“Cash discounting” has been a trendy term recently in the payments industry. Several processors have sprung up making claims of saving merchants thousands of dollars by promoting the use of cash over cards. You can probably guess that cash discounting programs aren’t nearly that simple. While the idea of not paying any fees to process cards sounds good, dig a little deeper and you will find that these programs can be detrimental to your business. Let’s review why this might be.
How Does Cash Discounting Work?
As the name implies, merchants using cash discounting provide their customers with a discount for paying with cash rather than with card. The appropriate way to do this is that all listed prices must show the credit price. You may also show the discounted cash price (think of gas stations) and apply the cash discount at the register. There must be clear signage posted at the front of your business and at the register informing your customers of the program.
What Cash Discounting is NOT
Cash discounting is not surcharging. Surcharging is adding either a percentage or dollar amount fee if your customer chooses to pay with a card. Many processors misleadingly sell surcharging as cash discount which is incorrect, violates card brand regulations, and is against the law in five states including Colorado, Connecticut, Kansas, Maine and Massachusetts.
To clarify:
A cash discount is when credit card prices are posted, and you offer a discount to your cash paying customers.
A surcharge is when you post your cash prices and charge a separate fee on top of those prices when your customer pays with a card.
Why Would You Want to Use Cash Discounting?
Business owners want to keep their expenses as low as possible and credit card processing fees are no exception. Processors that sell cash discounting make grand promises of how your card transactions will be reduced and sometimes even pass surcharges through to your customers. You’ll see advertising such as “free card processing” or “0% rate to accept credit cards.” This might technically be true but there is far more to the story that you need to consider.
What Are the Issues with Cash Discounting?
- First consider why a processor that relies on fees from credit card transactions would push so hard for you to implement a cash discount program. The reason is that these processors are selling you a surcharge program and labeling it as cash discounting. They are adding a fee (surcharge) up to 4% to your customers credit card transaction, paying out the processing fees and pocketing the difference which is usually over 2%.
Some things to look for to tell a processor is offering a surcharge program disguised as cash discount:
- If they tell you your customers that are using a card will receive a “service fee” or “non-cash adjustment” when they pay, it is a surcharge.
- If they explain that your business will list cash prices on shelves and add a fee to customers paying with a card. Unless you are posting prices with credit card and then offering a discount for cash, it is a surcharge.
Charging any kind of fee to your customer for using a card is, by definition, a surcharge.
- In most cases the discount given is more than just accepting the card would have cost you. Most cash discount rates range between 2.5% to 4%. Given that most card processing interchange fees range from 0.05% to 2.4% depending on card type, you’re going to “pay” more to accept cash than you would have had you just accepted a credit card through a traditional merchant account. This is true even after factoring the processors markup. Again, this assumes you are on a legitimate cash discount program and not surcharging.
If you are surcharging which is probable, you are likely to be told that the surcharges will outweigh any lost revenue from the cash discount. Because surcharges legally cannot exceed the merchant discount rate, you are either being misled or encouraged to operate in a way that is against the law. There is legally never any “extra” money left to recoup lost revenue from cash discounts.
- By law, you cannot surcharge a debit card, regardless of the state you are in. Debit cards are the most widely used method of payment, so you are still forced to pay fees on these transactions.
- Once you’ve reduced or eliminated your card payments, now you are sitting on piles of cash. This can cause a serious security issue. Furthermore, banks set limits on the amount of cash you can deposit each month. Once you exceed this amount, they begin charging you for deposits typically per every $100 deposited over your monthly limit.
- If you haven’t already seen why, you should avoid cash discounting and surcharge programs, consider your customer’s viewpoint. Perhaps you’re visiting your favorite deli and order a $!0 sandwich, only to be told you’ll be charged extra to use your card. An extra $.50 cents might not seem like much, but it hurts even more when you learn you could pay less with cash.
Closing Thoughts
Since 81% of consumer spending in the United States is cashless, card payments are here to stay. If you really want to utilize a cash discount program, be sure to select a processor that will correctly implement it. Avoid processors that are peddling surcharge programs as “cash discount.”
Surcharging or disallowing credit cards is an unnecessary battle. Risking customer loyalty and satisfaction by implementing a punitive charge for using a card isn’t worth it. Factor it into the cost of doing business and spend that energy marketing your business to increase sales.
If you would like more information on how D4 Payments can help you, feel free to reach out!
