Understanding the Pros and Cons of Cash and Credit Cards

This podcast originally appeared on PaymentsJournal.com.

Capital One Vice President Donny Hoye and Payments Journal Editor-in-Chief Ryan McEndarfer discuss the pros and cons of accepting credit card payments.

The following is an edited transcript of the podcast episode.

Ryan McEndarfer Editor-in-chief of PaymentsJournal.com

Welcome to the PaymentsJournal podcast. I’m your host Ryan Mac and on today’s episode, we are going to be talking about the evolution of payments with Donny Hoye, Vice President, Cash Management Executive at Capital One. Donny, welcome to the podcast.

Donny Hoye, Vice President, Cash Management Executive at Capital One

Thank you. Excited to be here.

How have payments evolved?

Ryan McEndarfer

Now Donny, let’s get started. Can you give us a walk-through of how payments have evolved? Maybe not going so far back as the barter system, but a bit of an overview would be great.

Donny Hoye

I highly recommend people looking into payment evolution in general from the first checks being issued by the Knights Templar during the Crusades, but I know that’s not why we’re here today. So, if you look at recent trends—conversions from cash to card use and other third-party apps, it’s been a pretty intense 20 years or so. I’m on the older cusp of being a Millennial, so I can remember back on road trips with my parents using credit cards at gas stations for the first time, to seeing McDonald’s when I was 14 or 15 start accepting credit cards, which was the first real quick service business to do so, and everything in between up to now, it’s got us to where we are today.

What are the pros and cons of cash sales in business?

Ryan McEndarfer

I’m in the same boat. I can remember my parents relied heavily on cash. It was always that Friday was payday and you’re going to run down to your local financial institution to cash your check and make sure you have cash for the remainder of the week. It certainly is interesting to see how it’s evolved. In my personal life, I rarely carry cash on me. My personal habits have evolved to using credit as a delayed debit. Focusing on the cash part there, you see a lot of news stories coming up where it’s the war on cash, and it sounds like an old-time radio headline. I’m curious to get your take on the advantages and disadvantages of cash sales in a business.

Donny Hoye

Positives are that cash for now at least has a marginally lower processing cost. You get costs from vault services; the banks will charge cost at the point of deposit. So the costs aren’t completely absent, and they’re inching higher if you look at trends in fee structures, but right now I would say that there is some potential cost savings from the pure dollar to credit card dollar perspective. It doesn’t rely on technology. So from a business continuity planning perspective–during a storm, during a blackout, anything like that, you can still barter goods and services using cash. It can be good for businesses that rely on divvying up combined income.

Think of restaurants, a great example. You have a server out there collecting all the bills, but behind the server is the food runner, the bartender, all the people that contribute to the client experience that deserve some of the tips. That’s much easier to do on cash in its current state than cards. And lack of complexity for fees, even with the bank’s charging, if they charge 10 cents for every $100, for the vaults charging $50 a week, it is a simpler fee structure to understand. Those are the positives. In regard to the negatives for cash, certainly it costs time.

Making change is not as easy as swiping a card, especially if there’s some complex requests as to how they want that change made at the end. So it’s going to keep your line up a little bit more. Again, if you’re in a high-volume business, it just slows the process down. And the risk of theft is greater, whether it’s an employee dipping into the till or more complex crimes or holdups, stickups, breaking and entering, that sort of thing. Those just aren’t problems that you have with cards. No one’s breaking into a place to steal a box full of credit card receipts from the day. It’s an easier transaction to keep safe. So that’s something to consider as the negatives of cash.

What are the advantages and disadvantages of accepting credit cards and digital payments for business?

Ryan McEndarfer

I’m glad that you brought up quite a few points there. And one that I really want to touch upon is the simplicity aspect of it. I have to agree that cash is simple when from a technological standpoint also the distribution of it does make it easy. I can at any point reach in my pocket and pull out a dollar bill and that tender will be valid without all the technical aspects of it. But getting into some of the technical aspects, what about credit cards and digital payments? Can you break down some of the advantages and disadvantages of accepting credit cards and digital payments for businesses?

Donny Hoye

Absolutely. The conversion from cash to card. Cash brought us out of a barter system to being able to exchange a stored value and keep that good in service at a negotiated rate. What cards have done is taken the payment mechanism and added some features and benefits to it.

From a business perspective, the positive would be that it can increase cross-sell. An example I would use is if I go to McDonald’s to buy an ice cream cone and I have five bucks cash in my pocket to do so. I show up and all of a sudden I want fries and a burger–I’m out of luck. We’ve seen in the statistics to back this up. Dun and Bradstreet found that people spend 12-18 percent more when they use their credit cards as opposed to cash. So from a business perspective, there are the processing costs, but you do increase your cross-sell and your bottom-line revenue by accepting cards. The credit card rewards programs can be a good one for consumers.

So now not only is the consumer decreasing their risk, where if I lose my wallet and I’ve got $200 in it and a credit card, well the $200 is gone if somebody picks up that wallet, but the credit card I can just reorder and dispute any fraud charges that are on it. Credit card processes efficiently. So if I’m a quick service business or store during peak tourism season that needs to push people in and out as part of my business model, cards on average take 5 seconds, but cash transaction is into the minutes (I don’t have the exact number on that). Fraudulent transactions are down due to chip cards that have been rolled out in 2015. No longer can you steal the number and put it on any plastic and go on a spending spree. So the positives, in my mind and a lot of my clients’ minds, far exceed from a benefits perspective – risk mitigation, visibility, everything like that. It really is far and away a much better technology.

Regarding the negatives of cards, it’s the one area we see that I think it’s important to make sure you have a trusted advisor on the complexity of the credit card statements, the credit card processing statements, understanding where your feeds come from. And this isn’t restricted to any business level. I’ve helped people [ranging from] dog grooming businesses up to Fortune 500 companies and in both instances, and you’ll run into CFOs or treasurers or business owners that just look at a credit card processing statement but really can’t make it out.

So if you haven’t dedicated the amount of time to become an expert in those processes and statements, definitely it’s important to have a trusted advisor, whether that’s your local branch bank, a commercial banker, or a financial advisor, a treasury management consultant, someone you want to come in and really help you know what you’re looking at and make sure that you’re getting the best value for it. It is important that you are tracking that and making sure you are not being taken advantage of by anybody. That would be the only negative but one that certainly mitigated with the right preparation.

What factors should businesses consider when deciding to go cashless?

Ryan McEndarfer

Jumping back to this the war on cash. We can do a little bit of role-playing if you will. So if I’m a business, what factors do I really need to consider when deciding if I’m going to go cashless?

Donny Hoye

My perspective is to always put your clients first. What impact is it going to have on the client? One of my big parking garage clients, one time we were talking about them going cashless and they had brought up some benefits of accepting cash—that a big portion of their business is foreign visitors with rental cars in New York City. Those people prefer cash (and I was thinking about the same thing), they prefer to pay in cash because there can be complexities if someone turns down a card and trying to negotiate or what type of payment innovation might suffice in that case.

So I think you just need to think about what your clients are going to do, how it’s going to affect your specific business model. Are you going to lose clients or not. I think the only way you get to the bottom of that is having a very targeted approach to how you decide to roll out the program, how you notify your customers, how you track feedback from your customers during that process, and how you initiate this new program.

What are the effects of going cashless on businesses?

Ryan McEndarfer

Keeping with our role play, let’s say you sold me here that I’ve decided I’m going to go cashless. What are some of the effects of going cashless on businesses? What are my next steps? What do I need to do?

Donny Hoye

Over communicate is key here. You put up posters and stickers everywhere you can to let your clients know at the point of sale. The cashier can tell them. That’s where it’s important to track feedback. When your cashier is telling people this, and you find out what the reactions are. Then you would do what’s called a soft launch where someone tries to pay in cash, and you say you prefer credit card, and see how those conversations are trending, tracking the interactions, following the data. Then you just start accepting card only, but you still have the ability to take cash in case there’s major pushback. And at the right time you transition to being completely cashless, and you embrace the digital world at that point. Hopefully by then you’ve communicated and it doesn’t catch any of your clients off guard and everyone’s better off for it.

What are some new trends in digital payments?

Ryan McEndarfer

I want to echo a previous point that you made – that you need to think about your consumers first. As a business, don’t chase the headlines and be “Well, nobody’s using cash anymore, so I’m going to switch there.” You really need to think about what’s best for your consumers first. Thank you for making that point. Now, before we finish up, what are some new trends in the digital payments arena that really excite you?

Donny Hoye

If you look at credit cards as being the first kind of stored value or transaction element that can add some features and benefits and the way that risk mitigation, rewards for cardholders, we’re starting to see the ecosystem come together even more. If I go into Sweetgreen (a great example, my personal favorite salad spot), I go in and I have their app.

I get at the end of my salad-making chain and they scan a QR code on my phone and not only does that attach to my credit card I’ve uploaded into the app, so it processes payment but it also processes how much money I’ve spent there from a rewards standpoint. So I don’t have to have some card that gets stamped in my wallet. They can also push out marketing to me, which I enjoy. My birthday month, I get $10 off my salad. So you’re certain to see it go from where it was cash where you’re just exchanging cash for value to card where you’re adding some benefits to it. And now you’re seeing more of the ecosystem come together, which as businesses that are focused on moving to an omnicommerce world where you’re really blending retail, e-commerce, customer satisfaction, marketing Sweet Greens all that stuff.

It’s really pretty exciting into where it’s going. More important, it’s not just cool technology, it’s being designed with a user-centric approach. So it’s technology that’s easy to use, fun to use, and really does benefit both the consumer and the business in the long run.

Ryan McEndarfer

Excellent. Well, thank you Donny for taking the time today to speak to us about the evolution of payments.

Donny Hoye

Anytime. I’m happy to do it.