For years, retailers and their associations have argued that the costs of offering bankcard payments to their customers have been too high. Their efforts to shape public opinion resulted in U.S. lawmakers passing the Durbin Amendment to the Dodd-Frank Act of 2010, in which a price cap was placed on debit card interchange. But a report from payment consultancy Aite Group LLC provides evidence the costs associated with accepting cash can far surpass those of electronic payments.
In Tender Truths: The Real Cost of POS Transactions in the U.S., Aite Senior Analyst and report author Madeline Aufseeser developed a financial model that compares card acceptance to cash acceptance costs. Aufseeser concluded that blanket statements about the costs of various types of payments are irrelevant because of the disparity in the payment mix among different types of merchants. In two vertical markets analyzed – quick service restaurants (QSRs) and convenience stores – cash is a far greater cost burden than cards.
In Aite's model, the variables of total sales; losses by theft, fraud and chargebacks; expenses; total number of transactions; and average ticket size are all broken down by tender type. For the case of the average QSR, Aufseeser found that the cost per transaction for debit and credit cards was $0.23 and $0.27, respectively, while the cash equivalent stood at $0.37. The percentage cost per transaction was therefore 2.83 percent and 3.02 percent for debit and credit cards, respectively, but 4.82 percent for cash.
The disparity is even greater for convenience stores. Aite found that the cost per transaction at c-stores was $0.43 for debit, $0.67 for credit and $1.06 for cash, which worked out to a percentage cost per transaction of 2.56 percent, 3.61 percent and 7.86 percent, respectively.
"The tender type comparison shows that the true cost of accepting cash is 45 percent higher than the credit card transaction at the equivalent dollar amount," Aufseeser wrote. A large part of that cash expense is tied to what Aufseeser called the c-store's "dirty little secret" – susceptibility to theft.
Meanwhile, in the brick-and-mortar specialty retailer category, the numbers were partially flipped, but to a lesser degree. In this category, where credit card use dominates, credit costs $3.19 per transaction, compared with $0.52 for debit and $0.74 for cash, which leads to a percent cost per transaction of 2.48 percent for credit, 1.88 percent for cash, and with debit in between.
Aite's research was based on over 40 interviews with merchant business owners/operators conducted between March and May 2013, as well as data provided by merchants and publicly available information. Aufseeser concluded merchants should be more detailed in how they arrive at acceptance costs per tender type, and include all cash handling expenses in the equation, before they argue about the high cost of plastic.
"One of the big findings, quite frankly, is that the merchants have been coalescing and coalitioning together for a long time against the quote-unquote high price of cards," Aufseeser told The Green Sheet. "And now they've lasered in on credit [interchange legislation]. But high cost compared to what?"
Aufseeser noted that merchants have not made legitimate apples-to-apples cost comparisons because it isn't a priority for them. "So they don't necessarily get into the weeds on how to look at some of this stuff, which I think is part of the point [of the report]," she said.
Aufseeser singled out the National Association of Convenience Stores as being the "loudest criers" of the high cost of electronic transactions for their constituents, and yet the association apparently hasn't done the necessary research to arrive at its conclusion. According to the report, the NACS website cited electronic transaction costs as being the second highest operating expense for c-stores after the cost of labor.
"However, they have not quantified and aggregated all the different theft and shrinkage expenses," the report stated. "That may be partially because those numbers are difficult to derive and capture. Store owners and operators do not always know how much and what is being stolen."
When NACS leaves out the various cost factors that go into the handling of cash, it is "only looking at half the equation," Aufseeser said. The result is an incomplete picture when the full picture makes the case for c-stores to increase plastic payments and reduce cash transactions, according to Aufseeser. "The less cash you handle, less is likely to fly out the door mysteriously," she said.
Aufseeser said the two main takeaways from Aite's research are that debit cards represent the cheapest tender type "across the board," and that different merchant segments will have different cost levels, depending on cash volume and average ticket sizes. The interchange cap imposed by the Durbin Amendment is the reason for the low cost of debit. It follows that merchants who emphasize cash payments over debit will not realize as much cost savings as merchants who push debit.
For ISOs, Aite's research provides ammunition for the value proposition of electronic payments. "I think they can lift the model from the report I put together and run it for particular merchants to help them sell more card services," Aufseeser said.
For the industry, the research can be used to counter merchant associations' claims and even educate lawmakers. Aufseeser said, "The first question I would ask if I were a senator and looking at this is, 'So credit is expensive compared to what? It's not more expensive than cash, so stop the whining already.'"
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