Taking cash to save money on credit card processing fees may be costing you more than you think. Contactless payments have made transactions fast and convenient, and while the cost of accepting credit card payments is rising, and legislation limits companies' ability to impose surcharges for those fees, asking customers to pay with cash has become more common. But what are the potential drawbacks of that shift?
Many companies don't take into consideration the hidden costs of accepting cash. According to the IHL Group, the actual cost of cash as a payment medium is about 4.7% to 15.3%. These costs include safe storage, transportation, counting and handling, plus the risk of theft or loss. On the other hand, accepting credit card payments may come with complicated rates, transaction fees, expensive POS equipment and hidden fees, but these can often be negotiated or offset by increased sales and customer convenience.
This article explores the hidden costs of accepting cash as your main payment medium and how they compare to credit card payments. Spoiler alert: credit cards can be less expensive if you are diligent about the overall expense and increase your bottom line.
Why is this comparison important?
Non-cash payment methods are increasingly the preferred way consumers pay. According to the 2022 Federal Reserve Payments Study, card payments accounted for approximately 77% of non-cash payments by number, growing to 157 billion payments in 2021. Credit card payments alone reached 51.1 billion transactions, while ATM cash withdrawals declined to 3.7 billion.
That indicates a significant preference for card payments over cash. Yet several businesses know very little about this change in consumer behavior, and a good percentage still consider cash their primary payment medium. Why? The popular belief that cash is free remains one of the main reasons.
At first glance, it's easy to understand why cash appears to be the cheaper option. Cash transactions don't come with transaction fees, and it's generally assumed they're easier to handle and manage. If you own a small business processing less than $30K in annual revenue, accepting cash may be more cost-effective in the short term. However, for larger businesses and those looking to grow, the hidden costs of cash can quickly add up and eat into profits.
The costs of cash transactions
Let's break down the costs of cash and how quickly they can add up for businesses.
1. Transaction time
This is a less obvious but significant cost of cash transactions. Typically, a cash transaction takes longer than a credit card payment. According to a small-business survey conducted by Square, handling about $100,000 in cash takes an average of 542 hours, including counting, handling and back-end operations like reconciling the cash drawer and updating records. In comparison, the same $100,000 in credit card transactions takes an average of 189 hours, saving businesses over 353 hours.
The cumulative time businesses spend counting, retrieving the drawer from the cash office and setting it in place amounts to over $15.7 billion annually, according to IHL Group.
2. Storage
When you accept cash, you must have a secure way to store it. You'll need a safe, a cash drawer and potentially a cash-counting machine to keep the cash organized and secure. Even if you plan to handle cash yourself, you'll quickly realize the cost increases as you grow. Suppose you process $100,000 per year in cash and spend $600 on a safe, that's about 0.6% of your annual cash flow. If your business grows to $1,000,000 in annual cash, you'll likely need additional safes, more cash drawers and potentially someone hired to manage the cash.
3. Counting and handling fees
The time it takes to count and handle cash adds up quickly, especially for brick-and-mortar stores that handle large amounts of bills and coins. Businesses may need to invest in cash-counting machines or hire someone to handle the cash. Overall, businesses spend a staggering $38.5 billion annually closing out cash drawers, according to IHL Group. Approximately 16.3% of that cost comes from opening and rebuilding the change in cash drawers, a process involving the cash office, managers and cashiers that might take just a minute or two for each activity, multiplied across every drawer, every day.
4. Theft and loss
One of the major risks of handling cash is the potential for theft or loss. Cash is easily stolen or misplaced, and even with proper security measures in place, theft can still occur. In the unfortunate event of theft or loss, businesses lose the cash itself plus the time and resources invested in counting, handling and storing it. Annual employee theft totals roughly $50 billion across US businesses, according to CNBC, almost as much as businesses spend on cash handling each year.
5. Counterfeit loss
Businesses accepting cash face the risk of receiving counterfeit bills they may not detect immediately. The business will be unable to deposit the fake currency and is left with worthless paper. According to the Federal Reserve, about $70–$200 million in counterfeit currency is circulating in the US, roughly 1 counterfeit note for every 4,000 to 10,000 genuine ones. For a business processing $1 million in cash annually, that translates to about $70–$200 in counterfeit losses per year.
While that seems relatively small, keep in mind that fake notes aren't evenly distributed across the US, you're either losing cash to counterfeits regularly or not at all. And as a business, you'll need to invest in anti-counterfeit measures such as UV lights, specialized pens and staff training, which still contribute to the compounding hidden costs of accepting cash.
6. Security
Accepting cash requires extra security measures to protect the cash and other assets on-site, even for businesses that have already invested in security protocols. These measures could include CCTV cameras, alarms and additional personnel. According to Ackerman Security, the total cost of a business security system can vary widely: security hardware runs $1,000 to $10,000, installation and activation $300 to $700, alarm monitoring $40 to $120 per month, and armed in-store security guards $25 to $50 per hour.
7. Higher accounting costs
Managing cash transactions also results in higher accounting costs. Unlike credit card payments, which are easily trackable through electronic records, cash transactions require more effort and resources to reconcile and keep accurate. This often means more time spent by accountants and higher costs for businesses. Moreover, the IRS closely monitors businesses that operate primarily in cash and those that report a loss, which can lead to more frequent audits and the need for meticulous record-keeping.
8. Transportation
The cost of transporting money can be substantial. Hiring an armored truck pickup can range from $10 to $500 per pickup, depending on the service provider, distance and location. Some armored car services charge extra fees, such as shipment liability (an additional charge per thousand dollars for high-value shipments) and on-call rates for unscheduled pickups. These transportation costs add up significantly for businesses that handle large volumes of cash regularly.
The cost of credit card transactions
The fees associated with credit cards can be complex, and it's easy for businesses to be intimidated by them. However, compared to the hidden costs of cash, credit card fees are often lower and more transparent.
Interchange fees
Interchange fees can be quite complex and challenging to calculate. There are over 1,000 different rates, fees and interchange categories, varying based on business type, transaction value, payment card brand and more. Additional fees depend on how payments are processed, keyed in, swiped or online, and tiered pricing can impose surcharges based on whether a transaction is "qualifying" or "non-qualifying."
Visa's US interchange reimbursement fees, for example, range from about 1.15% + $0.10 to 2.40% + $0.10 for consumer credit transactions depending on whether the card is present, with different schedules for debit, prepaid and commercial cards. Mastercard's US consumer credit rates generally range from 1.58% + $0.10 to 2.95% + $0.10, with reduced rates for programs like education, government and nonprofits. These fees are paid by the merchant's bank to the cardholder's bank, and merchants typically pay a "merchant discount rate" that bundles interchange with other processing costs. For current, detailed fee structures, refer to the official Visa and Mastercard interchange documents.
Markup fees
Markup fees are charged by the payment processor and can vary significantly depending on the provider and the pricing model. These include transaction fees, monthly fees and other miscellaneous fees. Traditionally, businesses paid a markup based on the tiered pricing model, where the provider might charge the lowest or highest rate possible depending on the merchant's billing history, making fees difficult to predict. With more transparent models such as interchange-plus pricing, businesses have more control and can save significantly in the long run.
Interchange plus, tiered & flat rate pricing
Interchange plus
Interchange plus separates costs into the interchange fees set by the card networks and a negotiable markup set by the processing company. For example, if a customer spends $100 on a credit card transaction, the interchange fee might be 2.5% plus $0.10, $2.60. The processing company may then add a markup of 0.25% and $0.05, bringing the total cost to $2.90. Interchange plus lets merchants see exactly how much they pay per transaction, making it easier to compare providers, and merchant fees adjust automatically as interchange changes.
Advantages: transparency (a clear breakdown of every fee), potential cost savings (the markup is negotiable, especially at high volumes), customizability based on your business's needs, and lower risk for businesses with higher-risk transactions, since pricing reflects the actual cost of each transaction type.
Disadvantages: complexity compared to flat rate pricing, and the potential for higher markups if you don't negotiate effectively. In general, interchange plus benefits businesses with high transaction volumes and larger transaction amounts, but it's always important to compare and negotiate carefully.
Tiered pricing
Tiered or bundled pricing is the traditional method. Businesses are charged a different rate for each type of transaction depending on the tier it falls under, usually determined by card type, transaction type and merchant category code (MCC). For example, a processor may charge a qualified rate of 2.5% for swiped transactions and a mid-qualified rate of 3.5% for keyed-in transactions. The problem: businesses often have little control over which tier their transactions fall under, and providers may charge the highest possible rate if the business has a high-risk MCC or the transaction isn't swiped.
Flat rate pricing
Flat rate pricing charges a single fixed rate for all transactions, no matter the card type, transaction type or MCC. It's straightforward and predictable, but businesses may pay more if they process high volumes or higher-value transactions. It can be a good option for low-volume businesses or those whose transactions are mostly under $25, and with good negotiation, you can often reduce the flat rate and remove other fees that add to the expense.
Other hidden fees in credit card processing
Aside from interchange and markup fees, businesses should watch for hidden fees that add up:
1. Regulatory & compliance fees. Processors charge compliance fees like PCI to cover the cost of complying with the Payment Card Industry Data Security Standard (PCI DSS). These can range from $20–$40 monthly and may be charged regardless of whether the merchant is compliant. This category is also often used to hide unnecessary fees under the guise of some new regulation.
2. Terminal fees. If you have a physical location and use a card reader or POS system, you may be charged a monthly terminal or equipment fee covering maintenance and equipment, typically $10 to $50 monthly.
3. Chargeback fees. Charged when a customer disputes a transaction and the processor must refund the funds. These range from $20–$40 per transaction and add up quickly if your business experiences many chargebacks.
4. Annual fees. Some processors charge an annual fee in addition to monthly, interchange and markup fees, typically $50–$300 per year and easily overlooked.
There are many other hidden fees, batch and settlement fees, gateway fees, security or tokenization fees, monthly service and statement fees, to name a few. While that seems like a lot, it's all negotiable with the right strategy.
Credit cards vs. cash: which is more effective?
Pros of accepting credit cards
- Increased sales: accepting cards reaches a wider audience of customers who prefer non-cash payment methods, which can increase sales and revenue.
- Faster transactions: card transactions are typically much quicker to process than cash, saving valuable time and resources.
- Safer transactions: unlike cash, card transactions leave a clear electronic trail, making them more secure for businesses and customers.
- Lower labor costs: accepting cards can save significant labor costs compared to handling and managing cash.
Cons of accepting credit cards
- Transaction fees: card transactions come with fees that businesses must factor into overall costs.
- Chargeback risks: businesses may face chargebacks, which can result in additional costs and losses.
Pros of accepting cash
- Widely accepted: in some cases cash is the only accepted form of payment, so accepting it keeps you accessible to all potential customers.
- No transaction fees: cash transactions don't come with processing fees.
- Easy to manage: cash is generally assumed to be easier to handle than card payments.
Cons of accepting cash
- Hidden costs: as this article shows, the hidden costs of cash add up and impact profits.
- Risk of theft and loss: handling cash brings the risk of theft, loss and counterfeit notes.
- Potentially slower transactions: cash can take longer to process than cards, resulting in longer lines and wait times.
- Limited record-keeping: cash transactions aren't easily trackable, making accurate records and financial management harder.
- Limited accessibility: with the rise of contactless and mobile payments, cash is becoming less convenient for customers who prefer cards or digital payments.
- Higher labor costs: managing and handling cash increases labor costs.
The bottom line
While accepting cash may seem easy and cost-effective, its hidden costs can quickly add up. In contrast, accepting credit card transactions comes with transaction fees, but they are often lower and more transparent than the hidden costs of cash.
Cash may still be the most cost-effective option for small businesses processing less than $30K per year, given the low volume of transactions. However, for larger businesses and those looking to grow, accepting credit card payments may be the better choice in the long run, resulting in increased sales, faster transactions and lower labor costs.
Business owners should carefully evaluate their payment processing options and consider negotiating with payment processors to get the best possible rates and minimize hidden fees. There are no generic negotiation tactics that work for every business, but we've consistently helped businesses save an average of 28% on their credit card processing fees. Book a call with us today for a free analysis of your current fees and see how much you can save.
