Hidden Impact of Inflation on Card Processing Costs

Flashback to March 2021 – the U.S. Government had just issued its third, and largest, round of COVID-19 stimulus checks. March’s issuance of $1,400 quickly followed the $600 second round issued in January 2021. This $2k infusion of cash into American’s checking accounts pushed the use of debit cards to new heights. Optimized Payments data indicates that debit sales mix (debit as a % of all card sales) hit a high of 57.6% in March 2021. Thanks in large part to the 2011 Durbin Amendment, which fixed large-bank issued cards interchange rates at 0.05% + $0.22, the average cost of debit card acceptance can be up to 200 basis-points (2.00%) lower than their credit card counterparts. All else being equal, as more volume shifts into debit cards, merchants benefit in the form of lower processing costs attributed to a lower total effective rate of processing. A typical merchant would likely have seen their lowest card processing effective rates in March 2021.

Fast-forward 18 months, to late 2022 – where the macroeconomic landscape has quickly shifted the other way. The inflation rate has risen from under 2% in Q1’2021 to over 8% for much of 2022 (figure 1). While the historic increases to the inflation rate have been well documented, what has been less noticed is the impact that inflation is having on card processing costs. The obvious impact is that card processing costs will increase as prices increase; an 8% increase in the price of a good or service will have approximately an 8% higher card processing cost. However, and just as significant, there is another impact to be considered – the hidden cost increase attributable to changing consumer payment behavior as in response to high inflation. As payment sizes increase, consumers will turn more to credit cards. The Federal Reserve just released its Q3’22 report on household debt, which found that credit card balances increased by 15%, their largest increase in more than 20 years.


Optimized Payments data supports this increase in credit volume, as the average debit sales mix in our data has dropped to 50.7% in 2022 (figure 1). That figure marks a dramatic 7-point drop in debit mix in the span of just over a year. When this decline in debit mix is combined with the 8% increase in inflation, the actual impact to merchant card processing costs per transaction is an increase approaching 16%. Figure 2 illustrates how the average cost to process a transaction increases for a hypothetical merchant. For example, a merchant that had an average payment size of $100 in 2021, and now has a $108 average in 2022, who also had their debit mix drop from 58% to 51%, would have experienced a 15.4% increase to their average card processing cost per transaction over the last 18 months. Merchants are experiencing cost pressures not just from inflation itself, but also from the resulting changes inflation is having on consumer behavior.

While merchants have little influence over inflation and consumer payment behavior, they are surely feeling the impacts. When analyzing how processing costs may have changed over the last two years, be sure to consider the hidden impacts that inflation is having on consumer behavior. Both Optimized Payments & Fed data indicate that credit card volume has increased significantly in 2022, causing card processing fees to increase.

Now, more than ever, it is critical that merchants do all they can to optimize their card processing costs.

Please reach out to Optimized Payments and see how our proprietary technology and expert payments professionals can reduce these costs for your business, including how to navigate the Fed’s recent debit routing ruling. Optimized Payments has helped clients like Apple, Verizon, Staples and Charter Communications save over $450M in card processing fees through Payment Analytics.

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