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 be asking yourself why. One primary reason 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.
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 7 states. Others are offering a discount to pay with cash, which is known as “cash discounting.” While they may sound like the same thing Visa recently took a stance that they are not, and that many cash discounting programs are merely an attempt to skirt the surcharge rules and are in violation of their regulations.
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 discounting 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:
|Surcharge Program||Cash Discount Program|
|Surcharge Fee to pay with credit card||$3.99||$0.00|
|Discount to pay with cash||(0.00)||(3.99)|
|Credit card final price||$103.99||$103.99|
|Cash final price||$100.00||$100.00|
Whether a merchant calls it a surcharge, convenience, checkout or custom fee it all falls under the surcharge rules.
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 discounting 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 guised as a cash discount.
Gas stations have been successfully running cash discounting 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.
While cash discounting 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.
Cash discounting is wrought with challenges for merchants. If you are considering a surcharge program, work with a credit card processor that is intimately familiar with the surcharge rules and requirements that can assist you in creating a program that is compliant, minimizes confusion for your customers, and customized for the needs of your specific business.