By 2021, most people have heard of cash discounting programs. It’s popping up everywhere from gas stations, restaurants, even to retail stores. With well over a decade in the payment processing industry, I’ve had countless merchants ask about it and wondered if it was the right option for their business, as well as the potential benefits.

In this article, we will cover the pros and cons of cash discounting and credit card surcharging.  The information I’m going to share probably will not win me any friends in the credit card processing space, but I prefer to have customers that are as informed as they can be, so here you go!

The Purpose of ‘Cash Discounting’

It was several years ago when I first heard about the concept of cash discounting for credit cards.  My initial reaction to it was to ask why surcharge for a credit card transaction?  Why not just raise your prices by a few cents or a percent to cover the difference?”

The response I received from business owners was that they did not want to raise their prices to stay competitive, or because it was a lot of work to reprice all their products/services. Most business owners would rather keep their prices the same, and if someone paid with a credit card, that customer would pay the higher price on their transaction. While it’s not “TRUE” cash discounting, it is how most credit card processors approach cash discounting.

In true cash discounting, the advertised pricing for goods and services is listed as the higher price for paying via credit cards, then a discount is added at the point-of-sale system for customers paying by cash or check. Using a cash discount should be done this way to be as compliant as possible with the card brands’ rules and regulations. However, most businesses get around this by simply adding signage in their location that explains there is a separate price for paying with or without cash, showcasing the discount for paying without a credit or debit card.

The Truth Behind Cash Discounting

There are a few POS programs in existence that do cash discounting as a true cash discount, but they require having the advertised price be the higher credit card price. Savvy readers will notice this is the same thing as raising the price of your products then offering a discount if people pay with cash. However, most point-of-sale systems do not have a cash discount program built-in. Despite this, most POS systems do have a way to add discounts. See where I am going here?

Credit card processing companies and salespeople have done a great job of presenting cash discounting as “no-cost processing” by spinning it as if you do cash discounting then processing is free or little cost (to you).  They all try to make it sound like a no-brainer: no hidden fees, no large monthly bills, no processing fees, keep your profit margin, etc.

This all sounds great and does cost the merchant less money (out of their pocket). If this program is such a good deal, why is it being pushed by so many processors and salespeople?

The answer is simple, processors make bank on this program!  Most cash discount programs are set up to take full advantage of the highest surcharge that Visa allows on a transaction:

  • In no event can a merchant assess a surcharge above 4%, even in cases where the applicable merchant discount rate exceeds 4% of the underlying transaction amount. Information provided here is subject to Visa’s operating regulations relating to surcharging.

Think about your business, what is the effective rate (average cost) of your credit card processing?  For MOST businesses, a traditional credit card processing account is between 2-3%. Notice the “MOST” in that sentence.

As noted by Visa, there are cases where the true cost of a transaction exceeds 4% and you may be in a business where your cost is significantly higher or lower than the average 2-3%.

Just for the sake of an example, let us say your business does $50k in sales per month and you currently pay 2.5% as an effective rate for processing.  That means you are currently paying $1250 per month in processing fees. That adds up to be $15,000 per year!

I know if someone told me I could pocket an extra $15,000 per year, I would probably listen to what they had to say.  The salesperson then says something like this: “It is simple, I will give you / sell you these terminals or POS system that can do cash discounting! Then, all you have to do is pass the fees on to your customers!”

The customers that pay with cash or check get the same great price they do right now, and the customers that pay with credit cards pay a slightly higher rate. You pay little or no credit card processing fees, you don’t have to change any of your prices, and you get to keep that $15,000 per year.

The Drawbacks of Cash Discounting

Sounds like a WIN/WIN, right? Well, it can be for the business owner and credit card processor. Like it or not, adding a cash discount program is a form of raising your prices; one where the real winner is the credit card processor.

Here is why.

When your business was paying a 2.5% effective rate, the processor’s margin on your account was probably around 0.5%.  Meaning they were making $250/month on your account. Now the effective rate for your processing got pushed to 4%, being passed on to your customers of course means that instead of making 0.5% margin on your account, they are now making a 2% margin on your account.

That means they went from making $250/month profit on your account to making $1000 profit on your account. Some processors even add a monthly fee for using the cash discount service. Sure, maybe they gave you a $400 terminal for free to get you on board with the Cash Discount program, but they recovered that cost the first month you ran the program.

So, is it a bad thing if the processor makes a little more money if the business owner saves on the processing fees? Of course not, and that is not the point of this article. Cash discounting is great for business owners and credit card processing companies. But it’s not great for consumers.

Most clients understand that businesses need to cover their costs, but that’s not the real issue. Instead, the problem lies with the processor raising their price to give business owners a deal through a cash discounting program.

In the scenario above, if the business owner had raised the price of the product by 3% and left the processing account the way it was, the business owner would have covered their cost of processing, plus an additional 0.5%.

This means that instead of just saving $1250 per month by not paying processing fees, they keep that amount plus an extra 0.5% for a total of $1500 per month, or a net gain of $18,000 per year.  Their customer would have paid 3% more instead of 4% more, which saves the customer 1%, and the processor would have made what they always made on the account.

So really the question as a business owner is who do you like more, your processor or your customers? With a cash discount program, you as a business owner make 2.5% more by not paying processing fees, your customers pay 4% more by paying your processing fees. Your processor makes 400% more by offering you this service.

Final Takeaways on Cash Discounting Programs

I know it sounds like we are against cash discount programs. However, a more accurate statement would be we are neutral on them.  Cash discounting can be good for some business owners. In most cases, customers do not have an issue with a business off-setting some costs.

And of course, we are a credit card processing company. We do increase our margin on accounts that choose to do the cash discount programs, and we do offer them in a wide variety of solutions.

But as I mentioned at the start of this article, I want our customers to have the whole story, with all the details, even if it is not in our best interest.

Consider all the options I mentioned in the article so that you can decide on whether implementing a cash discount program is right for your business. If you have additional questions about cash discounting or anything else related to credit card processing, we have a team of professionals ready to answer your questions!

Rob Andersen

Payment Expert