Impacts of Cash-Based Pricing
With Ebay officially completing its spinoff of PayPal last week, I thought it was the perfect time to visit the world of payment processing and the impact to the parking and transportation space.
In a two-part series, we will explore the impact of adding credit cards to your payment environment and also evaluate the options available for accepting credit cards.
Transaction Purchase Breakdown
In the United States, credit and debit cards are now almost synonymous with cash -- everyone has at least one in their wallet. Based on a recent Federal Reserve report, 66% of all payment transactions are completed with either a debit card, credit card or electronic means. Additionally, a host of companies like PayPal make it simple for businesses to accept and process cards.
With so many people having payment cards and technology readily available for processing and managing payment cards, why are so many entities still hesitant to accept payment cards?
Survey says...credit card fees!
When payment cards are accepted, we are now often seeing tiered pricing models penalizing customers who pay with a card, whether it’s at a gas station or paying for parking, as we recently saw in San Francisco where they added a 27 cent surcharge to all transactions involving a payment card.
It may seem tempting from a marketing standpoint to offer a lower cash price for a product to attract customers, but it comes with risk.
Merchants feel that it is more profitable for them to only accept cash payments. This is especially true for small ticket items like paying for parking or purchasing a transit fare. The fee structure on a percentage basis is very high relative to the overall purchase. However, this perception is linked to merchants’ belief that they do not incur costs when accepting cash payments or face the potential of a negative impact on sales.
In fact, reality couldn’t be further away.
Effective Costs Associated with Processing Cash
Have you measured the true effective cost of processing cash in your environment?
Consider the flow of cash for a purchase of a transit fare or parking meter - accepting cash from the customer through a meter, continuously collecting money from every meter, auditing the cash collected, moving the cash to and from the bank. All of these handoffs of counting, transporting and preventing cash theft represent costs that can be measured.
This doesn’t even take into account the initial capital outlay for the equipment and ongoing maintenance of the machines.
Various research has been conducted supporting a range of 6-8% for processing cash. A recent study by Tufts University found that the cost of cash in the United States to be $200B annually with a lion's share coming from municipal agencies.
Compare the effective cost that you calculate to the cost of processing payment cards which is around 3% - 4%. The result may surprise you!
Increase in Sales When Accepting Payment Cards
You will make more sales if you accept cards.
It’s a proven fact that customers who pay with credit cards spend more, join loyalty programs and tend to make impulse purchases. A study conducted by Dun & Bradstreet found that people spend 12-18% more when using payment cards instead of cash. We see this first hand with Passport clients who have added mobile payment to their environment and make 15%+ more revenue in the first year.
Certain behaviors are tied to how people purchase goods and services. Imagine a scenario where you were paying your rent, mortgage payment or utility bill in cash every month - you will likely become more cautious about your spending. You might be more mindful about turning off the lights when you leave a room or not letting water run in the shower. Cash is real and tangible. You see it in your wallet it one second and the next, it’s gone.
On the other end of the spectrum, you have payment cards where all you have to do is swipe or enter your number into a field, which is almost second nature for most at this point.
In the world of parking and transportation, this has real implications. From a parking perspective, you switch from thinking about how much time you need to purchase versus just paying with the coins in your pocket and taking a risk that you might not receive a citation (lost revenue). From a transit perspective, hopping on a bus or train that only accepts cash is a non-starter. This recently happened to me and a colleague in Chicago on the Metra train. We jumped on the rail system and, like most people, only had cards in our wallets. The train had no way of taking any other method and we were kicked off by the conductor, even though we said we would pay in cash when we got to the stop since our pickup was waiting with cash in hand.
The benefits of accepting payment cards far outweigh both the true and opportunity costs. The revenue benefits of accepting forms of payment cards are significant, while the cost differential between card transactions and cash transactions is arguably smaller than people think.
Would you rather have 100% of nothing or 97% of a purchase because you accepted payment cards?
CEO & Founder at DEC Parking Associates LLC | Parking Consultant | Parking Technology and Operations Specialist | Helping owners improve their parking operations NOI! | Call us now to discuss your needs!
9 年All good points. However, the problem with cash is that not all of it makes it's way to the counting room.
Semi Retired Founder of Parking Today Magazine & The Parking Industry Expo (PIE) The first Parking & Transportation Trade Show of the year. 2021 - marks our 25 year Anniversary
9 年I guess I missed something Manny - If you change from cash to cashless, there is no cash to count, collect, bank, or secure. If, for instance, you move to pay by cell, the costs of collection and counting is reduced considerably -- If you have five people collecting and counting, and reduce the amount of cash by say half, then two people would no longer be needed. You would visit each machine half the number of times, etc. Thus your cost would be considerably reduced. JVH
*Mr. Parking* Technology, eMobility & Services International Consultant. Past Board Member & Chair of Parking Tech at British Parking Association. European Parking Association Policy & Strategy Board APDS Council Member
9 年As an independent ?? consultant, I have looked in some detail at the matter of cash v cashless in order to advice my clients. The outcome of my investigation is that in all cases, introducing cashless on a previously cash only operation results in a further cost rather than a reduction. The reason for this is that the bulk cost of handling cash remain in the operation, collection, counting, banking, security and maintenance as these cost are primarily fixed by number of times done and the only part that will be subject to a cost save reduction is the % paid for the total amount banked which in most instances is 1% or less. So unless the number of cash collection is reduced significantly, introducing cashless at a cost of 3% plus, will result in an overall increase to the parking operation. It is also worth mentioning that the typical cost of handling cash according to my research is from 2.2 to 5.5% depending on the scale and competitiveness of the overall operation.
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9 年Great article that shines a light on the true cost of cash.