Payment Gateway Decreases the Real Value of Currency

Currency:

Currency is a medium of exchange issued by a government or monetary authority, used to facilitate trade and economic transactions. It serves as a unit of account, a store of value, and a standard of deferred payment. The value of a currency is determined not just by its nominal value (the number printed on it) but also by its real value, which reflects its purchasing power in an economy.

Payment Gateway:

A payment gateway is a digital service that authorizes and processes payments between a merchant and a customer, typically in online or card-present transactions. It acts as a secure intermediary that captures payment data, validates credentials, and facilitates the transfer of funds through banks, card networks, or alternative payment providers. Major examples include Stripe, PayPal, Square, First Data, and others.

Decrease:

A decrease in the real value of currency implies that consumers and businesses are getting less in terms of goods and services for the same nominal amount of money. This is often associated with inflation, but in this context, the decrease is a result of intermediary transaction costs introduced by digital payment ecosystems, particularly payment gateways.

Real Value:

The real value of currency is its effective purchasing power — what one unit of currency can actually buy in terms of goods and services. As digital intermediaries like payment gateways charge transaction fees, often ranging from 1.5% to 3.5% per transaction, a portion of every dollar spent is lost to processing fees, eroding the currency’s effective value in real commerce.

How It Happened:

As global commerce shifted towards digitization, reliance on payment gateways increased substantially. This transformation was accelerated by the COVID-19 pandemic and the boom in e-commerce, which led to the normalization of card and contactless payments across all business sizes. However, this convenience came with hidden costs:

• Merchants are charged a percentage of every transaction.
• These fees are often passed onto consumers indirectly through higher prices.
• In aggregate, these fees reduce the overall monetary efficiency in the economic system.

Case Study: First Data and POS Systems

First Data, a major player in the payment gateway and point-of-sale (POS) ecosystem, provides services to thousands of merchants. Let’s assume a small retail shop processes $100,000/month in sales via First Data’s gateway and POS.

• Average processing fee: 2.75%
• Monthly fee deduction: $2,750
• Annual loss: $33,000

This is $33,000 annually removed from the merchant’s usable capital — capital that could have been reinvested in wages, inventory, or expansion. At scale, across millions of businesses, these fees accumulate into billions of dollars, subtly diminishing the purchasing power of money circulating through the economy.

What is the Impact:

1. On Businesses: Lower net income, reduced capital for reinvestment, and forced price hikes to maintain margins.
2. On Consumers: Increased cost of goods and services, leading to diminished purchasing power.
3. On the Economy: A stealthy transfer of wealth from the real economy (producers and consumers) to financial intermediaries, contributing to inequality and inefficiency.
4. On Inflation Measurement: Traditional CPI metrics may underreport this loss of value, as gateway fees do not directly appear in price indices but still affect final prices.
5. On Cash vs Digital: The disparity between cash transactions (which involve no such intermediary fees) and digital payments contributes to a hidden “tax” on digital convenience.

Recommendations:

1. Regulatory:

• Fee Cap Legislation: Similar to European Union regulations, implement maximum limits on interchange and gateway fees.
• Transparent Pricing: Mandate clear disclosure of gateway fees on merchant statements and receipts.
• Promote Competition: Encourage fintech innovation to introduce lower-cost alternatives and reduce monopolistic pricing.
• Subsidies for Small Businesses: Offer government incentives to offset the burden of processing fees for micro-entrepreneurs.

2. Technological Solutions:

• Adopt Central Bank Digital Currencies (CBDCs): CBDCs can offer direct, fee-free payment systems reducing reliance on private gateways.
• Encourage Peer-to-Peer Payment Platforms: Expand decentralized systems that bypass traditional gateway structures.

3. Merchant-Level Strategy:

• Negotiate Lower Rates: Encourage businesses to negotiate lower transaction rates based on volume or loyalty.
• Incentivize Cash or ACH Payments: Offer discounts for cash or direct bank transfers to mitigate gateway usage.

4. Public Awareness:

• Educate consumers and businesses on how payment gateway fees impact pricing and value.
• Promote financial literacy around digital payment costs.

Conclusion:

While payment gateways have revolutionized modern commerce with speed and convenience, they come at a cost — a systematic erosion of the real value of currency through fees and hidden charges. For a truly inclusive and efficient economy, it is imperative to balance innovation with affordability, ensuring that currency retains its full utility across all levels of the economic chain. Robust regulation, transparency, and competitive technology will be key to mitigating this issue in the digital economy.