Cash Discounts & Credit Card Processing Fees
Learn How to Save on Processing Fees Using Cash Discounts
Cash discount programs are one way business owners cover the cost of accepting credit and debit card payments. Merchants can use cash discounting to build their credit card processing fees into the price of their goods, offering customers who pay with cash at the point of sale a “cash discount” on that listed price.
This process of cash discounting is just one way that business owners can mitigate card processing fees. Below we’ll take a more detailed look at cash discounting, including how to implement a compliant cash discount program at your business.
Cash Discount Programs:
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Payment Processing 101
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What Is a Cash Discount?
A cash discount is a practice that business owners can use to significantly minimize the impact of card processing fees. Merchants implement cash discounting at their business by raising the listed price of their products to account for the cost of accepting card payments. The cash discount then comes into play when merchants apply a discount to transactions paid in cash.
How Does a Cash Discount Work?
Cash discounts work by allowing business owners to bake services charges (or service fees) into the listed price of their products. This allows merchants to alleviate the burden of accepting credit cards by passing their credit card processing fees on to customers.
Plus, since cash discounting encourages customers to pay with cash, merchants who practice cash discounting can expect fewer credit card transactions. In turn, those merchants pay less in credit card processing fees. Credit card companies allow this practice and it is legal in every state in the US—you just need to implement and execute cash discounting correctly.
Implementing a Cash Discount Program
A cash discount program only makes sense if your business is set up to accept credit card payments. That means your first steps include signing up with a payment processor and obtaining a merchant account. From there, you’ll need to follow a few best practices to be sure your business is compliant.
Here’s an overview of the steps you’ll need to take to implement a compliant cash discount program:
This is something you’ll need to discuss with your payment processor. The gist of that conversation should be about securing the right hardware for your payment processing needs and to ensure that your hardware applies cash discounts accurately and reliably. Any slip-ups here could classify the discount as a surcharge, which you don’t want. We’ll explain why in the next section.
Most merchants pay 2-4% in card processing fees. That means you’ll want to adjust the prices of your goods accordingly. You can monitor your merchant statements to determine what the best adjustment would be for your business. Word of advice: choose an interchange plus pricing plan so that your merchant statements make it easier for you to identify your processing fees.
You’ll need to clearly display the credit card price of your goods. You’ll also need “conspicuous signage” (basically a clear and visible sign) indicating that you offer cash discounts. Your processor can typically provide you with a sign that’ll do the job, but you can create your own similar to following:
|CUSTOMER PRICING NOTICE
A ________% customer service charge is applied to all sales at this location.
As an incentive for our valued customers, we now offer a discount to pay with cash by applying a _____% instant discount.
The key thing to remember is that your business must list the credit card price and indicate to customers at the point of sale that there is an option to use cash and receive a discount. You cannot just add service fees at the point of sale—that would be a surcharge, and credit card surcharge programs are not under the same rules and regulations.
Cash Discounts vs. Credit Card Surcharges
Cash discounts and credit card surcharges are two ways to accomplish the same goal: reducing the processing costs associated with accepting credit card payments. However, it’s crucial for merchants to recognize that these two methods do not work the same way and are not subject to the same laws and regulations.
What separates cash discounts from surcharges? And why does the distinction matter?
- Cash Discount Program. Credit card prices (including built-in service fees) are clearly posted, and merchants only apply discounts on that price when customers pay with cash.
- Card Surcharge Program. Cash prices (not including any service fees) are posted, and merchants charge a “checkout fee” (surcharge) in addition to the listed price when a customer pays with a card.
Basically, a cash discount builds its fees into the price prior to the transaction while a surcharge is a fee applied at the time of purchase. The long and short of why this difference matters is that surcharges are prohibited in certain states—if you surcharge when you meant to apply a cash discount, you could face legal repercussions. And for customers, the experience of receiving a “cash discount” tends to sound better than being charged a “checkout fee” at the point of sale.
Cash Discount Program FAQs
Is it legal to offer cash discounts?
Yes, cash discounting is completely legal. You can apply a cash discount at the point of sale in all 50 states. The key is to be sure that you’ve posted the credit card price on your goods, have put up a prominent sign indicating that you offer cash discounts on those prices, and you execute your cash discounts at the point of sale correctly. Otherwise, you could lose your merchant account and face steep fines.
Can I really just pass credit card fees on to customers?
Yes and no. It really depends on how you pass on those fees and your municipalities’ laws. If you go with a cash discount program, it is 100% legal in the United States. Alternative methods like credit card surcharging are subject to the laws in your municipality—your best bet is to seek legal counsel to make sure you’re in the clear before choosing a course of action.
What is cash discount signage?
Cash discount signage can be as simple as a print-out indicating that your listed prices have been marked up to account for processing fees and emphasizing that you offer discounts for customers who pay in cash
Can I eliminate processing fees using a cash discount program?
Eliminating your processing fees entirely is tough because of the way interchange rates and card brand fees work. However, you can calculate your credit card processing effective rate. If that rate is pretty consistent month-to-month, you can adjust your prices and come as close as possible to covering your processing fees in their entirety.
Can customers paying with a gift card get a cash discount?
That’s up to you, but there’s no law against extending cash discounts to in-store gift cards and checks. Your customers would certainly appreciate the discount, but you should first review your monthly statements and decide whether this would be a viable option for your business.
What are the pros and cons of cash discounting?
The most obvious benefit of offering cash discounts is that you essentially have your card-paying customers cover your overhead for accepting card payments. Aside from getting to keep your revenue, customers appreciate discounts and you won’t have to deal with as many credit card chargebacks.
On the downside, card-carrying customers might get upset and your average ticket sale might drop since people spend more when paying with a credit card. Plus, when your business starts to take on more cash-paying customers, you open the doors to security risks—namely, theft. It’s important for you to consider all of these factors in the context of your business type, location, and so on.
Cash discounting is an effective way to counter credit card processing fees, but there are alternatives. We’ve touched on credit card surcharges, but there is also the option to charge a convenience fee for non-standard payment methods (typically credit card transactions). You could also simply build processing fees into the price of your products without offering a cash discount. Raising your prices might ruffle some feathers among your customers, so you’ll need to carefully consider how your customer base will react and whether a cash discount program might soften the blow of raising prices.