Cash vs Cashless - which is cheaper to process for the operator?

Cash is too expensive to manage. Everyone knows it’s true! That’s why everyone’s trying to get rid of it. Cash is so passé, old school. Cashless is the way to go. Cashless payment technologies are cool, and new means of cashless payment come to the forefront all the time. Besides, with cashless payments, the money is deposited into your bank account within 24 or 48 hours without any action taken on the part of the operator. What’s not to like about that?

One can debate for a long time whether cashless will completely displace cash or not, but let’s not debate this topic here. Let’s see how the cost of managing cash compares to that of managing cashless.

Herein lies the difficulty. While everyone is quick to complain about cash management, few can actually pin point how much it is costing them. Cash management costs arise from having to collect money from the pay stations, count the money in the operator’s revenue department, transfer change in the opposite direction, and, quite importantly, the cost of the Cash-In-Transit (CIT) service to transport cash back and forth between the bank and the operator premises. The question here is: how much as a percentage of collected revenue is spent on cash management costs?

Truth be told, cash management costs differ between operators depending on the transit segment they are in (i.e. bus vs metro), the fare structure, and how “solid” the cash management process is at the operator. A common figure that is tossed around for the metro segment is that cash management costs the metro operator about 7% of revenue. One would expect that cash management is costing bus segment operators more than that, because they are handling a lot of coin and low-value bill denominations. Let’s assume that the bus operator’s cash management costs are 50% higher than those of the metro segment. This means that we are pegging the bus operator cash management costs at about 10% of revenue. This is a large amount by any measure, and warrants careful consideration.

But before we throw the towel in on cash, let’s consider the cost of managing its cashless counterpart. There are many cashless means of payment. One can make a cashless payment on the internet, using the NFC technology in most smart phones, or using good old plastic. No matter your preferred choice of cashless payment, the cashless transaction falls into one of two categories: credit or debit. Credit and debit cards have different transaction fees. Whenever a transaction is effected with a debit or credit card account, various entities involved in concluding the cashless transaction take a bite out of Operator revenue. The entities that take a cut of each transaction are: the Operator’s bank (aka acquirer bank), the credit/debit account issuer (issuer bank), network association brands (e.g. Mastercard, VISA, etc…), and the communications gateway provider (gateway is what securely links the Operator network with the outside internet). Operators also incur other costs in relation to enabling cashless payment, such as significant PCI compliance costs, but these are fixed and not per transaction.

By and large, credit transaction costs are quite different than debit transaction costs, and each warrants detailed clarification. But are we talking about low-value single-ride (or short-term) tickets here or are we talking about loading up a smart card with a relatively larger sum of money? Given that many riders fall in an income segment that does not have the funds to commit larger sums of money into a smart card, we will address credit and debit transactions costs for single-ride tickets in this article.

Credit Transaction Costs

The largest credit transaction cost is what is known as the Interchange Fee. The Interchange Fee is comprised of a flat rate (i.e. fixed cost per transaction) and a variable rate (i.e. a % of the transaction value). Credit Card Associations publish a long list of industries and sectors, each with its own Interchange Fee rate.

The Interchange fee variable rate depends on many factors, such as the credit card association brand, the security of the transaction (qualified, mid-qualified or non-qualified, depending on whether the card is present or not, whether the user is entering a pin number or not, etc…), and the type of card used (reward cards have a higher Interchange Fee than non-reward ones). In general, single-ride ticket transaction values fall in the realm of what credit card associations call small ticket items and are therefore assigned lower Interchange Fees (4 cents for the flat rate, and 1.55% to 2.20% + depending on the type and brand of card).

Another important cost is the NABU or Acquirer’s Processing Fee. Network Association and Brand Usage (NABU) is the name that MasterCard uses, and Acquirer’s Processing Fee is the name that VISA uses for essentially the same charge (different from the Acquirer Bank’s fee). This fee is a flat fee that is a little less than 2 cents per transaction. Between this flat fee and the flat fee related to Interchange, you’re already at ~6 cents cost per transaction.

Other credit transaction costs involve an Assessment Fee (0.11%) by the card association brand, authorization and settlement fees, and other cashless fees (the Operator’s Acquirer Bank fees, and the gateway provider fees). These “other” fees could add another few cents to the flat rate and over 11 basis points (i.e. > 0.11%) to the variable rate.

In total, a flat rate per small ticket credit card transaction could quickly run higher than 10 cents per transaction. The variable component of the credit card transaction could quickly climb above 2% depending on the card.

So where does that put the total cost of a credit transaction as a % of the transaction value? The answer is that it depends on the transaction amount. For a single-ride bus ticket that costs $1-$1.5, the cost for a credit transaction could be anywhere between 9%- 13% (if not higher)!

Debit Transaction Costs

Are you now agitated at the high cost of a credit transaction? Relieved there is a debit option out there? Certainly, debit transactions cost less than credit transaction, right? Wrong! While this was true in the not too distant past, the Durbin Amendment came and changed everything.

The Durbin Amendment introduced a single-tiered debit transaction cost structure. No matter the value of the transaction, the Interchange fee for a debit transaction is now 0.05% + 21 cents. Yes, you read it right: 21 cents is the flat rate component of the regulated debit transaction Interchange fee. Where would that, then, put the cost of a debit transaction for a single-ride ticket whose value is $1-$1.5? We’ll let you do the math on this one, but suffice it to say it will make a credit transaction cost look cheap in comparison…

Is Cash Really More Expensive to Manage Than Cashless?

And that’s the million dollar question. We presented the facts with cold, hard numbers above, and leave it up to readers to reach their conclusion. But a word of caution from the authors here to operators out there: next time you want to enthusiastically say that cash is more expensive to manage than cashless, think again. Next time you get excited about enabling tap-to-pay with NFC phones, be careful what you wish for. A cash payment may well be better for your bottom line.

Visit www.CranePI.com for more information on our range of Complete Cash Management Solutions

About CPI

Crane Payment Innovations (CPI) is part of Crane Co., a diversified manufacturer of highly engineered industrial products (NYSE:CR). CPI provides a full range of unattended payment solutions for Gaming, Retail, Transportation, Vending, and Financial Services applications. CPI is built upon the technological heritage and market expertise of the NRI, CashCode, Telequip, Money Controls and, most recently, MEI and Conlux brands.

CPI works in partnership with valued customers to enhance its portfolio of high-quality payment solutions – from coin and bill processing to cashless systems and asset management software.

CPI is headquartered in Malvern, PA with additional offices, manufacturing facilities, distribution and service centers worldwide. The company holds one of the world’s largest installed bases of unattended payment systems. For more information, visit www.CranePI.com.