may affect both the cost structure for merchants and the benefits offered to cardholders.

Conclusion

Credit and debit cards offer tremendous convenience, but their widespread use has a ripple effect on the economy, contributing to inflationary pressures. The fees that merchants pay to process these transactions are often passed on to consumers in the form of higher prices. As the use of cash declines and the cashless society grows, these costs become embedded in our everyday purchases, subtly driving up the cost of living. To address this, businesses, consumers, and policymakers will need to explore ways to manage transaction costs while maintaining the convenience we’ve come to rely on.

*Article written by ChatGPT based on my prompts.