December 26, 2018
We are in the midst of a global war on cash. In fact, a few countries, including Sweden and Canada, are already almost completely digital. Payment providers and banks created this war for one goal – corporate profit. They are nudging companies and businesses toward a strictly digital society without making them aware of the associated risks, such as increasing swipe fees and processing rates.
The average cost of processing payments for US businesses that do between $10,000 and $250,000 in annual payments volume is between 2.87% and 4.35% per transaction. Other estimates – from the National Retail Association – suggest that credit card swipe fees average around 2% but can be as much as 4% for some premium rewards cards, and vary according to a merchants’ card volume and other factors. Applied to millions of transactions each day, they total approximately $80 billion a year nationwide.
While merchants and businesses are being told that going digital is a safer and more streamlined process, they are nothing but misinformed and misguided by credit card companies.
This past summer, Visa announced a $10,000 reward to 50 eligible restaurants that committed to giving up cash entirely. Enticed by this offer, many small-business owners were taken advantage of when credit card companies charged them huge transaction fees every time a customer charged their card. It’s through the lack of information provided by credit card giants that when small businesses go completely digital, they’re blinded by the rising processing fees they’re charged later on. In fact, according to Square, for US businesses processing between $10,000 and $250,000 in sales per year, additional fees are on average 28% to 60% higher than the initial quoted rate (+ the cost of hardware leases and software subscriptions).
Just because digital transformation has arrived doesn’t mean a cashless society is the only option. In fact, cash amounts to more than 80% of the world’s transactions. Companies pay wages in cash to about 230 million unbanked adults worldwide. If such a large population is still committed to cash, why are so many companies and small businesses being told digital is the only way? It is time for businesses to stop and think about how a cashless society will negatively impact businesses owners everywhere.
Wall Street benefits significantly from a cashless society, with some of the largest credit card companies like American Express, Capital One, and Chase, profiting anywhere between $1-3 million from increasing swipe fees each year. Amex, for example, is estimated to be making roughly $60 per year, per account, in interchange fees.
Source: How Credit Card Companies Make and Earn Money. Data as of September 30, 2017.
If cash were to become obsolete, it’s the small-business owners that would suffer. With no other option, large companies would have the opportunity to increase the credit card processing rates merchants are charged for each transaction. It’s with this opportunity that many small businesses would further go into debt, if not lose their business, due to the inability to pay the steep cost of the fees.
For example, after a 13-year lawsuit, Visa and Mastercard recently came to a 6.2-billion-dollar settlement with the nation’s leading merchants. The two companies were in violation of antitrust laws and illegally inflating swipe fees that small businesses were required to pay on every purchase transaction.
Unfortunately, this is a continuous war that small businesses will not be able to win unless they adopt strategies to help increase their bottom line. By making operational changes, businesses will be able to operate more efficiently and not have to face the swipe fees being thrown upon them.
As credit card companies push for a cashless society, merchants will be forced to continue footing the bill. Small businesses should look out for themselves and implement preventative strategies.
For example, small businesses can find a payment processing partner that runs on an interchange-plus pricing model – a model that credit card processing companies use to determine the cost per transaction paid by the merchant. As one of the fairest and most-balanced pricing schemes, small businesses can trust the credit card processing companies that follow this model based on its transparency. This process ensures merchants are working with an equal partner because it gives them the price for the interchange rate between each credit card plus the markup fee upfront. By offering the markup fee at the beginning, credit card processing companies provide merchants with a consistent fee. This is the opposite of a tired or fixed pricing program, which results in the lowest rate possible.
For small businesses owners to ensure they’re receiving the lowest price on the pricing option it’s imperative to regularly review budgets to understand what type of category the business falls under. This is important because credit card companies determine a markup fee based on whether a merchant runs a high-level or low-level risk business.
The problem that many businesses face is that they’re positioned as a high-risk company without being aware, which leads them to pay higher markup fees for every credit card transaction. It’s by documenting unnecessary costs, stream in revenue, and fraud prevention tactic that merchants can minimize the risk as much as possible. This may sound simple, but in the heat of the moment, it’s often forgotten. Putting time aside time to focus on documenting every expense allows merchants to stay ahead of the problems and ensure they’re classified as a low-risk business. This, in the long run, will result in low markup processing fees to help business owners ensure credit card transactions aren’t negatively impacting their bottom line.
The idea of a cashless society is a topic that will stir up a heated debate for years to come. Businesses need to take a step back and look at the impact of going completely digital. Cash is not only hugely important to the world, amounting to one-third of transactions in the US alone, but it is also a saving grace for small businesses that are possibly being taken advantage of by the dominating credit card institutions.\ \ Adopting strategies to improve their bottom line will allow merchants to defend themselves against financial institutions and credit card companies.
Realizing that a cashless society could do more harm than good, merchants can start advocating for themselves and create a more transparent payments market. With a true strategic partner, small businesses not only have the ability to understand fees that come with credit card acceptance but have an option to increase their bottom line.