The hidden cost of cash

What is the cost of accepting cash? A first blush response may be “nothing” because unlike cashless payments, there is no “discount” fee paid off the top to a processor nor a monthly connect fee for the equipment. Vending operators have long-favored cash in part because accepting it has been regarded as free especially when in comparison operators pay 5 to 7 percent for cashless payments. In an industry where every percent counts, this cashless fee is viewed by many as onerous and has been a barrier to greater cashless penetration.

Real-world analysis

Arguably there has to be a cost especially considering many of the activities of our “cash business” involve cash in one way or another. Cash is at the center of vending and it is so ingrained in our businesses that we have not been able to separate out the cost of cash. Since we cannot separate, we incorrectly assume it is nothing.

The cost is there; it is just hidden. There is a lack of understanding in our industry on that cost. Sure there are guesses and theoretical estimates, but what is the true amount? With this article, I intend to provide operators with a practical, real-world analysis on the cost of cash. It is not a scientific analysis, but rather rooted in my two decades of experience as an operator.

The smaller the operation, the more likely the operator is to view cash as free. This is simply because smaller operations will have a much less developed infrastructure and processes to handle the cash. More than likely, the owners are counting the cash and running to the bank themselves. The cost of handling cash is not linear – it does not scale at a consistent rate as the size of the operation increases. Therefore, I had to assume a reference point for this article and I selected $2 million in annual sales with 500 machines for the analysis.

My goal is that whether your business is larger or smaller, you will be able to use the model I outline in this article to better estimate your actual cost of cash. I begin by categorizing the cost of cash into three buckets: acceptance, processing and opportunity.

Acceptance

The first hidden cost of cash is in the cost of the equipment. Typically, operators purchase the machines with the bill acceptor and coin mechanism installed. The price of the cash equipment is therefore “hidden” in the cost of the vending machines. In comparison, usually an operator upgrades a machine to accept cashless payment and that equipment is a separate purchase. The cost of that cashless hardware is front and center.

Still an operator may argue the cashless acceptance has a monthly fee and the bill acceptor and coin mechanism are a one-time capital expense. While true, the one-time expense still equates to a hidden monthly cost.

Let’s assume a machine has a new bill acceptor that costs $375 and a new coin mechanism that costs $325. We may expect each to last 10 years and over the course of those 10 years, we’ll have to repair each one just once at a cost of $75 (clearly these are assumptions, but operators can attest these to be fair, if not overly conservative).

Just taking this one factor into account (the cost of equipment), the monthly cost of accepting the cash, as illustrated in Figure 1, is already $7.08! And this is just the first hidden cost we have uncovered (for simplicity I didn’t consider in the time value of money, but if considered, it would make the monthly cost higher).

But the largest cost is actually the cost of service calls related to coin and bill problems. At my vending company, we logged every service call that came in and categorized each complaint.

Over the years, I developed a rule that on any given business day, we should expect service calls for one percent of our machines. In other words, for every 1,000 machines, 10 calls should come in during the day. To revalidate this rule, I analyzed our service calls for a period of a year for a sample set of 1,200 machines that included every type of location including hospitals, schools, retail, manufacturing, warehouse, offices, hotels, call centers, etc.

We received 3,157 calls from those 1,200 machines in a year. Assuming 260 work days per year, this equates to 12.14 calls per day holding perfectly true to my rule.

What’s interesting is when we look at the types of calls that came in on those 1,200 machines. We can group those calls into problems with money, product or other, see Figure 2.

In one way or another, more than 60 percent of the service calls received are related to money acceptance. This is important information for an operator to consider when estimating the cost of cash. It’s a real cost, but hidden in the service calls. If an operator had 60 percent fewer calls, it would mean fewer trucks, fewer service technicians, lower parts costs, less supervision, etc.

My data shows that an average machine will receive 2.6 service calls per year, and 60 percent of that will be related to money. Operators that know their cost per service call can easily determine the cost per machine for cash related calls by multiplying this out. For example, if the cost per call is $50, then 2.6 calls x $50 per call x 60 percent money related = $78 per year or $6.50 per month per machine.

Of course this is an estimate, and the model works even better with actual data. Instead of using the estimated cost of a service call, figure out the total salaries of your service technicians, payroll taxes, benefits, and their van and gas usage and divide that by the total number of service calls to get a cost per call.

The point again is that there is a real cost to accepting cash that is hidden away in the cost of service calls.

There are other costs of accepting cash – the cost to upgrade the bill acceptors when the currency design changes, the cost of float in the coin tubes, and the cost of purchasing rolled coin to replenish the coin mechanisms. These costs are less hidden and easier for the operator to identify and add to the cost of cash.

Processing

The processing of cash is another bucket of deeply hidden costs. Clearly there is labor involved to count the cash and prepare the deposits. There is management time involved to post and reconcile. There is the security and auditing aspect as well. And then there is the banking side which includes fees the bank charges for the deposit of cash and coin, the banking supplies and the armored car transport costs.

Some of these costs are hard costs and easy to determine and some (like management time) are difficult to separate. Certainly the cost of processing cash is not zero, but it is also not easy to identify in full.

We can however make a fairly accurate estimate. For our example of an operation with $2 million in sales and 500 vending machines, I estimated a money room person at $14.00 per hour for 20 hours per week, and 2 hours of management time to reconcile at $25.00 per hour. The banking and armored transport costs are easily identifiable and I included my estimates in the analysis in Figure 3.

Opportunity

The largest cost of cash is the opportunity cost, the cost of lost sales. This is also the most hidden because by definition, the opportunity cost is not known since it never happened. Not known and no cost, however, are not the same things.

I still attempt to uncover this hidden cost. Industry statistics highlight that installing cashless acceptance on a machine will increases sales 10 to 25 percent. Clearly much of this is due to providing additional payment options and capturing people who would not have bought otherwise, or those that bought more or with an increased frequently than they would have with cash. A portion of these sales are from people who would have paid with cash, but there were issues – perhaps the machine was not working, or they had insufficient change, etc.

A strong argument could be made to consider the entire lift as the opportunity cost of cash (i.e., without cashless acceptance, those sales would not have occurred, therefore that is the opportunity cost of only accepting cash). However, a counter-argument could be made that the sales lift is not the opportunity cost of cash, but rather the benefit of adding cashless. It’s two sides of the same coin and further highlights how the cost of cash is difficult to ascertain.

Another approach would be to estimate the lost sales due to 60 percent of service calls related to money. Any operator who has been to a machine after a week only to find the bill validator got jammed after the second bill can attest to the huge lost sales that occur from service calls.

While both approaches – using the cashless sales lift or using lost sales from service calls – are valid and likely indicative of true opportunity costs, in an effort to be conservative, I’ll approach this differently and not use either as the opportunity cost of cash.

Rather, let’s assume a consumer is standing at the machine and she can pay with cash or cashless. In my experience, our data shows that consumers spend approximately 20 percent less when they pay with cash. Anecdotally, this makes sense because typically when consumers are purchasing with cash, their first consideration is often not what they want from the machine, but rather what can they buy with the cash they have. More specifically, if they have a dollar bill, they are looking at all the items that are a dollar or less.

On the other hand, with cashless, the decision is different. It’s about what they want. Also, in the case of parents, with cash, two kids have to agree on what they want and split it. With cashless, each kid can get what they want.

Accordingly, I would argue this is the opportunity cost of cash – by paying with cash, the consumer is spending less, and therefore, that is a real cost to the operator. What is this cost? Let’s start by assuming that consumers spend 20 percent less when paying with cash, and the contribution margin of each sale is 30 percent (what’s left after product cost, location commissions, driver commissions, taxes and other variable costs).

This means there is a net cost of 6 percent (20 percent x 30 percent) and let’s not forget that we have already uncovered cash acceptance and processing costs account for 3.01 percent and 1.33 percent respectively, so the net opportunity cost to the operator is 1.66 percent of gross sales. (Some may argue this is grossly underestimated.)

Admittedly it may be a weak argument not to consider the entire lift as the opportunity cost of cash, but nonetheless, it only strengthens the position that the cost of cash is much larger than most operators have believed for many years. For instance, Coca-Cola found in one informal survey “43 percent of our consumers may walk up to a Coke machine and not be able to purchase a Coke because they don’t have the right currency in their wallet or change in their pocket,” according to a 2013 article, “Coca-Cola Seeks to Increase Use of Mobile Phones for Payments and Rewards at Vending Machines,” appearing in NFC Times. Should those lost sales be considered an opportunity cost? If so, it dramatically increases the opportunity cost of cash.

Moreover, lost sales are only one component of the opportunity costs. I would also add shrinkage and break-ins (break-ins largely occur due to the cash in the machine). For break-ins, I estimated that 1 percent of the machines are vandalized per year and at a cost of lost cash and damage of $150 per instance. Shrinkage is very company specific and significantly impacted by policies, procedures, management and culture. For this analysis I estimated 0.5 percent of gross sales.

In Figure 3, I compile the cost of acceptance, processing and opportunity into one “worksheet” that allows an operator to easily identify the key cost drivers. The costs I present are representative of what a vending company of the reference size would incur, and it can be easily replaced with your actual costs. Certainly each vending operation is unique to an extent and your figures will not align perfectly with my examples. Use the tables as a worksheet and it is relatively straightforward to input your own costs and arrive with a fairly accurate cost of cash for your business. I’m confident you’ll be surprised at what you’re actually spending on accepting and processing cash. In my example, the cost of cash is 6.54 percent.

Arguments in favor of cash

Certainly there are many advantages to cash as well. Operators inevitably point out there are some unique aspects to cash that may offset the costs. Cash is what people are generally comfortable with. It is universal. It’s anonymous and allows the consumer to pay how they want to pay. And operators don’t need another partner in the business (referring to the fee paid off the top for cashless processing).

Also, I’ll mention something that is rarely discussed by the industry – cash is “off the grid” and it may help facilitate R Factors and cheating on taxes.

But much of this is what I would call “old school thinking”. The very ideal users of vending machines (Gen Y and Millennials) are also the very people who are becoming increasingly cashless. Our cash-centric business is losing its customers as the older generation retires out of the workplace, and the newer generation is not able to purchase from the machines even though they may want the products.

I strongly argue that cash in vending will become much less important. If the primary reason operators have not expanded cashless options is because of the cost of cashless, then these operators must in fairness recognize that “cash is free” is an illusionary argument we told ourselves to keep us from undertaking what needed to be done. In the future, there will be vending machines that don’t accept cash. If you think that’s farfetched, remember when you used to pay for cocktails on a plane with cash and now it’s only credit cards? Or have you tried to rent a RedBox DVD with cash?

Vending company of the future

Certainly the costs of cash don’t decrease proportionally as cashless solutions are implemented – in other words, by reducing the amount of cash by 10 percent, the cost of accepting and processing cash doesn’t decrease by 10 percent. To better illustrate that not only is there a real cost, but also that the cost may be far greater than we estimate, imagine for a moment that you were starting a new vending company today – this company is to be all cashless. You will not accept any cash payment.

In this imaginative scenario, think about how this vending company of the future would be different than your current one – how procedures would be different, and how your investment would be different. You would be able to save about 25 percent on the cost of the machines by not installing bill acceptors and coin mechanisms. Another way to think about this: you would be able to buy 25 percent more machines for the same investment, and therefore have 25 percent more revenue generating assets.

What about staffing? You wouldn’t need money room personnel, you could have far fewer service technicians, and management staff wouldn’t be overly concerned with auditing and posting. You wouldn’t need money bags, truck safes, vaults, drop safes in driver rooms and video surveillance can be lighter. Your sales would be deposited straight to your bank account daily. Vending Management Software (VMS) needs would be different, if not much lighter. Instead of spending time reconciling cash, management can focus on selling and marketing to consumers and invest in systems that support those efforts.

When you start looking at it from a fresh start, you can begin to appreciate all the ways cash is inextricably intertwined into a vending company’s operations and the costs of cash are far from free.