Inflation, Your Merchant Account, and Rising Credit Card Processing Fees - DirectPayNet

Inflation, Your Merchant Account, and Rising Credit Card Processing Fees


Inflation is a term used to describe an increase in the general level of prices for goods and services in an economy over time. This can be caused by a number of factors, including increases in the money supply or government policies that lead to lower productivity.

Inflation affects every part of your small business, from what you pay for supplies to how much you charge for services. That affects cardholders, too.

What is inflation?

Inflation is defined as an increase in prices over time. Over time, the rate of inflation can be measured by comparing the cost of goods and services that were purchased at different points in time.

When you hear about inflation, there’s good reason to think about how it affects your personal finances. But many e-commerce business owners don’t realize that it also has an impact on their cash flow and profits.

Where does inflation come from?

There are three main factors that can cause inflation:

  • An increase in demand for goods and services. This happens when more people want to buy the same amount of stuff, so those who already have what they need have to pay more for it.
  • A decrease in supply of goods and services. Sometimes there just isn’t enough stuff available for everyone who wants it—so prices go up as people compete for what little is left by bidding with their money.
  • Changes in value of money (which also has an impact on your merchant account). Inflation can happen when currency loses value over time, which means that you might be able to buy less with $10 today than you could have bought last year or ten years ago.

The effects of inflation go full-circle. The cost of running your business goes up, so you charge more. You aren’t the only one looking to secure profits, credit card companies are too. That’s why interchange rates are increasing.

How does inflation affect credit card processing?

Inflation directly affects credit card processing because merchants are required to charge a certain interchange fee for each transaction. The interchange rate depends on several factors including:

  • The type of credit card (or debit card, ACH, etc.)
  • The credit card network (Visa/Mastercard/American Express/Discover)
  • The type of account (standard or signature, like those offered by Chase)

The interchange rate is often higher on credit cards than debit cards and differs by card brand. This means that when your business processes a credit card, it costs more per transaction than if you processed a debit card. Inflation can also affect your credit card processing company’s rates because merchants are required to charge a certain interchange fee for each transaction.

This fee is non-negotiable, but interchange-plus pricing is. Work with your merchant services provider for a better rate.

This fee is what free merchant accounts are centered around. The questions arising today are, “should I open a free merchant account instead?” and “can I pass credit card surcharges onto my customers?”.

Should I open a free merchant account due to inflation?

Under the right circumstances, it could be a good idea to open a free merchant account due to inflation. When the economy is booming and businesses are doing well, merchant account providers and online payment processors might be more willing to offer credit card payment processing services at low cost.

If you’re lucky enough to get one of these accounts when they’re available, it could help offset some of your expenses while allowing you access to more customers.

That said: there’s usually a catch with these types of accounts; sometimes they require higher-than-average transaction fees or unfavorable terms like exclusivity agreements (which means that merchants can’t use other services). If you do decide on a free merchant account because of inflation, make sure that whatever deal you have makes sense for your business.

Generally, we don’t encourage opening a free merchant account. Fees are always high and the “free” aspect just means your customers pay for it instead of you—usually unknowingly. But now that some areas are removing the ban on passing surcharges onto customers, would a free merchant account be so bad?

Yes, they are still a bad idea. Just because you aren’t paying the fee doesn’t mean you should choose a provider that charges too much. Your customers won’t be so willing to pay an extra $10 for no apparent reason.

How does inflation affect credit card processing services?

Credit card processing fees are set by the credit card companies, like Visa and MasterCard, who then pass them on to you. This is why your rates increase every year. Inflation affects everything we buy and sell.

It’s understandable that you want to decrease your processing fees. Lower fees mean more money coming in. But inflation is inevitable and unavoidable. You can’t expect to pass the entire burden onto your customers without consequence.

Interchange rates may not be negotiable, but other fees are. A good merchant services provider will help protect your business through economic ups and downs.

Is surcharging allowed where I live?

The following states have laws that prohibit credit card surcharges or convenience fees:

California, Colorado (effective as of July 1st), Connecticut, Florida (March 7th), Kansas, Maine, Massachusetts and New York. Oklahoma references a statute enacted in 1985 which prohibits surcharge fee increases. Texas has had an anti-surcharge law on the books since 2002.

It’s important that you check with your state’s attorney general office to determine if there are any laws regarding surcharging in your area.

In Canada, the surcharge ban has been lifted, allowing businesses to pass on credit card surcharges to customers. There are repercussions to this, like a loss in customers, bad reputation, and chargebacks.

The functionality of surcharging is debatable: is it ethical to increase profits by making customers pay for my merchant fees?

We can tell you that your customer support team better get ready for an increase in calls, emails, and chats from angry customers if you choose to charge them.

Inflation will affect your credit card processing fees, now and in the future.

Inflation has a significant impact on your credit card processing fees. Here’s how:

  • As inflation increases, so do credit card processing costs. This is because banks need to recoup their losses through fees and other charges. These increases are passed on to merchants in the form of higher rates and fees, which will ultimately be passed down to customers as well.
  • Merchants are not responsible for these increases, so they can’t pass them onto their customers directly in most places. However, merchants can still try to mitigate the effects of inflation by offering discounts or otherwise reducing their prices in line with any changes made by their credit card processors or banks.

You shouldn’t allow inflation to decrease the usability of your payment gateway just to save a little cash. A per-transaction fee placed on the gateway for customers to absorb won’t help your business in the long run.

Many in-person transactions at a point of sale (POS system) device include a flat fee when using a credit card to make a purchase. These card present transactions (in-store) are generally undisputed by customers, but still leave them with a sour taste.

But virtual terminals and online checkout? Customers aren’t willing to pay an additional fee. What’s the service fee for? Who gets the money? Why do I have to pay it? They won’t understand your reasoning that it covers credit card purchase fees. Instead, they’ll think you’re scamming them—especially considering that the fee is a percentage of transaction amount. That could add up quick.

Bottom line—additional fees are never accepted well. If you want to charge fees, you better have the reasoning to back it up.

Quick Tip: Offer multiple payment options. PayPal is a popular choice, if it fits with your business model. ACH is one of the cheapest payment methods you can offer.

If you’re suffering from high credit card processing fees, give us a call.

Inflation is a complicated process, but one that you can learn to manage. By using the info listed above and keeping up-to-date on any economic changes, you’ll be able to keep your business afloat as inflation affects merchant accounts.

Merchant services offer different pricing models: flat rate, interchange plus, and tiered pricing. Yours may be processing credit card transactions at a bad rate. Remove the monthly fees and markups when you switch.

If you’re paying more than what you can afford in fees, speak with us. The experts here at DirectPayNet will help you manage your merchant account, decrease fees, and improve your cash flow.

About the author

As President of DirectPayNet, I make it my mission to help merchants find the best payment solutions for their online business, especially if they are categorized as high-risk merchants. I help setup localized payments modes and have tons of other tricks to increase sales! Prior to starting DirectPayNet, I was a Director at MANSEF Inc. (now known as MindGeek), where I led a team dedicated to managing merchant accounts for hundreds of product lines as well as customer service and secondary revenue sources. I am an avid traveler, conference speaker and love to attend any event that allows me to learn about technology. I am fascinated by anything related to digital currency especially Bitcoin and the Blockchain.