How Does Inflation Impact Merchants?
The short answer is – it depends. Inflation affects businesses differently depending on multiple factors. You might find that your business is actually quite resistant to changing market conditions. For example, if you operate in a very competitive market, some of your competitors might be incentivized to keep prices steady and attract customers from other market players that need to raise their prices to stay in business. If your business is in a niche market with fewer alternatives for customers, you’ll have more liberty to raise your prices without fearing lost customers. In this case, your position in a niche market gives your business additional resilience to inflation.
Another consideration is the type of goods and services you sell. Customers will always cut back on non-essential or luxury goods first, so if you’re a jewelry store, inflation might give you a more challenging time than it would for a supermarket or grocery store. Economists call this the price elasticity of demand, which is a sophisticated way of describing how resistant something is to price increases. Price elasticity explains why people continue buying gas and bread even through exorbitant price increases but stop buying sweets and sports cars. If you sell products and services that people can’t live without, you’ll have an extra layer of protection during inflationary periods.
Looking at the market and the products or services you’re selling is crucial to understanding how your business will be impacted by inflation, but you should also examine your brand. A strong brand is an underreported strength of inflation-resistant companies, but it can play a key role in saving your bottom line. Customers often buy the brand behind the product and the odds of this happening increase with brand fondness. A study found that 73% of surveyed consumers will pay more for a brand they love and trust. If you have a strong and trustworthy brand that has loyal customers and advocates, chances are you’ll be better off than less established brands.
Even with these considerations, it’s impossible to shield yourself from high inflation completely. It will affect everybody to some degree. Building an inflation action plan for your business necessitates discovering the hidden ways inflation will impact your merchant account. Although not a comprehensive list, we’ve included below the most common avenues worth consideration by merchants.
1. Higher Credit Card Processing Fees
Visa and Mastercard suspended their plan to raise the interchange rate (also known as swipe fees) in 2020 to ease the burden of the pandemic on businesses. However, the card companies plan to continue with the rate hike in April 2022. This is a painful blow to many merchants and will exacerbate the effects of inflation on businesses across numerous industries. Swipe fees are designed to cover the costs of processing a credit card payment. They also offset the inherent risk of fraud in credit card transactions, with higher rates assigned to riskier transactions. Online purchases, for example, are notorious for their high swipe fees because the risk of fraud is much higher. If you operate an ecommerce store or your customers have a tendency to pay with cards, then this interchange rate hike will hurt you disproportionately more.
2. Your Customers Change How They Spend Their Money
This includes how much money they spend on your goods and services and how they pay you. Visa’s 2022 Back to Business Global Study noted that 41% of surveyed consumers said they plan to shift to using only digital payments within the next two years, or are already cashless. As the COVID-19 pandemic continues into its third year, customers are changing the way they make purchases, as well as how they pay. While trying to understand how inflation will affect your business, consider how your customers are paying you and if this will change. Additionally, as customers lose purchasing power and change their willingness to spend money, you could experience less demand for your products and services. You might need to address low sales volume and reduced revenue in the coming quarters, depending on what you’re selling and the characteristics of your customers.
3. Increased Operating Expenses
Rising prices can impact your bottom line in many ways, including general operating costs. Prices are steadily increasing for everything from food and office supplies, and this trend shows no signs of stopping. Costs from wages and employee benefits are also expected to increase over time from rising prices. Across the board, the Consumer Price Index (CPI) shows a 12-month percentage change of 8.5%. Although many prices are changing, energy is by far the most severely impacted category, with the CPI showing a 32% increase compared to last March. Energy inflation at this magnitude will heavily impact utilities, travel, and transportation expenses. However, merchants will also feel it throughout the supply chain as getting materials and goods from location A to location B becomes monumentally more costly.
4. Expensive Business Loans and Debt
When inflation rises rapidly, one tool the Federal Reserve has at its disposal is the federal funds rate. The federal funds rate determines how expensive it is for commercial banks to exchange their reserves with each other. Higher rates make it costlier for the banks to borrow from other banks, making it costlier for merchants to borrow money. When money changing hands becomes more expensive, it reduces demand and helps push back against inflation. Economists polled by Reuters expect half-point interest rate increases in May and June, which could see the rate at 1.50% by the summer. The economists also predicted that the Federal Reserve would continue increasing the federal funds rate until it reaches around 2.50%-2.75% by the end of 2023. Unfortunately, the positive effects on the economy from rate increases take a lot longer to kick in than the immediate adverse effects on merchants.
If your business recently took out a loan or is considering doing so in the near future, pay attention to lending restrictions and the details behind the loan. Fixed-rate loans won’t be affected by rate increases, but payments for variable-rate loans will become more expensive as the Fed raises rates. Additionally, if your business relies on maintaining a balance on your business credit card, your monthly interest payments will increase