You probably know that when you use a credit card to buy something the merchant pays a fee based on a percentage of the item’s cost. This gets passed on to you in higher prices. Ever wander how much higher? This calculator/mashup will tell you. I tried one of my cards (enter the first six digits of the account number which identifies the issuer and type of card) which is from Amazon where I get a $25 certificate for each $2500 I charge. Turns out reward cards like that cost businesses even more. Might want to think about that when buying from a small merchant.
Rewards cards cost businesses more than non-rewards cards because the credit card issuers pass the cost of the rewards onto the businesses by charging them higher Interchange rates. Rewards interchange rates are typically around 0.30% higher than the rate for a regular card. However, many smaller businesses actually get charged more than 0.30% additional for such transactions because it triggers a downgrade, which allows their credit card processor to charge them as much as an additional 1.50%.
It appears people are using credit cards less in this recession. But some are worried the credit card debt poses a bigger problem than the mortgage crisis.
Lies.
Complete bullshit.
Cash costs more to manage, more to count, has to be deposited, can be stolen and on and on.
#1 – But it can;t be tracked. Ding Ding Ding.
Most banks don’t add a pass-through charge for debit cards. At least, in my neck of the prairie.
And I can manage my checking account as cash purchases – online daily.
Hmm – does that mean if I do cash back at a supermarket, they get a fee on that money too?
@ #1
Isn’t it more about where the cost of transitions is going. There is a cost for a merchant of processing actual cash, sure. But it would seem significantly less than the credit card processing fees, otherwise gas stations wouldn’t be able to give you significant amounts off the price if you pay with cash.
With the credit card companies – they have a cost for the infrastructure. But all the transactions are electronic, and therefore effectively close to free (ie its highly scalable). They have extra cost with rewards + insurance they have for fraud etc. I wouldn’t be suprised if American expresses biggest cost are their ads. I haven’t looked into it, but you can be sure they make a healthy slice on each transaction.
Personally I only use credit cards cos they have purchase protection/fraud protection. May consider using debit card more…
#1 Agree . Some day we will all stop carrying and using dead tree pulp for commerce.
@4 “But it would seem significantly less than the credit card processing fees, otherwise gas stations wouldn’t be able to give you significant amounts off the price if you pay with cash.”
Certain businesses are heavily oriented towards cash by nature and are an exception.
Gas stations deal with a lot of lottery ticket, prepaid phone cards, alcohol and tobacco purchasers and many also function as the neighborhood convenience store — these are people who demographically on a whole have bad credit.
As a result, having an ample flow supply of physical cash available helps facilitate their security procedures (they can’t open their safe to make change).
They’d make money in an ideal world using all electronic transactions, but this doesn’t work with their customer base.
@Dallas
There will always be room for cash of one sort or another (paper, coin or other) because the black market needs it to survive. Untraceable money is the lubricant that keeps the status quo.
#2: False. Cash has serial numbers and can be tracked. It just requires more work to track. Every time it passes through a bank it is processed. The bank knows who deposited it and when. Haven’t you wondered how the FBI can track money laundering?
#4: most debit purchases cost the merchant a flat fee of $0.50 per transaction. Some higher volume merchants would probably be charged less. If you’re making small purchases, this hurts the merchant, and thus will eventually cost you more. With visa and mastercard, as an example, small merchants are charged $0.25 plus a percentage of the overall purchase. (that percentage depends on the merchant’s bank) I think most banks charge 5% plus a per transaction fee for american express, but I’ll have to remember to ask my local meat market the next time I stop there. I usually try to pay cash there, in an attempt to keep my meat cheaper.
Hey – thanks for the link to our little mashup.
@moss – when you use the debit card with a pin (like to get cash back) the fees are usually lower and are usually just a fixed transaction cost, instead of a percentage fee and a fixed fee that is charged when the pin is not typed in. Walmart and Visa had a huge fight a few years ago over Walmart’s right to steer customers to type in the PIN – http://tech.mit.edu/V123/N22/debit_22.22w.html
@hmeyers – thats a little harsh, the website isnt “lying”, its just mashing up and presenting data that already exists. Obviously there are also costs to handling cash (and checks). The website doesn’t have any incentive to lie since it’s not like it has a position.
#1-3: You have obviously never owed a business that takes cash, credit and debit cards. I have. You pay fees for depositing cash into the bank. You also pay fees for each credit card and debit card transaction plus a percentage of the sale price. In some cases, the debit card fee is just a flat fee. Depends on the processor.
FYI, American Express charges a fee much higher than Visa or MC. That’s why many places don’t accept it.
And what if the business is adding hidden cost to all of their products to cover transaction fees? Doesn’t that put cash customers at a disadvantage because they are giving more to the business? (at least on the bottom line) Are cash customers subsidizing the credit customers?
#8. I did 12 years in bank operations (before escaping banking for good). Banks have better things to do than track the serial number of every bill that comes through. Except for very large transactions, it’s just $ in and $ out, just like any other cash drawer in any other merchant. It may have changed, but even the form you had to file for anything over $10,000 cash didn’t call for the serial numbers of the bills.
#10 Are cash customers subsidizing the credit customers?
Not really. Consider how much less business a merchant that didn’t take credit cards would get in the marketplace. The increase in sales volume helps keep prices down for everyone. Note that in many places (California, for example) it is illegal to charge a fee or higher price to the customer for using a credit card, but it IS legal to offer a cash discount. Still, very, very few merchants bother.
And, banks do charge customers who move a large volume of cash in or out on a regular basis. Then there’s armored car service, if needed…that gets very pricey for merchants, but it beets getting robbed or killed.
#11 – Dave W
>>Note that in many places (California, for
>>example) it is illegal to charge a fee or
>>higher price to the customer for using a
>>credit card, but it IS legal to offer a cash
>>discount.
Well. Now THERE’S a meaningful distinction!
Dave,
I tend not to shop at stores that don’t accept credit card purchases or try to charge a fee to use them. For small businesses, that is simply a cost of doing business. If you don’t want the added cost, don’t accept credit cards. Costco accepts AMEX only so I have one and use it anywhere it is accepted. I pay the balance monthly so there’s no interest and I earn a sweet 1-3% cash back. One of the best features of the card is buyer protection that increases the warranty by at least a year. My Costco also recently stopped accepting their own cash card at their deli counter. I used to buy the cash card to keep with me in case I wanted something to eat or drink. They said it was costing too much in fees to accept the card at the deli where purchases are smaller in value.
I don’t carry cash beyond what is needed for tipping and such minor needs. Have used credit cards for over thirty years now. They make me more apt to purchase a big ticket item than I would be were I to start looking for a checkbook.
Credit is great, if you pay the bill at the end of the billing period. The price of all items in this area reflect the additional cost of handling credit, even if you buy with cash.
I think the emphasis is misplaced. Handling the payment does cost the merchant and bank. Someone has to pay for that transaction. The questions should be
1) Who pays
2) How much
As pointed out, handling cash does cost a lot more than handling debit or credit card purchases. That though is a cost of doing business.
@9 Uncle Dave
“You have obviously never owed a business that takes cash, credit and debit cards. You pay fees for depositing cash into the bank. You also pay fees for each credit card and debit card transaction plus a percentage of the sale price.”
While this is true for a small business, consider that cash management does NOT scale well for medium sized or large businesses.
For example, I would imagine that administration of this blog is 90% deal with “people problems”.
In a medium size, chain store or large corporation .. the costs of managing physical cash are enormous in both personnel, complexity of procedures and management.
This is why large employers in recent years have taken steps to make everything electronic that they possibly can, from the banking industry doing instant check cashing to paying employees without checking accounts via cash debit cards. This goes for things like government benefit payments as well.
The cost isn’t some fee a bank charges you, it is the management of the people that screw up and the value of streamlined business practices where less problems occur that cost a lot of time and money.
In what twisted world would anyone think that the FBI catches people laundering money by having banks track the serial number of bills?
Oh that’s a good one.
I “wander” if this post was spellchecked?
I would use cash if I got a discount at my local store. I have done it before with a furniture purchase. So if they want cash, I would give it to them (the store) if they made it worth my while.
So if I use my credit card to get 1% – 5% cashback and pay my balance every month, how exactly is this costing ME more? Everywhere I shop the total is the same regardless how I choose to pay.
I want a discount for using cash. Thats all I use.