Monday, July 13, 2015

Why Businesses Accept Credit Cards, And Why McDonalds Has ATMs

Every now and then, I notice a few things that just seems so genius. Let me share one with you. I live in New York, and frequently take for granted that I never have to carry any cash. Need a stick of gum? Swipe my card for 50 cents. I pay my balance every month, on time. Credit card companies love me. For those of you who don't know, credit card companies make more money from people who pay their balance in full than those who keep an outstanding balance. How does this work? Every time you swipe your card, the credit card company gets 1.5% to 3.5% of the transaction, and maybe some base fee, depending on the arrangement. Ever watch Shark Tank? Kevin loves royalties. Allowing your customers to pay with credit cards is basically having royalty placed on your top line. It's expensive. That's why many places don't want to take credit cards.

Why would you give a cut to the middle man? There are 3 main reasons. The first is counterfeit money. Unless you actually run a brick and mortar business, you probably don't know how much fake money there is out there. After all, how often does someone give you cash? Most of the time, our cash originates from the bank when we make a withdrawal. After that, we're usually giving cash away, not taking it in. Taking a credit card payment guarantees that you won't take a fake bill. If you have $10,000 in revenue, and you have a net income margin of 10%, and one of your $100 bills turns out to be a fake, your $1000 income just turned into $900. The 1% revenue magnified to be a 10% hit to your bottom line. That's an easy way to ruin your day. You can think of paying the credit card fee as a form of insurance against accepting counterfeit money.

Another reason is time. If you're paying your cashier $9 per hour, it means you're paying him 15 cents per minute. Maybe it doesn't sound like a big deal, but how long does it take to take paper money, count out 46 cents in change and hand it back? It'll be anywhere from 5 to 20 seconds, depending on how smoothly it goes. That adds up. Over the course of a 12 hour day, at 40 transactions per hour, a cashier might spend over an hour of time doing the physical handling of money. Cut out that block of time and you'll need fewer workers to handle the same number of customers. You can have achieve a labor savings by needing to handle money less often.

The last reason is a bit less obvious. If you've read about the Walmart robbery recently, you might figure it out. There's a cost to transporting money. You can't just have a big pile of money in the back room growing forever. You have to get that to a bank. You might get robbed during transport. You can make a hundred trips, carrying small amounts, to mitigate the losses in case of a robbery, but now you have to pay for more labor. Walmart pays for professional couriers with an armored truck. Even if they didn't get robbed, cost of transport is still an additional expense.

That's where it suddenly hit me that McDonalds was doing something very smart. I can't remember a Mcdonalds which didn't have an ATM. They only cost 99 cents, which is a lot cheaper than the $3 that you might get charged using a shady, non bank ATM chained to a pole. Do you see what's happening yet? Rather than McDonalds paying for professional transport of the money, customers are paying to do it for them. Genius! It suddenly hit me that the abundance of ATMs at pharmacies and grocery stores are not completely there for your convenience. It can help reduce the frequency of needing to pay to transport out cash from the business. It's a wonderful system where everyone can end up on top!

Now, maybe it doesn't exactly work this way. Maybe there's a separate company who owns these ATMs and restocks the machines with a different pool of cash. Would be cool to hear from someone in the know. It would be cool to know if these companies would actually benefit more from offering the ATMs for free. I'm guessing not, since they probably would have done it already. But it's pretty cool how everything has been done for a often unobvious reason.


  1. Actually, casinos figured out this internal rotation of cash ages ago. The coins they collect in the machines go into change machines and into those little change devices that change people carry. The bills get recirculated into bigger change machines, ATMs, and the casino cage. There are some significant costs to counting all that cash and guarding it internally, but since most payouts take place as cash transactions, your customers end up carrying away most of your bills, instead of having to pay a Loomis or similar business.

    1. I used to go to a casino about every other week, and I never had the insight to notice. I wonder what other +EV arrangements there are which are also as obvious.

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