The Difference Between Cash Discounting and Surcharge

Sellers who accept credit cards, cash, and debit cards are often confused about how to recoup the service fees imposed by banks (on debit cards), and by card companies for the privilege of accepting those types of payments. It’s a fact that the vast majority of merchants who accept plastic, both debit and credit card versions, enjoy higher sales totals. One reason is that today’s consumers tend to carry at least one credit card and prefer to use it when they don’t have cash on hand.

The modern economy is a hybrid of credit, cash, and debit purchasing methods. Yet it’s important to keep in mind that credit card use rises steadily from year to year. In fact, there are more than 1.1 billion plastic credit cards currently in active use in the U.S. alone. That comes out to more than three cards, on average, for every man, woman, and child in the nation.

The use of cash is declining at about the same rate as the use of plastic in increasing. Remember that fact when you, as a merchant, decide how to deal with the thorny problem of whether to offer a cash discount to customers or to add a surcharge on credit purchases.

If you sell any kind of products or offer services to the public, you probably already know about two methods of charging: offering cash discounts and adding a fee to credit card purchases. Some retailers do both if they operate in multiple states. Others, who only have storefronts in a single state, do one or the other. Finally, a few sellers who accept credit cards choose to simply absorb card company fees, impose no card surcharges, and don’t offer cash discounts either.

The Legal Question

It’s not as easy as saying, “My store will be imposing a four percent surcharge on all credit purchases.” Why? Because the legal environment is tricky and arranged in a sort of patch-work scheme. Here’s a look at four parts of the legal landscape every store owner or seller should know about:

  • State Laws: States have their own laws that pertain to how merchant sellers within their jurisdictions can handle credit card sales. Ten states currently forbid businesses from tacking a credit-card surcharge onto a transaction to recoup the service fee. Those states are New York, Massachusetts, Oklahoma, Maine, Texas, California, Florida, Connecticut, Colorado, and Kansas.
  • Card Company Rules: You need to check the fine-print of your agreement with the credit card company and see if they allow surcharges. Some do and some don’t. If they allow them, it’s okay for you NOT to impose a charge. But if the contract forbids surcharges, in no case can you add one.
  • Franchise Regulations Another legal snafu you might be up against is your franchise or chain agreement. Many popular franchises don’t allow owners to add surcharges onto card users’ bills.
  • Your Bank’s Guidelines It’s also imperative to speak with your bank. Some credit unions and business bankers either forbid the use of surcharges or actively discourage them. That’s why it pays to always read the details of whatever legal agreement you have with your financial institution. If you run afoul of their guidelines, they could possibly cancel your banking privileges or freeze your account.
  • Federal Laws: A federal law, called the Dodd-Frank Act, the prevents merchants from adding a surcharge on debit card transactions, so there’s no easy or legal way to recover those expenses.

The Many Differences Between the Two Methods

Before you can decide which method, cash discounting or adding a surcharge to credit card purchases, is best for your bottom line, it’s essential to know the key differences between the two. For starters, keep in mind that most merchants pay up to four percent of credit card amounts directly to the card companies as a fee. The same is true for debit cards.

Be careful in assuming that the only difference between using a cash discount and a card surcharge is mathematics. There’s much more to the equation than that because your buyers are human beings, not robots. They make decisions based on their perceived best interest, and many people will switch brands, stores, or products if they notice a card surcharge on their receipt.

When it comes to the key differences between the two methods, the most vital points are the following, keeping in mind that it’s possible to do both or neither.

  • Credit Card Surcharge: Adding a percentage or flat dollar amount extra charge to every credit card transaction. You might add this charge to all cards or just specific ones, depending on card company rules and how you decide to do business.
  • Cash Discount: The simple cash discount gives a fixed percentage off each purchase for buyers who use cash. It’s up to the merchant to decide, and there are no state laws or regulations governing whether you’re allowed to offer cash discounts or not.
  • Neither: If you decide to absorb the entire card usage fee yourself and not pass it onto customers, you can do so. And you are not required by any law or regulation to make up for the loss by offering cash discounts. In most cases, however, the choice to fully absorb the fees is not a very wise business move.
  • Both: If you are in a state that allows surcharges, and if your card company agreement does not prohibit it, it’s possible to add a surcharge onto card transaction and offer cash discounts simultaneously.

Think Like a Customer

In order to make a profitable decision, business owners need to put themselves into the customer’s shoes. Study your customer demographics and preferences. If you sell in an area where cash is widely used, you might be able to boost profits by offering cash discounts as long as the policy induces enough sales to offset the lower prices.

On the other hand, if most of your customers use plastic only, then it might not do much good to encourage cash transactions via discounts. For businesses that earn most of their sales dollars from plastic transactions, a surcharge could be a wise move if the tactic is allowed by your state, franchise owner (where applicable), and credit card company.

The whole point of “thinking like a customer” is to imagine what the outcomes might be when you take one or the other tactic. Many business owners experiment to find the right way of doing things. They offer cash discounts for a few months and see what the effect is on the bottom line. Then, they impose card surcharges (if allowed) for a while and study the results.

Which Way Will You Go?

It’s not always easy to navigate the complex credit environment. With high fees for card usage the norm these days, it’s imperative for business owners to find the right mix of surcharges and cash discounting. At Metro Payment Technologies, we offer a wide range of products and services for companies that want to optimize their way of doing business.

When you feel like you’re not quite sure how to approach the credit card surcharge question, or wonder about how to set up your consumer-facing technology to do the heavy lifting, give us a call and speak with someone who can offer solid solutions that work to maximize your profits. There’s no reason to let the complexity of payment methods, technology, and everyday payment processing get in the way of your company’s long-term profitability. Feel free to phone us at 800-771-3719, or contact us via our website when you want quick answers and realistic solutions.