Card Processing & Fees Clearly Explained
The public loves their credit cards! A 2017 survey showed that we prefer our credit cards nearly 3:1 vs cash. Of course, accepting cards means paying card processing fees. That’s a cost of doing business.
And these fees can be pretty hefty in today’s card-focused world. For most of the retail world, merchants usually cover this cost by spreading out the dollar amount across all products as part of the “cost of sales.”
But as a competitive differentiator, some merchants are now offering buyers a discount for paying by cash or gift card (which is treated like cash). They say “You can pay less for this product because you don’t have to cover my card processing costs.” They deploy a Cash Discount Program.
Cash discount programs are legal as long as you follow a few guidelines closely. But like any business strategy, cash discount programs have positives and negatives. You should weigh these closely before deciding to implement discounts for cash payments.
Reduce Fees – Obviously, the biggest pro is reducing or eliminating card processing fees associated with accepting credit cards. If you don’t process cards, you don’t have to pay for the service. Of course, if you’ve priced your products to cover processing fees, this benefit may not carry much weight.
Easier to implement and explain than a credit card surcharge – Another way some merchants try to isolate and pay for card processing is to assess a surcharge on products bought with a credit card. That has its own set of challenges though. For instance, it’s illegal to add a card processing surcharge in 11 states. Implementing a cash discount, though, is legal everywhere. And it’s pretty easy to explain that all items in the store are priced as if paying by credit card, but the shopper can receive a discount if they pay with cash.
Encourages cash payments – Although many people prefer credit cards, a cash discount may encourage a customer to use cash instead of a card for their purchase. These means less time between the sale and when you have access to the funds. There is no processing time or wait period for cash in your hand. Plus you eliminate some fraud exposure.
Reduce chargebacks – With fewer people using cards in your store, it’s likely the number of chargebacks will also decrease. If this has been a problem for your business, this decrease may actually help reduce the card fees you do pay, because you’d be perceived as less of a risk.
Some customers may not carry cash – Just as 33% of people prefer to use their cards, lots of people simply don’t carry cash anymore. And if a customer is opposed to making a purchase without getting a discount, they may walk out without buying anything. You could experience a drop in sales volume.
Conspicuous signage – To offer cash discounts, you must post what the law refers to as “conspicuous signage” throughout your place of business to let customers know they can receive a discount if they pay by cash or gift card rather than via a credit card. There are rules the card brands have that your signage must follow. And, of course, you have that cost of printing — and replacing as necessary — the signs in your store. Also, while expressed as a discount and not as a fee, some customers may view the posted “offer” in a negative light.
Implementation – To be compliant with a cash discount program, the posted prices of your merchandise must reflect the amount charged for credit card purchases. A discount then may be given at checkout for cash payments. This reflects that you are not charging a penalty for paying with a credit card, but offering an incentive to pay with cash. That may mean revising your POS system software to include the discount. Plus you’ll want to be sure you follow any changes in the laws around cash discounts in the future to avoid any penalties.
More work for you — you may have to increase your frequency of trips to the bank to deposit the additional cash you take in.
Increased risk of counterfeit bills — as you increase the amount of cash you accept, you may also increase your risk of receiving counterfeit currency.
Potential Drop in Sales – Multiple studies have show that consumers spend more when using their credit cards. If cash appears to be a more attractive option in terms of managing credit card processing fees, be aware that it could end up discouraging and depressing your overall sales results.
If you chose to implement a cash discount program, make sure you go into it with your eyes open. Follow the rules closely to avoid issues and penalties, and be sure to evaluate the success of the program against any hit to sales you may experience to be sure the program is working for you.
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