With the rising popularity of legal cash discount and surcharge programs, it’s obvious why many business owners find this tactic appealing. And while offering credit card payments in your business seems like a no-brainer, the convenience of getting a merchant account for this perk comes at a cost. Credit card processors charge fees for each transaction you initiate. This means that Visa, MasterCard, and other credit card platforms are taking a slice of your earnings. If you’re operating your business by today’s standards, it’s essential to offer your customers digital payment options so that they can pay with credit cards. However, if you’re not willing to front the cost of the transaction, there are two ways to offset the fees: cash discount programs and surcharge programs.
For those who operate on thin margins, passing this cost onto the consumer seems like a natural conclusion. But charging your customers for credit card processing fees isn’t as easy as you think – in fact, it was once illegal. So, as a business owner, how can you spot the difference between cash discounts and surcharge programs?
What is a Cash Discount Program and is a Cash Discount Legal?
A cash discount is when a merchant offers a discounted price to a customer if they choose to pay with physical cash for an item or service as opposed to a credit card. Business owners use this type of program for many reasons. But the primary reason is that cash is much easier to process over credit cards because there is no middle man (AKA the issuing bank or credit card processing company). In addition to that, a cash discount is totally legal to use in your business.
Many business owners find credit card processing fees to be frustrating, making cash payments a way around this issue. A cash discount program may also work as an incentive for customers to spend more since they’re receiving a small monetary discount.
The Benefits of Offering a Cash Discount Program
There are a few main points to consider and understand before learning how to offer your customers a cash discount.
Eliminate friendly fraud with a cash discount
One of the major drawbacks to accepting credit card payments is the risk of “friendly fraud” or chargebacks. These pesky charge reversals are not only costly but also harmful to your business in the long run. Each time a merchant initiates a chargeback, for any reason, it reflects negatively on your business. Rack up too many of them and you’ll receive a high chargeback ratio which could result in the need for a high risk merchant account.
The good news is with a cash discount program, you’re able to completely eliminate the worry of chargebacks. The way a chargeback occurs is through the customer’s processing bank. When dealing solely with cash, you’re cutting out the bank’s influence entirely. Therefore, by offering your customers cash discount processing you’re also ensuring the transaction runs smoothly.
Cash discount processing lowers account fees
The biggest purpose of a cash discount is that you don’t have to pay merchant account payment processing fees. The payment you receive in cash goes directly into your cash register, never incurring any added fees. No percentages. No rates. What you see is what you get.
For smaller businesses or just those that process smaller transactions, this could mean a great deal of savings.
Cash discounts diversify (and attract) growth
A cash discount can become a marketing tool that your business can purposefully leverage to attract new customers. Customers who walk into your business for the first time may be more likely to return because of the added benefit. After all, you’re giving a small discount to buy items they might have otherwise bought at full price.
Programs such as a cash discount are generally appreciated by customers. It doesn’t deny or limit ways to pay, which is great for your bottom line. And in addition, it may give card-wielding consumers a reason to come back with cash in the future.
So Then, What is a Surcharge Program?
A surcharge program involves charging a fee to customers who opt to use credit cards. By charging credit card users extra money, you can recover the processing fee directly from your customers. This ensures that you can charge the base price for a product or service without having to factor in losses from credit card transactions. By implementing a surcharge program you are distributing the cost of credit card processing fees to your customers.
A surcharge program does not affect debit cards, cash payments, or corresponding digital payments. It can only be applied to credit card payments where the credit card processing fees would apply. However, it does come with some stigma worth considering before you implement it.
The Drawbacks of Offering a Surcharge Program
Just like offering a cash discount program to customers, surcharge programs come with their own risks and drawbacks to consider.
Some surcharge programs are frowned upon
While this is a widespread practice with many business owners, it’s frowned upon by credit card companies. Many credit card issuers pressure regulators to prevent surcharges. They don’t want credit card users to bear the cost of the transaction.
And in some states, these regulations prevail and business owners face regulations that prevent them from utilizing traditional surcharging methods. At present, you cannot use a surcharge program in the following states:
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Colorado
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Oklahoma
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Massachusetts
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Connecticut
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Kansas
Heavy regulations on surcharges
If you do decide to proceed with a surcharge program, you must notify your credit card processor and credit card association 30 days before you begin charging. Also, you can only add a surcharge to a credit card (not a debit card or alternative payment method). Additionally, you cannot charge more than 4% to a consumer. That percentage must also be the same for all credit cardholders, regardless of the type of credit card. It is also best practice to let your customers know about the additional surcharge that will appear. It must be a separate line item and easily identified as a surcharge on an itemized statement or receipt.
Each card association has its own rules, so it’s important to research the guidelines of each company before you begin surcharging customers.
How to Select The Best Option for Your Business
It can be hard to decide between a cash discount program and a surcharge program. And the answer isn’t so cut and dry. There are many subjective factors to consider before implementing either of these programs into your operations.
It may be helpful to see what your competition is doing to combat higher credit card processing fees. Are they requiring a minimum purchase amount to use a credit card without a fee? Are they straight out applying a surcharge onto card transactions? Have they raised their prices to combat the fees? Or none of the above?
You definitely do not want to stand out from your competition in a bad way, so deeply consider your organization’s business structure before mixing it up.
If you have already thought about starting a cash discount program and are ready to take the plunge to implement it right away, then there is no better time than the present to get started.