Understanding Cash Discounting and Surcharging

Cash Discounting Image

As a small business owner, you have likely heard of cash discounting and surcharging. But what’s the difference? At first glance, cash discounting and surcharging sound very similar. They both occur at point of sale and have to do with how a customer pays for a good or service. 

Once you dive deeper, it’s easy to see the difference between these two practices and the benefits and drawbacks of each. 

So, what is the difference between a credit card surcharge and a cash discount program? Read on to learn about both and which might be the best fit for your business. 

What is Cash Discounting?

Cash discounting is when a business or merchant offers customers an incentive to pay with cash over credit. Typically, they’ll offer a small discount to customers who pay with cash.

Cash discounting is a popular practice for small business owners because paying with cash saves them the processing fees associated with each credit card transaction. Accepting credit cards costs money, but cash discounting can help cover the cost of card swipes for your business.

Merchants increase their standard price based on the cost of card acceptance, and customers paying with credit and debit cards will pay the full price.

Essentially, cash discounting allows merchants like you to cover their cost of accepting cards in the fairest way possible. When you offer a discount with cash, you’re not actually losing money. You’re likely making the same profit, just minus the fees you’d incur from a credit card processor.  

Pros of cash discounting

  • Cost recovery. You have more control over offsetting your acceptance costs. Since cash discounting applies to all non-cash payments, including credit, debit, and prepaid cards, you’ll likely cover your credit card fees.
  • Convenience. Cash discounting allows you to offer your customers the convenience of paying with a card (which they expect) while covering your processing costs.
  • Avoiding chargebacks. When a customer pays in cash, businesses avoid the risk of a chargeback. A chargeback is when a customer uses a credit card at a business, then later disputes it. This could result in the business losing funds associated with the purchase and can also reflect poorly on a business’s merchant account if it occurs too frequently. 
  • Returning businesses. Similarly, once customers know about cash discounting, they may be more likely to return, as they’ll save in the long run by returning with cash.

Drawbacks of cash discounting

  • Compliance. Cash discounting can be legally complex, and you should be cautious when implementing a program. Stores with cash discounting should advertise pricing with credit card processing fees built in, then offer discounts at point-of-sale. It’s generally best practice to include cash discounting as a line item in the receipt. 
  • Extra work. You’ll need to raise your prices to stay compliant, which can take time and may potentially put off your customers—especially your regulars.

What is Surcharging? 

Another option to help cover the costs of card acceptance is to offer a surcharge, rather than a discount. 

Surcharging enables businesses to recover some of their processing costs by adding a percentage of the transaction total as a line-item markup on credit card payments.

Credit card surcharging only occurs with credit card payments, not debit cards, cash, digital payments, or gift cards. The fee is added at the point of sale, and items are priced without reflection of the surcharge.  

Benefits of surcharging

  • Cost recovery. With a surcharge, you can recoup some of the cost of card acceptance. 
  • Convenience. Implementing and adding a surcharge will likely be an easier lift for your business than cash discounting, because all you have to do is add the surcharge line item, instead of raising all your prices.
  • Familiar. Since the COVID pandemic, many business owners have had to add line-item fees to offset the new cost of doing business, like extra safety precautions. Many customers are used to these added fees at this point.

Drawbacks of surcharging

  • Surcharges are regulated. It takes time and can be complicated to institute a surcharge policy. Businesses should let credit card processors know at least 30 days before they begin instituting the policy. 
  • There’s a maximum fee. Each credit card processor has a different policy, but for example, Visa’s regulation states businesses can charge no more than 3% of a customer’s purchase as a surcharge. This was a recent change, so if you are charging more than 3%, you should reevaluate.
  • Customers may not appreciate it. Since it’s an added fee at checkout, some customers may feel slighted or angry that they’re being “penalized” for paying with a credit card.  

Cash Discounting vs. Surcharging

Cash discounting and surcharging are similar in that they’re both added at check out, but here’s how they vary. 

Cash Discounting Surcharging
LegalityCash discounting is legal in all U.S. states as long as it’s compliant.Legal in all states except Connecticut, Massachusetts, Maine, and Puerto Rico
ComplianceRequires some compliance, including listing store prices with processing fees included. You’ll have to be sure to raise all prices to stay compliant.Requires informing individual credit card processors. However, it is simpler to stay compliant since it’s just one added line-item.
Customer ExperienceCustomers are getting a discount at check out for their behavior.Customers pay a fee at checkout.

The psychological impact cash discounting versus surcharging can have on the customer is worth noting. In the event of cash discounting, it may feel like an incentive for the customer, as they’re spending less. However, customers may understand that they get extra rewards and points from using a credit card, outweighing the cost they will pay with a surcharge.

With this in mind, it’s important to consider in-store messaging around each policy carefully. Of course, there are gray areas to both cash discounting and surcharging.

What works best for your business? 

Cash discounting and surcharging both offer a fair share of benefits and drawbacks, and there’s no single right answer when it comes to what will work best for your business. Instead, consider how customers and employees may react to the polices, and how it may impact both the experience and your bottom line. 

How will this impact customer experience? 

There’s a chance that with a cash discounting program, paying with credit cards may feel like they’re being penalized for not having cash on hand. Similarly, if a business implements credit card surcharging, people paying with a card may feel the added fee is unfair. 

Customer reaction is unpredictable, and how the majority reacts may impact the decision you make.

How do employees explain the policy? 

Just as customers react to the policy, it may be worth considering how a cash discounting or surcharging program will impact employees. It may be worth training employees or team members on the best language to use around these fees or discounts. If they can take the time to explain to customers the fees associated with credit card processing, there’s a chance customers better understand your decision. 

Help create a script around common customer questions or complaints that may arise from either fee. For example, if a shop implements a cash discount, it could be worth determining where there are nearby ATMs for customers who want to return with cash and take advantage of the savings. 

It may be worth explaining to customers that both Cash Discounting and Surcharging are solutions that pass through a specific merchant cost to only those consumers who pay with cards and therefore reap the benefits of reward cards (airline miles, points, hotel stays, etc.).

Credit card surcharging isn’t legal in all states, and even in the states it is legal, business owners should pay careful attention to the laws surrounding it, with special attention to how they should inform and work with the credit card processors to accommodate the policy. 

Is my business compliant? 

While it’s legal in all 50 U.S. states, if a store chooses to implement a cash discounting program, they need to ensure the language around their cash discount is compliant. That means pricing items in the store without the discount reflected, and including signage at checkout informing shoppers of the discount. In addition, receipts and the POS system should have a line item discount reflecting the cash policy. 

Is my business equipped to deal with cash transactions?

If you decide on a cash discounting policy, you’ll likely have to pay closer attention to having proper change on hand, since you’re encouraging customers to use cash. That may also raise flags in terms of store safety. Make sure your business takes precautions if you’re keeping more cash on hand. 

Will it impact my bottom line?

Whether you choose to include cash discounting or credit card surcharging, it may be worth revisiting consumer behavior down the line. Does cash discounting lead to an uptick in cash payments, or do customers still prefer the ease of using a card?

In some instances, the cash discount may not be worth it if shoppers still largely prefer cash. Continue to revisit shopper behavior and data down the line. Since you can cover most of your processing costs, consider what offering credit card acceptance does for your bottom line too.

Cash Discounting vs. Surcharging: The Choice is Up to You 

The decision to start a cash discount or surcharge policy at your business is largely up to you. Both have pros and cons, and no one decision is best for all business owners. 

No matter what policy you choose, you can count on Get Beyond to help you through the decision. Our fee reduction programs are designed to keep your business compliant and help you improve your bottom line. Get in touch today

This article is provided for informational purposes only. Your business’s circumstances, goals, and objectives are unique to your business, so any information or opinions in this blog should not be construed as legal, tax, investment, financial, or other advice.  We urge you to always consult with a professional advisor before making important business decisions.

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