Cash Discounts vs. Surcharges: A Clear Explanation
Cash discounting (dual pricing) and surcharge programs are often confused, leading to business misunderstandings and potential legal challenges. Business owners must understand the difference between the two to avoid penalties and minimize customer dissatisfaction.
What is a Cash Discount?
Definition: A cash discount is a reduction in price offered to customers who pay with cash. The listed price is the credit card price, but a discount is applied if the customer pays with cash. This is also known as dual pricing.
How it works: The posted price is the credit card price. Customers who pay with cash receive a discount on that price.
Legality: Generally legal in all states when implemented correctly. Merchants must ensure that the discount is applied as a reduction from the standard price, which is the credit card price.
What is a Surcharge?
Definition: A surcharge is an additional fee added to the price for customers who pay with a credit card. This fee is intended to offset the cost of credit card processing.
How it works: The posted price is the cash price. Customers who pay with a credit card are charged an extra fee.
Legality: Legal in some states, prohibited in others. Surcharges are always illegal for debit card transactions. Compliance with card brand rules is necessary, including proper signage and advance notification to your processor before implementation.
Key Differences
Price Impact: Cash discounts reduce the price for cash customers; surcharges increase the price for card customers.
Posted Price: Cash discounts are based on the credit card price (price plus processing costs); surcharges are based on the cash price.
Legality: Cash discounts are generally legal in all states; the state and debit cards can restrict or prohibit surcharges.
Avoiding Common Pitfalls
- Understand the terminology: Some processors may use misleading terms like “non-cash adjustment” or “service fee” to disguise surcharges as cash discounts.
- Check state laws: Surcharging is prohibited in some states.
- Comply with card brand rules: Surcharges are never allowed on debit cards.
Potential Consequences of Non-Compliance
- Fines: Card brands can impose significant fines for violations.
- Merchant account termination: Non-compliance can lead to the closure of your merchant account.
- Negative customer perception: Surcharges can harm your business reputation.
Choosing the Right Option
Both cash discounts and surcharges can help offset credit card processing fees, but they have different implications for your business. Consider the following factors:
- Customer preferences: Some customers may prefer cash discounts, while others may be more tolerant of surcharges.
- State laws: While cash discounting is legal in all fifty states, specific regulations may vary. Surcharging is prohibited in some states and restricted in others.
- Pricing strategy: Dual pricing is a dual price model where the advertised price includes the cost of credit card processing, typically in the 3%-4% range. Surcharging requires adding a percentage to the cash price at the point of sale to cover processing costs. Visa limits surcharges to 3%, and some localities have additional restrictions. With surcharging, you must know what percentage to add to the cash price at the point of sale to cover your processing costs. The surcharge is added near the end of the sale by the POS system or e-commerce software. Merchants cannot profit from surcharging; they only need to recoup their actual credit card processing costs. Visa limits surcharges to three percent (3%), and some localities have additional restrictions.
- Potential impact on sales: Both options can influence customer behavior. With their fees added near the end of the sale, Surcharges can lead to customer frustration.
By understanding the distinctions between cash discounts (dual pricing) and surcharges, you can make informed decisions for your business and avoid legal and financial risks.
Would you like to know more about cash discounting, surcharging, or other reduced-cost solutions? The IntelliPay sales team is ready to answer your questions – sales@intellipay.com or 855-877-6632 option 3.
This material has been prepared for informational purposes only and is not intended to provide legal or business advice.
You should consult your advisors before implementing Dual Pricing or Surcharging.
