Wednesday, January 7, 2009

Cash or Credit

People are starting to pay closer attention to their credit card bills, especially now that banks are tightening up their standards and closing or modifying accounts. Most have no inkling about what merchants pay for processing these credit cards. Unless they read the business section closely, they also don't hear the merchants of America pushing Congress to limit the banks ability to pressure them into higher rates and fees. Timing is perfect for such a revolt, with hate for the banks and consumer friendly Democrats about to take over. It's being lead by the biggest retailers, so something may happen.

American businesses pay some of the highest merchant processing fees in the world, and there's really no reason for it. Merchant processing is mostly automated, meaning they do virtually nothing for a business. They feel otherwise. Visa and MasterCard will actually tell us they're raising our fees as a value add. Look, they'll say, we've just added special consumer incentives to use their cards more, therefore your fees will be higher. In other words, we're passing our marketing budget onto you, so you should be pleased. It's a perverse logic, but it's not like any merchant, no matter the size, can call them on it. Who would be willing to drop Visa or MasterCard? About 75% of our transactions are on credit cards, and as a merchant, we want to make it easy for customers to buy things, not harder. Therefore, we take every credit card. I just wish customers knew what that was costing us, and how it will effect our business and how it will come back to them.

For a $100 transaction, seeing cash is a lovely thing. Hand me a Visa card and I'll be paying a percentage of that $100 in fees, about $2 (2%), plus a transaction charge of around 30 cents. So when I see cash on that $100 purchase, it's like you've just handed me a free cup of coffee. If that Visa is a business card or a miles card, the fees are higher, probably in Latte territory. Hand me a Discover or Amex card and the fees are just about doubled; coffee begins to approach lunch.

Yes, you say, but you're a piddly small business, what about the big guys? I've got a friend who does processing that I'm about to switch to who deals with the big guys. The big retailers pay less, for sure, but not a lot less. That $2.30 cup of coffee is only $1.85; a regular cup of Joe instead of something slightly fancier. Doing some bistro math, the average game store does around $250,000 in sales each year, 75% of purchases with credit cards, so pays about $4,875 in credit card processing fees. That's a huge hit.

So what do I do when I buy things? As much as possible I reach for my Amex card, because of the cash back. Second choice is a miles reward card. On vacation this month I'll be staying for free at the Disneyland Hotel. My room at the GAMA Trade Show and Conquest Sac are paid for with miles. I'm not reluctant to use those cards, so I understand that my customers probably aren't either. However, I also understand that this hurts businesses.

My distributors are starting to cut back on this. One stopped accepting cards last year and I don't do business with them much anymore due to the terms. The biggest gives a smaller product discount if you use a card. My primary distributor started adding a surcharge. All of these practices, along with having a minimum charge, like we have, are against the cardholder agreement, but what choice do we have? All businesses are forced to find a way to cope with the costs and pass on these fees, which are always on the rise. Raising prices is not much of an option, but the money has to come from someplace, perhaps reduced labor expenses (fewer employees or employee hours) or fewer phone lines for customer service. The end result is that the business will find a way for the customer to pay more.


  1. >For a $100 transaction, seeing cash is a lovely thing. Hand me a Visa card and I'll be paying a percentage of that $100 in fees, about $2 (2%), plus a transaction charge of around 30 cents. So when I see cash on that $100 purchase, it's like you've just handed me a free cup of coffee.

    And when I take out $100 cash I could get charged up to $4 by my bank and the ATM I might get my cash from.

  2. Yes, but do you think that's an honest comparison? The everyday fee compared to the worst care scenario? Also, I'm not excusing the bank fees, they'll get you any way they can. A little planning though and you pay no fee for cash and avoid the credit card treadmill.

  3. Where do debit cards come into this. Same fees, lesser, higher?

    The banks really push debit cards as the "new cash" so I'm curious how they effect you as a business.

  4. Business Visa/MC are around 3%
    Debit cards are around 2.6%
    Reward cards are about 2.5%

    One of my projects is to buy a pin pad so I can run debit cards AS debit cards, which is much cheaper.

  5. This varies quite a bit by processing vendor. I just faxed over an application to my new processor about 5 minutes ago.

  6. OK, so you're running them as credit cards, which is expensive, but if you actually run them as debit cards it's cheaper?

    That's what I was curious about.

  7. Yes, it's cheaper. I don't recall how much cheaper, but I do know it would pay for the $200 in hardware within the first year, at least for me.

    I just ordered the hardware after I wrote the previous post. It was a good reminder.

  8. It's nice to hear you'll be able to run debit cards soon. I make it a rule never to use the Visa part of my Visa debit card because I never know when the money will come out and I don't always have enough cash on hand for a sixty dollar game/model. I must admit it has probably cost you a purchase or two from me.

    And to anonymous: $4 ATM fees? Seriously? Do you go out of your way to find a strip club before you withdraw money?


  9. I'm completely unused to ATM fees at all. Back in the UK, I could use pretty much any bank's ATM with no fees involved. Now I realise just how good I had it.

    I do still use credit, I'm afraid, but I'm using the Visa rather than the Discover. And I do feel guilty when I do that.

  10. I would still use the credit portion of my debit card. I have had too many stores charge me for using my debit. They can't do that with credit.

    Cash is something I deal with when I must, or when I need to be sneaky.

  11. OK disclosure first - I work in the card industry... (However I will also say I personally dislike many of the typical practices of credit card issuers).

    A couple of thoughts:

    If you're comparing the cost of different payment methods then you cannot assume cash is 'free'. This may not be as applicable to your business as much, but certainly for larger businesses, cash-handling and cash management does represent a cost to the merchant (in security, employee theft etc.)

    Also, do you not feel there are a certain amount of purchases made on a card that would not otherwise be made if a customer was paying cash? If I have $40 dollars in my pocket then I can only spend $40. If I have a card with access to a credit line or a bank account with $1,000 in it then my spending is really only limited by my capacity to be sensible; now that may be regarded as a reprehensible point of view (and I would not necessarily disagree) but from a strictly business perspective, it does benefit you.
    However, if you can gain the same benefit and only pay PIN transaction fees then you may have the best of both worlds.

  12. Correct, I've "externalized" the costs of cash to my employees, such as their personal security and even their small bits of time and money to make nightly deposits. I tell them to add that extra time into their hours, but I don't think they do that.

    The credit convenience factor is very big. How big? I don't know. I just got my merchant statement for December, and 90% of our sales value was done via credit card. Even when people have the cash, they're less willing to part with it. I see that in my finances, both the stores and personal.

    I'm hoping the addition of a pin pad will make everyone happier. I always considered it a benefit to me, not my customers. It was surprising to find out how may people desire this.

  13. I think you raise an interesting point, but it raises some other questions. If big businesses benefit the most from not handling cash, why do they pay less for service fees than small businesses? I realize that it's because of volume, but it certainly indicates that while this may be a benefit, it's not one that's actually being factored into the pricing structure.

    Also, having had to prepare deposits and do the daily tallies for a small business, I'd have to say that the costs involved with cash are still less than those involved with cards, especially when you are dealing with a large number of relatively small transactions and those minimum charges start adding up.

    There is the employee shrinkage issue, but that tends to be balanced by the possibility of chargebacks, which is something you don't have to worry about with cash.

    Your final point is the reason why credit cards exist, and why people take them. If it wasn't for people potentially putting more on their card than they could otherwise pay for at that moment, then no one would take them.

    That possibility is what retailers pay for. The question is, are they paying too much? The answer, based on prices elsewhere, is a resounding "yes."

  14. For the cost of my processing in December, I could have hired a full time staff person.

    Also, I've never had a charge back or any type of fraud. The only time I've talked with my processors is when they call once a year to make sure everything is fine. It really is a turnkey affair for most merchants.

  15. Charge backs have always been very rare with the retail businesses I've been associated with, but when they happen they're a pain in the ass. In most cases they usually just get written off unless they are for a very big purchase.

    Admittedly, my experience in this area is over a decade old now, so things might be different today.

  16. As you rightly say, Fulminata, the big guys are able to get the concessions they do because of their volume; none of the big international card brands can afford for their cards not to be accepted at the major retailers so I think the rationale underlying the fees goes out of the window to some extent.

    The conventional wisdom in the industry is that the interchange rates for signature transactions will decrease further over time, though there is an expectation that PIN rates will increase.

    I am not expert enough in this area to know what the true fair market rate should be - the interchange system was designed to try to balance the relative risk and reward on both sides of the transaction (acquirer and issuer) but the debate over rates has been going on for many years.

    By the way, while the retailer action mentioned by Gary may potentially benefit retailers if it succeeds, the evidence from markets such as Australia, where interchange rates are now regulated, is that consumers derive no benefit because issuers have tried to make up the 'shortfall' by introducing card fees to cardholders.

    Anyway, it is an interesting topic but I don't want to clog the blog further :-)

    Gary, if it helps, I'll bring you a Latte next time I visit :-)

  17. Believe me, as a consumer I'm completely happy with the system as it is now. It's only as someone with interests in small businesses and a possible future small business owner that I have concerns over the current fee structure.

    I expect that at the very least many of the kickbacks that credit companies provide for using their card will diminish or disappear if the interchange rate is lowered by government intervention.

  18. Thanks! Americano, if it's not too much trouble. ;)

  19. 2 things:

    Debit cards cost around $.25 per transaction, plus around .4% (sometimes not) commission. What it works out to is if the total is less than around $15, it's better to go with the credit card. If it's over $15, better to go with the pin-pad debit. So that $100 purchase? About $.65 if PIN pad is used. Yes, you will save a bundle, especially if you can get your employees to understand this concept, and when customers say things like "Ah, I don't care debit or credit", they will choose wisely.

    2nd thing: Costco does not take MC or Visa, Sam's Club does not take MC.

    and I have one more thing... When you start your internet store Gary, you will get chargebacks.

  20. I've been recently educated on the debit card costs and I can't get it set up fast enough!