The cost of taking our money

29 07 2013

As consumers we don’t really think about the costs involved with doing business, all we care about are the products or services we are looking for, and getting them at the lowest possible price. Oh, and to be fair, there is nothing wrong with that. All consumers know there are costs involved in running a business, but some costs, like a business paying to take our money, we often forget about…

This is something that even the EU is now trying to look into, proposing a cap on the “interchange fee” charged by your bank back to the merchant for taking your money from your debit / credit card. The problem here though, is that those fees will probably move elsewhere, meaning it will be pushed onto the consumer – more than likely in the form of us having to pay annually for the privilege of having a debit / credit card (something many EU banks already do).

So in this post I want to quickly look at costs businesses have to pay in order to take our money…

Someone has to pay, every time we use these

Someone has to pay, every time we use these

 

The average costs

When a business accepts debit / credit cards, they pay for being able to provide that option to us, the consumer. Now you may think that it’s a cost based purely on the transaction process itself, but you would be wrong. Typically, in order to take card payments, a business has to register for merchant services (SMEs and independents usually go through high street banks – though the actual merchant service is usually sub-contracted out). The business pays a monthly fee for this, and the cost of that will depend on the business, amount of transactions they process and their value. But many small businesses, start-ups etc pay around £30 per month per terminal. On top of that, there is a standard flat fee per transaction that goes through the machine, again this will vary in price. For debit cards though, a start-up maybe looking at loosing 20p per transaction, while credit cards may also have a fixed fee associated with them, but will include a fee based on a percentage value of the transaction value. To give you an idea here, this fee could be anything from 1% right up to 4% of the value of the transaction, again depends on your business, your provider etc etc.

Now these fees may seem small, but remember these fees per terminal are per month, and that every single transaction is subject to these fees. When you look at tight operating costs and small profit margins, you all of a sudden see why providing card facilities isn’t always an option for a business.

Here are some facts and figures. The average cost of a credit card transaction (remember average) to a business is 36.2p. This cost drops to 9.6p for debit cards, while handling cash is 1.5p. If you were to calculate your shop sold 100 items in a day – that would mean you have spent £36.20 in handling those transactions (if credit card). Now multiple that by 300 working days (just for simple maths) and you see you have £10,860 lost in credit card charges (not including the monthly fees). Now, for many SMEs, independents, start-ups, actually any business, this is a large chunk of money lost.  Obviously these are just some figures to illustrate my point, and that point is that actually, processing cards is not cheap.

So with these sorts of costs, is it any wonder that businesses want a cheaper alternative, and are actively looking for alternatives.

 

Will Mobile drive down costs?

Mobile payments are the most obvious alternative to typical card transactions. But there are 3 different form factors of mobile payments at the moment:

  1. Typical card processing, but using a mobile phone as a card terminal
  2. Using NFC technology for contactless payments
  3. Use real mobile payments, originating from mobile devices and no need for cards at all

 

So, option 1: Companies like Square, iZettle, Sumup etc provide a dongle that allows any business to turn their smart phone device into a device that allows them to process card transactions. This proposition brings down the monthly cost to the independent and SME business – they no longer need to pay for their merchant accounts with high street banks etc. But these solutions are still expensive for the merchant. Typical fees are at least 3.75% per transaction! That’s very high and ultimately expensive for the merchant. You must remember that these are still card transactions, so in our example earlier, the £30 per month fee may have been removed (saving the company £360 over the year), but their fees have gone up, so still looking at £10,000+ in card charges.

Option 2: Use contactless technology…Well you still need merchant accounts here, so you are still paying your £30 per month (if not more if your bank charges etc for NFC enabled technology). However, your card processing fees will drop a little – and this is because at the moment the interchange fees on an NFC transaction are lower than those associated with Chip and Pin transactions, signatures, and card not present. But this is making only a small dent in the overall fees paid, and again the merchant in our example is shelling out £10,000+

 

Option 3: Real mobile transactions offer real options to merchants. Since they aren’t dependent on card schemes such as VISA, MasterCard, there are less companies involved in the transaction handling process. This means savings can be made in every step of the process, and these savings are passed onto the merchant. Companies like CloudZync and their Zync Wallet product provide drastic savings to businesses. Take our merchant example, with CloudZync the merchant pays no monthly fees, and since they are processing 100 transactions per day, are simply charged 1p per transaction. That means their daily processing fee has dropped from £36.20, down to £1. So the business annual handling fee drops from in excess of £10,000, down to just £300 for the year.

 

Cost of business, and cost of not adding value

What we must remember with mobile though, is the potential here to add value to the merchant – consumer experience and relationship. While cards, cheque and cash provide payment methods, mobile has a lot more to give (just as it does with our emails, social connections, organisers etc). Mobile transactions can be the gateway to greater consumer merchant engagement, better shopping experiences and ultimately, provide a potential tool to ensure business growth.

So while this post really is focussed on the cost of doing business, and potentially doing business with mobile devices, we should also remember the cost of potentially not doing business with mobile devices….Can a business afford to not make processing savings and not increase customer engagement and retention? I don’t know any that can afford to miss out on both…

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