The Hidden Costs of Cash

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Cash Is So Last MilleniumDid you know that paying cash actually costs you more than paying with a credit card? Did you know that if you are pay in cash, you end up subsidizing the transaction fees for credit card payers? Unfortunately, it’s entirely unavoidable, hidden, and no one is at fault other than good ole Daddy Economics. Let me explain.

Imagine you are a store owner and on any given day, 50% of your customers will be paying with a credit card and 50% will be paying with cash. Credit cards, while convenient, represent an added cost of around 3-4% for you, the store owner, and you’d love to be able to pass that additional charge onto the credit card paying customer individually. Unfortunately, you can’t because of merchant agreements and, more importantly, because you can’t identify the credit card paying customers ahead of time.

The end result is that you, as store owner, consider credit card processing fees an expense and build it into the cost of everything to everyone, including cash customers. The 50% of your customers paying cash will end up subsidizing the transaction fees of the other 50% of customers that pay with a credit card.

From the perspective of the shopper, this means that every time you pay cash, you’re paying a little more than what you should’ve if credit card didn’t exist. While you can’t recoup the costs simply with a 1% cashback card, you certainly can cut down the premium by at most a third of a percent. Ultimately it’s the credit card company that benefits from the added convenience of everyone swirling around credit, to the tune of 3-4%.

This is an economics concept known as an externality, though they’re often best used to describe other scenarios as well (such as how the true and total cost of driving should include pollution and its impact on residents living near highways). The true cost of using a credit card isn’t actually felt by the card user or the store owner, it’s felt by cash paying customers even though they aren’t aware of it.

Interesting huh?

(Photo by phatcontroller)

{ 11 comments, please add your thoughts now! }

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11 Responses to “The Hidden Costs of Cash”

  1. Jay says:

    Interesting post. But I have to take issue with the idea of using a 1% cashback card to recoup some of the costs. Studies have shown that most consumers spend more when using plastic; some up to 20% more than if they had paid with cash.
    Great blog! I’ll be back often.

  2. Jared Rice says:

    I’m not sure I agree with this line of thinking. The concept is sound at the surface, but it presumes that the cost of handling cash is $0. As someone who used to handle cash for a living (running the office of a grocery store), this is DEFINATELY not the case. For every drawer I closed each night (with 3-6 drawers to close in a given night, this was a small grocery store), the credit cards took ~1 minute to reconcile – print up tally sheet from the credit card machine, compare it to the tally on the register (almost NEVER different), done. Cash (and checks), on the other hand, needed to be hand counted by the cashier first (before they clocked out), then by myself, and reconciled against the register. Then, at the end of the night, a cash deposit needed to be prepped, myself again counting all of the cash and checks to be deposited, and handing it all to the night manager to re-count. All of this labor wasn’t free. Then the entire office was reconsiled in the morning (i.e. all cash on hand is counted). All of this is labor that, while not crazy high pay, isn’t something you trust to minimum wage minions. I don’t know how the cost compares to that of credit card fees, but the idea that handling cash is free for merchants is silly.

  3. Garrett says:

    I thought the fees were lower than 3-4% — so I looked it up. Wikipedia has them from 1-6% but lists them at slightly less than 2%.

  4. Saving Freak says:

    McDonald’s saw a 17% increase in spending on plastic transaction instead of cash. The temptation is much larger to spend more when you don’t feel the pain of the cash leaving your hand. Cash should still be king and credit a tool.

  5. Will says:

    I have to side with Jared on this one. I’ve worked in the credit card division of a bank and one of the biggest benefits of plastic transactions for merchants is the streamlining of closing at the end of the day. He summed it up brilliantly so I don’t have anything to add to that.

    On the other side, I really think that the extra couple % points a cash user pays is more than set off by his avoiding the overspending that (more often than not) occurs with plastic.

  6. jim says:

    Jared, Will: Those are certainly valid points, probably outlined in painstaking detail in credit card merchant processing brochures! I didn’t consider the cost of processing additional cash, just the fees involved, so thank you for bringing it up. I’ve never reconciled a cash register before (the places I’ve worked were so small that the owner only trusted himself to do that) so I didn’t take that into consideration.

  7. In Australia, retailers have the option of charging MORE for credit cards!

    Of course, if all consumers moved to dredit cards to get the ‘reduced fee’, prices would go upm (on average) ANOTHER 2%.

    But, your point is well taken … thanks for some ‘unconventional wisdom’ – the best kind 😉

  8. Zach says:

    err. . . I’m always charged .75$ for card transactions.

  9. Zook says:


    Simply put….Switch your bank/card.

  10. Amber says:

    I do know there are retailers (McDonalds, Arco, Carl’s Jr for example) that will automatically charge a flat fee for using a card and others that are more local to me that have a minimum purchase on a card or you get charged an extra fee.

    That aside, the one thing I will say about my personal preference for using Cash over a Card for purchases is that I know I am not at a place right now where I can honestly say I will pay off the credit card bill at the end of the month. So it actually would cost me more (in terms of interest) based on your original post. It definitely is something to consider but the way I see it, you’re screwed any way you slice it.

  11. John says:

    Jared’s argument is sound on the surface, but my how we so easily discount historical precedence here. BEFORE THERE WERE CREDIT CARDS, merchants used to balance their drawers every night, everywhere across the nation. This was (and still is) the cost of doing business. To infer that this cost is something new or added because of cash payers is grotesquely untrue. It is a fact, and it it is true, that cash payers subsidize credit card users. Only modern-day computing makes reconciliation easier for credit card transactions; however, it should not be considered a new profit center. Of course, some bean counters, somewhere, will see it that way.

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