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Cash Discounts & Credit Card Surcharges Explained

Beware the Hidden Cost of Doing a Cash-Only Business

Posted Apr 5, 2018
Cash discount or credit card surcharge can make for an interesting business choice.

It makes good business sense to accept credit cards. Not only do many people pay exclusively with credit cards, but those paying with a card tend to spend more. (It’s easier to pick up one or two extra things when you aren’t restricted to only the cash you have on hand.)

But, of course, it costs money to accept credit cards.

If you’re wondering if there’s a way around this, the answer is “kind of.” Some merchants impose a surcharge on credit card purchases. Others give discounts to those who pay with cash or check. It’s important to understand what’s allowed (and what isn’t) with each of these strategies.

Credit Card Surcharges

Some businesses opt to pass on their credit card acceptance fees to the customer by applying a surcharge to all purchases made with a credit card.  Visa, MasterCard, Discover, and American Express all allow surcharging, but they do have rules you need to follow. To add surcharges without violating your contract with the card brand, you’ll need to get their permission.

The amount of the surcharge is limited to your cost of acceptance, which cannot exceed 4%.  This means you’ll have to do your homework to analyze what your credit card effective rate is, so you can set an appropriate surcharge rate.

Your state will also likely have rules governing how you handle credit card surcharging.  Several states prohibit credit card surcharges completely.  

If you’re considering adding a surcharge to credit card purchases, first verify what’s allowed under your agreements and by your state.

And please be aware that you are NOT allowed to add a surcharge to payments made by debit card or by a prepaid card.

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Cash Discounts

An alternative strategy is to offer customers a discount if they pay with cash.  To make this a reality in your store though, you have to add a service fee to all purchases, regardless of payment type.  You then waive the service fee for those customers choosing to pay with cash or a check.

There are guidelines that must be followed if you offer this kind of discount. First, you must make your customers aware of the policy. Signs at your entrance, in your store, and at the register must clearly state your policy.  Not only does this make it clear for consumers, these signs are required by law. Be sure your signage clearly explains the payment options associated with the discount program.

You must also show the service charge on your receipts, as well as show that it was removed for those paying with cash or check. Your receipts must clearly show the base cost of the items purchased, the cash discount, and the total amount of the sale.  Again, all this is part of the law.

Remember, however, that this may encourage customers to pay with cash instead of a card. While you won’t have to worry about credit card processing fees, you can run the risk of customers spending less in your store.  As a general rule, customers spend more when they plan to use a card.  Hard cash tends to restrict their buying behavior.

Plus, many merchants don’t realize that even cash has a cost associated with its use, although it may not be as clearly defined as a credit card fee.  For instance, it takes more time out of your day to conduct all your business in cash.  It may not seem like much on a per-transaction basis, but counting change takes time.  As does going to and from the bank more frequently for deposits and to maintain the right mix of coins and bills in your cash drawers.  Plus, more cash on hand can be a more enticing target for theft.  Not just by a thug from the street, but even by an employee with “sticky fingers.”

As with many things in life, restricting yourself to cash payment only, is not as simple as it may sound.

Yes, accepting credit cards adds to your cost of doing business.  But it also opens up your customer base and can lead to higher overall sales.  And it’s really not that hard to distribute the cost of card acceptance within the price you charge for all items in your shop, just like any other business expense.

But if you do decide to use cash discounts or credit card surcharging, do careful research and consider your options closely.  It’s a tricky business and you do not want to make a poor decision and find yourself on the wrong side of the law.