Customers who walk into your business or order your products or services have many expectations. One of them is multiple payment options.
While electronic payments have been rising in popularity, you still can’t ignore cash. According to YouGov Profiles, 67% of Americans still use traditional payment options for in-store purchases.
In addition, contactless and digital payment options, such as debit and credit cards, only increase the financial burden for businesses like yours. In 2023, card brands in the U.S. earned approximately $135.75 billion in merchant processing fees.
Settling these costs from your profits can be a huge setback for any business owner.
But you can always encourage your customers to pay with cash through a cash discount program. In this article, we’ll look at what a cash discount program is and how to set it up properly.
TL;DR
- A cash discount program is when a business offers its customers incentives to pay using cash for a product or service instead of a credit or debit card. It allows merchants to motivate their customers to pay using cash by offering a price deduction.
- A cash discount program is a reduction in the listed price for customers who choose to pay with cash. It’s meant to incentivize customers to pay using cash and reduce the costs associated with accepting electronic payment methods. On the other hand, surcharging passes the processing cost to the customer.
- Cash discount programs are legal in all states in the U.S. Business owners’ rights to offer cash discounting are protected under the Durbin Amendment of the Dodd-Frank financial reform legislation.
What is a Cash Discounting Program?
A cash discount program is when a business offers its customers incentives to pay using cash for a product or service instead of a credit or debit card. It allows merchants to motivate their customers to pay using cash by offering a price deduction.
The main reason why businesses implement a cash discount program is because cash is easier to process. Electronic payment methods involve a middleman, which leads to payment processing fees.
The business is often compelled to settle the processing fees or pass them on to its customers through surcharging.
Yet, many customers are attracted to electronic payment methods for many reasons. They’re convenient, easy to use, and also come with various incentives, such as loyalty points.
So, businesses have to think out of the box to nudge them to use cash.
This is where cash discount programs come in.
A cash discount program is beneficial for both the merchant and the customer. The merchant saves on credit card processing fees and the customer pays less to purchase a product or service.
Cash discount program vs surcharging
Cash discount programs and credit card surcharging may seem synonymous at the surface level. But a deeper insight reveals stark contrasts between the two in terms of how they operate. They’re also subject to different rules and regulations.
A cash discount program is a reduction in the listed price for customers who choose to pay with cash. It’s meant to incentivize customers to pay using cash and reduce the costs associated with accepting electronic payment methods.
On the other hand, surcharging passes the processing cost to the customer.
When a business applies a surcharge fee, it imposes an additional fee on customers who pay using credit and debit cards to help the merchant offset acceptance fees.
For a business applying a cash discount program, customers paying using a debit or credit card pay the listed fee while those who pay using cash get a discount. In surcharging, the listed price is the cash price. When a customer pays using a card, the surcharge fee is added to the listed price and appears on the receipt on a different line item.
Here’s a comparison table to further understand the differences between the two:
| Cash Discounting | Surcharging |
| Offers a discount on listed prices if the customer pays by cash | Adds a charge on listed prices if the customer pays by card |
| Card processing fees are included in the listed price | Card processing fees aren’t included in the listed price |
| Legal in all US states | Illegal in some US states |
| Less regulation by card networks | Stringent regulation by card networks |
| Debit cards and credit cards are treated the same | Surcharge fees aren’t applied to debit cards |
| Appears as “cash discount” on the receipt | Appears as “surcharge” or “service fee” on the receipt |
Businesses can choose to apply either cash discounting or surcharge programs based on business preferences and priorities. You can even implement both as long as you understand the legal implications. You must also ensure compliance with card network regulations.
How Does a Cash Discounting Program Work?
As a merchant, you can apply a cash discount program to various types of purchases, whether in-store or online transactions.
To implement it, you need to preadjust pricing for all your products and services to include payment processing fees (for debit and credit card transactions). In other words, the posted prices for all your products and services will include payment processing fees.
If a customer pays using cash at checkout, they’ll be eligible for a discount equal to the payment processing fee. They will essentially pay the listed price minus the fees the merchant charges to offset the cost of processing electronic payments.
This discount appears on the receipt on a line item as a cash discount.
If done correctly, a cash discount program can save your business up to 95% in monthly processing fees.
Example of a cash discount program
The typical credit card processing fee ranges from 1.5% to 3.5% of the transaction.
Let’s say you run a baking and pastry business and you sell birthday and anniversary cakes at $50. You also have a payment processing fee of 3%, or $1.50. This means you list the cakes at $51.50 ($50 plus $1.50 service charge).
Customers who pay using a card will pay the full $51.50.
On the other hand, customers who pay using cash will receive a 3% cash discount, bringing the amount back to the original $50.
Pros and Cons of Cash Discounting Programs
Let look at the pros and cons of cash discounting:
Advantages for businesses
While many businesses use cash discount programs to offset their merchant processing fees, their benefits don’t end there. Other advantages for businesses include:
- Lower transaction fees – One of the prominent advantages of cash discount programs for businesses is the reduction or complete elimination of transaction fees. You don’t have to pay merchant processing fees to receive payments in your merchant account since the cash you get goes straight to your register. And even if the customer chooses to pay using their card, you’ve already applied those fees to your price.
- Reduced risk of chargebacks – A chargeback is a reversal of a debit or credit card payment initiated by a customer through their bank or card provider. Chargebacks are extremely expensive for businesses. They can also taint your business’s image. With a cash discount program, you eliminate the risk of chargebacks. Since there’s no third party between you and the customer, you can seamlessly refund any payments without penalties.
- Increased growth – Customers love discounts. You can use your cash discount program as a selling point and attract more cash-paying customers to your business. Customers who buy from you are likely to return due to the cash incentive. More customers bring more profits. And you don’t have to share the profits with a third-party payments processor.
- Minimized fraud – Debit and credit card processing companies and payment gateways consistently enhance their security features. However, card transactions are likely to attract hackers, fraudsters, and scammers. With cash discounting, you don’t have to worry about someone stealing your customers’ credit cards or obtaining their card details.
- Easier to implement – Some merchants might think it’s better to implement credit card surcharges instead of a cash discount program. But the truth is that surcharges have their own challenges. For example, surcharges are illegal in 10 states and territories. On the other hand, cash discounts are legal everywhere. It’s also easier to explain a cash discount to your customers.
Potential drawbacks for businesses
Cash discount programs also come with several potential drawbacks to consider. They include:
- Fewer people carry cash – Up to 41% of Americans today say that none of their purchases in an ordinary week are paid for using cash. Cash and checks are rapidly becoming less popular as people prefer the convenience and flexibility offered by electronic payment methods. Implementing a cash discount program may push away customers who prefer paying using debit or credit cards. Also, there may be issues if customers insist on getting a discount while not using cash.
- Sales and profits limitation – Countless studies have proven that customers are likely to spend more when using credit cards to purchase goods than when using cash. When you encourage your customers to purchase using cash, you might not truly exploit the maximum potential of their buying power.
- Customer perception – There’s a chance that not all your customers will be open to a cash discount program. Some, especially those who prefer credit cards, may view it as penalization for their preference. Such customers are likely to shop elsewhere.
- Theft – Minimized risk of fraud doesn’t mean that cash is completely safe. It’s susceptible to theft. Burglars could break into your cash register and get away with your profits. You also have a risk of fraud through counterfeit bills, which can cause significant financial losses and legal consequences.
- Compliance – Cash discount programs are regulated under various legislations. You need to take note of the various laws and regulations to avoid running into legal issues.
Implementing a Cash Discounting Program
If you plan to implement a cash discount program, you need to do it the right way to ensure it runs efficiently. Here’s a step-by-step process to help you do it the right way:
Understand laws and regulations
As we’ve mentioned, cash discount programs are legal in all states in the U.S. Business owners’ rights to offer cash discounting are protected under the Durbin Amendment of the Dodd-Frank financial reform legislation.
Generally, state and federal laws around cash discounting include the following aspects:
- Disclosure – Businesses implementing a cash discount program must explain the discount program’s terms and payment options to the customer clearly using visible signage.
- Transparency – The discounted amount must be listed on the receipt generated from the transaction. The receipt should indicate the base amount, cash discount, and total sale.
- Non-discriminatory – Federal regulations like the Electronic Funds Transfer Act (EFTA) have guidelines in place to ensure that cash discounts are offered to all customers who pay using cash without discriminating against customers who pay using credit.
Also, you must be aware of state-specific laws and regulations. For example, California (Department of Business Oversight) and Texas (Office of Consumer Credit Commissioner) require merchants who want to implement a cash discount program to apply for a special license.
In Wyoming, cash discount programs are limited to up to 5%.
Card networks like Visa and Mastercard echo their cash discount program guidelines from federal laws.
Set the discount amount
Choosing a suitable discount rate can be tricky. It should be set at an amount that incentivizes more customers to use cash while maintaining profitability for your business.
To calculate your discount rate, consider the average credit card processing fees you pay for your business, the number of cash transactions you anticipate, and competitive pricing in your industry. Also, analyze your profit margins, expenses, and customer behavior to come up with an ideal percentage or fixed rate amount.
The rule of thumb is to psychologically offer a noticeable benefit. For example, a cash discount of 3% or 5% may be more effective than an obscure amount.
Choose the right payment processor
Most payment providers can accommodate a cash discount program. Your provider should be able to reprogram your payment hardware and software, create a robust cash management strategy, and ensure compliance. They should also automate the pricing adjustment and taxation reporting.
If yours can’t, consider CardX by Stax.
Before you sign up with the processor, ask yourself the following questions:
- How much do you spend every month on payment processing?
- Does the provider have any requirements, such as minimum sales volume?
- Does the provider charge a fee to implement a cash discount program?
- Does the provider have contract length requirements?
- What features does the processor provide to support your cash discount program?
- Does the provider charge to reprogram your current payment terminal and point-of-sale hardware?
- How fast can the new processor implement your program to minimize downtime?
Many payment processors will be glad to offer a free trial, demo, or no-obligation quote to help you evaluate their services.
Train your staff and educate customers
Properly train your staff, especially those who face your customers at the counter. Ensure they understand everything from handling your cash register to how to apply your cash discounting program. They should be able to explain the program to your customers.
To comply with the non-discriminatory rule, train your staff to verbally offer the cash discount to all customers even when they’ve expressed interest in paying electronically. They should make it clear that the cash discount is available to all and isn’t a penalty to those who wish to pay using a card.
Also, choose various strategies to communicate the cash discount to your customers. You can launch a marketing campaign, send newsletters, update your website, and post on your social media pages.
Your customers should understand the benefits of paying using cash and any changes to pricing or payment options.
Continuously monitor and adjust the program
After implementing the cash discount program, it’s important to evaluate its performance and adjust accordingly on an ongoing basis. You can track its performance using metrics such as transaction value, sales volume, and customer satisfaction.
You can also adjust based on market shifts or changes in laws and regulations. Stay up-to-date with changes that could affect your cash discount program and make appropriate adjustments to maintain compliance.
Conclusion
If you run a business that accepts card payments, you should consider implementing a cash discount program. This program helps you incentivize more customers to pay using cash, minimize card processing fees, maximize business growth, and positively impact your business’s bottom line.
However, there are several considerations to make, such as compliance with laws and regulations. Also, keep in mind that your customers might not receive it well since they might think it’s a penalty for card payments.
But if done right, a cash discount program has the potential to streamline your business and financial operations, boost customer satisfaction, and support long-term profitability.
Contact us today and learn how you can implement a compliant cash discount program.
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