This post is from GRS staff writer April Dykman.
A couple of weeks ago, J.D. highlighted research that showed that rewards cards cost the poor (in higher prices overall) and benefit the rich (who are more likely to use the cards). But what if retailers offered you a discount if you paid in cash?
It might not be so far-fetched. In Will Financial Reform Kill the Rewards Card?, Brett Arends writes that a provision in the financial reform act allows for such a discount.
If competition works its magic, that discount should end up worth as much, or more, as the points you get from a card. We may end up saying goodbye to the rewards card, and go back to old-fashioned money.
The new cash is, er, cash…According to both the Public Interest Research Group and the National Retail Federation, when you pay for a purchase by credit card, it costs the retailer about 2% in transaction fees. So, logically, that’s about how much they can afford to discount if you pay cash instead.
Arends points out that the value of your rewards can be difficult to determine, especially with points for purchasing items or airline miles.
…experts explained that the average card user is doing really well if they get back about 1½ cents on the dollar. That’s why cash-back cards paying 2% seemed like the best deal for most people.
But why wait to get 2% back if you can never part with it in the first place?
Getting More for Your Money
Paying with cash could yield even bigger discounts, since the new law allows retailers to offer other benefits, like vouchers and gifts, in lieu of cash back.
Stores, naturally, sell products at a profit. So they may be able to offer you $2.50 worth of goods, say, as a bonus for settling your $100 bill in cash. You effectively get rewards worth 2.5%. But it may only cost them 1.8%. (At a high-margin retailer like Tiffany, the deal could be even better. Tiffany’s gross markup was about 75% last year. So the company could give you, in theory, gift vouchers worth $35 in return for settling a $1,000 bill in cash.)
Coming Soon to a Store Near You?
It’ll probably take time before cash discounts are offered by retailers and restaurants, but there’s interest. Before, it was difficult to implement such an offer since the law was unclear and credit card companies employed lawyers to make it harder.
But does this mean rewards might be a thing of the past if the rewards lose their allure?
Store Discounts Could Cost You
Arends is decisively anti-credit card, and that’s not a viewpoint I share for those who use them responsibly. Personally, I haven’t paid interest on a credit card purchase in years, nor have I paid late fees. I have, however, racked up some serious rewards.
For me, it’s worthwhile. But I had to ask myself, given the opportunity to get an instant discount, would I take it? Maybe. But only if I actually got cash back. With vouchers and discounts, it’s easy to feel like you’re getting a good deal, when really you’re just spending more money. In Learning to Discount All Those Juicy Discount Offers, Karen Blumenthal reports that stores that offer discounts through loyalty programs count on people not redeeming their rewards:
…we are likely to spend more to qualify for a coupon or earn cash back—and then forget to spend it. All loyalty programs count on a certain percentage of consumers not redeeming,’ Prof. Nunes notes. In addition, he says, ‘once you get closer and closer to a reward, you want it more and more’ and may spend more to get it.
Second, vouchers are a bigger win for the merchant, or else the programs wouldn’t exist. Take the example of Tiffany’s that Arends gives to show how higher markups can mean bigger rewards. How many things can you buy in Tiffany’s with a $35 voucher? Not much. The cheapest thing I could find on their website was a sterling silver ring for $100. You’re still shelling out $65 to use your voucher. If you were going to buy the item anyway, it might be a good deal. If the discount found you looking for something else to purchase, you aren’t coming out ahead.
So readers, what do you think? If you use a rewards card, would you trade in the rewards for an instant discount? Would you trade them in for vouchers or gifts?
This article is about Credit Cards, Shopping
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Not only is cash riskier for the merchant, who would have to hold it on the premises, it also takes longer. Remember those days when you’d be behind someone with a bunch of loose bills or a checkbook? You’d roll your eyes and prep yourself for a long wait in line. It takes the cashier more time to give change and count money. This could easily cost the store 2% in terms of paying their extra employees to handle the extra load.
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Here is my take.
Beth above me somewhat touched on it.
The whole problem is stores are passing off all the cost to the customers, instead of looking at it in a way that addes value to their business.
Benefits for a store to use credit cards:
- Less cash on hand = less risk
- Less handling time
- Instant payment
- Increased customer base available due to not requiring cash only
- Increased customer base means more business, higher revenue, etc
- Less time at the register
So why is it that a customer is to pay for all of these services that a business recieves from having card service? That is what I never got. I think the businesses themselves are to blame, trying to make people feel guilty, when really they are the ones reaping more benefits than the customers.
I remember going to an ice cream store, but upon arriving they didn’t take cards, so I just went to Dairy Queen instead because I didn’t have cash.
I remember buying a keg of beer and they charged me an extra 3% for using a card. They claimed “well the card companies charge us you know”, my thinking is yes they do and you benefit because I wouldn’t come here if you didn’t let me use my card. For all they know, I could write a bad check and throw a kegger never to be seen again.
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I use the credit card because of the safety and convenience, not the rewards. The rewards are just a bonus and not very significant. We usually use them to get a discount on our yearly airline tickets to the Caribbean. It’s annoying to patronize a restaurant (or in a real example, my hair salon), that doesn’t take credit cards, because I need to remember to have a check on me or take cash out of the ATM.
I would never use vouchers or rewards unless I was going to use them to purchase something I would buy anyway, like food. I think the benefits I get from using the card far outweigh the small discount I would get.
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Check out this Consumerist article about credit card $10 minimums:
http://consumerist.com/2010/09/amex-visa-mastercard-all-give-thumbs-up-to-10-credit-card-minimums.html
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MM Said: “So why is it that a customer is to pay for all of these services that a business recieves from having card service?”
Two things to consider here:
1) Restaurants have a profit margin of 4-7% if they stay open past the first 3-5 years. Small businesses and full service restaurants are toward the lowest end of that scale. Anything they can do to cut costs will be done.
2) The customers (i.e. people paying with a card) will pay for that credit card fee. The question is, will it be built into the price? Or will it be paid only by those customers who use the service?
One restaurant I frequent says that when a customer is paying for anything less than $20 or more than $60, it is better to use debit. But that middle area it is cheaper for him if they use credit. Another place I used to work, it was cheaper for the owner if people paid in cash for anything under $80, and running debit versus credit didn’t change anything with the fees. (Anything over $80 he figured was higher risk anyway, we weren’t in the greatest part of town and that would have been almost 1/5 of his total sales for the day–so it’s better if it’s safe.)
It’s definitely more difficult for a server or bartender to steal money when customers pay with cards. But some places have a policy of paying those tips on the paycheck–and then only if the card isn’t denied when the batch goes through (and waiting for the paycheck removes some of the benefit of working in a tipped industry). Also, some places charge their servers the credit card fees, so that is taken out of their tips.
The only way to know about these policies is to ask, and that’s a VERY personal question to ask your server and even restaurant owner sometimes. “Do you have a preferred payment method?” is as far as I will go–but even then, most people tell me it doesn’t matter, even when it does.
I routinely pay for gas with cash, because it’s a significant discount (4-15 cents per gallon!). One place I go is usually 15 cents cheaper than their competitors, but they charge a fee for using cards. I can literally feed myself for a day on the money I save buying gas there every week.
OTOH, I prefer using cards for most of the rest of my purchases. Tracking without needing to save receipts, and because I lose coupons and gift cards all the time. I never could convince myself to get a gas card, which I really should have–but I know myself well enough to know that I would OBSESS over only buying gas wherever that card gave me rewards, even if it was inconvenient or in the long-run downright costing me money. OCD for the win. I’d rather just buy gas where I can get it cheapest when I can plan ahead, or wherever is convenient when I can’t.
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Unfortunately, the agreements most retailers sign with the credit card companies forbids charging a different price if a customer pays with the card. (And yeah, the card companies insert enough language to cover most tricky ways around it.)
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http://tipjarfinance.blogspot.com/2010/08/5-reasons-why-you-shouldnt-pay-with.html, check out this article
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@Brigitte
“Two things to consider here:
1) Restaurants have a profit margin of 4-7% if they stay open past the first 3-5 years. Small businesses and full service restaurants are toward the lowest end of that scale. Anything they can do to cut costs will be done.
2) The customers (i.e. people paying with a card) will pay for that credit card fee. The question is, will it be built into the price? Or will it be paid only by those customers who use the service?”
Answer #1) Ok I get it, but are you to tell me that they would still receive 100% of the people they are getting when offering credit card service vs making people pay only in cash? I doubt that. Instead of cutting cost, they add it to the product. They cut cost by keeping your wages low. Or charging for the lemon in the water.
Answer 2) Like I said, they add it to the product. So why pay cash when its already build into the price? Might as well get some cash back.
My whole point is that the business itself is not accepting any cost. It’s all passed on to customers, but customers are not the only ones receiving benefits. It’s obvious that credit card service has benefits or else why would so many businesses offer it if it didn’t help them in some way?
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Many gas stations already offer a discount if you pay by cash, so I wouldn’t be surprised if retailers and restaurants started the same practice. Once a few of them start the trend, others will follow.
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In a free market system for currency we would probably not even be using cash dollars, it’s arcane. Where there is a free market we see credit/debit cards and other novelties not yet wide spread. It would be nice to have a free market system for everything so we could see more innovation. Government makes everything so arcane.
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Yes discounts are coming;
from apmex.com
“Shipping, Handling, and Insurance
Is there a discount for paying by Cash?
(Check, Money Order, Cashiers Check, Wire)
***Yes, we provide a 3% cash discount off our Shipping, handling and insurance to our customers if they pay for their orders by check, money order, cashier’s check, bank wire, cash or trade. ”
And yes i would trade any reward for a cash discount. I am an avid airmiles collector but when it comes down to it I’d rather spend less and keep more of my money.
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I went in Best Buy today in hopes of getting a bit of a better deal with cash. We already had gone in the night before and decided which t.v. we wanted and the price was marked $549. I told the salesman I am paying cash and would they be able to come down at all- he practically laughed me out of the store. He said very boldly “HAHA… No. We don’t work that way.” I said, okay.. I’ll go somewhere else. He said okay. He didn’t chase after me, he could not have cared less.
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