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The Hidden Costs of Cash

Posted By Jim On 04/01/2008 @ 12:29 pm In Credit | 11 Comments

Did 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 [3], 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 [4])


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[3] externality: http://en.wikipedia.org/wiki/Externality

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