That is, how much extra do things cost because of the “free” use of credit cards?
I’m not talking about your personal bill, but what percentage of what the store has to raise prices to cover their credit fees. I know some small hardware stores say this is a major slice of the markup, but I wonder how much.
Credit cards don’t add to the cost of merchandise, they subtract from it. The vendors accept credit cards because it increases sales and reduces the percentage of fixed cost. They allow for economy of scale. Ask your hardware store guy why he continues to accept cards if it costs him money. If he stops accepting cards, he’s going to raise his prices or go out of business, probably both.
Huh? I believe the CC companies charge the vendors a fee on each sale. Like 2% or 3%.
Using a CC (verses cash) decreases a vendor’s profits, which is why some will offer a discount when you use cash.
And why some impose a minimum price (i.e £5) before they will accept a credit-card.
You are, of course, technically correct, but Bill Door would argue that what he says is correct at the same time. Or that the two claims aren’t necessarily incompatible. Bill Door is saying that even factoring in the cost the merchant pays, accepting credit card somehow increases volume so much that it’s well worth it and the merchant’s net margin is higher than if they accepted only cash.
Recently, I have read several articles about how the credit card fees are killing small businesses. What I don’t understand is why they won’t give a discount for cash. I get back 1% of my credit card transactions, but a 2% cash discount would be even more compelling.
In the end, with virtually all merchants taking credit cards, no one of them gets increased business and the credit card companies make out like bandits.
Very true. If a vendor claims CCs are decreasing profits, then why does he still accept them? Because the boost in profit he gets from increased volume likely offsets the profit decrease from CC fees.
It is interesting to note that, according to most CC contracts that vendors sign, a vendor is allowed to offer a discount for a cash purchase, but is not allowed to do the opposite, i.e. they are not allowed to impose a fee for CC purchases. The normal everyday price must be the price when using a CC.
The 2% cash discount wouldn’t be compelling to lot’s of people because people don’t like carrying about cash. Which is why everyone has to accept credit cards in the first place. There are lot’s of things businesses all do just to be competitive with their peer businesses and not increase their business relative to their peers. It gets them increased business relative to what they would do without accepting credit cards.
Now, I can see how this would be true for one competitive business, or arguably the inverse way of stating it - if one vendor does NOT accept credit cards, he’ll lose market share to competitors who will offer the convenience and lose profit.
It seems less likely to me that accepting credit cards will make ALL consumers spend more on a particular kind of merchandise, instead of just influencing their choice for which vendors to purchase from. So if you look at a type of vendor instead of individual businesses, the OP’s question might have a different answer.
CC fees are the reason many gas companies have been offering gas-discount cards. If you use their card, you will (for example) get ten cents off each gallon of gas you purchase. It’s a win-win situation; you receive an instant ten cent reduction in the price of a gallon of gas, and the gas company doesn’t have to pay a CC fee since you are using their card.
What’s a real killer for the merchant is that they pay a flat fee of about a dime in addition to a percentage. Not a big deal when a customer buys a $40 item, but when somebody puts a $1.20 snack item on a credit card, it can wind up costing the merchant 10%. If they are in a business which has a large volume of dinky purchases, they get soaked.
These days, more like because if he didn’t accept them, he’d go out of business. It’s not an extra service to attract customers any more, it’s offered by everybody, and has become a requirement.
All it means is that the credit card fees are a cost of doing business, and wind up factored into the prices charged. And the people paying cash are subsidizing the people that are using cards. Which can be said about promotions like club cards and coupons as well.
If it decreased profits the vendor wouldn’t accept them. It increases profits because without the credit card many people wouldn’t shop there. How much does having salespeople decrease profits? Even though they cost money without them sales don’t happen and margins disappear.
Note that gas stations are one of the few businesses that advertise their prices to the penny in big numbers at street level, often right across the street from their competitors, so a dime here and there can actually capture consumers’ attention. Most businesses couldn’t make that big a deal out of a 1 or 2 percent price reduction. Particularly when the credit-card price is accepted as the market price because everyone else offers them.
Also, cash handling has costs of its own. I wonder whether credit card sales offset those costs enough to be noticed.
True, and I neglected to look at the big picture. I think Hari Seldon summed it up best: “In the end, with virtually all merchants taking credit cards, no one of them gets increased business and the credit card companies make out like bandits.”
The best thing a vendor can do, then, is to offer incentives to not using a CC. On big purchases this could add up to real money. As an example, say I want to buy a gun that is advertised at $7K. If I use a CC the vendor will have to pay the CC company 3% of this ($210). So I offer to pay cash, and he takes $100 off the price. It is a win-win situation… I pay $100 less for the gun, and the vendor makes $110 more in profit than he would have made if I had used the CC.
It is true that not accepting CC cards will cut into sales, especially if other merchants accept them. It is also true that CC fees are high and merchants must build in that cost when setting prices. This means customers who pay cash are somewhat subsidising those who pay with CC. In the US the terms of the agreement between CC companies and merchants prohbits adding a surcharge to CC purchases, but it is OK to offer a cash discount.
In the macro sense, it is a diificult thing to determine how CCs affect pricing. If merchant fees were lower it would help lower prices, but that would mean the CC companies would probably have to tighten up who they issues cards to or what their limit is. This would mean less people would be using CC cards and would be buying less. This could cause prices to drop because demand is lower, but it also could mean that a stores fixed costs are amortized over fewer purchases thus raising overhead and forcing stores to raise prices.
IMHO, the CC companies are so large that they have a strangle-hold over merchants. If you have a store you need to accept CCs or buyers will go someplace else. In my experience from two stores, about 2/3 to 3/4 of purchases are by CCs. In one of those stores they did not accept Discover because of the high fees and in the other they did not accept Amex for the same reason. Both of those cards off “rebates” back to the consumer as a percentage of their purchases. That means people paying in cash are subsidizing CC users.
In any case, merchant fees are a big expense to store owners and pricing does reflect that at the micro-level.
So that’s how it works! Suddenly it becomes clear.
Surprised the cost of running a cash-based business has not been mentioned.
Accepting cash is not free. An employee has to be paid to count it, sort it, and ready it for deposit. Then someone needs to take it to the bank (or you can pay armed guards to come and pick it up in one of their unarmed suburban tanks). Then your bank (especially if it’s a business bank) may very well charge a fee to deposit that cash.
A business accepts a credit card and the cash is in their bank account 2-3 business days later.
And of course, if you do accept cash, the employee you’re paying has to count it correctly. Every time. Or you end up throwing money down the drain or pissing a customer off. No need to give change with a credit card. No need to have cash on hand for a refund, either.
And of course, a big bad bully with a stick (or gun) can’t come in and steal your credit card receipts and then use them to buy his next fix of meth, crack, donuts etc.
ETA: And let me speak from another business perspective. Many customers are now using purchasing cards (P-cards) for smaller dollar purchases. That means I don’t have to (A) fill out paperwork and a W-9 to get set up as a vendor and (B) don’t have to wait 30-45 days for payment. Some organizations rely almost entirely on P-Cards for small purchases, especially organizations like the federal government. It’s a win-win for the customer and the vendor.
IAmNotSpartacus may be right on. The Nevada casinos switched to non-cash as soon as the technology permitted. These people know how to “Squeeze a nickel until the buffalo shits”.
Here’s a data point from my personal situation. I own a small accounting business, and I am currently working to encourage more of my clients to pay by credit card. The way I see it is this:
- Checks have a cost - we have to take them to the bank, for one, which means someone is out of the office for 10-15 minutes. We could bill that time at $10-$30 if it were spent on client work.
- I’m REALLY tired of hearing “the check’s in the mail.” I figure the cost on a two-week delay in receiving a check is about 2%*
- Credit cards aren’t returned NSF. We don’t have many of these, but you know right away whether the money’s good.
- We’re setting up an online payment gateway so that clients can pay invoices and check balances without even having to call us. You can’t do that with cash or check.
- Last year, we had major cash flow issues due to late payments. About 10% of annual income was tied up in checks that were “in the mail.” If we’re paying 20% on credit card balances to finance expenses while we wait to be paid, a 2-week delay is about 1/10th of the annual rate, or about 2%. That’s ignoring some late fees we got hit with due to cash flow issues.
Yes, I interpreted the OP to be asked how prices currently compare to what they would be if you took credit cards out of the picture altogether, not to the difference in what one particular store would charge if they stopped accepting credit cards but their competitors still did.