The difference between cash discount and surcharge
Cash Discount Programs VS Surcharge Discounts
In this article we will discuss the pros and cons of cash discount programs VS surcharge discounts. As credit cards continue to get more expensive for merchants, smaller companies often find themselves unable to afford them at all. Businesses accept credit card payments by paying an upfront fee for each transaction processed through their payment gateway. Swipe fees vary between 1–4%, but they’re usually not too high if you’ve got enough volume. However, when you start doing hundreds of thousands of credit card transactions per month, these fees add up quickly.
Many small business owners are seeking ways to accept credit card payments without incurring high monthly interchange fees. A solution for this problem has been found in recent federal legislation authorizing state-based cash discounts across the nation.
Credit card processing fees are often inconvenient for companies, so cash payments have become a solution. There has been some confusion as to whether a cash discount program is different than a surcharge.
In order to understand the difference between a surcharge and cash discounts programs, we need to first define both terms. A surcharge is an additional charge added to a bill for services rendered by a merchant. Cash discounts are typically offered at checkout time by retailers who want to encourage their customers to buy from them rather than competitors.
The incentive for the business is clear: processing costs are reduced. Nonetheless, implementing a cash discount plan that is legal and will remain so in an ever-changing legal landscape is difficult.
To make an educated selection, merchants must understand the distinction between a cash discount and a surcharge. A surcharge is a fee added to the cost of a good or service that is meant to offset taxes already paid.
Surcharge costs are assessed on purchases made via credit cards when the consumer prefers convenience. Surcharges are a percentage of the total regular price before taxes in certain situations. In seven states, surcharges aren’t allowed and can’t exceed 4% of the merchants’ actual rate. You may use a surcharge program to offset the cost of credit card processing fees.
You’re increasing the cost for credit card users with a surcharge program, but you’re lowering the price for cash users with a cash discount program. Furthermore, surcharging is far more controlled by a credit card company, state legislation, and federal rules.
A merchant must provide and advertise credit card prices as part of a compliant cash discount program. Credit card costs are one example of processing fees. When a consumer pays with cash or in-store gift card, the regular price is reduced at the point of sale. Cash discount programs do not include a credit card surcharge since they do not charge an extra fee on top.
Cash discounting is a complex process, with negative consequences for non-compliance. The fee or discount amounts are automatically determined by intelligent payment platforms using compliant cash discount technology based on the payment type.
The payment platform charges the fee, which is then paid by the technology provider to the merchant. Each month, the merchant pays a smaller technology fee as well as a reduced credit card fee.
The rules regarding a state surcharge program are different in each state. There is no language prohibiting merchants from offering a cash discount scheme as long as consumers are informed before purchasing.
Cash Discount Laws
All 50 states allow discounted cash, whereas surcharging is not permitted in Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, or Oklahoma.
The laws in California and New York have been challenged in court. The California law was declared unconstitutional in Italian Colors Restaurant et al. v. Harris in 2015. California is appealing the district court decision. In September 2016, the U.S. Supreme Court agreed to hear Expressions Hair Design v. Schneiderman, the case challenging the New York statute that prohibits merchants from imposing a surcharge for using a credit or debit card but does not prohibit cash discounts. supremecourt.gov
Cash discount programs are often linked with surcharging, which has resulted in a lot of misunderstandings. There has been an increase in non-compliant cash discounting recently. Visa made the following clarification when asked about cash a discount to customers:
“A discount for cash is different from a surcharge. The rule states that the posted price must be for cards; however, merchants can provide a lower price for cash acceptance. Discounts for cash are allowed by Visa. However, merchants are not permitted to post a price for cash, and then charge a higher price for cards.”
The Durbin amendment to the Landmark Dodd-Frank Act is the authority on cash discounting. The amendment grants businesses the right to provide discounts to consumers as an incentive and to encourage them to pay by other means than credit/debit cards. Check or cash are examples of alternative methods for obtaining a reduction when purchasing goods.
Understanding Cash Discounts
Cash discounts, also known as early payment discounts, are reductions allowed to clients by some vendors or service providers to encourage them to pay their bills on time. Early payment discounts are also known as cash discounts. Sellers and service providers who provide a sales discount will call it a sales reduction, while the buyer will refer to the same price reduction as a purchase.
Business owners are increasingly turning to cash payments as a way to avoid credit card processing costs, which many find frustrating. Customers may be enticed to spend more money because they’re getting a small financial benefit through a cash discount program.
Why Might a Business Give a Cash Discount vs a Credit Card surcharge?
A discount may be given to a buyer as an incentive to use the cash at the time of sale, avoid charging the client or re-investing the money into the company to help it develop faster.
We’ve all been short of cash at one time or another; the business owner may require money to pay a past-due obligation, for example. The second reason stated above is that billing may be a time-consuming administrative operation as well as being costly. Small and mid-size businesses that are successful typically do not consider this aspect of their business.
When a private doctor is launching his practice, he offers patients the opportunity to pay in advance by taking advantage of an attractive 5% discount. Although this may seem like it would cost him money because then there’s more paperwork involved than just having people come through for appointments on-site and paying at the time, all those extra tasks are actually saved thanks to avoiding billing AND collections costs!
In the third scenario, new entrepreneurs and young professionals may frequently benefit from infusions of cash to help them grow their businesses more rapidly.
Is Your Merchant Implementing a Legal and Successful Cash Discount Program
To set up a successful cash-discount program, vendors must first get past the confusion and queries that customers and employees may have about such programs.
A merchant must provide at least one point of notification prior to sale that a service fee is charged to all sales and a discount given if a cash payment is made. Multiple points of warning are suggested, such as on the premises, at the entrance, in the store’s register, and so on.
At the point of sale, it is also essential to mention the program verbally. It’s critical that you use the proper terminology, such as “Would you want to save (X amount) today by paying in cash or using your card?” This phrasing makes it clear that the service charge applies to all transactions. If they have any more questions,
Cash discount programs are regarded in a more favorable light and do better with the end-users. There has long been a notion that if a customer does not have cash, they would be unable to purchase anything.
Spotting a Non-Compliant Cash Discount Program
Despite the confusion, non-compliant cash discount programs are easy to spot. They’re revealed by requiring merchants to post “cash” rates on their shelves and menus:
Even if a credit card processor refers to the program as “compliant,” it is not if it fulfills the criteria outlined above. When cash prices are posted, but then a fee is charged at the point of sale, the program is non-compliant. Because this kind of cash discount program falls under card networks’ surcharging regulations,
If a cash discount program posts a cash price but adds a fee at the point of sale, it’s not compliant.
Non-compliant cash discounts may result in hefty penalties and the cancellation of your merchant account. Fines begin at $1,000 per occurrence and can climb up to $25,000 per occurrence for repeat offenses.
Things to Consider when Evaluating Cash Discount Programs
- Legality – Cash discount programs are not all the same. Make sure the one you choose is good and has a good BBB rating. Ask them to show you a sample receipt. Federal law says they must show the service fee or discount amount on the receipt, so make sure they do that.
- Equipment – Check to see if the company’s technology and equipment supports all card types, as well as mobile wallets and EMV chip cards. Cash discount tech isn’t available on every piece of equipment.
- Hidden Costs – Some services will demand setup fees, although in most cases you may ask for these to be waived. Cash discount programs are straightforward in concept, and a good provider will be completely upfront with their pricing and charge no hidden costs.
- Fee Pricing Options – There are two service fee pricing options available from reliable suppliers: a flat fee or a percentage of the total sale. A fixed fee is required for businesses with a significant ticket difference, whereas a flat fee is appropriate for enterprises with consistent average ticket sizes.
- Customer Service – With a successful implementation, merchants will require cash discount supporting materials such as in-store signage, training manuals and videos, quick reference handouts, and a hotline to answer consumer inquiries. All of these things, as well as being on hand to troubleshoot equipment, respond to billing questions, or offer further instruction at no cost.
Final Thoughts on Cash Discount Programs and Surcharge Discounts
If you’re a business that wants to start accepting credit card payments, or if you’re looking for a more affordable way to process your current transactions, contact us today. Our experts can help you find the right payment gateway and save on processing fees. Don’t get stuck paying high swipe fees—contact us today and let us show you how easy and affordable it is to accept credit cards.