Cash is king. Or is it?

  • Date:
  • Posted by kindle

I have noticed lately that some small businesses are offering a discount if you pay with cash. It got me thinking and wondering if this was really a good idea.

Credit card fees can be expensive. No one wants to pay them. They are yet another expense that a small business has to deal with and it’s sometimes one they forget to budget for. To add to this, each credit card processor has different fees and has different rules. Some have contracts, some make the business pay for their terminal and some offer a pay as you go plan.

I understand why businesses are offering discounts if you pay with cash. It’s simple. They are trying to avoid paying the credit card fees to the card processors. At first, this seems like an easy way to save some money, and everyone likes a discount, right?

Well, sort of. Sometimes good intentions backfire.

Let’s say I offer a cash discount of 3%. That is what some of the online card processors charge a merchant. So on a $20 sale, that would save the customer sixty cents. The next customer spends $50 and his/her discount jumps to $1.50. Then the next customer spends $200, but doesn’t pay with cash, and they miss out on a $6.00 savings.

But lets say your first customer gets a cash discount, but the second customer doesn’t hear the customer is paying in cash, but hears the word discount. When they step up, they ask about the discount as they are pulling out a credit card, and you say, “I’m sorry, that was a cash payment discount.” Your customer may have just gone from being happy with their intended purchase, to feeling like they are being penalized for using their credit card.

I was taught there is a cost associated with doing business. My prior experiences in retail sales involved working with credit card processors that made the business pay thousands a year to buy their card terminal, and then also charged huge fees on top of that. They also charged the merchant different fees for accepting different cards. Ever wonder why many stores refused to accept American Express? Because processors charged higher rates for processing Amex. People loved their Discover cards because of the free cash back, but guess who paid the cash back? Yup, the merchants in the form of higher fees. You didn’t really think the credit card company was actually going to accept less profit to give you cash back did you? I am happy to accept credit cards from my customers. It means they are making a purchase.

Here are a few facts for you.

  1. People don’t like to have constraints placed on how they pay. Some will consider your cash discount as a surcharge for using their credit card.
  2. Customers are more likely to spend more if they put the purchase on a credit card. (Immediate gratification and delayed costs.)
  3. People are carrying less cash on them. Credit cards are ubiquitous and are used for everything from online purchases to vending machines. People now have their credit card linked to their phones and watches so they don’t even have to pull out the card to swipe it anymore. Some folks even have their paycheck balance added right to a debit card.

We use Square at Five Katz Antiques. I have to say I am happy with the service. It’s not the easiest for me when I have to track something to a report at tax time, but I don’t use their services to the minute detail. They charge a small percentage, plus ten cents per transaction. The money is in my bank the next day and more importantly I don’t have to keep large amounts of cash on hand, so I don’t have to make a trip to the bank. During the pandemic last year, banks closed their lobbies. Then, many shortened their hours, and cut staff. This caused a backlog at the bank with lines of anywhere from five, to ten or even twenty cars. Yet, when my clients paid with their cards, I didn’t have to deal with those lines and delays in the drive through.

Square also doesn’t charge me more for different cards. It’s all the same fee schedule and if someone issues a card, they will take it. I like to be able to tell my clients that I will be happy to take their American Express card. Sometimes they are surprised and it makes them happy.

Many people use their cards to accomplish their goals. Some receive monies towards a new car. Other cards incentivize the users with points for airline travel and some offer a cash back option.

I thought about the cash is king scenario for a long time. To me, if I take a credit card, I lose the percentage to the processor. If I give a cash discount to a customer, I lose the percentage to them. The customer actually wins more by paying in cash because they are not paying the average 22% – 24% interest on their purchase when it hits their balance, unless they pay their card off every month when the statement comes due.

It’s a tricky situation.

When I sold Maytag’s back in the day, people would come in and ask if I would match Sears’ 10% off price. I would say no because the Sears 10% discount was predicated on the fact the customer had to use their Sears card. When I asked them what their interest rate on their card was, I could almost see the little lightbulb click on above their head. I would then offer them a year same as cash and close the deal.

We all want our customers to feel valued. I use small discounts in two ways. One to incentivize a customer to buy that day and return, or to thank a client for their return business. By offering a blanket policy that is fixed and rigid, it takes away these options for me.

Sometimes cash is king, but I find this to be true more with negotiating larger purchases. For example buying hurricane shutters for your home or a large shed. Private individuals selling a car are more likely to offer a lower price if you have cash in hand. Gas stations cheat by offering one price for using their card, and a higher price for cash or another card.

The expression “Cash is king” is an age-old saying often used to explain the failure of both businesses and consumer households. Without the right amount of cash on hand, both of these entities can run into major trouble, even into bankruptcy.

Everyone should have some cash on hand. A little bit in their wallet or purse, and a little bit stashed away in case of an emergency. ATMs and banks don’t work if there’s no power. I remember I needed a few sheets of plywood before a hurricane. The credit card line had 40 people in it. The cash line had three. Good thing I remembered I had a c-note stashed in my wallet.

When you need some immediately, that’s when cash really is king.