Cashless costs more than Cash?

It’s finally happened, the day has come where cards have overtaken cash. More people now use their cards to pay than those that use cash. What’s the real cost of the convenience and who is benefiting the most.

For the consumer it’s great, no need to carry around cash just use your contactless card, mobile phone or smart watch, the transaction is done in seconds and you don’t need to visit the cash point or the bank. Use a debit card and the money comes out of your account immediately or use a credit card  and you don’t need to pay for a month.

For the banks it’s great too, as if there is less cash in the system, there is less work for them to do. They need fewer people, they need fewer branches, there are fewer mistakes and although the cash is deducted from the customer’s account immediately, they hang onto it for a few days before they pay the retailer, it’s a win-win.For the retailer, it’s not so clear-cut. For the small retailer, it’s quite a cost, particularly for businesses like coffee shops, where the average transaction value is low.

For the retailer, it’s not so clear-cut. For the small retailer, it’s quite a cost, particularly for businesses like coffee shops, where the average transaction value is low.

For these businesses, taking cash is by far the cheapest option, costing around 0.6% of the value of the money banked. Of course you need to include in the retailers cost, the time it takes to count the money and take it to the bank.

How is the cost calculated?
The cost to the retailer of taking a card transaction is nowhere near simple to calculate. Debit cards are generally charged at a flat rate of around 20p per transaction, and about 10p per transaction for a contactless card. Credit card costs vary, based on the type of card that is used and a percentage of the total transaction which is normally somewhere between 1% and 3% is charged.

So when a retailer accepts a credit card, it is virtually impossible to know exactly how much that transaction will cost them. We can’t think of another business transaction where the real cost is virtually impossible to calculate. Also, the money taken by card does not reach the retailers bank account for between three and five days making interest for the bank.

The retailer will also need to hire a terminal at around £15-£20 per month, and be PCI compliant at an annual cost of about £50.

The key impact on a small business is that the majority of cards taken are a debit card which are the most expensive for small transaction values

The table below illustrates a typical cost of taking each of the different types of cards versus cash for a typical £3 transaction and are based on transaction charges typically quoted to small businesses.

Fee/cost to retailer for a £3 transaction% of transaction
Debit Card20p6.7%
Contactless Card10p3.3%
Credit Card6p2%

 So on a £3 transaction, it is over 11 times more expensive to take a debit card than to take cash.

Small businesses that don’t take cards are at a massive disadvantage compared to those that do.

Customers don’t expect to have a minimum spend when paying on a card and since 2013 retailers are not allowed to charge the customer more than the cost of taking the card. Customers dislike intensely paying extra to use their card anyway.

The European union have got involved and has put limits on the amount banks are allowed to charge customers and since April this year the UK has a new quango, The Payment System Regulator, whose objectives are pretty wooly, and seem to lack any real power to affect change.

The fees charged to large businesses and small businesses vary disproportionately, favouring the larger businesses. The market is dominated by a few global companies, any new players to the market have big barriers to entry.

Business owners have to accept that customers now spend more on cards than with cash, so negotiating better rates with their current bank or moving to a more favourable supplier should be high on the list of things to do.

One thing’s for sure, Cash is no longer King.


About the authors

Andrew and Claire Bowen have run their own coffee shops for the last 8 years starting as franchisees and moving to develop their own independent business. The knowledge and experience gained from this has been used in the development of Café Success – the UK’s best resource for coffee shop, café and tearoom owners. Free to Join at it is growing to cover all aspects of setting up and running a coffee business. Please link in with them and join the Coffee Shop Owners of the UK discussion group on linked in.