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An Introduction to the Cash Discount Program
***Important update, please read***
Visa has officially announced that the cash discount program, that has widely been implemented throughout the payments industry, is not compliant with Visa regulations. You can read their statement here. For this reason, Harbortouch is now offering The Advantage Program to help merchants offset merchant service fees.
The Advantage Program is a cash discount alternative. As the card brands crack down on cash discount programs, the Advantage Program provides a replacement solution that offsets the credit card processing fees for merchants, that’s legal, compliant, and without the risk.
Credit card processing comes with hefty fees, and today, it has become costly for merchants. That is a challenge for businesses with smaller budgets. Swipe fees, or interchange fees, might become a financial burden on your business if you have decided to accept credit and debit cards. That is the main reason many merchants are considering cash discounting for their credit card processing services.
The cash discount program comes with numerous benefits for businesses of all types and sizes, but there are pros and cons. Unfortunately, most business owners do not know what this program is or the benefits and problems to expect, so we’ll break everything down below. But first, let’s start with the definition and how it works.
What is a Cash Discount Program?
A cash discount program (aka cash discounting) relates to the methods merchants apply in their business to pass the costs of accepting credit and debit cards to their customers or cardholders.
The merchants raise their prices through simple conspicuous signage in the business location and offer discounts to the customers who make cash purchases. Here’s an image of the complete process to illustrate how it works:
A quick example: If you charge 4%, processing fees on all items, the formula will indicate that the services or products you should sell at $100 will retail at $104 unless your customer uses cash. In that case, the customers making cash purchases will be discounted and will only pay the original $100. The totals are reflected on the customer’s receipt.
Surcharging vs Cash Discount
Surcharge or convenience fees are different from cash discount program. A surcharge is when merchants increase the cost of purchases made by credit card. No cash discount fees or surcharges are allowed on PIN-based debit transactions.
Surcharging is an option allowed to merchants as discussed here at creditcards.com, however there are limitations and restrictions to consider before surcharging your customers.
Sometimes the program gets confused with surcharging, but here’s the difference between the two:
With a little background out of the way, let’s get to the meat and potatoes of this article. We’ll take a look at the pros and cons of offering a cash discount.
Benefits (Pros) of Cash Discounting
The main benefit relates to eliminating or reducing card-processing fees associated with credit cards accepted. After deciding not to process cards, you will not have to pay for the services. But if you have already priced your products or services to cover the card processing fees, this benefit might not make sense to you.
Easier to Implement
Apart from being more accessible to achieve, the program is also easier to explain to customers. Some merchants isolate and then pay for the card processing by assessing surcharges on the products customers buy with credit or debit cards. That comes with numerous challenges. For example, adding card-processing surcharges is illegal in many states. However, implementing cash discounts is legal in all states. Explaining that every item in the store is priced with built-in service fees is usually easy. The merchants can also deduct the fee easily if someone prefers cash payment.
Encourages Cash Payment
Even though most individuals prefer card payments, cash discounts incentivize them to use cash instead of debit or credit cards for all their purchases. In other words, the time between the sale and the access to funds is minimal. Such transactions do not involve wait time or processing time for the money to get on the merchant’s hand. Moreover, merchants can eliminate fraud exposure.
After reducing the number of customers using credit cards in your store, chargebacks will also diminish. If chargebacks have been a massive problem for your store, the decrease might help you minimize the card fees you pay because you will be at a lower risk.
A Great Marketing Tool
The cash discount might be a useful marketing tool for your restaurant or retail store that will eventually attract more customers. The word “sales” is known to attract more people, and that is why most businesses display it at the year-end outside their stores. Getting more people inside your store should be your primary goal throughout the year.
Ideally, people will get in for a single item and go out with more. Even though a 4 percent discount will help you cover the cost of processing your cash discount service, it will be a useful sales or marketing tool if you implement it in the right way.
Complete processing fees elimination is essential to most merchants. Merchant level salespeople benefit from the programs due to the above average margins associated with them. However, when choosing a type of cash discount processor, you should educate yourself on the associated problems.
Problems (Cons) of Cash Discounting
Some Customers Hate Moving with Cash
Around 33 percent of people prefer using their debit and credit cards to make purchases. That means that today, many people do not carry cash. And if your customers are opposed to making cash only payments to get discounts, they might leave without making any purchase. That might lead to reduced sales.
To provide cash discounts, you have to post in your place of business signage to let all your customers know that they will receive discounts if they use gift cards or cash to make a payment instead of debit or credit cards. That is a rule that credit card brands have set and your business must follow it. You should be ready to incur printing costs and replace the prominent signage in your store if the need arises. Even more, some customers may see the offer in a negative light if expressed as a discount. Example of signage you’ll need at your store:
For you to comply with this program, all your receipts should reflect that there are service charges on your products and cash payments eliminate the service charges. You should, therefore, work with a provider like Harbortouch merchant services that offer this feature. Furthermore, you will have to observe all law changes around cash discounts to avoid penalties.
Potentially Lower Sales
Most studies have shown that most customers spend more money when using their debit or credit cards to shop. If cash is a more attractive option to you when it comes to managing credit card fees, you might discourage and depress your sale results.
Cash discount implementation in your business comes with several challenges. However, it will be more successful if you follow every rule. By observing all rules, you will be able to avoid penalties and issues related to cash payments. Be ready to evaluate your success programs.
Will a cash discount eliminate the monthly processing fees? Yes!