Cash Discount Credit Card Processing vs Surcharging: What’s the Difference

There’s a good reason why the practice of passing on credit card processing fees to customers is quickly gaining traction among merchants all over the world.

The average processing costs charged by card brands (like Visa, Mastercard, Discover, and Amex) vary between 1.3 to 3.5% of every transaction. This covers the costs of interchange and assessment and is non-negotiable. Interchange fees go to the bank that issued your customer’s card—the issuing bank—and assessment fees go to the card network (e.g., Visa).

But that‘s not all. Your payment processor will also charge a fee for facilitating credit card payments and sending them to card networks via the point of sale (POS system) or online payment gateway.

It‘s obvious that business owners can save a lot of money by passing credit card fees on to customers via cash discounts, convenience fees, or credit card surcharges. But is that even legal?

In this article, we’ll discuss the ins and outs of cash discount processing and surcharging, and answer some important questions that small business owners need to know.

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What Is a Cash Discount Program?

Simply put, a cash discount program is a type of payment processing that allows merchants to incentivize cash payments by offering a discount on their regular prices to customers who choose to pay by cash.

As such, customers who pay by card are required to pay the regular price to cover the cost of card processing. Thus, cash discount merchant processing enables business owners to accept all major card brands while offsetting the costs that come with processing credit card transactions.

Some of the major benefits of offering cash discounts include:

• Lower costs. When you accept payments in cash, you don’t have to pay any extra fees to process them. It goes directly to your cash register which means more savings for your business.
• Lower risks. Accepting cash payments means you don‘t have to worry about chargebacks or friendly fraud-related issues at all. Since there’s no middleman (aka the issuing bank) involved, customers can‘t initiate a dispute through their bank. That means no more pesky chargeback fees or charge reversals that negatively affect your business’s bottom line.
• More sales. Discounts are always received well by customers, so offering cash discounts can not only get more people through the door but also bring them back for repeat purchases.

A cash discount program can be beneficial to businesses that sell high-ticket (but not luxury) goods or services. One example would be those in the healthcare industry.

In the realm of dental clinics, for instance, costs are often quite high, even with insurance. A root canal can range from $1,200-$2,000 and when you add processing costs on top of that amount, patients are left with a hefty bill.

That’s why some dental clinics implement cash discount programs to alleviate the costs of care.

Can cash discounts be used to recoup debit card processing costs?

Yes. Cash discounts can essentially be offered to customers who choose to pay by cash or check instead of debit or credit cards. Even though debit cards have a different fee structure compared to credit cards, cash discounts can be used to recover the cost of debit card processing as well.

What is Surcharging?

Surcharging is a type of credit card processing that allows merchants to recover the processing costs from customers by tacking on an extra fee to the posted price of goods—if they choose to pay by credit card.

This additional fee—typically a specific percentage of the cost of goods sold—is called a surcharge. Essentially, if you implement surcharging, you would be posting cash prices on the shelves and then adding the surcharge at the point of sale.

The obvious benefit of surcharging is that you can pass on the fees of credit card processing to your customers which can result in substantial savings for your business.

Can surcharges be applied to debit cards?

Surcharges can‘t be applied to other payment methods including debit cards, gift cards, or digital payments. They can only be applied to credit card payments to save on credit card processing fees. Since debit cards and gift cards have different fee structures, these transactions are charged different fees from credit card transactions.

Cash Discounts vs Surcharges: Similarities and Differences

A cash discount program and a surcharge program are similar in the sense that both are strategies that merchants use to pass on the costs of credit card processing to customers so they can retain a greater part of their revenue. However, there are some important distinctions between the two.

1. Lower price vs higher price. A cash discount program provides a discount to customers on posted prices (which are essentially the prices for paying by credit card). That means customers are actually offered a lower price than the listed prices of goods. On the other hand, surcharging adds a fee to the regular price of a product at checkout if the customer pays by credit card.
2. Transaction types. Surcharging is allowed only on credit card transactions; it‘s prohibited for debit cards and other prepaid cards. However, cash discounting can be used to cover the costs of both credit and debit card processing.
3. Legality. Cash discounting is legal in all 50 states, thanks to the Durbin Amendment which allows merchants to pass on some or all of their processing fees to customers. At the time of publication, surcharging is legal in all but two states: Massachusetts and Connecticut.
4. Pre-requisites. Merchants need to notify their credit card processors and card associations 30 days before implementing a surcharge program. However, no such notice needs to be given before implementing a cash discount program.

How a Cash Discount Program Works: An Example

As explained earlier, a cash discount program works by providing a discount to customers who pay by cash or check instead of a credit or debit card. This means that the listed prices of items already have the processing costs built into them. So when someone pays by card, the merchant can recoup the processing fees while getting paid in full for the products sold.

Let’s explain that with an example. Imagine the following scenario:

• A customer walks into a store and notices a sign that says they would be eligible for a discount of 4% on their total bill if they pay by cash.
• The customer picks up the items they need and walks up to the register.
• The cashier scans all the products and confirms that their total is $100.
• At this point, the customer informs the cashier that they’ll pay by cash.
• The cashier tells the customer that they‘re eligible for a 4% discount on their bill amount of $100, so they need to pay only $96.
• The customer completes the transaction in cash and pays $96 for goods worth $100, and this 4% cash discount shows up in their receipt as a separate line item.

How Surcharge Programs Work: An Example

A surcharge program works by tacking on an extra fee—a specific percentage of the listed price of the products—at checkout, if a customer chooses to pay by credit card. In this scenario, credit card processing costs aren‘t built into the listed prices. So, essentially the listed prices are cash prices. When a customer pays by credit card, the merchant can recoup the processing fees by adding a surcharge to their bill.

Let’s explain that with an example. Imagine the following scenario:

• A customer walks into a store and notices a sign that says a 4% surcharge will be added to all store sales if paying by credit card.
• The customer picks up the items they need and walks up to the register.
• The cashier scans all the products and confirms that their total is $100.
• At this point, the customer informs the cashier that they’ll pay by credit card.
• The cashier tells the customer that there will be a 4% surcharge on their bill amount of $100, so they will need to pay $104.
• The customer completes the transaction via credit card and pays $104 for goods worth $100, and this 4% surcharge shows up in their receipt as a separate line item.

How Can Merchants Implement a Cash Discount Program?

While setting up a cash discount program may not be too complex, there are a few things you must absolutely keep in mind.

1. Even though cash discounting is legal in all 50 states, make sure to review the individual policies of every payment method you accept, before implementing cash discounting.
2. Never go about setting up your cash discounts manually because it could be erroneous. Talk to your merchant account provider. They should be able to set up your POS system to reflect the program pricing.
3. You probably won’t need any specialized hardware to implement cash discounting. Most card terminals and POS systems can be easily programmed to apply cash discounts. Make sure that your receipts show these discounts clearly as separate line items.
4. Before you start offering cash discounts, make sure you‘ve posted adequate signage at your store entrances and point of sale that notify customers about the program.
5. Finally, make sure your staff is properly trained on the program and are aware of the applicable rules. They should be able to properly resolve any related queries or disputes that may arise.

Why Cash Discounting May Not Be Right for Your Business?

Despite its ease of setup, there are reasons why cash discounting may not be right for many businesses. For example:

• Paying by cash may be inconvenient for many customers. Studies show that only 19% of transactions are still paid in cash.
• Some customers may end up perceiving your cash discount program as a penalty for making card payments.
• Accepting cash means you’ll always need to have enough change on hand and be comfortable handling it. You’ll also have to physically deposit it in the bank, plus there’s always a risk of theft or loss of the physical cash.
• Cash is quite limiting when it comes to making purchases. Studies show that customers have a tendency to spend more using a credit card than cash. So you may be hurting your bottom line by incentivizing cash payments.

Before jumping right in, see what your competition is doing. Also, consider your business objectives and target customers to decide if cash discounting may be the right choice for you.

How Can Merchants Implement Surcharging?

If cash discounting doesn’t seem like a viable option for your business, you may want to consider using a surcharging program to pass on the processing costs to your customers. However, there are some important things you should keep in mind before you begin:

1. Make sure that you comply with all federal and state laws.
2. Review the guidelines laid down by each credit card association with respect to surcharging.
3. Notify your processor and card associations 30 days before you implement the program.
4. Remember that you can add surcharges only to credit card transactions (not debit cards or other payment methods).
5. You can’t charge a customer more than a set percentageas a surcharge and this should be the same for all credit card holders regardless of their card type. Be sure to verify your percentage limits. While most states set the cap at 4%, others limit surcharging to 2%.
6. Disclose the surcharge to customers. Alert them using adequate signage at the point of sale (both online and in store) and at store entrances. Also, make sure that it appears as a separate line item on receipts.

Before choosing to implement a surcharging program, make sure to evaluate the potential impact it may have on your customers’ experience.

How Stax Makes Surcharging Simpler for Merchants

Since there are heavy regulations around surcharging, it’s important that you work with an experienced payment processing partner that can ensure compliance with all applicable laws. Stax’s all-in-one Platform takes care of the following so you can rest easy:

• Our cutting-edge technology can distinguish between card types, making sure that surcharges are applied only to your credit card transactions.
• Even though processing costs vary by the type of credit card (rewards card, corporate card, consumer card, etc.), Stax establishes the surcharge rate for you and automatically adds the pre-set amount for online and card-present transactions.
• It also discloses the surcharge clearly to your customers within your online checkout flow, so that’s one less thing you need to worry about.
• We make sure that your sale price and surcharge get processed in the same transaction. Plus, your surcharge is clearly displayed to customers before processing and stated on their receipt.

What’s more, our team will guide you every step of the way to ensure you are compliant. They will also advise you on which payment acceptance solutions make the most sense for you—from card-present transactions and online payments to recurring billing.

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