There are many reasons why people use credit cards, whether at big box stores or at independent retailers. For some, it is strictly a matter of convenience. Others want the cash back. Others want the rewards. Others need to manage cash flow. Whether shopping at Home Depot of Bob’s Independent Retailer Hardware, those reasons don’t change.
Yet, here we are in July, which is Independent Retailer Month. It’s a good time to review what independent retailers experience when you use credit cards, to see if you should change your charging behavior in deference to the independent retailer.
Merchant fees and independent retailers
Independent retailers usually must operate on thinner margins (lower profits) than large competitors with huge national footprints. They don’t have the economies of scale that come with massive operations. Consequently, whether on the revenue or expense side of the profit and loss statement, the dollars have a greater impact on the bottom line.
Every time someone makes a charge on a credit card, the issuer (Visa, MasterCard) charges a fee to the merchant for processing the transaction. It can vary, but it’s usually around 3% of the total transaction, although American Express tends to charge more.
That’s 3 cents or more for every dollar that the merchant does not see. That means higher expenses. That means less profit.
Your own code: Points to consider
How much does this matter to you? Do you want to support Bob’s Independent Retailer Hardware instead of Home Depot? If so, you might want to consider paying in cash. Don’t fool yourself, though. The pennies you save Bob won’t make any difference. It will take a lot of Bob’s customers using cash on a regular basis to really have any impact.
Chances are, Bob takes credit cards because his customers want him to, for all the reasons explained above. He’ll appreciate the gesture, but ultimately, that’s all it is likely to be.
Tipping with cash or credit?
When it come to tipping service folks, it generally doesn’t matter whether you tip with cash or credit as far as what your actual service provider takes home. Tips are usually pooled and divided.
However, this is a circumstance where tipping in cash may make a substantive difference to the service folks. If you tip with credit, just adding it to the total bill, then the tip is subject to those processing fees. Service people like waiters generally earn minimum wage or a bit higher, so tips make a real difference. Every penny literally does count here.
It’s not like a restaurant owner is necessarily making a mint, but his revenue will be affected less by credit card fees than waiters take-home pay will. It will vary based on the business.
Doing the math on tips
But let’s say you have a restaurant taking in $5,000 per day in revenue, which is pretty darn high. If tips come to a total of $1,000, and there’s a 4% average processing fee taken from it, there’s $960 left to split among, say, six other employees. That’s about $6 per person per day lost to fees, or $30 per week, or $1,500 per year.
Now you have to decide about giving up the rewards or cash back on that 15-20% tip. Once again, it’s strictly a matter of personal preference. If you feel your rewards are too valuable to give up, then charge. If you feel generous, pay cash. Of course, you can also alternate.
Conclusion: It’s up to you
The local vs. big box debate is really a matter of personal preference. For some, it’s a matter of great import. For others, it’s not. Only you can decide how you want to pay. Just remember that your credit score depends on using credit responsibly. If you went to all this trouble to get and maintain good credit, then you have to ask why you would always want to pay in cash.
Independent retailer image via Shutterstock
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