Small shops do themselves no favours

Walk around London and it’s hard to miss the Maestro “Cash Is Dead” advertising campaign. You’d never believe this in many small bricks and mortar retailers; try to purchase something with a card for say £7.99, pull out the plastic and the shop keeper shakes his head and points to the sign – “no card payments for under £10”. What sort of madness is this that retailers refuse to accept money because it is the wrong sort of money?

OK, so there are interchange fees; a card payment is probably going to incur a charge of around 2% of the transaction. For the retailer there is therefore an incentive to prefer cash. But at what cost? (Perversely for the banks they penalise against not using cash, despite the handling for cash being so much more than an electronic transaction).

Let’s say I am buying something for £7.99. Let’s say the cost price for the item is £3.50. That’s £4.49 gross profit. Obviously this doesn’t all go into the retailers pocket; the tax man takes his share in VAT and there are the operating costs. I’m no retailer, but let’s assume that a whopping 90% of the gross pocket is swallowed up in costs, leaving the retailer 45 pence net profit. Now of this, the bank is going to take 15 pence from the retailer for me using my card. Which the retailer is not happy about.

And this is the mad part; for the sake of 15p the retailer is willing to loose the sale (OK, that is 36% of his net profit – and that is a lot, but isn’t cash flow king?). He has given me a shocking customer experience, not allowing me to buy from him this time (and I’ve got a memory – not going there again). I’ll go down the road to the supermarket where they will not only accept my card – but give me cashback as well!

There is of course, an alternative. Give the customer an option of using the card, passing on the card fee. For most customers, the opportunity cost of paying slightly more but getting instant gratification is probably more acceptable than either driving several miles out to the supermarket, or having to find a local ATM.


  1. matt m · Tuesday, 13 November, 2007

    Unfortunately, there is generally a fixed transaction fee in addition to the percentage fee. This can be around US$1.15 in my experience, and is different depending on which card you use. This can more than wipe out the profit on small purchases. The smaller the retailer, the worse rates they are charged.

    I like the idea of passing on the card fee, but it’s difficult to know what it is in advance.

    Of course, there may also be a problem in that cash transactions are easier to misrepresent for tax purposes…

  2. Prashant Gandhi · Wednesday, 14 November, 2007

    The other alternative is of course to simply raise the price a bit if they were paying by card or simply pass on the transaction cost to the customer. Even a huge store like IKEA charges a transaction fee for credit card payments, so definitely not just a small shop phenomena. Cash is still king because it is convinient way of avoiding tax by simply not reporting the income.

  3. Nick B · Wednesday, 14 November, 2007

    VISA and Mastercard merchants are not allowed to pass the fee on to the customer. They are allowed to offer a discount for cash transactions, which is similar, but not quite the same.

    One thing that is often ignored by smaller merchants is the cost associated with dealing with cash. It isn’t zero. The reason the banks charge credit card fees is that they have actually accounted for the risk and assigned a cost to it.

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