Surcharges vs. Cash Discount Programs


By accepting credit cards, businesses increase their revenue streams. How many of you have walked out when you see the sign “Cash Only” on a storefront?

Carrying plastic and using mobile payments is more popular than ever, especially for younger generation of consumers becoming increasingly dependent on technology.

However, credit card processing fees have become increasingly expensive for businesses. Discount fees, regulatory product fees, PCI fees, authorization fees…it’s maddening to understand and they add up to a lot of money every month.

These are normal processing fees set up by the card associations and additional fees set up by the banks that issue the credit or debit cards. Additionally, there are processing fees to cover other costs to assure your merchant services account is running smoothly and securely.

Total fees can range from 1 to 4 percent. As a result, many small businesses are seeking solutions that will enable them to keep accepting credit cards with a significant reduction in fees, and merchant services companies have been offering those programs.
But not all of these programs are compliant, and businesses need to be educated or face stiff fines and penalties.

Passing the cost of processing fees onto the customer, or surcharging, is still illegal in Puerto Rico, California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas. However, this may change in New York, and the case is still in the courts.

This leaves an obvious opening for a workaround, and many companies are soliciting business owners with cash discount programs, where they set up their equipment to charge a service fee and then “discount” it when a customer pays with cash.

Beware of these names:
• Cash Discount
• Zero Pay
• Swipe 4 Free
• No Fee
• 100% Free Processing

Visa announced that cash discount as it has widely been implemented throughout the payments industry is not compliant with their regulations. For this reason, many processors have since discontinued their cash discount program.

You can an implement a cash discount program yourself, but in New York it’s still not legal to add credit card surcharges, so a business will have to be very careful that your cash discount program is actually a cash discount program.

If you break with credit card company regulation, or if they can make a case that you broke the contract, there are some stiff fines and penalties involved.

This is why most merchants trust their payment processing companies to handle the work of actually setting up and implementing a cash discount program for their business.

As stated, in New York State surcharges are still not legal, but if this changes soon, there are some rules that must be followed, just as they exist today in other states:
• A business needs to register with Visa, MasterCard and Discover 30 days before they begin surcharging. This is not a requirement for American Express.
• Proper disclosure of a surcharge is required.
• You cannot place a surcharge on debit (PIN or signature) cards, as these transactions are considered cash.
• A merchant should be charging the cardholder at the same rate in which they are charged, or no more than 4 percent. This fee is not meant to be profit for the merchant, but to cover the merchant services charges.
A merchant should take into consideration several things before opting to apply a surcharge:
• The impact on the customer’s experience, complaints and loss of business.
• If competitors are applying a surcharge.
• The notification process and signage requirements.
• Number of customers that use credit cards who will be affected.

Businesses also have the option to waive the fee upon customer request. This can be selected at the time of sale for debit transactions or if a customer refuses to pay the surcharge.

With all these great benefits, cash discounts are a win-win for your business, right? Well, not all customers will see it that way.
They especially value the convenience of credit cards for larger ticket items. Despite the friendlier language when compared to surcharges, some customers will still view a cash discount as just an extra fee for them.

Many point-of-sale devices allow cash discounts. Owners may easily discontinue the program or turn it off for loyal customers on a case-by-case basis, if desired. If you would like to try the program at your business, remember that you can always change your mind if you feel it no longer benefits you.

Credit card fees are an allowable tax deduction, so it can always be offset. Whichever way you choose, the most important thing is to assure your pricing is fair.

The value your payment processor can bring is also relevant. Do you have good customer and technical support? Will they be there to assure your transactions are secure and funded in the quickest manner?

It’s also better to have a direct merchant account where you have more control of your funds as compared to an aggregator, such as Square, that pool businesses to offer payment processing.

For more information and to discuss your payment processing needs, contact Melinda Reyes of Premier Merchant Consulting Services. She can be reached at (718) 506-4224 or at

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