Cash discount programs have become a popular pricing strategy for businesses looking to reduce credit card processing costs and encourage cash payments. In this blog, we will cover the legality of cash discount programs, the key elements to consider when implementing them, and the role of the Durbin Amendment.
What is a Cash Discount Program?
Cash discount credit card processing, sometimes known as “cash discount programs,” is a type of payment processing that allows businesses to charge their customers more for using credit cards. Under this system, the merchant adds a fee to the customer’s total bill, which is waived if the customer pays with cash or check.
For example, let’s say a merchant charges $100 for a product or service. Customers who pay with cash or check will be charged $100. However, if the customer pays with a credit card, the merchant may add a 3% or 4% fee, bringing the total to $103 or $104, respectively. The customer can then choose to pay the $103 or $104 or pay with cash or check to avoid the fee.
This type of processing is legal and compliant with Visa and Mastercard regulations (as well as Massachusetts law) as long as the fee is clearly disclosed to the customer before the transaction is completed. The fee must also be applied equally to all credit card transactions and cannot exceed the actual transaction cost.
Cash discount benefit merchants as it allows them to offset the cost of credit card processing fees. It can also simplify the checkout process by eliminating the need for separate pricing for cash and credit card transactions.
However, it can also have drawbacks. Some customers may be turned off by the added fee, and it may create confusion or frustration during the checkout process. However, this confusion or frustration is usually alleviated by a clear disclosure of the fee.
What are the Advantages of Cash Discounts?
Reduces Credit Card Processing Fees
One of the primary reasons businesses offer cash discounts is to reduce or eliminate the credit card fees associated with payment processing. Every time a customer pays with a credit card, merchants incur a fee. Businesses can save on these fees by incentivizing customers to pay in cash.
Improves Cash Flow
Cash payments are immediate, which can enhance a business’s cash flow. There’s no waiting period for funds to be transferred from credit card companies, which can sometimes take a few days.
Reduces Credit Risk
Businesses don’t have to worry about the risks of credit, including chargebacks or non-payment due to expired or over-the-limit credit cards when clients pay in cash.
However, some customers still prefer to use credit cards for purchases because of the convenience, benefits, or safety they offer. Additionally, customers may become confused or dissatisfied if a company’s cash discounting policy isn’t clear.
Is Cash Discounting Legal?
Yes, cash discounting is legal in all 50 states, thanks to the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Durbin Amendment prohibits payment card networks from restricting merchants’ ability to offer cash and check payment discounts. However, laws and considerations depend on the jurisdiction when implementing cash discounts for a merchant services provider.
Key Elements of Legal Cash Discounts
Transparency
To maintain the legality of cash discounts, businesses must be transparent about their pricing strategy. They should clearly and conspicuously disclose the cash discount policy to customers before purchasing. Transparency ensures that customers are informed about the discount and the difference in pricing based on their payment choice.
Equal Treatment
Cash discount programs should treat all customers equally. This means that the same discount percentage or amount should be offered to all customers who opt to pay with cash. Discriminatory practices, such as offering different discounts based on a customer’s perceived financial status, are generally discouraged (and likely illegal).
Compliance with Card Network Rules
Businesses must adhere to the guidelines established by credit card networks like Visa and Mastercard when implementing cash discount programs. These regulations often ask for a definite distinction between costs for payments made with credit cards and cash. Businesses should be aware of the pertinent legislation in their jurisdiction, as surcharges on card payments may also be subject to state laws and the card network restrictions mentioned above.
The Role of the Durbin Amendment
Businesses must adhere to the guidelines established by credit card networks like Visa and Mastercard when implementing cash discount programs. These regulations often ask for a definite distinction between costs for payments made with credit cards and cash. Businesses should be aware of the pertinent legislation in their jurisdiction, as surcharges on card payments may also be subject to state laws and the card network restrictions mentioned above.
Interchange Fee Regulation
The Durbin Amendment directed the Federal Reserve to establish regulations capping the interchange fees that debit card issuers could charge merchants for processing debit card transactions. These regulations aimed to lower the costs of accepting debit cards, which could have indirectly affected the incentive for cash discounts.
Influence on Cash Discounts
While the Durbin Amendment primarily targeted debit card transactions, it had the potential to influence cash discount programs indirectly. Lower interchange fees for debit cards could reduce the overall cost of card acceptance for businesses, making cash discounts less attractive as a cost-saving measure. Accordingly, the Durbin Amendment specifically prevents the card networks from penalizing merchants for offering an incentive to customers to pay by alternative means, such as cash.
Wrap Up
In general, cash discounts can be a good approach for merchants to reduce the expenses associated with accepting credit card payments. Before introducing this kind of payment processing, it is crucial to thoroughly assess the potential effects on their consumers and entire business operations.
Transparency, equal treatment of customers, and compliance with relevant rules and regulations are essential when implementing these programs. The Durbin Amendment played a role in regulating interchange fees and contributed to the broader conversation about payment card acceptance costs, and it expressly legalized cash discounts.
Businesses considering cash discounts should consult with legal and financial professionals to ensure compliance with all applicable laws and regulations, including those related to payment card acceptance.
If you need help incorporating a payment processing system for your business, don’t hesitate to contact Max Value Processing. We are an experienced merchant service provider and can help increase your business’s profitability through effective payment solutions.
If you need help with your business’ payment solution, Contact us today!
FAQs
To effectively explain cash discounts to your customers, you must promote them as a benefit. For example, you could say:
“We offer a 2% cash discount on all purchases. Just pay with cash or check at checkout to receive the discount”.
Avoid jumping into technical explanations, which might confuse or overwhelm the customer. Your customers only need to know how paying in cash benefits them.
A cash discount is a reduction in price offered to customers when they choose to pay with cash instead of a credit card. For example, “save x amount of money by purchasing any of our products in cash.”
On the other hand, a surcharge is an additional fee imposed on a customer when they opt to use a credit card for their purchase. With surcharges, the displayed price is for cash payments, and an extra percentage or fee is added if a credit card is used. Surcharges deter credit card use by adding an additional charge.
