Quick Takes: Do Stores Benefit from Offering Cash Back?

Posted on Jul 12, 2016  in Quick Takes  | No Comments

Being asked if you want cash back at a grocery store or convenience store is one of those experiences you don’t really question—it’s just part of the normal shopping experience at many places. I couldn’t help but think, though, that there had to be more to the story than only convenience for the customer. There’s no fee collected by the store and it’s likely most of the competition offers the same service, so what’s in it for the store? I had a few theories, but decided to figure out what was happening behind the scenes.

Interestingly, customer service wasn’t the motivation behind the idea to offer patrons cash back. Wikipedia outlines the two major advantages that business realize when they offer cash back1:

  1. When accepting payment by debit card, merchants pay a fixed commission fee (as opposed to a percentage) to their bank or merchant service provider. (This is because the commission paid by the merchant for accepting debit cards, unlike credit cards, does not need to fund interest free credit or other incentives).
  2. Accepting payments in cash can be costly for merchants, given that many British banks [the practice started in the UK] charge around 0.5% for depositing cash into a business bank account, along with the costs of transporting and insuring the cash.

Convenience for customers isn’t often the bi-product of cost-saving efforts by companies, but this is an example where both parties benefit.

1. You can read more about the practice of cash back on Wikipedia.

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