By Matt Nern
Credit card processing has become increasingly expensive for merchants, especially for small businesses that have tighter budgets and may not bring in as much revenue as their larger competitors. By accepting credit cards, businesses face the financial burden of interchange fees, sometimes called swipe fees. On average, interchange ranges from 1 to 4 percent and, over time, can turn profits into a loss for smaller businesses.
As a result, many small businesses are seeking solutions that will enable them to keep accepting cards but avoid monthly interchange fees. An answer to this dilemma was delivered in recently formulated cash discount programs, which were federally authorized in all 50 states in 2011. However, there has been confusion as to what a cash discount program is and how it differs from a surcharge.
Let's discuss the main differences between surcharge and cash discount programs, how to implement a legal and successful cash discount program, and what merchants should consider when evaluating cash discount providers.
According to the National Federation of Independent Business, a surcharge is a charge or fee added toward the price of a good or service and is usually added to an existing tax. Forty states in the United States allow surcharge fees to customers who pay with credit cards. The states that prohibit surcharges are California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas. Surcharges, however, cannot be assessed on debit cards.
Surcharges are added simply for the privilege of using a credit card. Typically, surcharges are based on a specific percentage of the total price of goods or services before taxes are assessed.
There has been much confusion around cash discount programs because people erroneously tend to associate them with surcharge programs. A cash discount program enables a merchant to decrease the price for cash purchases and offers merchants an alternative to credit card processing. Cash discount programs are not credit card surcharges because they do not levy a fee that is added to a credit card transaction.
Cash discount programs are set forth in the Durbin Amendment to the 2010 Dodd-Frank Act, which states that businesses are permitted to offer a discount to customers as an incentive to encourage them to pay with alternative methods to credit and debit cards. The discount for alternatives, such as checks or cash, is applied at the time of sale.
A cash discount works by applying a small customer service fee to all customer transactions. This fee is removed if the customer pays with cash or in-store gift card. True cash discount technology automatically determines the service fee or discount amounts, depending on the payment type. Legal cash discount programs must present a clear receipt detailing the service fee or cash discount amount.
Service fees are collected by the technology provider, who then pays off the credit card charges on behalf of the merchant, essentially removing the need for any back-end accounting or complex statements. The merchant will usually see credit card fees dramatically reduced, with only a small technology fee to pay at the end of the month.
While state laws may vary for surcharge programs, there has yet to be seen any direct language prohibiting a merchant implementing a cash discount program – as long as consumers are notified prior to purchase.
To implement a truly successful cash discount program, a merchant must overcome the confusion and questions consumers and employees have about cash discount programs. At minimum, a merchant is required to provide at least one point of notification prior to sale alerting customers that a service fee is applied to all sales and a discount given if a cash payment is made. Multiple points of notification are recommended, for example, the door, POS station and throughout the establishment if needed. Additionally, reference to the program should be made verbally at the POS. It is important the correct language is used, such as "Would you like to save (X amount) today by paying in cash or do you want to use your card?" This language clearly indicates the service charge applies to all transactions. It is also recommended the merchant has quick reference information handy to give to customers if they have additional questions.
Unlike surcharge programs, cash discount programs are seen in a better light and fare better with consumers. The notion that cash discount programs prohibit sales for customers who do not carry cash is a misconception based in fear. At SignaPay, we've researched this with multiple merchants employing cash discounts. In all cases, credit card volume has remained consistent or even increased month over month, with reports from merchants that their customers disregard the convenience fee in 99.2 percent of transactions.
Following are five points to consider when evaluating cash discount programs.
Matt Nern joined the SignaPay team in 2016 and is responsible for overseeing all aspects related to sales, business development and marketing. With over 18 years of payment processing industry experience, Matt previously worked as Senior Vice President of Sales and Marketing at Secure Bancard, LLC and as Vice President of Sales at CrossCheck, Inc. He has recruited, trained and developed numerous sales teams nationwide that consistently exceeded sales projections. To learn more about implementing a cash discount program in your business or becoming a trusted PayLo authorized reseller, please visit getpaylo.com or call 877-776-9953.
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