More and more merchants have to contend with a growing consumer habit of cashless transactions. Given the rise of this trend, many merchants that may have shunned a merchant account for some time are finally accepting it as a new normal and payment processing fees as the cost of doing business. Know what is the cash discount?
Since those fees can be excessive, merchants have increasingly embraced another rarity, cash discounting, to avoid having to pay merchant account fees. Below we explore what is cash discounting, the pros and cons of such a program, what businesses need to be careful about, and if it is really right for them.
What is a cash discount program?
Cash discounting is a program where merchants offer a discount to consumers who pay with cash for the goods or services they procure. If a customer walks into a tire shop and buys a tire with a list price of $100 which has a cash discount program offering a 2% discount to cash-paying patrons, the customer walks away with that tire for $98 if he pays for it in cash.
It’s very important to understand that a merchant cash discount program offers a reduction in the listed price if the customer chooses to pay in cash.
Needless to say that merchants are still better off foregoing 2% on a cash transaction rather than an average of 4% in payment processing fees for credit card transactions.
Businesses need to tread carefully with a cash discount program
The reason merchants have to be careful is that it can be very easy to confuse cash discounting with surcharging. That’s when a merchant applies an additional charge to a customer using a credit card. Using the tire example, if that shop had a surcharge of 4% for credit card transactions, the customer may have ended up $104.
Based on legal precedence according to the Truth in Lending Act, the regular price is whatever price is available if businesses only publish one price for their items. A merchant would have to charge below that for it to be classified as a cash discount, and if a business charges above that for using a credit card, that’s a surcharge.
The reason why these granular classification details are important is that merchants can easily confuse the two. Merchant account providers offering new technology to enable this may not be upfront about what guidelines merchants need to adhere to. This is because legal and business ramifications are significant to offering one program over the other. There is no harm in offering a cash discount as long as it complies with the legal definition.
However, if businesses confuse a cash discount with a surcharge program and start offering the latter, they must be aware that surcharging is illegal in many states, including California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, Puerto Rico, Texas, and Utah. Merchants would also have to notify their customers with sufficient signage informing them of the practice. They are also obligated to notify their merchant account provider of the practice.
As a result, merchants should carefully review the language of any program they are implementing with a third-party service provider and be clear that it is a cash discount program.
What are the benefits of a cash discount program?
There are clear benefits of implementing a cash discounting program for merchants. Since a cash discount would be on the listed price of items, It is a great way to present the program as a bargain to customers. Another great advantage is that you don’t have to wait for your merchant account provider to clear your payment, you have readily available cash on hand.
Another benefit of facilitating more cash transactions, merchants would have to deal with fewer administrative tasks related to payment processing, such as statement reconciliation, disputing chargebacks, etc.
What are the drawbacks of a cash discount program?
Not to cast everything with a rose-tinted hue over cash discounts, they do carry significant drawbacks. Not all customers may have the cash to pay for items above a certain amount. That threshold of cash that consumers feel comfortable carrying around has been dropping for a few years.
Many customers paying with a credit card may not be too happy with the fact that they aren’t eligible for a discount because they chose a credit card. It’s really difficult trying to explain to an already upset person the granularities of cash discounting and interchange fees.
Such emotions of feeling bilked may be enough for customers to take their business elsewhere. Also, there is sufficient research that consumers spend more when paying with plastic as they don’t physically account for the amount of cash remaining after their spending.
Finally, as a drawback, keep in mind that cash transactions are trending downwards. To try to maintain that status quo is really going against the grain. From an economic and government perspective, cashless transactions are in their best interest as it reduces costs of physical currency and can aid in reducing the informal economy.
Is it right for your business?
It is difficult to make a cookie-cutter call on whether a cash discount program is right for your business, a lot has to be taken into consideration. What percentage of a merchant’s existing sales arise from cash versus non-cash transactions? Do the positives sufficiently outweigh the negatives of such a program?
It is important to realize that creating unnecessary friction at the very last stage of a transaction may be an unforced error that merchants don’t need in doing business in the current hyper-competitive market.