A friend recently suggested that credit card fees are a painpoint for all small businesses. That rising fees are deeply cutting. I have no better way of saying this other than, that’s a bunch of crap.
It’s absolutely absurd on so many levels. They act as though they don’t see the value of taking credit cards, yet continue to take and use them?
In reality it’s better for the customer and the business (in revenue and in ease).
The question is; how much do you value making purchasing easy for your customers?
Simply put.
If it’s not worth 2%-5% then don’t take credit cards. But you would be an idiot not to see the value of taking credit cards. Well, not an idiot, but just one who doesn’t actually understand the intricacies of business.
Let me lay it all out there.
1) Reduce in Purchasing Friction
Online, friction is understood really well. If you add boxes on your registration form the percent of people who complete the form (to register for your product) goes down. The more steps there are, the fewer people will buy.
Okay, so when your customer comes in without cash, wanting to buy something, why don’t you kindly ask them to make a quick trip to their bank to withdraw the appropriate amount of cash while you hold the product?
Because, duh, they may not come back. Not only will they likely buy it somewhere else this time, but they won’t come back next time.
If you want to limit yourself to cash, do it, but you’ll see a drop greater than the cost of taking the dang credit cards. So don’t pretend you don’t see the value for your customers. If they didn’t love it, the store wouldn’t take it.
2) The psychology of spending
It’s exactly why credit cards are dangerous, Dave Ramsey says (according to my sister-in-law) that people spend 10% more when they have a credit card. So spenders be warned and be well in control of your spending.
But for businesses, you obviously want to encourage splurge spends. The lack of friction is not only preventing loss of business it potentially increases revenue by 10% (which is more than the credit card fee for sure).
Perhaps one with cash gets out the right amount and one with a card will find other things they need along the way.
Love it or hate it, it’s always good for business.
3) Handling of the money
Given that keeping track of money is not optional for businesses, it’s a legal matter, I suggest that credit cards have other values. The perk isn’t just for the customers ease but the business’ ease. Businesses moving forward need to figure out how to automate and move away from manual.
For this reason, I think moving forward you’ll see people not taking cash at all. Honestly.
The digital and automated benefits of credit cards are greater than the revenue earned in cash at many places. And if people have no cash they need to go get it. But if people have cash… well, they still have their card.
The benefit of credit cards in analytics. Paying someone hourly to do the analytics is worth the 2%-5% alone.
4) The competitive nature of it all
Not only do people carry cards consistently, they only want to make spends on cards. Truly. People prefer using cards for a number of reasons:
- It’s easy (which was discussed).
- Its cost, because while fee-free atms may be around, generally people will use the most accessible atm to withdraw cash, despite fees.
- People don’t want to carry cash.
- They have their own spending analytics automated with programs like Mint or American Express.
- Rewards.
Yep, now people don’t like using cash because they don’t earn rewards. I’m guilty of this. Especially if it’s a big spend. I would rather pay slightly more and put something on a card to earn points.
The banks have to offer competitive rewards, and business have to stay competitive in the same way. Undermine peoples’ ease, cost or rewards and they’ll go somewhere else.
5) The big cards are worth it.
Generally speaking, the more the credit card charges a retailer, the better a card it is. The better cards are given to people with more money.
If a business wants to deal with wealthy people, they will deal with bigger credit card fees. Unless you’re running a thrift store, I think you want more people with money shopping at your store, not less.
So when you see an Amex Platinum card, you should suck up, not drive them away.
6) Switch to a different program
If you don’t like the price you’re paying for taking credit cards use something else. I can’t comment on this too much other than I know that a lot of coffee shops in Charlottesville have switched to using a SquareUp which has a flat rate of 2.75%.
Don’t like 5% fees… then use this. It has its pros and cons too, but that’s up to the business.
Conclusion
The fact that many businesses wouldn’t exist without credit cards and yet complain about the fees, while getting all the financial and data benefits, doesn’t make any sense to me.
Don’t like it don’t use it, and you also won’t benefit from it.
“Times are hard, 3% is still a lot…”
I can’t imagine the percentage lost by going all cash. Hint: it’s more than 2%-5%.
Not only am I saying that credit cards are good for business, but I’m saying they are so good that many should consider not dealing with cash. Of course it depends on the business. If one charges an average of $1 per transaction, maybe people honestly enjoy getting rid of their change. I don’t know. But I can’t imagine the loss would be great.
Still, I’m making the bold claims that credit cards are great for small and big businesses alike. The fee is very minor for the benefits.
If it benefits the customer it benefits the business. And then again, it directly benefits the business.
Just a few more…
Cash is more easily stolen from registers (by employees)
Carrying cash to the bank for many businesses can be dangerous.
Carrying cash can attract unnecessary government attention. One recent story of a grocery store whose funds were taken by the government under forfeiture rules (suspected structuring to avoid reporting requirements) turns out to be that they always took less than $10k at a time because that’s what their insurance covered.
Checks bounce, and funds paid by check may not be available as quickly.
You can set up automatic or recurring payments with a credit card but not with cash.
Credit cards manage foreign currency transaction much more seamlessly.
Saying that credit card processing fees are a major concern for businesses strikes me as not all that different from saying that rent is a concern, or more accurately that inventory is a concern (since this latter can vary with sales volume while rent is generally a fixed cost).
These points are so excellent… that I wish I included them.
Some businesses can hide income if it is not strictly reported so cash is more valuable. The local Chinese massage (no, not that kind) place doesn’t even charge local taxes if you pay cash (saving 8%).
That’s funny. Illegal but funny. So those who wish to make legal paperwork easier, for them it would be better. lol
But the biggest problem with credit cards is about cost assymetry: Consumers rarely have to pay extra to use a card, so even if there are some benefits to the business, they aren’t worth it to the business themselves. I think there should always be a 1% fee for credit card use to distribute the cost among both parties. Then when the client thinks the convenience isn’tworth the cost, the business doesn’t get burdened. Even as a big credit spender for travel now, I never use cards at small businesses, as they pay higher transaction fees on cards.
But when the client thinks the convenience isn’t worth the cost, the client very well may go elsewhere. I think very few businesses would benefit from charging extra to use a card even where legal – why give your higher spending customers a reason to think of taking their business somewhere else?
The entire point of this article is that the small fee is more than worth it to small business. Because people will use them, because they’ll spend more, because there is less accounting issues, because cash is a liability, because checks bounce, and because if you added a fee you would be giving every competitor a competitive edge.
In fact, I think you may start seeing some businesses not take cash soon. It’s business smart. Don’t spent your time counting money, instead spent the time making money.
Generally yes if it benefits the customer then it benefits the business. As the profit margins get smaller and you get to smaller businesses that are struggling though, then those fees can hurt business more than help.
Also @JB above makes a good point that cash businesses operate with a little more “flexibility” in what is declared so they stand to gain far more by maintaining cash only status.
Don’t get me wrong, I try to put everything on cards now for the points, but I completely get why my favorite pho restaurant is cash only and I have no problem withdrawing money just to eat there because it is delicious!
If it’s an such an unprofitable business, a more profitable and efficient (automated (like credit cards) business will replace it. It’s how the market works.