Two of the hottest topics around payment processing today are surcharges and cash discounts. These two strategies for beating credit card processing fees are becoming more and more popular among merchants, and many payment processing companies have begun to offer programs specifically designed to promote them. The problem is that many merchants don’t necessarily understand the rules around surcharging and cash discounting, and getting it wrong can result in some harsh consequences. With that in mind, let’s take a look at some of the more important details surrounding these two fee-reduction strategies.
What Differentiates Surcharges and Cash Discounts?
One of the biggest points of confusion for merchants is that it’s becoming more and more common for the terms ‘surcharge’ and ‘cash discount’ to be used interchangeably when the two, while similar, are most certainly not the same thing.
Surcharges represent an increase in price at the register for customers paying via credit card. Commonly listed as service fees or processing fees, surcharges result in the price charged at the counter being higher than the price listed on the shelf. These kinds of fees are designed to offset the transaction fees that the merchant is charged on each card payment.
A cash discount is essentially the opposite of a surcharge – it results in the price paid at the counter being lower than the price listed on the shelf. This strategy represents a kind of reward for customers paying cash. Rather than attempting to offset payment processing fees, cash discounts are designed to eliminate them by incentivizing customers to pay with cash instead of cards.
What Do the Rules Say?
When it comes to cash discounts the rules couldn’t be clearer – they’re essentially universally allowed. One caveat to that is in some places, the law requires merchants to post both the cash and credit prices, so merchants looking to implement a cash discount should ensure they’re signage is in compliance with the laws in their jurisdiction.
When it comes to surcharges, things become a little murkier, and that’s where merchants if they aren’t careful and don’t do their due diligence, can get into some trouble.
First and foremost, the major credit card brands have their own rules regarding cash discounts and surcharges. Visa, for instance, requires that the price posted to customers is the price charged for credit cards at the counter – that means surcharges are a no-go for Visa based on their terms of service. The penalties for breaking Visa’s rules are steep – starting at $1,000 per instance and going up from there.
The second big consideration is the law. Surcharging is outright illegal in seven states – Florida, Connecticut, Colorado, Kansas, Massachusetts, Maine, and Oklahoma. The Durbin Amendment – part of the Dodd-Frank Act – also muddies the legal water by laying down some rules for what kinds of payment processing fees consumers can be charged and requiring that discounts be a reduction in price.
So, while it’s well beyond the scope of this article to say that surcharging is outright not allowed, it’s important that merchants take the time to carefully understand the laws surrounding it and the terms required by the major credit card brands. Failing to do so could not only lead to fines but potentially to a lost merchant account as well.
Does a Cash Discount Benefit Me?
With a cash discount being the safer of the two options, the question merchants have to ask themselves is whether or not a cash discount is beneficial to them. The obvious benefit is that a purchase made with cash doesn’t incur a transaction processing fee, saving the merchant one or two percent on the sale. That works out in the merchants favor if they’ve already priced the cost of that processing fee into their items. But if they haven’t, shaving off a couple of percent from the sticker price to entice buyers to use cash will cut into their profits just as much as the transaction fee would have.
To avoid that, merchants have the option of keeping their cash prices fixed and raising their credit card prices. But since the credit card price is the one that has to be displayed on the shelf, the negative psychological impact that higher sticker prices could have on consumers may not be worth the small savings in fees.
Most merchants would prefer to avoid transaction processing fees if possible, but it can’t be overstated how important it is for them to understand the laws and rules surrounding cash discounts and surcharges before implementing either. Arguably, a much better strategy is for businesses to simply seek out payment processing services with the lowest fees, to begin with. At BAMS, that’s where our expertise lies, and we’re ready to help your business get set up with the right merchant account for you, with the lowest transaction processing fees possible.
Call us today to get a quote or learn more about how we can help!