Cash vs. cashless
Which is cheaper to process for the bus operator?
By Bassam Estaitieh & Chris Zafirovski
There are those who say cash transactions are too expensive to manage, along with the inconvenience of having to continuously count and transport the cash between the operator premises and the bank. They say cash is passé, old school and that cashless is the only way to go, with more payment technologies coming to the forefront all the time. With cashless payments, the money gets deposited directly to the account without any action on the part of the operator. What’s not to like about that?
The debate over whether cashless payments will completely displace cash or not will go on, but for now, let’s measure the cost of managing cash compared to that of managing cashless.
While everyone is quick to complain about the hassles of cash management, few can actually pinpoint its actual costs.
Cash management costs arise from having to collect money from the stations and busses, count the money in the s revenue department and transfer change, as well as the cost of the Cash-In-Transit (CIT) service to transport cash back and forth between the bank and the operator premises. The question is: What percentage of the collected revenue is spent on cash management?
Cash management costs differ among public transit operators depending on the transit segment, the fare structure and the cash management processes for each agency. A common figure tossed around for the metro segment has cash management costs at about 7 percent of revenue. One would expect cash management for bus segment operators to cost more because they are handling a lot of coins and low-value bill denominations.
Assuming the bus operator’s cash management costs are 50 percent higher than those of the metro segment, the bus operator cash management costs are about 10 percent of revenue.
This is a large amount by any measure and warrants careful consideration. Before throwing in the towel on cash, consider the cost of managing its cashless counterpart.
There are many cashless means of payment. One can make a cashless payment on the internet, through NFC technology in most new smartphones or with plastic. Regardless of the preferred choice, the cashless transaction falls into one of two categories: credit or debit. Each has different transaction fees.
Using a debit or credit card, each of the various entities involved in the cashless transaction take a bite out of operator revenue — the acquirer bank, the credit/debit issuer bank, and the network association brands such as MasterCard and VISA, as well as the communications gateway provider that securely links the operator network with the internet. Operators also incur other costs in relation to enabling cashless payment ,such as PCI compliance and connection costs. These are fixed costs as opposed to costs per transaction.
For the most part, credit transaction costs are quite different than debit transaction costs, and each warrants detailed clarification.
Are we talking about low-value single-ride short-term tickets or are we talking about loading up a smartcard with a relatively larger sum of money? Given that many bus riders fall in an income segment that does not have the funds to commit larger sums of money into a smartcard, we will address credit and debit transactions costs for single-ride tickets.
Credit transaction costs
The interchange fee is the largest credit transaction cost. This fee is comprised of a flat rate, i.e. fixed cost per transaction, and a variable rate, i.e. a percentage 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, how secure the transaction is (qualified, mid-qualified or non-qualified, depending on whether the card is present or not), whether the user is entering a PIN, and the type of card used. Reward cards have a higher interchange fee than non-reward cards. In general, bus single-ride ticket transaction values fall into what credit card associations call small-ticket items. These are assigned lower interchange fees — 4 cents for the flat rate, and 1.55 percent to 2.2 percent or more depending on the type and brand of card.
Different from the acquirer bank’s fee, the Network Association and Brand Usage (NABU) for MasterCard or Acquirer’s Processing Fee for VISA are important cost factors. This flat fee is a little less than 2 cents per transaction. Between this flat fee and the flat fee related to interchange, the cost per transaction is already 6 cents.
Other credit transaction costs involve an assessment fee of 0.11 percent by the card association brand, authorization and settlement fees and other cashless fees such as the operator’s acquirer bank fees and gateway provider fees, which could add another few cents to the flat rate and over 11 basis points to the variable rate.
All totaled, 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 percent depending on the card.
So where does that put the total cost of a credit transaction as a percentage of the transaction value? The answer depends on the transaction amount. For a single-ride bus ticket that costs $1.00 to $1.50, the cost for a credit transaction could be anywhere between 9 and 13 percent.
In addition, credit card transaction fees have been on a steady increase. Interchange fees have more than doubled in the last 10 to 15 years with no reprieve in sight.
Debit transaction costs
Agitated at the high cost of a credit transaction? Relieved there is a debit option? You might think debit transactions are cheaper than credit transactions, but you’d be wrong. While this was true not too long ago, the Durbin Amendment changed everything.
The Durbin Amendment introduced a single-tiered debit transaction cost structure. Regardless of the transaction value, the interchange fee for a debit transaction is now .04 percent plus 21 cents — the flat rate component of the regulated debit transaction interchange fee. Where does this put the cost of a debit transaction for a single-ride bus ticket valued at $1.00 to $1.50? It makes the cost of a credit transaction look cheap in comparison.
A word of caution
Is cash really more expensive to manage? A word of caution to bus operators: To enthusiastically assume cash is more expensive to manage than cashless transactions may not be entirely correct. Cash payments may actually be better for the bottom line.