How Coinstar gets away with not charging a transaction fee

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I first heard about Coinstar 6 years ago in a TV advertisement and immediately thought it was the dumbest idea ever. See, I was living in Illinois at the time and you could easily just go to any bank teller and convert your coins into cash for free. Coinstar charges a 10% fee – so why would I pay someone to give me $9 for $10? I hope you see my dilemma here.

Then I moved to California. Over the last 2 years I’ve acquired a lot of coins and decided to go to my nearby bank and turn my pot of coins into CASH! Unfortunately, California banks simply gave me some coin wrappers and wanted me to do all the coin counting by hand. I knew I had at least *200 pennies and had no patience to do the counting. I decided to swallow my pride and go to a nearby Safeway grocery store and use Coinstar.

After I deposited my cash I was pleased that I didn’t have to give up 10% of my money – I could simply get a giftcard instead.

They had a ton of options. Pretty much a giftcard from any of the top brands.

This is a brilliant way to avoid no fees. I bet Coinstar actually makes more than 10% off the brands that provide gift cards. Retailers love gift cards because they are high-margin and low-maintenance.

I wonder if Coinstar’s innovative approach to eliminating fees are something ATM machines should adopt to also have No Fees. I’d really love to know what you think about this in the comments below.

Side Note: Coinstar made $2 Billion in revenue last year. Their business model is simple and brilliant, “Give me $10 and I will give you $9 back”. This business model reminds me of a story  about how the founder of Reliance (the most profitable company in India) made some cash in the early days.

The Yemeni Rial Coin had high content of pure silver around 1948. Young Dhirubhai (the founder of Reliance) perceived high demand for ‘rial’ in London Stock Exchange and purchased them in bulk and melted the coins in silver and sold it to bullion traders in London. Though it was stopped in 3 months, D.A. made a few lakhs of Rupees in this transaction.

What Coinstar and Dhirubhai Ambani are doing is really the heart of any good business model, turn money into more money.

*PS I had 432 pennies and got the Starbucks gift card.

17 Comments

  2. Holy Shit! So the Reliance guys made their initial money by melting coins and selling it for the raw materials? That is brilliant and super scammy at the same time. Reminds me of “Cash for Gold”

  3. What perfect timing! My sister and I have being debating what to do with our growing jar of coins and were intentionally avoiding Coinstar because we didn’t want to lose that 10%. I’m now set on and excited about getting an Amazon gift card instead, since I feel like I’m gaming the system. Agreed: brilliant strategy. Thanks for sharing.

  4. It certainly is ingenious of Coinstar to bypass the transaction fee in exchange for a gift card. But how exactly does the business model work? Does Amazon (or insert any store name here) say “for every $10 gift card you dispense we’ll give you $2”?

    • Yes, that is exactly the type of arrangement that Coinstar has with retailers. Retailers love gift cards for the following reasons:

      #1 Retailers can hold on to the money. It is like a mini bank loan
      #2 Customers think of the gift card as Free Money. Usually they come into the store with the mindset that they HAVE to buy something.
      #3 Customers usually end up spending more than the amount on the gift card.

      This is why you see retailers trying to sell their gift cards EVERYWHERE (hallmark, grocery stores, walgreens, etc)

  5. When taking the bimetal two euro coins out of circulation, they would pop the center metal out and send the scrap to China. Some enterprising guy in China hired someone to put them back together and sent then back to Europe. Had to have huge returns on that scheme. It got shutdown when they started throwing the metal in a shredder first.

    http://marginalrevolution.com/marginalrevolution/2011/04/china-arbitrage-story-of-the-day-german-flight-attendants-arrested-in-quantitative-easing-scheme.html

  6. As always, great article Rishi! How would you see the business model working with ATM’s? “Would you like to pay a $3 fee or buy a $10 gift card?”

    Jason

    • Thanks Jason! Yeah… something like that.

      I’m not sure what I would do. I hate ATM fees. Honestly if it was a $10 Amazon gift card – I’d probably prefer that. What would you do?

    • Yeah they totally should start advertising the No Fee thing. Not many people know about it.

      They have massive distribution so they don’t really need to get the word out. Everyone knows about them.

  8. I’ve always been wary of using Coinstar, worse that they charge money for it.

    The bigger question though is how would anyone even know whether or not they already took the 10%? Lets say you had $32 in pennies which amounts to 8000 grams or about 17.6 lbs. If they took 10%, that’s 16 lbs of pennies left, barely discernible even if you carried it away and if you brought in nearly 18lbs of pennies and walked away with almost $30, I’m sure you wouldn’t even know. Imagine those people bringing in water cooler jugs of coins for counting which can end up being several thousands of dollars.

    Not that I believe Coinstar is a fraudulent business but maybe an enterprising machine tech or store operator?

    I’m glad my bank offers their machine for free which I’m planning to use once my container is filled.

    • Hey Phil,

      Thanks for the comment.

      It is a pretty big risk for CoinStar to do something fraudulent. Millions of people have used their machines and even if 1 customer complains they would lose all their partnerships (Grocery Stores) overnight. No one wants to work with a fraudster and the people over at CoinStar are smart enough not to take that type of risk.

      Rishi

      • Not to mention Coinstar is a publicly traded company (CSTR – they own Redbox as well).

        If they did those fraudulent things, their stock would tank overnight and they would be delisted in the morning.

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