Merchants who have been quick to complain about the cost of accepting card payments at the point of sale haven't always calculated the true cost of accepting cash in comparison, a new Aite Group study says.

It is difficult to measure interchange rates because they are "all over the map" depending on the merchant, transaction and payment types, says report author Madeline K. Aufseeser, senior analyst with Boston-based Aite Group. The complexities make it nearly impossible for the industry to establish cost standards for payment acceptance at the point of sale, Aufseeser adds.

"However, you can calculate a general cost of acceptance, which is inclusive of interchange and co-mingles with different card types," Aufseeser says. "It gives you some benchmarks as to really being able to compare the cost of accepting all different tender types."

A lack of understanding the true costs of payment acceptance ultimately fuels the numerous legal squabbles pitting merchants against card networks, the report says.

In compiling the report on the cost of point of sale transactions in the U.S., Aite conducted more than 40 interviews from March to May with merchant business owners and senior leaders. Those interviewed represent more than 30 companies that are merchants or support merchant acceptance programs.

Card payment acceptance has distinct advantages over cash in that consumers tend to spend far more at the point of sale with a card, and cash payments slow down the checkout line process. In addition, new technology allows merchants to make offers linked to cards, particularly with the evolution of digital and mobile wallets, the report says.

But many merchants fail to monitor and include "shrinkage" in their cost factors for accepting cash. Shrinkage includes inventory losses, cash losses from miscounts, employee skimming and robberies, the report says.

Some of the quick-service restaurant and convenience store merchants interviewed reported overall shrinkage as high as 4% of sales from employees stealing food, goods or cash out of the drawers, the report says.

The report indicates that some retailer industry groups do not quantify the cost of cash shrinkage, Aufseeser says. "How can you say accepting a card is too expensive when you have no idea what you are losing by accepting all of that cash?" Aufseeser asks.

In establishing a financial model to compare costs, Aite took an average ticket price, or what a consumer spends during one visit at the POS, for each payment tender. It did not consider inventory theft as a part of cash-handling expense.

Cash expenses included handling and labor, or reconciliation when cash it out of balance, as well as armored car services for larger retailers to deliver cash deposits to a bank. Payment card expenses include processing and interchange.

Based on Aite's formula for determining in-store average ticket size at specialty store retailers, the merchant pays about 74 cents for a cash-payment of $39.26, and 52 cents for a debit card payment of $89.75. On a credit card payment of $128.63, the merchant pays $3.19, the report says. Those numbers vary for quick-service restaurants or convenience stores, but cash acceptance remained the most expensive.

Merchants have to take into account that, in most cases, it would take two or more cash customers to match the amount being spent by one customer using a payment card, Aufseeser says.

"If it takes two times the number of transactions, then it is two times the cost and that makes it equal for comparing apples to apples," Aufseeser adds. "It is not fair to say the cost of cash is 50 cents vs. $2 on a credit card transaction when you need double the volume on those cash transactions to equal the one credit card transaction."

Accepting debit card payments proved to be the least expensive method for merchants, mostly because of Durbin amendment mandates that lower caps on those transactions.

Still, some merchants who accept several low-value debit card payments complain that debit costs are still too high. Because Durbin now calls for a flat rate rather a sliding scale, the lower value transactions would carry a higher percentage, Aufseeser says.

"In some cases, their debit expense might have gone up, however, it is still considerably cheaper than every other form of tender," she adds.

Private label cards would benefit certain merchants because of lower acceptance costs and the ability to drive greater customer loyalty with those cards, the report says.

Not understanding the costs of card acceptance vs. cash has had other costs for the payments industry, including legislation and litigation between merchants and payments networks over interchange rates, pricing schemes and network rules.

Retailers have been in a legal tussle with Visa and MasterCard over card swipe fees for nine years, with a $5.7 billion settlement in the case simply sparking a new round of appeals that could take years to resolve.

Generally, merchants argue that card acceptance costs are too high and have risen over the last several years, while banks and networks counter that merchants are guaranteed payment of electronic funds, which is safer than cash and better than waiting for checks to clear.

Even though part of the swipe-fee case settlement gave merchants the option to add surcharges to card transactions, merchants need to avoid that option as a way to cover their costs, Aufseeser says. Merchants could alienate customers and could possibly implement surcharging illegally if rules are not properly implemented, she adds.

"Surcharging is banned in more than half of the states, so that tells you something," Aufseeser says.

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