Making Sense of the Cost of Cash for Businesses

Increasingly, the most used wallet in a shopper’s pocket isn’t the leather one. It’s the digital wallet in their phone.

That’s also the case with the money they use to pay small businesses and merchants — it is becoming more and more electronic, and less and less physical.

Underscoring this trend is the fact that, according to the Federal Reserve, a staggering 84% of all payments made in 2023 were performed using alternative, non-cash methods.

And the PYMNTS Intelligence report “Digital Bill Payments: Mobile Wallets Gain Popularity, but Hurdles Remain” found that 60% of consumers reported using mobile wallets to pay their bills in 2023, a 22% increase from the previous year.

That’s why for merchants, selecting the right mix of payment methods is a crucial decision, one that directly impacts profitability and customer satisfaction — and comes down to an evolving calculus around cost and convenience.

At the surface level, things may seem straightforward: when a customer makes a purchase with cash, the business avoids credit card processing fees. Conversely, credit card payments incur fees but streamline the process of getting money into the bank.

However, the reality is far more complex.

That’s why, for small- to medium-sized businesses (SMBs), understanding the full spectrum of costs associated with various payment methods, as well as the preferences of their shoppers, is crucial.

Ultimately, for SMBs, every transaction counts, and the way these transactions are handled can have significant implications for a business’s bottom line.

Read also: $100 Bills Jump in Volume Despite Merchant Distaste

The Cost of Cash: Understanding the Financial Dynamics of Retail Payments

For example, on a $100 sale using a credit card or digital wallet, a retailer might pay anywhere from $1.50 to $3.50 in fees.

For a small business with thin margins, these fees can significantly impact profitability. However, the convenience and security provided by electronic transactions often justify these costs. Credit card payments are processed quickly, funds are transferred directly into the business’s bank account, and the risk of handling and transporting cash is mitigated.

And after all, cash is not costless either — and if paying cash costs SMBs money, the natural implication is that it’s making money for somebody else. For instance, if a buyer pays cash for a $100 sale, that cash then has to make it to the SMB’s bank, a process that comes with its own costs and complications.

The set of expenses associated with cash can be substantial, especially for businesses that handle large volumes of cash.

Banks often charge businesses for depositing cash. These fees can vary but are generally based on the amount of cash deposited. For instance, a bank might charge $0.10 per $100 deposited. While this might seem negligible, it can add up for businesses with high cash sales.

Counting cash, preparing deposits and reconciling cash drawers at the end of the day are also labor-intensive processes. The time employees spend handling these tasks is time not spent on other productive activities. Moreover, the risk of human error and theft is higher with cash transactions. Insurance against these risks, particularly theft, can be costly, and not all losses can be fully insured or recovered.

That’s why, for small businesses, regularly reviewing and optimizing payment processes can contribute to a healthier bottom line.

Read more: Why Zillennials Will Rule the Digital Economy

As the Federal Reserve’s report noted, although consumers still made most of their payments in person in 2023, the increase in card payments without an associated increase in cash payments suggests that the share of cash payments is not likely to return to pre-pandemic levels absent a significant shock to the payments landscape or economy.

That’s why for small businesses, adopting electronic payment methods can also open up new opportunities for growth. Digital payments facilitate online sales, allowing retailers to reach a broader customer base beyond their physical location. Moreover, data from electronic transactions can be invaluable for business analytics, helping retailers understand customer behavior, optimize inventory and tailor marketing efforts.

Findings highlighted in PYMNTS Intelligence’s “Money Mobility Tracker®: Peer Pressure: Balancing Convenience With Compliance in P2P Payments” noted that at least 50% of millennial and Generation Z consumers report using P2P payments for purchases made both digitally and in stores.

A growing number of retail merchants accepts P2P payments. In the food and beverage space, Starbucks’ rewards app accepts payments via Venmo and PayPal, and Chick-fil-A accepts PayPal. Major retailers Walmart and Target accept PayPal too, as do eCommerce marketplaces eBay and Etsy.

Ultimately, while cash remains a vital part of the economy, especially in certain demographics and regions, the benefits of electronic payments cannot be overlooked. They offer convenience, security and opportunities for business growth that are particularly important in the digital age — and they are increasingly where all the most exciting innovation is happening within payments.