Lost profits can appear in many different ways – it can be a bad review online that goes viral, a particularly aggressive competitor, or it can be something so simple you might not even realize it’s there – losing money through payment processing fees.
According to studies, in 2023, US merchants paid $224 billion in credit and debit card processing fees. That’s a 30% jump on the previous year, and $143 billion of that was due to just interchange fees. It’s no wonder many companies have considered dual pricing.
In this guide, we’ll take a deep dive into dual pricing merchant services, how it works, and why it might be a good option for you. In fact, it could even form part of your growth strategy as a high-risk merchant. Let’s get started:
TL;DR
- Dual pricing allows merchants to offer two prices: a lower cash price and a higher card price, helping offset card processing fees.
- It promotes transparency with customers by clearly showing the cost difference between payment methods.
- Strategic advantages include increased profit margins, reduced processing costs, and better cost control.
- Drawbacks may include customer confusion, potential resistance, and the risk of losing card-preferred shoppers.
- Legal acceptance varies by state and region. Businesses must follow federal, state, and card network rules.
- Clear signage, staff training, and consistent pricing communication are key to smooth implementation.
- Emerging trends suggest widespread adoption as businesses look to reduce costs and avoid high card fees.
Fundamentals of Dual Pricing
Before we delve into how you can make dual pricing for you, let’s first consider what is dual pricing and how it actually works.
In its most basic form, dual pricing means you have two different prices for the same goods or services. One will be a cash price and the other a card price. Due to high payment processing fees for credit and debit card processing, the cash price will be lower.
To effectively implement dual pricing, specific point of sale set ups are needed so the price difference can be automatically applied.
The Math Behind Dual Pricing
There are two ways to offer dual pricing, and both start with identifying the card processing fee. Once you know that, you can either add it as a surcharge for card payments or off it as a discount for cash payments. Both end up in the same place, but they’re presented slightly differently to customers.
For instance, a $100 item might be priced at $103 for credit card purchases, with the posted price being the cash price plus a surcharge, or alternatively marketed as $103 with a cash discount.
The table below dives deeper into the math behind dual pricing:
Implementation Approach | Formula | Example ($100 purchase) | Customer Perception |
Cash Discount | Listed Price – Discount % | $103 (listed) → $100 (cash) | Positive: Customer feels rewarded |
Surcharge | Base Price + Surcharge % | $100 (listed) → $103 (card) | Negative: Customer feels penalized |
Service Fee | All prices + Fee (refunded for cash) | $100 + $3 fee (refunded for cash) | Neutral: Depends on presentation |
The Evolution of Payment Processing Economics
You might wonder how card processing fees are as high as they are and why dual pricing is often necessary. This is because the payment processing ecosystem is about more than one or two stakeholders; there are issuing banks, acquiring banks, card networks, and payment processors, and each takes a small portion of the overall transaction fee.
Processing costs used to be a simple flat rate. But as technology and payment processing in general have evolved and become more complicated, there are many different combinations to arrive at a final fee. This can be affected by card type, merchant category, e.g., high-risk businesses, and characteristics of the transaction.
How the Durbin Amendment Changed Everything
One thing which drastically affected the payment processing world and associated fees was the 2010 Durbin Amendment. This capped debit card interchange fees for large issuers, creating a regulatory precedent and paved the way for dual pricing by directing attention to the hidden costs in electronic payments.
For many years, the largest credit card networks refused to allow dual pricing through merchant agreements. Yet, many legal challenges changed this, allowing for more relaxed rules and paving the way for dual pricing.
Different Ways to Implement Dual Pricing
Now you know what dual pricing is, let’s talk about the different ways to implement it. It’s important to ensure that your chosen method works for both online and in-person transactions.
The Cash Discount Model: Customer-Friendly Approach
Dual pricing systems create lower costs for customers willing to pay in cash, bypassing expensive credit card payment processing fees.
Source: Pexels
The first method is the cash discount option. This means that you display the credit card price as the standard price and then offer a discount for customers who want to pay with cash. This option is usually positively received by customers as it appears that they’re getting a special benefit. However, as with all dual pricing methods, it’s vital to communicate everything clearly.
The Surcharge Model: Transparent But Challenging
The second option is the surcharge model. This displays the cash price as the original price and then adds a fee for payments by card. Again, there needs to be clear communication here to avoid any negative reactions.
Hybrid and Service Fee Models: Creative Alternatives
The first two are the main dual pricing methods, but there are some more creative options, including the hybrid model. In this case, all customers pay the additional fee but it is then discounted or refunded for customers who choose to pay by cash. However, this method can cause confusion, so communication is another must, and it can also cause potential compliance issues if not structured correctly.
Technology Considerations for Dual Pricing
Once you know which dual pricing method you want to use, it’s important to ensure you have the correct technology in place. This includes point-of-sale systems, accounting software, and communication methods. However, it’s also vital to ensure that you think ahead; don’t just consider your current capabilities but also how your business may evolve, along with regulations and payment methods.
Is Your POS System Ready for Dual Pricing?
Some point-of-sale systems don’t support dual pricing natively, so the first step is to evaluate what you have currently and think about upgrading to a system that can detect the payment method and adjust the price accordingly. This will help to reduce human workload and potential for error, while also making the process smoother for your customers.
Receipt and Disclosure Requirements: The Technical Details
Receipts should clearly show the dual pricing method and calculation, itemizing any surcharges or discounts accordingly. Different jurisdictions have rules in terms of how this is worded, but modern POS systems usually generate receipts that are in compliance with these regulations. However, e-commerce platforms may need to be updated to ensure that the correct information is disclosed both at checkout and receipt form afterward.
Data from receipts should then flow smoothly into accounting systems, with both discounts and surcharges categorized correctly for tax and financial reporting purposes.
Strategic Benefits and Drawbacks
Dual pricing merchant services are something which many businesses go back and forth on, and it’s important to weigh up the pros and cons before making a decision whether to implement it or not. Let’s take a closer look at these.
Financial Advantages of Dual Pricing
First, let’s start with the advantages of opting for dual pricing. The main appeal is your ability to recover card processing costs that could easily eat into your profit margins. This is especially the case for businesses that have thin profit margins in general or high average transaction values. In fact, reports show that, when implemented correctly, dual pricing can recover between 70-90% of processing costs.
The table below gives some insights into processing fees over time and potential recovery by implementing dual pricing.
Business Type | Avg. Monthly Card Volume | Typical Processing Fee | Annual Cost | Potential Recovery |
Restaurant | $100,000 | 3.0% | $36,000 | $25,200-$32,400 |
Retail Store | $75,000 | 2.5% | $22,500 | $15,750-$20,250 |
Service Business | $50,000 | 2.8% | $16,800 | $11,760-$15,120 |
E-commerce | $120,000 | 2.9% | $41,760 | $29,232-$37,584 |
Cash Flow Benefits Beyond Direct Cost Recovery
It’s not only recovering card processing costs that counts as a benefit here. Dual pricing can also boost your cash flow by encouraging customers to pay by cash, which provides instant liquidation. You can compare this to a card transaction which has a settlement delay of between 24-72 hours. This is particularly beneficial for small businesses or those that have tight working capital limitations.
Customer Experience Factors to Consider
Clear dual pricing communication ensures a smooth and pleasant customer experience, likely leading to repeat business.
Source: Pexels
When deciding on a dual pricing strategy, it’s important to consider the customer experience, including how it might affect customer satisfaction, loyalty, and spending behavior. Of course, this is also about how you communicate your dual pricing strategy, with studies showing that 68-72% of customers prefer transparent pricing that separates fees from the original base price.
The Transparency Trade-off: Pros and Cons
Dual pricing can create transparency about the costs associated with various payment methods, e.g., card versus cash, but it can also make things more complicated. It can cause the customer to second guess and think too much, and it may, in some cases, cause them to feel they’re being penalized for using a card. For this reason, it’s important to frame the price difference carefully.
Whether you frame the price difference as a surcharge or a discount matters, with most people perceiving discounts more favorably. Additionally, studies have shown that customers perceive discounts in percentages more positively than in other forms. This is particularly the case when the discount is quite large.
Identifying and Minimizing Customer Friction Points
A clear customer journey is important for overall satisfaction and increases the risk of repeat business in the future. While dual pricing is transparent, it can add friction and potential confusion at the payment point. This can be reduced by clear communication at several points, whether in person or online, and in seamless implementation through smooth POS systems.
Common friction points include unexpected charges that appear late in the purchasing process, potentially leading the customer to question whether to go through with the transaction. For instance, studies have shown that 36% of customers abandon their online shopping carts because of high shipping costs not communicated to them beforehand.
To help reduce this friction, it’s important to give advanced warning and simplify the pricing structure as much as possible, in a consistent way. It’s also vital to have regular staff training on clearly explaining dual pricing issues.
Operational Considerations for Your Business
Aside from everything we’ve spoken about so far, dual pricing can also add operational burdens and costs onto your working days, including transaction processing times, staff efficiency, and reporting requirements.
Staff Training Essentials for Smooth Implementation
To ensure that your dual pricing strategy is implemented as smoothly as possible, staff training is a must. It’s vital that your employees can clearly explain the pricing difference to customers, answer their questions, and deal with any conflicts in an efficient way. Additionally, they need to be able to process the transactions according to the customer’s chosen payment method without errors that could add further confusion to the situation.
The checklist below gives some food for thought:
Staff Training Checklist:
- [ ] Train on the technical operation of POS system for dual pricing
- [ ] Provide scripts for explaining pricing difference to customers
- [ ] Practice objection handling for common customer concerns
- [ ] Review compliance requirements and proper signage placement
- [ ] Conduct role-playing exercises for various customer scenarios
- [ ] Implement a buddy system for new employees during first week
- [ ] Schedule regular refresher training sessions quarterly
- [ ] Develop quick reference guides for payment processing procedures
- [ ] Create FAQ document addressing common customer questions
- [ ] Establish feedback mechanism for staff to report customer reactions
Accounting and Reconciliation: Behind-the-Scenes Challenges
Dual pricing makes the accounting process a little more complicated because sales must be tracked separately according to the payment method, e.g. card or cash. Within this, surcharges or discounts must also be categorized correctly. This could mean you need to adjust your bookkeeping processes or update your accounting software to ensure these differences are tracked and reported correctly.
Legal and Compliance Framework
One of the main questions on this subject includes: is dual pricing legal? The simple answer is that yes, dual pricing is legal but it depends on how you report it and where you are. There are different rules across various locations and it’s vital to understand the rules and regulations where you are based to ensure you remain in compliance.
Geographic Variations in Dual Pricing Legality
There are various rules at national, state, and even local levels which makes the dual pricing landscape complicated. So, while dual pricing is generally legal, it’s not a simple situation, and there are a lot of muddy waters to navigate, especially for merchants operating across different markets.
Compliance programs must include regular monitoring of any regulatory changes across all jurisdictions you’re operating within. This will help you stay compliant. However, multi-jurisdiction businesses must have location-specific policies that are designed with local requirements in mind. This should be integrated into the POS to ensure nothing is missed.
Within this, documentation of all compliance efforts is key. This provides protection in case of any legal issues or regulatory audits.
U.S. State Regulations: A Patchwork Approach
Let’s see some regional differences. Dual pricing is generally allowed at the federal level. However, there are differences. From 2023, several states, including Massachusetts, Connecticut, and Colorado have implemented limitations or disclosure requirements on credit card surcharges.
In general, state-level restrictions include either total bans (which are very rare), a need to disclose specific information, and/or limitations on surcharges. Merchants operating across several states have a complicated situation, but geofencing technology is a good option, along with location-specific POS design for businesses with a physical location, rather than online.
International Implementation: Global Perspectives
When we venture outside the US, we see an even more varied picture. For instance, the EU generally allows dual pricing but there is a ban on excessive surcharges thanks to the Payment Services Directive, also known as PSD2. Further afield, Australia encourages transparent dual pricing but has regulations that place a limit on surcharges to the actual acceptance cost, therefore banning excessive surcharges.
We can also look at Canada that has allowed surcharging since 2022, while some other countries place restrictions on the practice. For this reason, it’s vital to fully understand the rules and regulations in the markets you’re operating within, along with any updates.
Card Network Rules: The Other Compliance Layer
Dual pricing credit card processing varies from company to company in terms of regulations.
Source: Pexels
Compliance goes beyond government regulations. It’s also vital to follow rules imposed by card networks in terms of dual pricing merchant services, and these also vary across the board.
Network-Specific Requirements You Must Follow
When exploring what is dual pricing credit card processing, there are specifics to consider. All major card networks, such as Mastercard, Visa, and American Express, have their own rules about surcharges, outlining maximum amounts, disclosure practices, and registration.
For instance, Visa and Mastercard both specify that businesses must register their surcharge practices at least 30 days before they plan to implement it. Visa states that the surcharge cannot be more than the merchant’s cost of acceptance or 3%, depending on which is less. However, Mastercard places this at 4%. Both also state that the surcharge must be clearly stated at several points, including point of entry, point of sale, and on the receipt.
American Express and Discover: Important Distinctions
In general, both American Express and Discover have stricter rules on limiting surcharging. These have become slightly less stringent over recent years. These days, they align closely with Visa and Mastercard, however, for American Express, registration must be completed through Amex’s merchant portal
Implementation Best Practices and Future Trends
We’ve covered a lot of ground on what is dual pricing credit card processing, so now let’s talk about how to implement it and what the future may look like. We’ve talked at length about how customers perceive the way you communicate your dual pricing strategies, so let’s now look at other aspects, while bearing the vital importance of communication in mind.
Technical Implementation Approaches
The technical aspects of implementing and executing dual pricing is key. This not only affects your operational smoothness but the overall customer experience. This should include a detailed assessment of your current systems, integration requirements, and identifying any potential roadblocks or limitations.
When implementing a system, make sure that you test everything out carefully, making time for comprehensive staff training. A phased rollout is also useful to avoid any major disruption to your business and to avoid confusing your customers.
Once your new system is in place, have a strong technical support plan to address any potential problems and resolve them quickly.
Payment Gateway Configuration for Online Businesses
If you’re an e-commerce business, dual pricing can be complicated, but with careful steps, you can simplify the process. This usually involves a specific payment gateway setup that presents the appropriate options and applies the surcharge correctly. An experienced firm can do this through custom development, or through a specialized plugin. This will vary from case to case and depends on the platform you’re using.
For instance, there are many purpose-built solutions for major options, such as Shopify or WooCommerce. It’s also possible to use a custom API integration for any proprietary systems.
Measuring and Optimizing Your Dual Pricing Program
Once your dual pricing system is in place, it’s important to monitor it over the long-term and make any changes to optimize it effectively, especially in terms of compliance and customer experience improvements.
Essential Metrics to Track for Success
There are some metrics that are more vital than others in terms of tracking the effectiveness of your dual pricing system. The most basic metrics to track include any changes in payment method selection, net margin improvement by payment type, and the percentage of processing cost recovery.
In addition, customer behavior metrics can help you track any changes in payment method selection, cart abandonment statistics, purchase frequency, and average transaction amount. If you want to take this a step further, you can also look at processing time, staff compliance, and frequency of exception handling. These metrics will give you an overall picture of the effectiveness of your dual pricing processing system and inform you if any changes need to be made.
Future Trends Reshaping Dual Pricing
Technology and markets change on a dime and new advancements can revolutionize systems quickly. For this reason, staying up-to-date with any potential future trends can inform you of any tweaks you may need to make to your dual pricing strategy.
How Emerging Payment Methods Will Impact Your Strategy
New payment methods will have an effect on dual pricing soon, including cryptocurrency, mobile wallets, and BNPL (buy now, pay later) options. This means you need to be ready to adapt your dual pricing strategies beyond the traditional cash versus mobile credit card processing options.
Staying up-to-date on any changes, including the different processing costs and customer expectations associated with each one is key. Staying ahead of the curve may help you implement a tiered pricing model that reflects the true cost of acceptance for each payment option. This could also mean offering better pricing for lower-cost digital methods, while keeping the regular surcharge amounts for credit card payments.
Artificial Intelligence: The Future of Price Optimization
We can’t talk about future trends without mentioning artificial intelligence. AI-powered dynamic pricing can be incorporated as a variable in pricing calculations in real-time. This allows the price to be adjusted more accurately to adapt to any specific conditions, also including time of day, competitive pricing data, customer loyalty, or the overall transaction value.
Regulatory Trends: Where Dual Pricing Is Heading
Regulations can and do change regularly and staying ahead of the game is vital. The global regulatory landscape in terms of dual pricing looks to move toward allowing surcharging but having strict customer protection guidelines in place. For instance, this could mean following Australia’s lead, which allows surcharging but limits it and requires strong transparency.
While we don’t have a crystal ball and can’t predict major changes, having a flexible approach and staying up-to-date as much as possible will see you through.
Learnings Recap
We’ve talked a lot about dual pricing merchant services and the challenges it poses for both businesses and customers. It’s clear that there is a real need for businesses to not only manage high payment processing costs while keeping customers happy and satisfied. Dual pricing fits into this strategy but it’s vital to manage this carefully and ensure transparency and clear communication every step of the way.
Credit cards often have high costs which can easily eat into profits and this is a concern for all businesses, but especially for small businesses or those with low profit margins at the current time. By implementing a robust and clear dual pricing strategy, this problem can be overcome, while boosting cash flow and overcoming profit issues. Whether you utilize a surcharge or discount approach, staying in line with regulations from both governments and payment processors is vital.
While all of this can sound like a major headache, it doesn’t need to be.
At PayCompass, we make your payment processing life easier, including when implementing dual pricing. We offer POS services, along with specialized high-risk merchant services tailored to your needs. Of course, if you’re already in the high-risk bracket, you don’t need us to tell you about the other challenges that come your way, including chargebacks, increased risk of fraud, and disputes. All this can be managed with our account tools, including built-in chargeback prevention.
If you’re keen to change your payment processing services and move toward smoother options, reach out to us today. One of our experienced experts will be in touch to show you how much easier your payment processing can be now and in the future.
