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As a merchant, your margins are under attack from rising costs from vendors, labor costs, supplies, etc. The cost of accepting payment is no exception. Merchants bear the costs of processing credit card transactions and maintaining a merchant account or payment processing service.

To make matters worse, the interchange and the non-negotiable fees charged by the major credit card brands have steadily risen over the past five years, making it more expensive for merchants to accept credit cards. The fees for online transactions have risen sharply in recent years due to increased 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 likely will mean higher interchange fees for many smaller merchants.  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 this coming 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 reduce processing costs?

The idea behind a cash discount is to reduce or eliminate up to 100% of the processing costs. The first step for a merchant is determining what they pay in credit card processing fees. The National Merchant Association estimates this to be between two (2)% percent and four (4%) percent per transaction.

If a merchant pays an average of three (3%) percent on card purchases, they would add three (3%) percent to their posted prices. Cash buyers would have three (3%) percent deducted from their total since cash transactions don’t have fees. So, a $15 item becomes $15.45 after a three (3%) percent increase, with the cash price at the POS adjusting back to $15. Debit cards have processing fees and are not eligible for a cash discount.

The upside

A cash discount program can create a positive perception of a merchant by positioning themselves as cost-friendly and customer-oriented.

Plus, a cash discount program could appeal to cost-conscious consumers. By promoting the program, merchants can highlight the benefits of paying with cash and emphasize the savings customers can enjoy. Appealing to consumers who are looking to cut costs and get the best deal possible.

The downside

The biggest downside to a cash discount program is raising your posted prices. One strategy to minimize would be to adjust the price increases by margins. For example, a small-ticket item may see a three (3%) percent price increase, while a larger ticket item (with a higher profit margin) might increase one percent (1%) to two percent (1%).

If a merchant has found a particular time sells best at a specific price point, they don’t have to increase the card price but will send to give the three (3%) percent to cash buyers at the POS. This margin-based strategy enables merchants to adjust item-level pricing and balance their margins while maximizing sales.

Benefits to salespeople

Salespeople benefit as well. By offering cash discounts to customers, merchants attract more business and increase sales. Salespeople can earn higher commissions on cash transactions, increasing their income, with no processing fees to deduct from the transaction amount.

Education

We also recommend merchants educate themselves on the nuances of offering a cash discounting program. There are state laws  and card brand rules, that must be followed when implementing a cash discount.  Visa’s rules can be found here.

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 (Card brands or networks) have strict guidelines on how a cash discount program must be implemented. That said, 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.

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 early 2024, available in 48 states. Only Connecticut and Massachusetts have enforceable 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 a merchant is located in a state where surcharging is legal, they may add a surcharge fee on all credit card purchases. However, the major card brands (Visa 3%, Master Card 4%) and Colorado, New Jersey, and New York place limits on surcharge amounts. A New York law that went into effect February 11, 2024, also has strict customer disclosure laws. Merchants can only add a surcharge to credit card purchases, not debit, gift/pre-paid card, cash, or check transactions.

Other important requirements are:

  • the merchant must notify their acquirer or payment processor before beginning surcharging
  • hang signage advising customers of the surcharge at points of entry and point of sale

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 acquire or payment processor notification 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 finder.com; 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, is 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 will 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.

Other Considerations

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,  it’s dirty, and 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.

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.

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, other no-cost credit card processing solutions, or how our payment suite can help you reduce the time and costs associated with managing payments, call 855-872-6632 select option three or email sales@intellipay.com.