Recently, “cash discounting” has been making waves in the payments industry. Processors have popped up claiming to save merchants thousands of dollars by encouraging the use of cash over cards. Of course, cash discounting programs aren’t that simple. While they might look promising at first glance, further inspection reveals that they can be detrimental to your business.
Recently, “cash discounting” has been making waves in the payments industry. Processors have popped up claiming to save merchants thousands of dollars by encouraging the use of cash over cards. It’s an interesting idea -- what better way to eliminate credit card processing fees than by reducing the number of card transactions your business processes?
Of course, cash discounting programs aren’t that simple. While they might look promising at first glance, further inspection reveals that they can be detrimental to your business. Let’s explore why that might be.
First, let’s clearly define what cash discounting is. Let’s say you run a coffee shop and charge $10 for a cup of coffee. Under a standard processing structure, your customer pays $10, no matter how they pay. But under a cash discounting model, customers will pay a different price depending on what method of payment they use.
Cash payments are discounted, meaning that they’ll pay a lower price. A typical cash discount is around 2.50%, so your customer would pay $9.75 in this case.
In some programs, card payments are surcharged, meaning that your customer will pay a percentage above the posted price. Your processor may call this a surcharge, or might couch it in a more welcoming term like “service fee.” To make things easy, we’ll say card transactions incur a 2.50% surcharge, meaning your customers pay $10.25 to use a card.
In theory, when given the choice to pay $9.75 for $10.25 for a coffee, patrons will select the lower price. But as we’ll touch on later, the choice isn’t always that simple.
Simply put, nobody likes paying credit card processing fees. Cash discounting processors promise to reduce the number of card transactions, and in some cases, will even pass the cost of card transactions on to customers through surcharges. Cash discounting programs that pass the cost onto customers often advertise using words like “free credit card processing” or “pay nothing to accept cards.” What they say is true--you won’t receive monthly processing statements or see processing fees taken out of your deposits--but that doesn’t tell the whole story.
There are several issues that you should be aware of if you’re considering a cash discounting processor. These points may not apply to every business, but are important to consider before signing on.
Most cash discount rates are somewhere between 2.5% to 4%, depending on the processor you choose. Card processing interchange fees, on the other hand, range from 0.5% to 2.4%, depending on the type of the card. Given, processor margin would be charged on top of interchange, but in many cases, merchants “pay” a higher percentage of the product price to offer the cash discount than they would to process a card payment.
Let’s take that $10 coffee as an example. If you offer a 2.5% discount to a customer using cash, they’ll pay $9.75. If you instead accepted their card (let’s say a basic rewards credit card), you could expect to pay an interchange rate of 1.43% plus $0.10, meaning your revenue would be $9.85. Even adding average processor rates of 0.15% and $0.10, your revenue would be $9.78. You’re basically losing three cents on every cash transaction by offering a cash discount.
Processors who include surcharging as part of their cash discount program will claim that the surcharge to cards will balance this out, but legally, surcharges on credit card transactions cannot exceed the merchant discount rate, which is the price the merchant pays to process the payment. This means that your surcharges will never leave any “extra” money to balance out funds lost from cash discounts.
Some processors might try to counter this by offering a revenue share from surcharges, meaning that they’ll agree to give you a cut of their markup above interchange. This really only makes sense for you if you can negotiate to receive a large majority of the markup. Keep in mind that the processor has free reign to adjust the amount of that markup, so you don’t have much leverage here.
While cash discounting programs advertise that you’ll never pay processing fees, that’s not entirely true. By law, merchants cannot apply surcharges to certain card types, namely debit cards and prepaid cards. A study conducted by TSYS in 2017 indicates that debit cards are used in 28-54% of transactions, depending on the type of business. Business owners who see a high number of debit card transactions will be forced to pay processing fees on these transactions, which start at 0.5% but can be much higher depending on the markup rates the processor offers.
One important thing to realize: card companies don’t like surcharging. In fact, they actively discourage merchants from pursuing it. “But wait,” you might say, “of course the card networks would prefer merchants take more cards! How else would they make their money?”
You’re not wrong -- card networks make money when cards are involved in transactions. That’s why they’ve set up barriers to surcharging that make pursuing it in your business a complicated and time-consuming process. Take Visa, for example. Merchants who hope to surcharge Visa cards are required to give notification to both Visa and their processor 30 days in advance. Furthermore, merchants are required to clearly inform customers of the surcharge both at the entrance to their location and at their point-of-sale. These are only the Visa requirements--each card network requires different disclosures to surcharge on transactions. Covering all of them in one place isn’t really worth your time, especially if it’s not saving any money.
To make matters a little more complicated, surcharging is actually illegal in several states, so it may not even be available to you depending on your location.
If we haven’t yet convinced you to avoid cash discounting programs, let’s consider the viewpoint of the customer for a moment. Say you’re visiting your favorite coffee shop and order your favorite $10 coffee, only to be told that you’ll be charged extra to use your card. That $0.25 might not seem like a huge amount, but it stings when you learn that you could pay $0.50 less if you pay with cash.
The fact is that most Americans don’t carry cash nowadays. A recent Consumer Credit article pointed out that 80% of consumer spending in the United States is cashless, and that 80% of Americans prefer to use their debit or credit cards for daily purchases. Disallowing (or surcharging) card transactions is an uphill battle; no customer wants to be penalized for using their preferred payment method. Risking customer satisfaction and loyalty to save a couple pennies just isn’t worth it.
There’s one more position we need to consider, that of the processor. Think about it: why would a credit card processor, who relies on processing fees to stay afloat, encourage merchants to prioritize cash transactions? The major reason is that cash discounting allows them to make a larger margin on individual card transactions.
Remember the law we mentioned earlier that restricted surcharges from exceeding the merchant discount rate? That law was put in place because processors would assess massive markup fees on card transactions, which merchants would then pass on to the customer. Nowadays, surcharges are capped at 4%, but even that allows processors to rake in a fairly large margin above interchange rates. That’s money that should stay in your customer’s pocket that’s making its way to your processor’s pocket instead.
Cash discounting programs are a clever way to package payment processing to make it appear low-cost, or even free. The truth is that these programs are more expensive than they appear, complicated to implement, and burdensome for customers.
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