Why Everyone Loses When You Run A Cash-Only Business
To walk into a coffee shop and be told “We’re cash only,” is irksome for a number of reasons: the clerk tends to say it as though the company had been born that way or something. As though there’s an all-powerful god of payment forms, and we must do his bidding.
It’s not divine will. It’s a shortsighted business decision by often distrustful or resentful business owners. Contrary to popular belief, operating as a cash-only business is neither profitable for companies, nor beneficial for anyone in the grand scheme of things. (OK, a few companies can benefit but the way they go about it is not nice.) Here’s why it’s so bad, and what recourse you have, and in order to explain it all, I may have to bust a couple myths along the way.
It’s The Banks! The Banks are the Villains! Right?
Just this week, Visa got hit with a lawsuit from Walmart over fees. Walmart’s lawyers say Visa illegally colluded with the banks to produce a rate hike. They’re quick to point out that that means $350 billion in charges paid by consumers at the point-of-purchase. Of course Walmart gets charged, and has to pass the price hike onto the consumer. So it’s a tale as old as time: The business is forced to behave badly by the bank. The devil made them do it.
As with any fight between a company and a bank, the hostility may take place in an office when the owner looks at his or her bills, but the actual clashes happen when an underpaid clerk and a customer face off. The clerk and the customer don’t have any beef with each other in the grand scheme of things. With Walmart, since the rate hikes didn’t cause them to do away with credit cards in their stores, I suppose that would be a customer demanding an older, lower price. But in the case of the bar with the Johnny Cash photo above, Johnny’s bird is meant to be an act of rebellion against a Faceless bank, but that’s lost on me, the cashless consumer, and I’m the one who feels flipped off.
I’m like anyone else though. I feel burned and powerless when a rate hike happens. My immediate reaction is always to declare that I’m done with whatever service that may have been, but I rarely pull the trigger. When businesses have that “enough is enough!” moment, it’s their customers who feel the pain, and they’ll feel it until when? The end of time?
So where’s the nearest ATM?
Best case scenario for the customer in one of these cases: you find some cash in your pocket after all. The best case scenario for the business, however, is that they operate a merchant ATM on the premises, and not only do they not get squeezed. It’s their turn to squeeze you. This is the one situation where being a cash-only business is extra profitable, but it’s rarer than you might think.
Before your greed alarm goes off, and you go ballistic on the next proprietor who directs you to one of those fee-laden, totally un-fun slot machines next to the register, know that businesses don’t always profit from having an ATM. Companies like ATM Merchant Services make their money by providing companies with free equipment that they won’t have to worry about. The machine will charge a fee to the consumers, and ATM Merchant Services keeps every dime.
Also, at least they’re not sending you around the corner to one of those mysterious, unaffiliated ATMs.
“But I lose (X huge percent) of my already slim profit margin!”
Sure, each swipe is about a 2-3 percent loss for the company, depending on size and fee structure in the event of a credit card transaction. Alternatively, it’s a maximum 21 cent fee for debit as of this week’s Federal Court ruling. 21 cents can be much better, or much worse, depending on the type of transaction. But transaction fees won’t threaten your profits. You’ll more than absorb these costs if your business is healthy. More than absorb. In many cases business will improve, actually.
In order to debunk this idea, here’s a little primer on the profitability of a small restaurant or cafe business:
That thing people say about restaurants having a failure rate of 90 percent within the first year is hogwash. A study by Ohio State University says it’s actually one in four. On a longer timeline, failure for restaurants is comparable to any other business.
As for your microscopic profit margin, you’re on a little better footing, rhetorically. It’s tight for restaurateurs, for whom and average healthy profit margin is estimated at around 7 percent according to The Houston Chronicle. Coffee shop owners fare a little better, and can net 25 percent, but given the wide disparity in the cost of operating a coffee shop compared to a restaurant, and the relative cost per transaction in each. The amount of profit is actually estimated to be comparable when all is said and done.
So assuming 66 percent of in-person transactions involve cards, and a 2.75 percent fee (default for Square) is about average for card swipes. One hates to lose 1.8 cents on every dollar, but it shouldn’t sink your business.
“You said business would grow, Mike.”
I did, and I wasn’t lying. Yelp can ruin you these days, and being Cash only isn’t a fun quirk in the eyes of Yelp reviewers. It’s a flaw. No two ways about it. A CNBC story from last November told the story of Joe Coffee, a New York City coffee shop that stayed cash only for ten years, until they started noticing that 75 percent of their reviews were about their irritating policy. They also noticed that they were losing business to more accommodating competitors, who were also able to do a healthy side business selling larger items like coffee grinders.
That little moment of rejection makes your customers feel unwelcome, particularly if it sends them out the door. As for Joe coffee from the CNBC story above, new Joe Coffee locations all take credit cards. The lost opportunities from people who know a business is cash only, and consciously avoid it, can’t really be measured by a study, and they’re seldom felt in store because those patrons simply aren’t there.
As for me, I choose coffee shops and restaurants that take my modern, plastic money, and form habits around that. What’s more, point-of-sale technology has come a long way, and now I can pay for things on an iPad with square. It’s silly, but there’s something friendlier and more comforting in that than there is with a big boxy register, or one of those credit card scanners that looks like a TI-83.
My Square (yes, my clients can pay me for my writing with a credit card if they want, although I’d prefer to avoid the fees) was free, and free to set up, and doesn’t come with a yearly fee like many card scanners. There was also no license fee. I, like many coffee shops, only offer email receipts, so I don’t have to buy rolls of receipt paper. That’s me though. Your mileage may vary.
In any case, my favorite coffee shops use modern credit card scanners like Square, or even its competition from the major banks, and this makes me feel a little more at home, and never rejected for trying to use my preferred payment method. This in turn makes me likely to come back.