As a merchant, you know that being able to accept credit cards from your customers is necessary in order to maximize sales, and for years it’s been considered just the cost of doing business. However, those fees have been getting more expensive year after year, and you may now be asking yourself why you’ve been hearing so much about cash discount and surcharge card processing programs. Well, here’s the real scoop on cash discount card programs:
One primary reason that fees are rising is that banks are charging higher interchange fees on certain types of credit card transactions. Interchange fees are the fees you pay to the credit card holder’s bank to process the payment, which vary depending on what type of credit card the customer uses.
For example, if a customer pays with a rewards credit card that provides cash back, airline miles or hotel points, etc., the interchange fees you’re paying are higher than another credit card without those reward benefits. Credit card issuing banks use the increased interchange fee to help subsidize the cost of the rewards given back to the cardholder, essentially leaving the you footing the bill.
Desperate times call for desperate measures
As rewards cards continue to grow in popularity, banks lure new cardholders by ratcheting up the level of rewards, driving up the interchange fees paid by merchants to cover those enhanced rewards. This has pushed some retailers to find creative ways to encourage people to pay with cash, check or debit card in an attempt to lower or even eliminate their credit card fees. Some merchants have assessed a surcharge on purchases made with a credit card, which is allowed by the card brands and is legal in all but 6 states. Others are offering a discount to pay with cash, which is known as “cash discount.” While they may sound like the same thing Visa recently took a stance that they are not, and that many cash discount card processing programs are merely an attempt to skirt the surcharge rules and are in violation of their regulations.
What exactly IS the difference?
A surcharge occurs when a merchant displays cash prices and charges an additional surcharge fee on top of that price for customers who want to pay with a credit card. Cash discount is when a merchant displays credit card prices and then offers a discount to customers who pay with cash or check. Here’s an example:
| Published Price | ||
| Surcharge Fee to pay with credit card | ||
| Discount to pay with cash | ||
| Credit card final price | ||
| Cash final price |
Whether a merchant calls it a surcharge, convenience, checkout or custom fee it all falls under the surcharge rules.
Potential issues with cash discount
Some cash discount programs have kept cash prices posted, but then add a fee at checkout and immediately remove that fee if someone pays by cash. Visa recently announced that this type of cash discount card processing program is in violation of their rules. A merchant cannot add a fee on top of the published cash price of an item at checkout and then immediately remove it and call that a cash discount. They do not consider this to be a legitimate price increase, but rather a surcharge masked as a cash discount.
Gas stations have been successfully running cash discount programs for years, by publishing both a cash price and a credit card price so it’s 100% clear to the consumers exactly what they will be paying based on how they elect to pay. This isn’t something that’s easily done by other merchants. Take restaurants, for example, and how complicated a menu would look if it offered two prices for every item – a cash price and a credit card price.
Merchants wanting to implement a true cash discount program need to either increase the displayed prices of all the items in their store or show two prices, which may turn off and confuse some customers. Merchants’ front-line cashiers, wait staff and store clerks are often left to explain these higher fees and cash discounts to consumers, tying them up unnecessarily and causing delays at checkout.
What’s the best solution?
While cash discount programs are popping up more and more, if not done properly a business can be subjected to non-compliance action by the card brands, possibly losing their ability to accept credit cards at all.
Sales agents for some credit card processors have been quick to push merchants into cash discounting programs done incorrectly to skirt the surcharge rules, and certain point of sale systems, like Clover, decided in September to remove all cash discount programs from its software.
More announcements from processors and card brands are likely in the coming months to crack down on improper use of cash discount programs. Merchants wishing to implement a program to reduce their credit card fees should lean more towards a surcharge program, which has established rules and guidelines for compliance.
Important considerations before implementing a surcharge program:
- Surcharge fees cannot exceed 4% and are limited to your effective rate to accept the card.
- 6 states currently prohibit surcharging– Colorado, Connecticut, Kansas, Maine, Massachusetts, Oklahoma and 3 additional states have specific surcharge restrictions (California, New York and Texas.) Know the laws in your state and consult an attorney, if necessary.
- Consider the impact a surcharge program could have on the reputation of your business overall and whether the gain in fee revenue will offset any loss of sales from consumers turned off by additional fees.
- Realize that a surcharge program won’t completely eliminate your merchant fees, those will still apply for prepaid and debit card transactions (regardless of whether they are run as debit or credit.)
- If your state has a sales tax, know how a surcharge fee could impact your sales tax reporting, as some states have recently determined that surcharge revenue is part of the taxable sales price.
- Be prepared to post all required signage your business needs to properly notify your customers of any applicable surcharge fees and train your staff accordingly.
- Visa, MasterCard and your acquiring bank partner require 30 days advance written notice before implementing any surcharge program.