Nickeled and Dimed: The new cafe applies cash only to avoid fees
$17,000: That’s the amount of money in credit and debit card fees made by local restaurateur Becky Tranchell in 2021 at her old restaurant, the now-closed Rose and Fern.
When Tranchell announced a new business venture earlier this year — a coffee and juice bar called Rough Pony — it did so with a surprising twist: The new facility would be cash-only, with no credit or debit card payments allowed.
Credit card processing fees in the United States ranged from 1.3% to 3.5% per transaction in 2021, depending on the payment network, according to financial advice website The Motley Fool. For example, Visa cards tend to have the lowest processing fees of the major providers, while American Express cards tend to have the highest fees. If you’ve ever wondered why many restaurants and retailers don’t accept American Express, it all boils down to merchant fees.
Establishments like Rose and Fern, a breakfast and lunch cafe, usually shoulder the burden of these fees. And according to Tranchell, they add up significantly over the year. Last year, she even began passing on the credit card processing fee to customers – a move that raised awareness of the cost of merchant fees among her clientele and prompted many customers to choose to pay with cash as part of the Rose and Fern to make routine.
“So if you think about it, my processing fees would have been even higher last year (over $17,000) if I hadn’t started passing the processing fee on to the customer during the early winter months,” Tranchell said.
That experience — and the willingness of most customers to pay cash, whether to help out the restaurant or to avoid the extra fee — eventually inspired Tranchell to pay cash only for Rough Pony.
An approach she thinks is doable, especially given that 1) her new spot at Warehouse MKRT will place her right next to an ATM, and 2) a coffee shop falls into the establishment category — along with ice cream parlors and small bakeries — the usually perform best with a cash-only approach.
Rough Pony won’t be the first facility in northern Michigan to decline credit card payments. Bardon’s Wonder Freeze, for example – one of Traverse City’s most popular summertime institutions – has long been available only for cash. And Art’s Tavern in Glen Arbor, known for its legendary chicken and jalapeno soup, has been cash-only since it opened in 1934.
“Initially, of course, there was no other option,” said Bonnie Nescot, co-owner of Art’s Tavern, commenting on the restaurant’s decision. After all, the modern credit card wasn’t invented until the 1950s. Rather than switch to the new payment method when it emerged, Art’s stayed the course.
“As time went by it became easier to just hold things with cash,” Nescot continued. “As credit cards became more accepted as a payment method, economics became important. As an example, take half a million dollars in credit card sales and multiply that by the fairly common credit card fee of three percent. $15,000 is a lot of money for a small business.”
Still, not accepting credit cards is a bold move for any business in 2022. Each year, the Federal Reserve conducts a payment study — called the Diary of Consumer Payment Choice — to understand the payment habits of consumers in the U.S. percent of all transactions, surpassed by both debit cards (28%) and credit cards (27%).
In the past, card payments were even more common in restaurants. For example, a 2017 survey by payment processor TSYS Payment Solutions found that only 12% of restaurant transactions were paid for in cash, with debit cards and credit cards combined accounting for 77% of payments.
Judging from general trends, these numbers would likely be even higher post COVID-19, when consumer habits shifted dramatically in favor of digital and contactless payments. According to the Federal Reserve Diary, cash transactions overall declined by seven percentage points from 2019 to 2020.
According to Tranchell, the pandemic has proved particularly problematic for restaurants when it comes to credit card processing fees. Not only were more customers using cards, the way they paid was often different – and often associated with higher fees than normal.
“Most people don’t realize that credit card processing fees change based on whether the person is actually present or not,” Tranchell explained. “So if you walk into my store and pay with a credit card, the fee is about 2.5% plus five cents for each transaction. But during the pandemic everyone was online or calling to order and gave us their credit card over the phone. And if the person isn’t present for that transaction, then the fee was about 3.2 or 3.5% (of the transaction), plus 20 cents for each transaction because (that kind of transaction) is a security issue.”
Card processing fees are split between a few different parties: the issuing bank behind the credit card (e.g. Chase or Capital One), the credit card company (Visa, Mastercard, Discover or American Express), the payment processor (like the TSYS mentioned above) and the Payment gateway (platforms like PayPal or Toast). Every bit of money eats away at the profit margin of the business the customer is actually patronizing – a problem for businesses like restaurants that already operate on low profit margins.
“Restaurants, their profit margin is so small initially, once you take out your labor, your food costs, your overhead and incidental fees like merchant fees,” Tranchell said. “And I just couldn’t find a solution that I could take.”
Tranchell says she values her autonomy and freedom as a business owner and doesn’t need big companies to transact.
“And my theory is if I have $17,000 that I’m not paying to a credit card company at the end of the year, but instead paying it to my employees and being able to keep them and provide a work environment where they thrive, that’s more important.” “, she says.
She points to two former employees who, although born and raised in Traverse City, left the area because they could no longer afford to live here.
“Well, one of my theories about doing cash only is hopefully being able to pay employees more money,” she said.
Tranchell admitted she gets nervous when she sees how customers react to a situation where they only have cash, or how many customers Rough Pony has to turn away because they don’t have cash on hand.
“But I also think there’s an opportunity right now,” she said. “I think people are waking up.”
Tranchell, for example, points to a partnership with Wild Pages, a radical bookstore below The Coin Slot whose books and zines are featured at Rough Pony.
“And they told us that when they ticker article came out (announcing Rough Pony), customers started bringing cash on purpose to pay cash at their store — (they) just didn’t have a clue (about handling fees),” she said. “People don’t know unless we educate them and that’s one of the reasons I’m a business owner because it gives me a platform to help educate.”