Should Merchants Go Cashless? It Depends on Sophistication.


There has been a recent trend of merchants – particularly restaurants – going cashless. Credit card networks like Visa have been quick to offer “rewards” for making such a move, with Visa most notably ponying up $10,000 for businesses that make such a move.

Which sounds very fishy. Remember, always follow the money.

There are benefits to going cashless, no doubt, and we can list a few right here:

  1. Eliminate employee theft at the register. Many times employees are ringing up fake transactions, issuing refunds or voids, and putting their hands right into the cookie jar to line their own pockets. The National Restaurant Association reckons that this sort of behavior costs restaurants 7% of sales, and across all of retail 75% of employees have admitted to stealing. If a merchant goes cashless, it becomes really hard for an employee to steal from the register. They can still pocket inventory, but they would need to bring a credit card skimmer or take pictures of a customer’s card in the front of house. Even then, the customer would now be the victim of theft and not the merchant.
  2.  Transaction times come down. Dealing with cash is often more time consuming than accepting cards. Even EMV card transactions, which took ~15 second per transaction in the early days, are being hastened as the payments industry realizes the importance in getting customers processed quickly; Walmart and Visa have worked to get their EMV time down to 2 seconds. Faster transaction times mean merchants can process more customers and leave customers with a more positive experience.
  3. Improved customer marketing. When customers pay with cash, there is no way to find out who they are. When they pay with cards, there’s data that can be analyzed for a number of different purposes. Some smart POS companies have created loyalty programs tied to a customer’s credit card because it’s incredibly easy – and seamless – to track who that customer is and what they’re purchasing. Larger retailers have reverse appended credit card transaction data to find out who their customers are and market to them directly. Payments companies are adding in these features to make it easier for their merchants to analyze customer behavior. Google is using credit card data to close advertising transaction loops. In fact Apple Pay’s biggest problem was that it wouldn’t share any customer data with the retailer, who would otherwise use payments data to market to customers.

But do these benefits make sense?

To find out, we need to do a little math. The average brick and mortar merchant will sacrifice 3% of their reveue to accept credit cards. That is, for a $100 purchase, they are shelling out $3 to Visa, the banks and the processor.

The average brick and mortar merchant does somewhere around $600K in annual revenue, with an estimated 25% of transactions coming from cash. That means around $450K in processing revenue per merchant. At 3%, a merchant is paying $13,500 per year for the pleasure of taking plastic.

If the merchant went cashless, they would be forking over another $4,500 in annual fees. Since the average merchant exists for 2.5 years, that’s $11,250 in total fees. But that’s also not including the value of the underlying processing data that the networks are monetizing through some creative means. Therefore Visa may breakeven on their $10,000 offer for half the market, but they will be coming out on top when taken in totality.

A merchant may yet want to go cashless for all the benefits we noted above. However, our experience has been that merchants don’t rigorously track theft. Hell, 85% of restaurants don’t even know their COGS. Further, merchants are mostly clueless when it comes to using data to successfully run marketing campaigns, so more credit card data is worthless to the industry on the aggregate.

A fair rule of thumb is this:

if a merchant doesn’t even know how much their items cost, they definitely won’t be rationalizing any decision they make.

These merchants will take Visa’s $10,000 check and be totally ignorant of the opportunities on the table. Can’t fault the processing industry for capitalizing on stupidity; it’s not Visa’s concern that the merchant won’t execute the full value of going cashless. Props to Visa for figuring out how to make more money.

  • Don Apgar

    “Since the average merchant exists for 2.5 years, that’s $11,250 in total fees.” Are you saying the average brick and mortar merchant only stays in business for 2.5 years? Is that specific to restaurants and where are you getting that?

    • Jordan Thaeler

      Well we pull data from tens of thousands of restaurants so we build a LTV model that never goes past 2.5 years. For SMB generally there’s a 25% annual attrition rate. With a little math and you can arrive at that 30 month number pretty confidently.