If you’re planning to start a business in 2024 or you’re eager to scale one you’ve already started, it’s time to think seriously about implementing a cash discount program. It’s an easy way to eliminate card processing fees and gain more control of your business’s budget—but there are some compliance issues to take into consideration. Here’s a quick overview of what a cash discount program is, how it can help your business, and how to implement one correctly.
How A Cash Discount Program Can Help You Achieve Your Business Goals in 2024
All payment processors charge merchants to process transactions. On Square, for example, merchants pay anywhere from 2.5% to 3.5% plus an additional fee of up to $0.30 per transaction depending on payment type. Meanwhile, it costs nothing to record a cash payment.
A cash discount program offers a product at two different prices: the cash price and the card price. Say you’re starting a business in 2024 and plan to sell handmade baskets for $50 apiece but your payment processor charges 3% for card transactions. Using a cash discount program, you would set the cash price at $50 and the card price at $51.50 ($50 plus the 3% processing fees).
This way, customers are incentivized to pay with cash so you can avoid processing fees while those who still prefer to pay with card are now covering their own fees. Either way, your profit margin is no longer being eaten up by processing fees.
In addition to healthier profit margins, this also makes it possible to create more accurate forecasts. If you sell a product for $50, you’re only actually getting the full $50 from cash-paying customers. From card users, you’re actually only getting $48.50 (assuming the 3% fee from the example earlier).
This makes it difficult to create precise forecasts of your profit margins because you can’t predict how many customers will use cash and how many will use card—not to mention the number of customers who used a card but would have gladly opted for cash if they knew they could get a discount. So you might sell 1,000 units in Month A and net $49,000 after fees but then sell another 1,000 units in Month B and only get $48,500 after fees. That kind of unpredictability is not only stressful but makes it harder to plan for your business’s future.
Is a Cash Discount Program the Same as a Surcharge?
A lot of people use “cash discount” and “credit card surcharge” interchangeably, but they’re technically different programs. With a cash discount program, the price you display is the credit card price (with the processing fees built in). Then, you offer a discount to customers who pay cash. With a surcharge, the price you display is the cash price (with no processing fees built in). Then, you add the card processing fee during checkout for customers who are using a card.
The end result is the same for merchants but the slight difference in mechanism really matters. For one, cash discounts are legal in all 50 states right now while surcharging is illegal in at least two states (Connecticut and Massachusetts). That’s because, in the surcharge scenario, legislators argue that displaying the lower cash price is a deceptive tactic that conceals the true cost of the product until the customer is at the register.
Beyond legality issues, that difference also impacts your customers. With a surcharge program, customers come to the register expecting to pay the advertised only to find out they have to pay more if they’re using a card. Meanwhile, cash-paying customers pay the advertised price. This leaves your cash-paying customers feeling neutral and your card-paying customers feeling disappointed.
With a cash discount, customers come to the register expecting to pay the advertised price and, if they’re using a card, that’s exactly what they do pay. If they’re using cash, they get to enjoy a lower price than expected. This leaves your card-paying customers feeling neutral and your cash-paying customers feeling pleasantly surprised.
Tips for Implementing a Cash Discount Program
While it’s a simple program in concept, it can be difficult to actually implement and you do need to make sure you’re doing it in a way that complies with any local regulations. Here are a few tips to make that process as simple and painless as possible:
Choose a Payment Processor with a Cash Discount Program
To start, consider opening a merchant account with a payment processor that offers a cash discount program. Not all of them do. If you’re using Square, for example, you would need to apply the discount manually to each cash transaction by creating a discount in the amount of your processing fee in your online dashboard and then adding it during checkout each time a customer uses cash.
Processors that offer a dedicated program for this can automate that process completely so that the discount is applied accurately and consistently to every cash-paying customer and never mistakenly applied to card-paying customers.
However, these programs typically come with subscription fees that can range from $25 to $99 per month or more. That monthly cost eats into any savings you might see with the program so it’s important to find one that fits with your business’s budget.
At National Processing, for example, the cash discount program is open to all clients, allowing you to offer a cash discount rate of 3.99% to customers. For clients processing less than $3,000 per month, the program is available at no cost. In months where you don’t meet that threshold, you pay a flat $30 fee for the month.
Make Sure Your Program Is Compliant
Some merchants make the mistake of advertising it as a cash discount to customers, but processing the transactions like a surcharge program. That is, they changed the price on the shelf to reflect the higher rate charged to card users but at Point of Sale (POS), they still use the lower price and add a surcharge for card payers. It might look the same for customers, but from a legal perspective, the transaction was technically processed with a surcharge rather than a discount.
In other words, say you currently sell a product for $10 and you want to add the 4% processing fee to the price charged to card users. To do that, you need to change the regular price of the product in your system to $10.40 ($10 + $0.40 processing fee) rather than leaving it as $10 and adding the $0.40 for card users. Then, add a $0.40 discount for cash users to bring the price back down to $10 for those customers.
In some jurisdictions, including New York and Maine, you might be required to display both prices clearly and prominently so that customers know what to expect. In general, be sure to look up any local regulations that might apply before you implement the program so you can avoid any legal headaches later on.
