The Hidden Cost Eating Away at a Restaurant's Bottom Line

Dear Pros,

You've got restaurant editor Raphael Brion here. In the hospitality industry, even though a lot of payments have gone cashless and purely digital, it seems like cash is still king. Back when I used to wait tables for a living, the restaurant I worked at didn't pool tips. At the end of each night, all the servers would compare what our tip hauls were. There was no rhyme or reason as to why exactly, but some nights you'd luck out and most or all of your tips would be cash, so you could take all the tips home and (blessedly) not pay taxes on them. This was many years ago, so hopefully this is way beyond some statute of limitations with the IRS, but either way, hopefully enforcement agents at the IRS are not subscribed to this newsletter. Surely they have bigger fish to fry. (Also, I am now a responsible adult and do not recommend this.)

At restaurants these days, cash is becoming less and less popular in favor of credit cards and digital payment systems. For the diner, there might be an ease of use case, as well as the whole credit card points game. But for independent restaurant operators, credit card fees are a silent and mounting financial burden. Typically ranging from 2% to 3.5% per transaction (plus in many cases, a per-swipe fee of about $.30), as writer Regan Stephens recently reported in her Food & Wine story "Why You Should Consider Paying Cash at a Restaurant," credit card processing fees have become a big concern for restaurant owners across the country — especially as consumer payment habits have shifted away from cash.

For some restaurant operators — like Jordan Rubin, the chef-owner of Mr. Tuna and co-owner of Bar Futo and Crispy Gai in Portland, Maine — credit card fees are the third biggest expense behind labor and food costs, and double his rent. Scott Stein, who owns Bardea Restaurant Group in Delaware estimates that about 99% of his customers pay by credit card today, up from just 20% in 1999.

Credit card fees often come up in conversation with chef-operators about some of their biggest challenges — especially in an industry where the average pre-tax profit margin is already razor thin, typically hovering between 3% and 5% for a small business restaurant. As Stephens reports, credit card fees "aren't just eating into profits – they're affecting businesses' ability to grow and invest in their future."

Solutions to this problem are limited, each coming with its own drawbacks. Some restaurants have opted to raise menu prices to offset the fees, but this risks making a meal too expensive in an already competitive market. Others have taken the more direct approach of adding a separate credit card processing surcharge to bills, though this often leads to customer pushback. Some states, including Connecticut, have even banned the practice.

Ultimately, paying in cash lets restaurants avoid these credit card fees completely.

So Pros, we'd love to know from you: How are you handling this credit card fee dilemma? Are you absorbing the fees, viewing them as an accepted cost of doing business? Raising menu prices? Adding a credit card surcharge if you can? Email me at raphael.brion@foodandwine.com, and let us know.

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Raphael