Cash Discount Program Guide: What It Is, How It Works, and When to Use It

While 65% of consumer payments are made with a credit card or debit card, only 14% of payments are made in cash. For merchants, this represents a potential opportunity. If you can increase the number of cash transactions, you can lower your overall processing fees and reduce your operating expenses.

Companies can encourage more cash transactions by offering a cash discount. For the best results, merchants need to become familiar with the regulations involved and the top strategies for implementing cash discounting programs.

To learn more about using cash discounts with merchant services, read on.

TL;DR

• Cash discounting decreases the amount customers have to pay by giving them a discount for paying in cash. 
• This type of program can reduce the amount merchants pay in processing fees, but merchants must be careful about the size of the discount.
• Surcharges are a similar concept that involves charging customers more if they pay with a credit card.
• Federal law bans surcharges on debit card payments.
• Many states also ban or restrict surcharges on credit cards. 
• Because surcharges feel like paying extra, customers generally prefer cash discounts over surcharges.
• The Durbin Amendment allows cash discounts, but they must be a genuine discount and not a surcharge.
• When setting up a discount program, merchants must make sure the discount is available to all buyers, isn’t restricted or banned in the merchant’s state, and is allowed by their card issuer or network.
• To make setting up a cash discount strategy easier, merchants should schedule a professional consultation with PayCompass.

What Is a Cash Discount? 

So, what is a cash discount? And is it a good idea for your company? 

A cash discount involves giving customers a discount on their purchases when they pay in cash instead of using a card. By implementing a cash discount program, merchants can encourage customers to use cash instead of cards. 

This type of program benefits customers and merchants. For example, let’s assume a merchant sells drills at $50 each. On average, credit card fees cost 1.5% to 3.5% of the transaction. This means that $0.75 to $1.75 of each drill’s cost goes directly to the payment processor, card network, and issuer. By offering a discount that is less than the processing fees, merchants can save money and give their customers a lower price.

How Are Cash Discount Programs Structured? 

This is what cash discounting looks like in practice.

1. The price of a pair of gloves is $15. 
2. At the register, 3% of this amount is subtracted because the customer paid in cash.
3. The subtotal before tax is $14.55.

Often, this is the main method used for providing a cash discount. The actual products in the shop are labeled with the credit card price, so the cash discount is subtracted at the register.

Alternatively, some merchants display the cash price and credit card price on each product. This provides better visibility, but it is slightly more work for the merchant. 

Once you decide on how you want to set up your cash discount program, the next step is figuring out the mechanics. Your point-of-sale (POS) system must be reconfigured to deduct the discount. This also means you’ll have to conduct additional training with your team members and adjust your signage. 

When Are Cash Discount Programs Allowed?

Under the Durbin Amendment (Dodd-Frank § 1075), cash discounts are specifically allowed. However, merchants can only use these programs if they are genuinely set up as a discount. If the merchant charges credit card users more, it is considered a surcharge and may not be allowed.

To be legal, the discount must meet the following requirements.

• It must be a genuine discount and not a surcharge.
• Customers can be given a discount for using cash, but merchants can’t give discounts for using specific card networks or issuers.
• The discount should be offered to all prospective buyers.
• It must be legal to provide a discount in your state.

How Is a Cash Discount Different From a Surcharge? 

While cash discounting is different from surcharges, the actual expenses involved often look the same to customers. A cash discount provides customers with a discount for using cash. Meanwhile, a surcharge involves charging customers more if they pay with credit cards. 

This means that how items are priced in your shop will also change based on which option you choose. With cash discount programs, the price listed is what someone would pay with a card. Then, the receipt would show a line item for the cash discount. 

With a surcharge, the prices on your products are the prices that cash customers must pay. Then, a line item on the receipt adds a percentage of the transaction as a surcharge. 

For customers, cash discounts are often preferable. Cash discounting feels like a special promotion or deal. In comparison, surcharges make customers feel like they are paying extra.

Currently, every state allows cash discount programs in some form. However, Massachusetts, Maine, and Connecticut prohibit credit card surcharges. California, Oklahoma, and Texas also have significant restrictions.

	Cash Discount	Surcharge
How Prices Are Displayed	The credit card price is typically the price that customers see. Later, the cash discount is removed from the price.	The cash price is listed on each product. During the transaction, a surcharge is added to the price if the customer pays with a credit card.
How Receipts Look	After the full transaction price is totaled, a cash discount line item is subtracted from the total.	The base price is tallied on the receipt. Then, a surcharge line item is added to the total.
When Is It Allowed	Because it is considered a discount, this is generally allowed in most parts of the United States.	Some states have limits on using surcharges.
How Is It Typically Used	This method helps to offset the cost of payment processing without explicitly penalizing people for using cards.	With this method, companies pass on credit card processing fees directly to the customer.
Basic Compliance Reminders	To avoid compliance issues, the posted price must genuinely be the pre-discount price.	Debit cards are not subject to the surcharge. Additionally, the surcharge can only be for the actual processing costs.
Brand Image	Customers feel like they are getting a special benefit. There are lower risks to the brand’s image and reputation.	Customers tend to dislike this option because it feels like they are being punished for providing card payments. As a result, there are higher reputational and compliance risks involved.

It should be noted that surcharges can only be used with credit cards. In the United States, federal law bans the use of surcharges for debit cards.

The Impact of Using Cash Discounting

When you use dual pricing (a cash price and a card price) as a part of your merchant services, you can enjoy a few key benefits. However, there are also added requirements and potential drawbacks that must be considered as well.

Reputational Impact

The way cash discounting affects your reputation can vary greatly. If you market it as a discount off of the regular price, it can often help your reputation. However, it can potentially deter customers who pay with a card.

Customer Perception

How customers perceive the change depends largely on how the change is communicated and marketed. To maintain customer satisfaction, it’s essential to train workers on how the discount works and how to communicate it to customers in a positive light. 

Operational Requirements

In order to implement a cash discount program, businesses will need to make sure their signage, POS setup, and disclosures are in order. The pricing should be clearly advertised and communicated so that customers understand what they will be paying. Similarly, POS systems must be set up so that the receipts correctly show the discounted amount and the appropriate tax.

Better Profit Margins

When it comes to cash discounts and credit card processing, offering a discount can result in better profit margins. By encouraging customers to pay in cash, you can avoid paying processing fees. However, this is only true if the total dollar amount of your discount is less than what customers would have paid for credit card processing fees. 

Lower Risk of Chargebacks and Disputes

Each time you convince a customer to switch from a card payment to cash payments, you decrease the likelihood of chargebacks and disputes.

Faster, Easier Cash Flow

By encouraging cash, you can increase your company’s access to its revenue stream. Instead of waiting for payments to transfer from the issuer to the acquirer, you can instantly have access to your earnings.

Steps to Implement Your Cash Discounting Program

With the right cash discount merchant services, you can get guidance about starting a discount program at your company. Each state has different laws and regulations, so you should always consult with a payment processing expert before implementing a cash discount.

Understand Compliance Rules

The first step is understanding what the compliance rules are like in your area. On a federal level, surcharges are banned on debit cards. Many states restrict or ban surcharges on credit cards. However, cash discounts are generally allowed.

Decide How Much You Want to Discount

Next, you need to decide how much you want to discount. Sometimes, merchants will provide 2.5% to 4% discounts. However, these rates are often higher than what they would pay for processing fees, making a cash discount program more costly than doing nothing at all.

Because of this, it’s essential to carefully review your existing payment processing fees. For cash discounting to improve your revenue stream, it has to be less expensive than your standard payment processing costs.

Change Your Pricing Structure

Once you decide on the pricing, you’ll need to determine the best way to advertise the new prices. You can list the cash discount at the register and train employees on talking about the discount with customers. Alternatively, you can list the cash discount price and regular price on each item individually.

No matter what you do, you’ll also need to update your POS systems. Once they’re reconfigured to subtract the discount rate, you can start using your new discount program.

Communicate With Your Customers

Next, create a marketing campaign and in-store materials to educate customers about your new pricing system. Make sure to advertise the change in your newsletter, social media posts, and other channels so that customers are aware of how they can save money.

Train Your Staff Members

Your staff members should be trained on how the cash discount program works. In particular, make sure they are taught how to communicate it in a positive, clear manner. Team members will also need to learn how to use your POS system to subtract the cash discount.

Analyze the Efficacy of Your Program

Once you have set up your program, the next step is analyzing its efficacy and fine-tuning it. In particular, ask yourself the following questions.

• Compared to the number of cash customers you had before, has there been an increase in cash customers? If there hasn’t been a corresponding increase, the discount should probably be discontinued.
• How are customers responding? Do they view it as a positive change? 
• Has your revenue risen since the change?
• How much have you saved in processing fees since the change was implemented?

How to Communicate a Cash Discount Program to Your Customers

To ensure an effective rollout, it’s important to communicate the discount as clearly and transparently as possible. For example, you’ll need to show the price and let customers know if the price they see already includes the discount. You should also emphasize that cash discounting is a discount off of the current price and not a surcharge.

For best results, communicate the price changes with a sign near or on the front door so that customers are aware before they start shopping. There should also be clear prices on the products and a sign at the register as well.

Finally, check your receipts to see how they list the discount. To avoid disgruntled customers, the discount should be listed as a discount line and not as a fee.

How PayCompass Helps Merchants Implement Compliant Cash Discount Programs

With PayCompass, you can get help with all of your cash discounts and credit card processing needs. When it comes to cash discounts, our team can help you navigate important compliance requirements at the local, state, and federal levels. Whether you need help understanding applicable financial regulations or want an expert to structure your cash discount merchant services, our merchant account processors can carefully analyze your company’s needs and the best way to set up your program. 

For the best results, it’s essential to set up your cash discount as a part of your broader payment processing strategy. Our team can help you determine the most cost-effective discount option and how to integrate the discount into your payment processing systems. Then, we can ensure your receipt formatting, POS setup, and disclosures are compliant and ready for your new strategy.

Final Thoughts

By offering a cash discount, merchants can encourage customers to use cash payments instead of credit cards. This allows the merchant to spend less on processing fees while simultaneously saving the customer money as well.

For this program to be as effective as possible, it needs to be implemented properly. There are important financial regulations that dictate when cash discounts and surcharges are allowed. Additionally, companies must clearly communicate what their discount is and its benefits to each customer.

With the right cash discount and credit card processing strategy, your company can improve its revenue stream and encourage more cash purchases. For help with implementing your new approach, reach out to PayCompass today for a professional consultation.