What Are Cash Discounting Programs?

Running a small business means constantly juggling expenses, and one of the biggest headaches is the cost of accepting credit cards. The interchange fees charged by the major credit card brands and issuing banks have steadily risen over the years, making it more expensive than ever to allow your customers to pay with credit.

To cut down those costs, many business owners look for ways to pass some (or even all) of the fees back to customers who choose to pay with credit cards. One of the simplest and most popular methods is offering a cash discount. By giving customers a break when they pay with cash or debit, you can keep more money in your pocket and help your business stay profitable.

In this article, we’ll walk you through how cash discount programs work and how they’re different from credit card surcharges.

What Is A Cash Discount Program?

A cash discount program offsets the cost of credit card processing fees by encouraging customers to pay in cash. The system applies a small discount (up to 4%) to transactions paid in cash. Customers using credit cards pay the full price, which covers the payment processing costs.

Virtually any type of business can implement a cash discount program. While they’re typically used in traditional brick-and-mortar businesses, cash discount programs can also be applied to eCommerce sales.

How Do Cash Discounting Programs Work?

With cash discounting, the advertised price of an item will include all applicable credit card processing costs. If the customer uses a payment method other than a credit card (e.g., debit card, cash, paper check, etc.), a discount is automatically applied to remove the additional processing fees included in the displayed price.

Why Would A Business Use Cash Discounting?

Businesses use cash discounting to lower their overall credit card processing costs by passing the transaction processing costs onto their customers who choose to pay with a credit card. Note that the merchant is still responsible for paying all recurring and incidental fees required to maintain a merchant account.

Also, note that cash discounting may result in lost sales when customers realize that a purchase will cost them more if they pay by credit card.

Is A Cash Discount Program Legal?

Cash discount programs are fully legal within all jurisdictions in the United States as long as all compliance requirements are met. The Durbin Amendment to the 2010 Dodd-Frank Law authorizes cash discount programs to incentivize consumers to use alternative payment methods rather than credit cards.

Cash discounting alleviates some of the burden merchants face in paying the cost of transaction processing fees. It’s important to understand that a cash discount is not the same thing as a credit card surcharge, where the cost of processing is added to the regular price at checkout if the customer uses a credit card.

While anti-surcharging laws have been repealed or overturned in most states in recent years, surcharging remains illegal in Canada and a few US jurisdictions.

Setting up a valid cash discounting program requires that you comply with federal and state law and policies laid out by the credit card associations themselves. While this isn’t terribly complicated, it can be confusing — especially if your business operates across state lines. We highly recommend that you consult with an attorney or local business consultant who can advise you of the specific requirements and limitations that will apply to your business before you start using cash discounting.

In Canada, cash discounting is allowed by the Code of Conduct for the Credit and Debit Card Industry in Canada.

Again, you will have to comply with Canadian law and the rules set forth by the credit card associations if you use cash discounting. The Code of Conduct also allows convenience fees but prohibits surcharging. As in the United States, both cash discounts and convenience fees must be clearly disclosed in advance to the customer.

What To Know Before Starting A Cash Discount Program

Before you decide to give cash discounting a try, you’ll want to ask yourself the following three important questions to determine whether this is a good idea and how to go about setting up a program. Here’s some information to help you make a more informed decision.

Alternatives To Cash Discounting

Although cash discounting can be an effective way to lower your credit processing costs, it’s not the only way to achieve this goal. Here are some alternatives to cash discount processing to consider before deciding to implement a cash discounting program.

Does Your Business Need A Cash Discount Program?

The interchange fees charged for credit card processing are high and getting higher all the time. eCommerce businesses have seen particularly steep adjustments due to increasing online fraud.

To offset costs, the payments industry is pushing cash discount programs, but the card networks and banks don’t like them. Visa, Mastercard, AmEx, and Discover worry that these programs discourage card use, while issuing banks lose out on interchange fees when customers switch to cash or debit.

So who really benefits? Mostly the merchant services providers. These programs often come with extra fees, and providers can earn markups of 1.5% or more — far higher than the 0.30% or less they’d typically get with interchange-plus pricing.

For customers, that means higher prices. In effect, they’re paying more than just the fair share of processing costs. Imagine being charged a flat 4% on every credit card transaction. You’d probably walk away.

Still, cash discounting can make sense in industries where it’s already common and doesn’t hurt competitiveness. Just choose a provider carefully and avoid those that charge a monthly fee for the program.

For a deeper look at both cash discounting and surcharging, check out our article, The Truth About No-Fee & Zero-Cost Credit Card Processing. Good luck!