A cash discount program is basically a way to make your customers pay for your credit card service provider fees. The basic premise is that you add a service fee to all purchases, and then make the service fee smaller when they pay with cash, and you call it a discount. It’s a clever spin on passing your costs on to the consumer. Admittedly, it’s hard to describe a cash discount program without making the whole thing sound a bit shady, but, there are some upsides to the idea, even for the customer.
Cash Discount Program: Is It For You?
The cash discount program sounds questionable when you imagine a big retail outlet taking part.
After all, why would they need a service fee when they’re making you do your own check out at the automated lanes? If anything, they should be paying you a cashier’s wages for the five, ten, thirty minutes it takes to get the darn machine to work properly, right?
Certainly these big outlets and chain restaurants aren’t exactly strapped for cash and don’t need to putting some of the financial burden on their customers. But cash discount programs aren’t really designed to benefit these large companies in the first place.
You can really start to see the benefits to a cash discount program when you consider the costs incurred just for processing credit cards by small businesses who run hundreds of small transactions a day. Consider a coffee shop, for instance. Some shops offer regular coffee for a buck. When credit card fees eat into that, there’s not a lot of profit left over. Businesses that make a lot of small ticket transactions can benefit greatly from a cash discount program, and if we’re talking about a small, locally owned business, customers probably won’t mind spending a few cents extra on each purchase.
This brings us into the benefits for customers: A lot of our favorite small businesses wind up folding because their owners understood every part of the business, except the business part of the business. Maybe a small burger shop makes great food, they’re good at marketing, everyone in town loves them, but they can’t afford to keep their doors open because they didn’t factor in all the nickel and dime costs like credit card processing fees. When customers are able to pitch in on that front, with a discount when they use cash, it keeps their favorite small business in business.
In that a cash discount program will, of course, encourage cash purchases, it can also streamline the bookkeeping a bit. You don’t have to wait for those payments to go through, you don’t have to worry about chargebacks or blocked payment or friendly fraud when you have a cash purchase. The money changes hands, and that’s the beginning and end of that transaction. The last thing a small business needs is to be labeled a high risk merchant and have to deal with higher fees for their processing service because of fraudulent chargebacks.
Is A Cash Discount Program Legal?
Cash discount programs are one of those things that have occupied “questionably legal” territory. Following some back and forth on the subject, the Dodd-Frank law declared in 2011 that it was totally legal for merchants to add a surcharge, and to offer discounts for those paying in cash. Furthermore, credit card companies are barred from infringing upon that right. So you don’t have to bother looking it up, your credit card company is legally required to allow you to offer a cash discount program. It stands to reason that a credit card company would prefer people pay with a credit card, of course, so the Dodd-Frank law ensures that they cannot interfere with how you do business in regards to cash discounts.
That said, there are certain rules that merchants are expected to adhere to. Fortunately, they’re pretty easy to follow:
- You need to present “clear and conspicuous signage” in order to let customers know about the payment options. They need to know about the service charge, and how to get it waived, and the signage needs to be at the entry point of the store.
- The service charge and discount need to be noted on the customer receipt.
Some of the confusion surrounding the legality of cash discount programs comes from the fact that they weren’t one hundred percent legal until around 2013. Or rather, they weren’t against the law but against regulation for certain credit card companies. Visa and MasterCard in particular had regulations in place that disallowed merchants to add a service charge to those using credit cards, even though a credit card purchase incurs an added fee for the merchant. A lawsuit was brought against the credit card networks in 2013 and this resulted in credit card companies not being allowed to impose these restrictions against merchants, except for in Puerto Rico and ten states, being California, Colorado, Maryland, Connecticut, Massachusetts, Nevada, Washington, Oklahoma, Wyoming and Wisconsin.
But even if you work in Puerto Rico or one of these ten states, these regulations won’t affect you. The Visa and MasterCard regulations stipulate that you are not to charge extra for a customer using a credit card. But that’s not what a service charge is. The service charge was legal even before this lawsuit was brought into courts, because it’s not a charge for credit card use, but for a service. The charge is discounted for those using cash or other payment methods. So as long as you follow those two rules listed above, and as long as you advertise the cash discount program as a discount on cash exchanges, rather than as a charge on credit card payments, you should have no problems running such a program. If your credit card service provider takes issue, the courts are on your side.
The wording of the law dictates that a merchant may not apply a surcharge unless that surcharge is applied across all payment forms. This is why it’s framed as a cash discount, because you are allowed to apply the surcharge, and then discount the full price of the surcharge from the cash transaction. This is why it’s important that it’s marked on the receipt. If you’re simply not ringing the surcharge up, then you may be violating several regulations and even federal law.
Is this effectively the same thing as a service charge for credit card users?
You could say that, but legally speaking, it’s not.
Is It Just For Cash?
It’s up to you what you want to apply the cash discount to, but generally the idea is to apply the service charge to debit and credit cards, and to waive it with a discount for any other form of payment. That includes gift cards, personal checks and so on. Basically, if it doesn’t go through your credit card processing service, if it doesn’t incur any fees on your end, then you can give it a discount. Of course, it’s entirely up to you how you wish to apply your cash discount and to what payment methods. The only regulations in place on cash discount programs are those listed above, which effectively mean that you just need to keep your customers informed as to the service charge and the discount program.
Can I Implement A Cash Discount Program Myself?
Technically, there’s no reason you can’t implement the program yourself. But most users trust their payment processing provider to do the work for them in actually implementing the program. Some point of sale systems have the programs built into them. The reason many merchants choose not to implement the system themselves is because a slip-up can result in heavy fines and penalties from credit card companies, and possibly even legal consequences. By entrusting your payment processing service to handle the job you can bypass a lot of those risks.
That said, it is entirely possible, and legal, to set the program up yourself. But you need to make absolutely certain to cover all of your bases. So you need to ensure that you are actually charging the service charge on every single receipt, and discounting them on the cash transactions (or the gift card transactions, the personal check transactions and so on). Once you make a mistake, it’s very hard to correct without being hit with any fines and penalties, so you need to be very confident in your abilities to implement the system before you decide to set the program up yourself.
Will Credit Card Companies Try To Put A Stop To This?
People have been running cash discount programs for about four, five years now with no indication from Visa or MasterCard of any interest in changing regulations so as to disallow the current system. At present it seems that it ranks pretty low on their to-do list. In any event, there’s no reason not to keep using a cash discount program for now. If any changes are to come, they’re a ways off, and may require Visa and MasterCard pushing laws through the slow, slow legal process.
That said, there’s really nothing to stop the big credit card companies from changing their regulations so as to put a stop to cash discount programs. It would only take a change of wording in user contracts to squash the loophole, and then perhaps a court trial to push that into legal precedent. Visa and MasterCard have made quite clear in the past that they are not fans of the cash discount program, so there’s certainly reason to expect that they might try to do away with it at some point in the future. Maybe not the near future, but soon enough.
However, we can also wonder if Visa and MasterCard have found that it’s simply not worth pursuing. Issuing a regulation change that disallows merchants from offering cash discounts would likely involve lawsuits and angry merchants and possibly even boycotts. It may even be the case that Visa and MasterCard aren’t losing as much money on cash discount programs as they thought they would be losing. Or, they might just be drafting up the perfect plan to attack cash discount programs. Or, they might be waiting to vote out a board member who’s in favor of cash discount programs. Or… the point is we just can’t know what Visa and MasterCard are planning in regards to cash discount programs, or if they’ll ever make an attempt to get rid of them.
In any event, if you run a small business and are considering running a cash discount program, there’s simply no reason not to implement it. If Visa and MasterCard are planning on combating cash discount programs again, that’s still a ways off in the future. For the time being it remains a good way to save money at the register with a little help from the customer.