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As a Merchant, your margins are under attack from rising costs from vendors, cost of labor, supplies, etc.  The cost of accepting payment is no exception. Credit cards, especially premium credit cards tied to rewards, are expensive to process. Merchants bear not only the costs of processing credit card transactions but other costs with maintaining a merchant account or payment processing service.

To make matters worse, the interchange fees charged by the major credit card brands and issuing banks that help pay for consumer perks have steadily risen over the past five years, making it more expensive for merchants to accept credit cards. In addition, the fees for online transactions, a necessity for survival during the pandemic, have risen sharply in recent years due to the increase in fraud when purchases are made online versus in person.

Smaller merchants lack the clout of more prominent national merchants to negotiate lower rates with payment processors or ways to tweak the interchange fees that Visa, Mastercard, and others charge. As a result, the cost of these transactions is higher for smaller merchants: 2.8% in-person and 3.1% online, according to consulting firm CMSPI.

Never-ending increases

Visa and Mastercard have announced changes to their interchange structures, which will mean higher interchange fees for many smaller merchants. These changes were to take effect this year, but the lingering pandemic and political pressure put those revisions on hold for a year. Payments experts predict that online sales and premium credit cards or cards that offer rewards to cardholders have the highest interchange fees will likely see increases next April when Visa and Mastercard enact their changes.  And, since interchanges fees are reviewed annually in April and October, the prospect of future interchanges increases is always on the horizon.

Relief for merchant margins

Ever-increasing processing costs have merchants seeking options to lower their processing costs. One option is to shift some or all of these costs back to consumers who use credit and debit cards. Cash discounting and surcharging are two familiar options merchants are considering. While you’ve likely heard of these terms, it is crucial to know how they differ.

This article examines cash discounting and surcharging, the differences between the two, and the benefits and risks merchants need to consider.

What is cash discounting?

Cash discounting is simply a business owner giving customers who pay in cash a discount. A cash discount program automatically applies a small discount (up to 4%) to purchases when the customer pays with cash or check. Only customers using a debit or credit card pay the full or advertised price, including processing fees.  A surcharge differs in the cost of processing is added to the regular price at checkout if the customer chooses to use a credit card for payment.

Cash discount programs are most typically used in traditional brick-and-mortar businesses but can also be applied to eCommerce sales.  In general, a merchant can implement a cash discount in one of two ways:

Cash discount

Prices on all goods and services are raised to help cover business expenses, and the merchant offers a discount to every customer paying with cash.

Reverse cash discount

Merchants add a fee on all purchases while offering a discount to customers who pay with cash. The fee offsets or eliminates the merchants increased business expenses, including credit card processing fees.  Gas stations that display one price for credit and another for cash are running a reverse cash discount.

How does a cash discount work?

Merchants who offer a cash discount increase their prices by a specific amount.  A merchant’s advertised prices are for customers who pay with credit and debit cards. When a customer decides to pay with cash, the merchant offers them a defined discount. Merchants need to display signs advising customers that they’ll receive a discount for cash payments, but it’s not necessary to display signage informing customers of the increased card prices. All advertised prices are for customers who pay with credit and debit cards.

To summarize:

✓  When a customer pays with a credit or debit card, merchants charge the advertised price.

✓  When a customer pays with cash, Merchants apply a cash discount to the purchase.

Visa, Mastercard, Discover, American Express collectively the card associations have strict guidelines on how a Cash Discount program must be implemented. There are three things every merchant must do to have a compliant Cash Discount program:

1) Compliant signage must be posted at the door(entrance) and checkout

2) The amount of the added fee must be easily findable on the receipt and

3) Offer your customers the cash discount verbally.

Even though gas stations post different prices, a retail merchant does not need to do so. Any posted prices are considered cash prices, and the signage alerts customers that there is a fee for non-cash payments. To be compliant, merchants with a Cash Discount program need to include the Base Amount of the transaction, the Cash Discount, and the Total Cost of the transaction on the customers’ receipt.

What is surcharging?

Surcharging is when you add a fee to all purchases paid for with a credit card. This fee helps cover your credit card processing costs. One of the most common questions about surcharging concerns its legality. Surcharging is, as of mid-2021, available in 48 states. Only Connecticut and Massachusetts have surcharging prohibitions in place.

New York and Maine have additional requirements above what is required by the major card brands; please see our state-by-state guide here. Understanding the surcharging laws in the state or states, you do business and abiding by them is essential for your business’s continued success.

How does surcharging work?

If your business is located in a state where surcharging is legal, you may choose to add a surcharge fee on all credit card purchases at your location. However, the major card brands and Colorado place limits on surcharge amounts. Furthermore, merchants can only assess a surcharge on purchases made using a credit card, not debit card transactions processed as creditor transactions completed with a PIN, signature, or prepaid debit card.

With surcharging, you’re required to register with the card brands 30 days before beginning surcharging, hang signage advising customers of the surcharge at points of entry and point of sale.  For more on Surcharging,  read “The Only Guide You’ll Ever Need for Surcharging” here.

What are the differences between surcharging and cash discounting?

The main differences between cash discounting and surcharging are:

Cash discounting is legal in all 50 states while surcharging is prohibited in Connecticut and Massachusetts.

Cash discounting does not require you to register in advance with the major card brands, unlike surcharging, which requires card brand registration thirty (30) days before beginning surcharging.

What are the benefits of these programs?

There are many benefits of cash discounting and surcharging for your business, including:

Lower processing fees

The main reason merchants consider either a cash discount or surcharge is to reduce payment processing costs. There are no processing fees with cash payments. For merchants whose transactions are lower dollar amounts, this can add up to significant savings.

Whereas surcharging is ideal for merchants with larger transaction amounts, merchants whose business is with other businesses, or provide a one-time or ongoing service.

A reduction in friendly fraud

Customers who pay with cash do not receive a statement weeks after completing a transaction with your business. So. a merchant doesn’t have to worry about their cash customers initiating a chargeback for a valid purchase their customers don’t remember making.

Also known as friendly fraud, chargebacks result in the merchant refunding the purchase cost and losing the physical product or service revenue.

Chargebacks further cost your business in the time spent and opportunity costs in resolving them. What’s worse, every time you receive a chargeback, it reflects poorly on your business.  A business with too many chargebacks has a high chargeback ratio. These merchants will be required to move a high-risk merchant account with higher costs and more limited processing options.

Customer loyalty could be at risk

Whether a merchant decides to offer a cash discount or a surcharge, customer loyalty is a risk.

Adding a surcharge could alienate a percentage of customers, especially in the highly competitive retail and restaurant verticals, a cash discount program that charges higher prices to those that choose debit or credit cards is equally problematic.

According to recent payment research by; Debit cards are by far the most popular payment choice for people of all ages, with between 31.58% and 39.18% of any given generation listing debit cards as their payment method of choice.  And, 37.58% of those ages 18 to 24 are more likely to say they’d use a debit card; they’re the group least likely to favor a credit card (18.18%).

Is surcharging or a cash discount a good fit for your business?

Surcharging is legal and available in forty-eight (48) states and, as we have just seen, ideally suited to certain types of merchants. However, continued compliance with surcharging requirements is essential to avoid fines and penalties.

Cash discounting is legal and available in all fifty (50) states and has card brand requirements.  Two critical drawbacks to cash discounting are; 1) how to inform customers of two potential prices, one for cash payments, and another for card payments 2) how not to alienate consumers whose preference is to use a debit card.

Important Considerations

Further, merchants in service verticals such as locksmiths, plumbers, and electricians may manually calculate the two totals and provide a quote. Finally, restaurants, including delis and counter-service establishments, may want to list cash and non-cash prices on their menus.

Even when you implement a compliant cash discount or surcharge program, you may run into complications. It’s worth mulling these risks over to be sure you’re proceeding with caution.

Besides the additional regulations and compliance associated with surcharging, this fee is uncommon in the retail and restaurant verticals, with the notable exception of gasoline purchases. As a result, merchants in these verticals risk alienating customers by adding an extra cost to their purchases.

Suppose you want to participate in a surcharging program. In that case, you must register in advance with the major card brands and work with a payment processing company with the experience and technology required to manage a surcharging program.

Credit card usage may remain high in the near term. Customers often find paying with credit cards safer, easier, and more convenient. In addition, many consumers will choose to pay with credit cards to receive the travel perks and cashback rewards, even when offered a discount to pay with cash. Also, debit cards will remain a preferred way to pay, especially as they are combined with emerging payment technologies.  So, merchants choosing a cash discount may not end up with the savings they thought they would see.

Training is more involved. Your team will need to be ready to answer customers’ questions, as they may be unfamiliar with these types of programs.

Accepting cash requires more labor and is riskier. In addition, management must physically deposit cash payments increasing the risk to employees, especially during the evening, late night, or early mornings.

Paper money and coins also have real and perceived challenges. For example, the global pandemic heightened the awareness of disease spread using paper money for many consumers.  Plus, the risk of carrying cash is a concern for many.

As a merchant, you’ll need an adequate amount of paper money and coins for change to support a potential increase in cash-paying customers. Unfortunately, a national coin shortage brought on by the ongoing pandemic can make it a challenge to get the change you need.

Counting cash payments and the change needed can take more time than processing a card payment, increasing checkout times and aggravating your customers.

Generally, customers spend more when they’re paying with credit cards than they do with cash. So by offering a cash discount, a merchant may cause a decline in sales.

Cards and card readers can be used from a safe distance and be cleaned and sanitized, safeguarding both your customers and employees.

Finally, security risks increase with cash. With a large amount of cash on hand, your business may be more vulnerable to theft or loss.

Cash discounting and surcharging are just two ways merchants can reduce their overall business expenses and payment processing fees, but there are other options.

If you’re interested in learning more about surcharging or other no-cost credit card processing solutions and how our payment suite can help you implement them, don’t hesitate to contact us at 855-872-6632 option 3 or