I am really quite surprised at this. The small businesses around here must be crazy. They all take cards, so they have the 20% increase which is good. But they are offering about 3% discount for cash. According to the analysis posted above, they are doing this even though cards are cheaper to use. Dumb people.
Those are all costs to using cash. If we are including them in this discussion it seems only fair to include the equipment and operating costs of the card readers and the cost of charge-backs into the cost of using cards. Not being a retail business owner, I have no way of adding up the full costs of each method of transaction.
No because it’s a pass through. The merchant collects the tax on behalf of the government. It’s a separate accounting item, not part of revenue, not part of cost.
Not all credit cards give rebates, not all customers pay with credit cards. If you look at it at the transaction level, a merchant selling a $10 item to customer with a credit card incurs a fee of, let’s say, $0.30, and selling for cash incurs a fee of $0. So the merchant has incurred a cost of 3% on the credit card customer, not 1%.
The total economics are a different issue. Just to scratch the surface, it’s not at all clear that the supply and demand curve would allow the merchant to raise prices by 2% just because they accept credit cards.
Good point.
The cost of cash is hidden and indirect. And like I said, the cost of using cash is more like 1% for most, but it does go up.
However, cash does have one benefit that CC don’t- the ability to hide some % of it from the IRS.
As I mentioned upthread, the cost of using cash is there until and unless the merchant can stop accepting cash completely. Especially for the small Mom ‘n’ Pops we’re mostly trying to help by our various reasonings here.
Them offering a 3% discount for cash, and full price for credit, makes the after fee costs the same, assuming the merchant was going to take any cash at all. Or assuming the merchant is in an area where not taking cash has been outlawed.
I hadn’t popped in fer awhile, but wanted to thank you guys for answering my original question.
Tripler
Man, this thread grew legs!
So to sum up -
If the seller can raise the price to cover the additional fee - they will, usually. They may raise the cost for everyone (cash buyers are bigger losers) or for credit card users (who now pay for the convenience and the “float” time between charge and payment)
If the seller cannot raise the price (market competition) then the seller loses the amount of the fee.
“Cash back” simply encourages the buyer to use that card - unless the merchant raises the price for credit cards only.
Unless the seller can escape using cash entirely, there will always be some costs associated with cash handling.
Visa and MasterCard have most of the business here. You can get American Express cards but a lot of retailers will refuse to take it.
There is one big difference between the sales tax and the credit card fee. The tax is always paid (*yes some purchasers are tax exempt) so whether the tax is included in the price or added on, the merchant always has to pass it on. The credit card fee, however, disappears if someone pays by cash (yes there are other costs). So the merchant can tack on 7% and know he’s collecting the sales tax (and he doesn’t get it or transmit it when a tax exempt sales occurs). But if the merchant tack on n% to cover credit card fees, he “wins” if more people pay cash than expected and “loses” if fewer do.
So the tax situation is not the same.
They could make it the same by passing through the credit card fee to the customers on a case-by-case basis, but I’d guess they experience a big loss in sales and anger customers.
Certainly. Interchange rates vary depending on the business, too–high-risk CNP (Card-Not-Present) businesses are going to pay a higher rate than, say, a fast-food restaurant, where it’s hard to defraud them out of a lot of $$ and they’re likely to just eat (!) the charge anyway. It’s a crazy business.
Your logic doesn’t make sense. This whole topic is paying cash vs. paying with a credit card. If you have the cash and choose to use your credit card to make your purchase, then you have the cash to pay off the credit card when the bill comes due. If you don’t even have the cash to begin with, you wouldn’t be making that purchase.
I was referring to the part of the discussion about rewards, and noting that those who cannot use cards are both overpaying (because they’re paying the interchange fees that the merchant is not having to pay on those cash purchases) and not receiving the card rewards. That’s doubly regressive. I don’t see any illogic there.
This assumes that the people who use cash, don’t have the option to use a card. Some people irrationally (in my opinion) reject credit cards for - what? Some guy on a forum says they are the work of the devil? Some, for various reasons, cannot get a card and they are the ones who lose out.
I recall a discussion meeting at an event I was at several years ago. The person organizing the finances mentioned the previous year, they’d had a local friendly bookstore handle the credit card charges for attendees buying tickets at the door.
Apparently one person actually checked their statement later, and complained to their bank I never bought anything from this bookstore". It took a bit of back and forth, but they accepted the charge when they understood what it was. However, the bank told the organization and the bookstore to not do this again. Not because of possible confusion, but because a bigger business like the store got a much better rate on credit card fees.
I seem to recall a complaint in the news from the small business association, back when rewards cards first started getting ubiquitous - that apparently the fee charged the merchant varied depending on the card’s reward levels, and some cards had bigger fees than others. Of course, the actual amount charged the merchant was unpredictable at the time of purchase. Complaints were loud enough about merchant fees (many smal businesses had signs saying “no credit or debt for purchases under $5 (or, $10)” and eventually parliament put a cap on merchant charges.
Thanks to COVID and fears of handling money everyone else has touched, plus my Apple Watch, I find that I rarely handle cash today. Before COVID I would use cash for any smaller purchases.
I don’t know if there’s such a difference between us and the USA, but I do find a bigger emphasis in American news and discussions about things like credit scores and credit card debt and alll sorts of financial irresponsibility. Perhaps that guy had a point.
I think that much of the discussion about credit scores is driven by the companies that want to provide them. I get frequent spam offering to tell me my score “for free”. Only in the small print do you discover that you have to sign up for the service to get the “free” offer. If you are not about to take out a loan, your credit score has no impact on your life, so I ignore them.
I also have no concerns about the high rate of interest that my cards will charge if I fail to settle every month. I have them set to be paid automatically and check online to make sure that there is sufficient credit in my current account to cover this. Almost all my spending is on credit cards.
My thought too. Although in Canada, over 40 years of dealing with banks, nobody has every mentioned my “credit score”, even when I bought a $500K house. (Mind you, I was putting 30% down.) I assume most banks do a quick check with the Credit Bureau and make their own evaluation as to a person’s creditworthiness.
Same here. Although, I do try to use cash with smaller privately-owned businesses when i can - although since COVID I’ve tried to limit cash handling, since I know that credit or debit, they get dinged with fees. (And worse, it seems the smaller the business, the less clout they have so the higher their fees). For bigger chain stores, tap with Apple Watch and Apple Pay is so simple - no digging in a wallet for a card.
Worst case, like when i needed new shingles, or a down payment on a car, I could put Several thousand more on the card and pay it with a line of credit. When i bought a new car a decade ago, our HELOC was 3.7%; when I asked the dealer if he could do better for laon terms, he put back the loan binder he’d been pulling out and said “no”.
There’s an entire subfield of economics studying tax incidence, i.e., the question of who, economically, bears the burden of a tax. It’s a complicated matter, but the bottom line is:
- The person who is legally responsible for paying the tax (the merchant, in your example) is not necessarily the one bearing this burden; but:
- That doesn’t mean the merchant will, in all cases, be able to pass on the tax burden as a pass-through cost by adding it to the price of the product. Depending on the circumstances of the market (most importantly, the price elasticities on the supply and demand side of the market), the merchant may be able to pass on only part of the tax.
Similar logic can be applied to payment fees, which, in this scenario, operate in a manner similar to a tax.
My superficial analysis of the Canadian GST (and presumably European VAT) is that it is essentially a payroll and profit tax. Shops are charged the tax on the goods they buy, and collect the same percentage on sales. he difference in price is primarily sales and profit (plus assorted other overhead that does not have a deductible GST component, like insruance.)
However, it replaced a hidden tax on wholesale, so in the end the same thing only more logical. It also has the effect of catching some of the under-the-table work taxes, since a contractor could not get a rebate for the tax on materials if he was not charging the tax on total work.
The way VAT works means that a business with a turnover under £85,000 does not have to be registered (although it can be).
This means that a homeowner who is having a small job done may find a small business (and some try to remain small and unregistered) that will be cheaper for the labour at least. Materials will be VATable but that may be the lesser part of the final bill.
The problem is that the £85k limit has not been updated for over five years and it looks to stay the same next year as well. £85k is not a big enough turnover for even a one-man business to make a living.
That’s why the tax is called, in Europe, “value added tax” - at every step of the chain, the value added to the product is taxed. So if an iron mine produces iron ore and sells it, that is taxed. If someone takes that ore and turns it into raw iron, the added value of turning the ore into iron is taxed. If someone takes that raw iron and turns it into an iron tool, the added value of that step is taxed. Administratively, this is done by taxing, at each stage, the sales value of the entire product but deducting the input tax that the company at that stage paid for its input resources. Example: If the toolmaker pays £5 (net of tax) for raw iron and turns it into iron tools that sell for £20, then, assuming a VAT rate of 20% (the standard UK rate), the VAT on the tools will be £4, but the toolmaker will have paid £1 in VAT on the raw iron. This £1 in input tax can be offset against the £4 in tax on the product, resulting in a tax liability of £3. The overall effect of this is that, after all the stages the product has passed through, the entire value contained in it will have been taxed once.