Retailers rail about card costs as cash use declines

Retailers rail about card costs as cash use declines

Contactless cards, online sales and self-service tills are contributing to a steady decline in the use of cash by UK consumers says the British Retail Consortium.

New data reveals that a growing proportion of smaller payments previously made in cash are moving to debit cards, which now account for 50% of retail sales value in 2013, up by 11% over the last five years. Over the same time period there has been a decline in the average debit card transaction value, and in the use of cash by 14%.

However, cash remains the dominant method of payment, with 53% of transactions still made in loose change, although this has declined by three per cent over the last year and 10% over the last five years.

The BRC's Payments Survey 2013 covers 60% or £191 billion in retail sales in 2013.

The figures are broadly in line with recently released data from Halifax Bank, which shows that debit cards are now used in 56% of all transactions and the use of notes and coins on the wane.

For retailers, the switch to plastic is not entirely welcome, with the BRC accusing banks of levying "unjustifiably high" charges for handing card payments. The average cost to a retailer to process a credit or charge card payment is now 40.9 pence, up 18.3% in the last five years. Credit and charge cards account for only nine per cent of transactions but almost half (48.7%) of costs, says the retailer lobby group

At the same time, the cost to process a cash payment is now 1.3 pence and has decreased 38% in the last five years. Cash accounts for 53% of transactions but nine per cent of costs. Debit cards costs have increased by four per cent in the last five years and cost 8.8 pence per transaction. They account for 32% of transactions but 37% of costs.

Comments: (7)

A Finextra member
A Finextra member 02 June, 2014, 12:081 like 1 like

The cost of transaction is a misleading parameter to focus on. If it were important, all the merchants would still be forcing their customers to pay with cash.

Retailers do spend money on advertising/marketing without blinking, but I bet very few of them know how much it really costs to get new/incremental sale.

The important parameter should be: how can a (new) payment method help me make more money. Is serving one extra customer per hour by accepting mobile payments worth an extra 1% in transaction cost? If such mobile payments also include a loyalty programme, how does that compares to 50% off promotion ("buy 1 get 1 free"), in terms of effectiveness?


A Finextra member
A Finextra member 02 June, 2014, 12:24Be the first to give this comment the thumbs up 0 likes

Credit Cards may only acount for 9% of transactions but nearly half the cost, however the BRC's report shows that credit card volumes are moving in the right direction, with a 12% rise in the average transaction value. This means credit cards are still  being used for high value purchases and are not displacing debit cards at a high cost to the retailer. More fast, payment instruments for low value purchases will reduce cash in circulation and provide retailers with the fast liquidity they need. 

The cost of debit card transactions is not high - it's the credit card fees at a percentage of the value that hurt.

A Finextra member
A Finextra member 02 June, 2014, 12:31Be the first to give this comment the thumbs up 0 likes

As for DC txn cost, that depends on use case. Some small merchants are paying as much as 15-25p per txn. For a small-value purchase (say £3.00), that's well over 5%...

A Finextra member
A Finextra member 02 June, 2014, 22:46Be the first to give this comment the thumbs up 0 likes

I would argue that the costs of handling cash for a retailer i.e. staff time to count it and to reconcile cash tills, staff time to deposit cash at a bank branch, associated bank fees for cash deposits levied by some institutions, lost cash interest on cash float amounts equates to much more than the actual card processing costs. 

I very much doubt whether the above costs are factored into any analysis conducted by any self-serving retailer group.

Russell Bell
Russell Bell - Fastbase Ltd - Wellington 03 June, 2014, 05:262 likes 2 likes

Your typical retail business owner isn't ignorant of the costs of different payment methods.  But they don't turn away customers who've only cash in their pocket or only plastic.  They'll deal with whatever costs and issues arise, with whatever payment methods their customers want to use.  It's natural they resent high transaction fees.  Especially on low-margin sales.

Credit card charge-backs are another spanner in the works.  Often the business wants to offer lower prices for website sales.  That's ok for sales on-account where you build a relationship with the customer and trust them to pay later.

But for casual website sales both parties want instant gratification, payment right now.  Not so easy when over the web you can only accept payment via credit card or PayPal and both are subject to charge-backs.  How do you set prices when you can't predict how often payments to you will get reversed, for no fault of your own ?

Paul Davidson
Paul Davidson - Expense Reduction Analysts - London 03 June, 2014, 10:431 like 1 like

I agree, Russell, that retail businesses are mindful of costs, though a key challenge which we see in mid-sized retailers is accessing and interpreting the mix of transaction and card types from the data provided by acquirers.

Outside IC+ models there are so many variations which muddy the waters and make decisions on process change to avoid non-secure premium charges and comparison between acquirers very challenging.

Knowing that doesn't stop retailers feeling frustrated, in fact it's when people perceive they are facing barriers they can't overcome that they'll rail against a system.

Russell Bell
Russell Bell - Fastbase Ltd - Wellington 03 June, 2014, 22:58Be the first to give this comment the thumbs up 0 likes

Retailers bend over backwards for their customers, competition obliges them to.  They look at the behaviour of Visa & MC and card-issuing banks and don't see a competitive payment industry bending over backwards for them.  The banks make handsome profits on these interchange fees.  Such extraordinary profits you won't see in a healthy market.

For sure analysis of transaction data might help a retailer, not an easy task when the fee pricing is so complex and opaque.  And there's Durbin et-al on the regulatory front.  But that's just detail, the big picture is not healthy.