Are Merchant Facilities Cost Effective?

Are Merchant Facilities Cost-Effective?

As a business owner or manager, cost-effectiveness is a key factor when making decisions about which systems and tools to implement. One common dilemma for small businesses is deciding whether to offer card payment options through a merchant facility or to operate as a cash-only business. This choice can have far-reaching implications for both customer satisfaction and operational efficiency.

This issue came to mind during a recent lunch outing with my wife. We visited a charming vegetarian café nestled within a plant nursery in one of Adelaide’s scenic beachside suburbs. The food was fantastic, and we thoroughly enjoyed the atmosphere. However, when it was time to pay the bill, we were surprised to find out that the café only accepted cash payments.

Given how accustomed we are to the convenience of card payments, this caught us off guard. I had to rush across a busy road to a nearby service station, withdraw cash from the ATM, and return to settle the bill. Despite the great food, the experience left me somewhat disappointed, and I couldn’t help but reflect on how this decision might impact the café’s overall business.

Why Opt for Cash Only?

When we enquired about the decision to avoid card payments, the café’s owner explained that they believed having a merchant facility was not cost-effective. This is not an uncommon sentiment among small business owners, who often weigh up the costs of merchant facilities and decide it’s simply not worth the expense. But what does this really mean?

A typical merchant facility in Australia comes with a range of fees. On average, businesses pay around $20 to $50 in monthly fees for the service, plus transaction fees that range from 0.5% to 2% for credit card transactions and about 0.5% to 1% for EFTPOS (Electronic Funds Transfer at Point Of Sale) transactions. These fees can add up, especially for businesses with tight profit margins. For some owners, particularly in industries with lower transaction volumes, the perceived cost of these fees outweighs the convenience.

However, the true cost of a cash-only operation may not be as straightforward as it seems. While merchant fees are an obvious, tangible cost, there are also hidden costs associated with handling cash that many small businesses fail to account for. These include the time and labour spent counting cash, preparing deposit forms, and making trips to the bank. There’s also the risk of human error, theft, and even the simple inconvenience to customers who may not carry cash at all.

The Hidden Costs of Handling Cash

In my own accounting business, I’ve experienced firsthand the cost of managing cash transactions. While we predominantly use card payments for client services, I do have employees responsible for handling some cash, particularly when dealing with suppliers who prefer traditional payment methods. One of my employees manages these tasks, including counting cash and cheques, filling out deposit forms, and physically visiting the bank.

The time involved can add up. For example, if an employee is earning $35 an hour, and they spend 30 minutes each day managing banking tasks, that translates to a labour cost of roughly $17.50 per day. Over a week, this adds up to $87.50, and over a year, the cost approaches $4,500—just for banking tasks. Of course, this figure doesn’t even account for the time taken by a business owner who could be doing more profitable activities.

Efficiency in Business Operations

One of the key advantages of offering a merchant facility is the efficiency it brings to business operations. A card payment system eliminates the need for manual handling of cash, reduces the risk of errors, and can speed up the payment process, making it easier to manage daily reconciliation and accounting tasks.

From a customer’s perspective, the convenience of paying by card is now almost expected in many parts of the world. In Australia, cash payments have been steadily declining, with card and digital payment options like PayWave and Apple Pay becoming the norm. According to the Reserve Bank of Australia’s latest payments survey, less than 30% of transactions are made with cash, and this trend is expected to continue.

In the café example, the owner may have saved on merchant fees, but at what cost? Not only did I have to go out of my way to find an ATM and withdraw cash, but there’s also the very real possibility that other potential customers—who either don’t carry cash or prefer the convenience of paying by card—might simply avoid such establishments in the future. In today’s fast-paced world, consumers are less patient and more likely to walk away when faced with inconvenience.

Improving Customer Experience

Offering card payment options improves the overall customer experience, which can result in higher customer satisfaction and repeat business. In the age of digital wallets, contactless payments, and online banking, the expectation is that businesses will provide a variety of payment options to cater to their customers’ needs. Failing to do so can create frustration and alienate a portion of the market, particularly younger consumers who rarely carry cash.

Furthermore, studies have shown that consumers tend to spend more when they use cards as opposed to cash. This behaviour, often referred to as “credit card float,” occurs because paying with a card feels less immediate and tangible than handing over physical cash. For many businesses, particularly those in the retail and hospitality sectors, this can lead to higher sales and increased revenue.

Reducing the Risk of Theft

Another key consideration is security. Handling large amounts of cash increases the risk of theft, both internally and externally. Card transactions, on the other hand, leave a digital paper trail that makes tracking payments and reconciling accounts much simpler. There’s also a lower likelihood of cash-related mistakes, such as incorrect change being given to customers or misplaced funds.

Businesses that handle cash are also more vulnerable to break-ins or robberies, especially if they regularly deposit significant amounts of money at the bank. By reducing the amount of cash on hand, businesses can lower their exposure to these types of risks.

Making an Informed Decision

Deciding whether or not to invest in a merchant facility requires a thorough analysis of both the direct costs (such as fees) and the indirect costs (such as time, labour, and customer experience). In many cases, the costs associated with merchant fees are outweighed by the benefits, especially when factoring in the convenience for customers, the reduction in administrative overhead, and the security of electronic payments.

As a business owner, it’s important to assign value to your time and the time of your employees. If you’re spending hours each week managing cash, preparing bank deposits, and handling administrative tasks related to cash flow, those hours could likely be better spent growing the business, improving customer service, or developing new revenue streams.

Conclusion

Ultimately, the decision to implement a merchant facility comes down to a cost-benefit analysis. While the fees associated with credit card payments may seem daunting at first, the long-term benefits—such as improved operational efficiency, reduced risk of theft, and enhanced customer satisfaction—often outweigh the costs.

For businesses like the café I visited, operating as cash-only might seem like a way to cut costs, but it could be costing them more than they realise in lost sales and customer frustration. In today’s digital age, offering flexible payment options isn’t just a convenience; it’s a necessity for staying competitive in the market.

Do you operate a small business? Have you considered whether a merchant facility is the right choice for you? I’d love to hear your thoughts in the comments below. Is the convenience of card payments worth the associated fees, or do you believe that sticking to cash remains a viable option in today’s economy?