From a 30,00 foot level a cash discount program is as simple as merchants charging a lower price for purchases made with cash rather than credit cards. If it was only that simple. Historically and most visible, gas stations were one of the first merchants to offer discounts for cash. They promote two prices per gallon, one for cash and one for credit, a simple solution. What makes offering cash discounts complex is the compliance rules enforced by credit card associations and state and federal laws. Additionally, confusion arises delineating the difference between cash discount programs and surcharges.
Cash Discount Models
The model used by all major programs marketed as ‘Cash Discount” add a fee at the point of sale (POS) and then remove it for cash purchases. The obvious reason for this model is merchants do not want to raise their prices. However, Visa issued a bulletin on October 18, 2018, stating this model is not compliant with their rules. “Models that encourage merchants to add a fee on top of the normal price of the items being purchased, then give an immediate discount of that fee at the register if the customer pays with cash or debit card, are NOT compliant with the VISA rules and may be subject the acquirer to non-compliant action“. Adding fees at the POS, regardless to what they are called are surcharges and must comply with the surcharge rules.
The clarity in this VISA issued bulletin has compelled processors to evaluate their solutions. Some such as First Data’s Clover and Harbortouch have discontinued their respective programs. Most other processors have chosen to ignore the bulletin and take their chances on enforcement and legality of the rules.
Another model that certainly complies with the rules would require the merchant to change all product reflecting the credit card price, typically, between 3-4% higher. When the customer checks out and pays cash, the cash discount is realized by subtracting the discount. If the merchant’s posted pricing already incorporates the processing fees, this is simply a change made at the POS. If not, the merchant if forced to reprice or absorb the discount. To offer this discount, VISA requires conspicuous signage throughout the store and at POS.
All of these solutions have barriers to entry. Initially, they are either labor intensive or lack customer transparency or are non-compliant. There are other alternatives to incent customers to pay with Cash. Cash may include debit or gift cards.
Without a surcharge, the cost of credit card processing fees is shared by all customers. By assessing surcharges, both the merchant and the cash customer reap the benefits. The cash customer pays a lower price and the merchant eliminates the transaction fee by passing it on to the credit card user.
A surcharge adds a fee to a credit card transaction at the POS. The surcharge is a percentage added to the cash price whereas a cash discount is a percentage discounted (subtracted) from a published price. Simply put a surcharge adds to the price and a cash discount reduces the price. It may be semantics, but the end game is the customer pays less using cash and the merchant covers their credit card processing fees imposing a surcharge on credit cards.
Surcharges only apply to credit cards, therefore debit cards and gift cards (Durbin Amendment) remain an option for those who don’t like to carry cash but want to reap the benefit. Additionally, all card networks require disclosure of the fee at the POS.
There are inhibitors to surcharges. As of 2018 surcharges are illegal in 7 states. Plus, your POS system must have the capability to print the surcharge on the receipt. Finally, Mastercard and Visa both have their own rules but generally, are the same and include:
- There are limits on the surcharge amount.
- Appropriate notice must be posted inside your store.
- You need to include the surcharge amount on the receipt (as a separate line item), in the network authorization request, and in the settlement.
- Brand-level surcharges or product-level surcharges are optional. However, you can’t do both.
- You must notify the card association as well as your acquirer/ISO in writing, at least 30 days in advance.
Decoupled Debit Cards, bank debits, and ACH
A decoupled debit card, bank debits, and ACH have in common the use of the Automated Clearing House to move money rather than a credit card network. Usually, a decoupled debit card is issued by a merchant for use specifically at the merchant’s place of business. It is not attached to any specific debit network but rather uses the ACH network to move money through one or more financial institutions, thus the name decoupled. The issuers realize the benefits of lower processing fees, as the debit transaction processes through ACH incurring lower fees than a credit card transaction. Target REDcard is by far the largest and arguably most successful implementations of this module. For more information read our detailed article on decoupled programs.
Summary of Options
Cash Discount Programs
- If a merchant chooses to offer a cash discount program the prices market on their products are credit cards prices and the discount is given at the POS when cash, debit cards are the form of payment.
- A merchant CAN NOT mark their products with the cash price and add a fee at the POS for all transactions and immediately discount (remove the fee) for non-credit card transactions.
- “Conspicuous” signage must be posted throughout the store and at POS.
- If compliant, cash discount programs are legal in all 50 states.
- If non-compliant the merchant is subject to fines and being added to the TMF.
- A merchant posts cash prices on their products and adds a fee on credit card transactions at the POS.
- Regulated by state and federal laws in addition to the regulations imposed by the card networks. As of this posting, surcharges are illegal in 7 states.
- Can only be applied to credit cards.
- Surcharge CANNOT exceed the merchant discount rate or 4% whichever is lessor for the specific credit card being rendered.
- The surcharge must be disclosed on the receipt as a separate line item.
- It is not allowed to profit on credit card surcharges, caution should be taken to ensure the POS system calculating the charge does not exceed the processing fees charged back to the merchant.
Decoupled Debit Cards
- Not issued by a Financial Institution
- Only usable at issuers business
- Usually tied to the issuer’s awards program, thus potentially providing more benefits for the consumer
- Discount is dictated by the issuer
The overarching theme to these programs is to lower the fee incurred by a merchant for credit card processing fees. Cash discount programs eliminate the fee entirely while surcharges distribute the cost of the fees back to the consumers paying with credit cards.
The pros for both, of course, is the reduction or elimination of the expense. The major con for both is a potential drop in sales. Studies show consumers tend to spend more using credit cards.
Consumer satisfaction may take a hit to credit card users. In the surcharge model, they specifically see the surcharge fee on their receipt. The optics of the cash discount signage in the store make the credit card user acutely aware they are paying a higher price. Remember you as a merchant are intimately aware of the fees you incur accepting credit cards, the consumer not so much.
Sources and More Information
Dodd-Frank Wall Street Reform and Consumer Protection Act
Consumer Financial Protection Bureau