The Cost of Cash

Cash is great. I think all stores should accept it. In fact, there’s been plenty of backlash when stores don’t accept it because it limits consumer choice and can be seen as a form of discrimination against those who don’t have a bank or credit card.

But accepting cash isn’t free. For stores that accept cash-only, or those who pass the 3% charge on to the customer, I think they’re missing something critical: there is absolutely an associated cost with each transaction, and in some cases it might be more than the standard 3% credit card processing fee. It’s just not as obvious.

(I think, in reality, a good portion of these businesses prefer cash because it’s less traceable and they can do things like pay employees under the table and fudge taxable income, but for the sake of argument here we’ll assume people are doing things 100% legal).

I never considered this until recently when I was chatting with a friend who is opening a small business. We were discussing the pros/cons of accepting cash, and for the first time I really thought through the associated costs of cash. You need to:

  • Have a register.
  • Have almost all denominations of cash and coins on hand to provide change for each transaction.
  • Have a system for calculating the change properly.
  • Hand back the correct amount of change.
  • Provide receipts.
  • Manually enter the transaction into your books.
  • Count the drawer at the end of the day.
  • Go to the bank to deposit the cash.
  • Not lose any of the cash or get robbed.

Those are all capital and labor costs that credit cards don’t have. Some of those things can be done with an app like Square, but in most cases these costs are completely unique to cash.

If I was starting a retail location I would accept cash, but I would also attempt to calculate those costs. Some quick research turned up some attempts at industry-wide analysis, but I think the reality is that the costs swing wildly depending upon the business, which is why this is a number that all brick and mortar stores should be paying close attention to.

4 comments on The Cost of Cash

  1. Tim says:

    Cash is interesting, save for the unsavory side of business, it seems there is little to no advantage to dealing with cash.

    I’d add theft is another cost of dealing with cash, same with counterfeit money. If you are in a cash heavy industry, like a bar or something, banks actually charge you for cash deposits over a specific number, it’s not out of hand, typically like 20 cent per $100 after the first $10k in cash. The catch, if you deposit $100k/month in cash it’s a couple of hundred dollar fee just to deposit it.

    It feels weird to say this, but I’m old enough to remember running a business that saw a significant percentage of cash sales, by current standards and a lot of weird things would come up. Like the first customer of the day looking to pay for a $5 bill with a $100 bill, or getting cleaned out of $5’s or any other denomination, it makes life tricky. This sounds like small stuff, but when you’re running a small business stuff like this adds up quickly. Then there are the soft costs, that aren’t actual capital expenses, but can cause negative sentiment. Have an employee who’s not good at handling cash, mistakenly gives the wrong change (in either direction), or anything else that can go wrong when people are interacting with real money can cause a negative experience for customers. We actually printed the change to return to a customer for any change amount so our employees didn’t have to think about it. Just look at the laminated sheet, 87 cents due back, 3 quarters, a dime and 2 pennies… Sounds silly, but for folks bad with math it creates a better consumer experience. While this is a pro, it took time to realize the problem and then create the change guide.

    • Adam McFarland says:

      Great comment Tim! Those are all things I didn’t know about. It makes sense that the banks would charge since it’s a ton of labor for them too. The costs really do add up.

  2. Rob Sleath says:

    Interesting post.

    I think the advent of terminals that don’t require a fixed landline and don’t have a monthly contract has significantly changed the use of cards vs cash for many businesses. Previously you couldn’t take payments at off-site shows easily, or for small transactions economically. With square, izettle, paypal here etc. offering free/cheap card readers and just a minimal percentage fee, things change quite a lot.

    I agree with yours & Tim’s assessments of the fees, but there’s also another issue – change/float. You have an amount of money that you can never deposit, which is annoying enough, but you also have to maintain it. For us previously this meant having an agreement with the bank or post office to provide certain denominations of coins on a regular basis, which we had to pay for (I think it was 1.6%?). We had a paper agreement with them, which took a week to go into effect or amend. We couldn’t simply rock up to the bank and ask for £200 of £1 coins for example, we’d have to either make that a regular recurring request and we’d collect on a specific day, supplying our “change card” and paying the fee, or if it was a one-off, we’d have to put the request in writing using their stationery and upply it to the branch in person 5 working days ahead of time.

    Dealing with coinage is also really frustrating – payments in had to be bagged in particular amounts of certain denominations, and we’d have to stand in line and then pay it in at the counter (very few banks offered automated coin pay-in a few years back, no idea of the situation now). In the end I spent £60 on a coin counting machine which served me well for a few years, until the design of one coin changed! I managed to sell the machine for what I paid for it after having it 5 years though, so there wasn’t a net cost overall.

    Card payments are far superior from a logistical perspective, but I do still like cash personally. I also don’t like the possible “chilling effects” and police-state implications that a totally cashless society would face.

    • Adam McFarland says:

      Whoa, great point Rob. I didn’t realize that the banks charged you for maintaining change! What a pain!

      Totally agree on your last point too – for all of the hassles from a business perspective, as a consumer I love having the option of the anonymity of cash, even if I don’t use it a ton myself.

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