Merchants today are practically forced to accept premium credit cards. With fewer people carrying cash and checks becoming obsolete, the average shopper will pay for things with debit cards or credit cards. Though this might make shopping easier, it does add one huge cost for merchants. They must pay exorbitant fees to process those transactions. Each time a customer swipes the credit card, the merchant must pay a small, flat fee, as well as a percentage to the card company. Though this might not seem like a big deal, it really adds up, especially for those merchants who depend on many small sales such as corner stores. Perhaps more importantly, merchants are not able to charge customers directly for those costs. The result, of course, is higher prices across the board.
The average costs of processing credit cards
Different merchants will pay different rates to process those credit cards. This is because there are many options in the credit card processing world, and they each have a different fee structure. Premium credit cards that feature bonus programs such as Air Miles, or other point programs appear to give the cardholder access to free travel or other goods. In fact, those bonuses are paid for by forcing the merchant to pay additional fees which are not allowed to be passed on or even disclosed to the consumer.
Business owners typically pass all of their costs on to customers. Laws prevent them from charging customers for the processing fees, though, and this means that merchants have to find other ways to compensate for the costs. This is something that has an impact on the economy at large, pushing prices up across the board. In the end, consumers end up subsidizing the credit card processing companies, and those companies charge higher rates with every passing year.
The effect of credit card processing fees on the consumer economy
Even though businesses cannot make customers pay the fee directly with every purchase, they compensate for the higher costs either by cutting into their profit margins or raising prices. Because business owners are not in the business of making less money, the invariably raise their prices on all products. This means that even those people who do not use credit cards and those people who use credit cards without bonus programs end up paying the cost. The benefit of using cash to make purchases is no longer present, as increased prices are shared by consumers.
All merchants are in the same boat when it comes to processing fees. The prevalence of cards makes accepting them a complete necessity, and any merchant that denied cards would die a hasty corporate death. What this leads to, of course, is people being charged more for those common purchases like clothing, fuel, and food. The money is directly funnelled to credit card processing companies and their premium customers with no real benefit to the business or non-participating consumers. It is, in effect, a form of wealth shifting. Making matters worse, these companies often band together to form informal cartels to set their prices in similar ranges, depriving merchants of the benefits of a competitive environment.
Today’s merchants are in a no-win situation, and they’re forced to either pay the higher prices or go entirely refuse credit card purchases. When consumers find themselves using premium credit cards more often, they’re bringing on higher prices for everyone, as the market has adjusted. Worst of all, this hidden cost is intentionally designed to keep consumers in the dark, shifting the blame for higher prices onto merchants while simultaneously creating goodwill towards premium credit card vendors through the illusion of free travel and points programs.
Mark Jenkins is a business analyst and financial advisor at Nova Scotia Financial Management.