How your convenience could be killing small businesses

Maestro ad campaign 2007-2008

It’s a well known fact that credit card companies are greedy. They appear nice, loaning you money whenever you need it, just by handing over your card whenever you need a quick cash fix, but when the bill comes in you quickly see why. Extortionate interest rates are not the only way that they make their money though, they have their cake and they eat it too. When you use your card, a percentage of the total transaction is also payable to the card issuer by the retailer.

Actually, a portion of the total is payable not just to the card issuer, but also to the payment processor. In fact, when you make a card payment there are a whole bunch of different companies benefiting, out of the money that had you paid cash, would all have gone to the retailer.

Although costs do vary between providers, on average a retailer will pay around 4% of the total transaction value on a card payment to the payment processor. There are often monthly costs associated too, and then there can be an amount payable to rent any chip & pin machines. Accepting cards can be very costly.

If this is so, then why do so many small businesses choose to accept cards? Well, simply because they have to. Over the past 30 years, the past 15 especially, paying by card has become the norm. Card issuer Maestro even had a campaign in 2007-2008 telling us that “cash is dead”, which is totally in their interest to do, since for every payment made with their card instead of cash, they make a healthy profit. There is very much the perception now that if you don’t accept debit or credit cards, then your customers will go elsewhere.

When I ran a retail business, the profit margin was very low since we were trying to compete in a very hostile industry. The profit margin we worked between was generally 6-10% over cost price. It was an online business, so we had no choice but to find a payment processor and accept debit & credit cards. After some shopping around, we had to settle with a provider that charged a £15/month fee and 4% on every transaction – this was the best we could find, and there were big limitations. All of a sudden our profit margin fell from 6-10% to 2-6%, a mighty drop when you consider how little we were making anyway. You won’t be surprised to learn then that this business is now defunct.

Another drawback is payment times; again, terms vary, but the time between you making the transaction and the beneficiary receiving the money can be up to three months. In fact, that’s how long most have to wait for the funds to be sent to them. This is generally to do with fraud; giving time for fraudulent use to be reported and investigated.

But what do you care? Well, you shouldn’t really have to. What I’m getting at is this; there’s a lot of talk about supporting local businesses, and a lot of us are. Shopping with independent supermarkets or snubbing Starbucks and going to a local coffee house.

Your local deli, coffee shop or corner shop probably survives profit margins similar to those in the case above, meagre amounts, and although they may have the chip and pin machine for you to pay with, they’re secretly scowling every time that you do, because that split second decision between cash or card can make one heck of a difference to them and their survival. So choosing to hand over the wonga will go some way to making sure they’re still there next week, next month or next year. Think of it like “Gift Aid“, would you leave that box unchecked if you didn’t have to?

tl;dr: Try to pay by cash with small business, especially for small amounts, because credit card companies take a big chunk of their profits.

How the weak pound actually benefits me

With everything about the economy being as dire as it is now it is infrequent that good news comes out where money is involved, so when it does I feel compelled to document it.

The pound is currently very weak against the dollar. This must be bad, you would think from the phrasing. Weak is generally perceived to mean not good, but it can be beneficial. If you are selling goods or services in USD then you will receive more GBP for your dollar.

In June of this year you would get £1 for every $2. Today you will get £1 for every $1.50. So, if I was to receive $200 from a client and convert it to pounds, in June I would have received £100 but now I will get £133.

This is particularly important for me as I do freelance programming and a lot of my work comes from across the pond in the United States. Paypal does the converting from dollars to pounds and with it being as it is right now, I am earning approximately 1/3 more than I was 6 months ago.

Of course, it’s the total reverse if you’re converting your money from pounds to dollars. You will be spending 1/3 more than you would have 6 months ago. $200 spending money for a trip to the USA will now cost you £133 whereas 6 months ago it would have only been £100 and of course buying goods in dollars will also be more costly, this will affect businesses who buy stock from the United States.