There is now an emerging plethora of payment methods that businesses need to consider. Its no longer a question of offering your customers cash, cheque or card and as mobile payments gain traction the options are only going to increase. But how much does each payment method cost your business to accept? Here’s our perspective.
Cost of payment acceptance for small businesses
Take an average UK SME business with annual turnover of say £75,000 – £100,000 per year. The UK Card Association tells us that the average card transaction is £48.65 and the average credit card transaction is £62.73 (click here). So what is the typical cost of that £62.73 transaction across the common payment methods ?
- Cash, once thought of as free, is now on a par if not more expensive than cheques, new electronic transfers (like Pingit) and debit cards to accept. A standard business account with one of the big 4 high street banks will cost 60p – 90p per £100 of cash banked which is how we represent the costs above (sure you can get introductory offers with lower costs but this is the standard tariff). This doesn’t take into account staff time of counting and reconciling cash, going to the bank, pilferage and the opportunity cost of sales if cash was your only means of accepting payment. In a June 2014 study (click here), PayPal estimated the cost of cash to a small business equated to 12 man days or £942 per year.
- Cheques are actually cheaper than cash in terms of bank charges. They involve less bank staff handling time which is becoming more expensive as banks move online and away from bricks and mortar. Our analysis doesn’t include the time value of money as you wait for cheques to clear.
- Barclay’s Pingit is paving the way for a raft of mobile payment/bank transfer/e-wallet options about to, or currently hitting the UK market – PayM, Zapp, V.me, MasterPass, etc. Evolution of pricing on these products will be interesting as the brands fight for share of consumer wallet and protect their legacy pricing models. Pingit is not currently available to all businesses (sole traders, partnerships only) and can be free if your business banking is on an e-payments plan (downside is your non-electronic banking is more expensive).
- Debit and credit cards are often viewed as expensive to accept but actually stack up well to their competitors. Debit is akin to cash/cheque/bank transfer and should be judged relative to that peer group. Credit is a different beast and cost comparison to debit/cash/cheque/bank transfer doesn’t price in the fact that consumers may choose to use it because of the credit period, especially for higher ticket value items which may not be affordable without credit. So a cost of 1.3% may be justifiable if it helps you get that sale. Our low range is the cost of a chip and pin transaction and the high range the cost of a more expensive e-commerce transaction.
- mPOS (mobile Point of Sale such as WorldPay Zinc, iZettle, SumUp, PayPal Here etc) current cost range is from 1.75% to 2.75% per transaction, but also applicable to debit cards. At current market rates, mPOS only works out cheaper if you have very low volumes and want to avoid fixed monthly fees (click here). But this is a very crowded market and renewed price wars seem inevitable.
- PayPal for e-commerce follows a similar cost profile to mPOS. At low volumes it is a good option to avoid fixed monthly fees like gateway charges or MMSC. It does have a tiered volume pricing structure (we use 2.4% + 20p above) but this never reduces to the level of traditional credit card acceptance costs and like mPOS, its pricing also applies to debit cards. Check out our PayPal calculator to compare Paypal costs to merchant account costs for your business (click here)
Our analysis is of the marginal cost of acceptance and unashamedly omits the accompanying fixed costs for any of these payment methods. These fixed costs are incurred whether you accept 1 payment or 100 payments, so we omit :
- For debit and credit cards, the terminal hire, gateway fees, PCI, etc. If these costs were included it would add c.13p for a chip and pin transaction and c.18p for an e-commerce transaction.
- The Barclays £6 monthly business current account fee in our Pingit analysis
- The £20 monthly PayPal Pro fee
- The £20-£100 cost of buying an mPOS device
- The monthly business current account maintenance fees levied by banks.