Surcharging VS Cash discount – pros/cons should your business do it?
While credit card surcharging seems to be all over payments news lately it really is nothing new. We have been talking about and working towards educating our clients about the option for credit card surcharging as well as better alternatives for quite some time now. Last year we weighed in on the pros and cons of the program for merchants in order to help them decide if it was right for their business and then again tackled the topic in an effort to show merchants how they can offset merchant services costs legally and transparently without risking compliance with regulations.
But alas, credit card surcharging has been enjoying more press in the recent months.
The simple fact is that consumers love using credit cards for everything they need. The main choice to use credit over debit or cash is largely due to two benefits: miles and protection. Consumers love earning miles, points or cash back through the use of rewards cards making them feel like they are getting a whole lot more for their hard earned money. There is also the promise of more protection from liability when it comes to fraud. With ATM debit use consumers simply do not have the same protection from losses if their information is compromised as they do with their credit card company. What many consumers do not realize however is how much more expensive these rewards cards are for merchants to accept. It never crosses their mind that somebody has to pay for all those miles and points they’re earning and that it actually is those merchants they so love to frequent that are paying for it.
No wonder more and more these days merchants are looking for ways to help offset these costs that are eating into their bottom line. At first glace, implementing a credit card surcharge program seems like the perfect answer. But, as with anything there are pros and cons, and it will behoove any merchant to make sure they weigh them carefully before jumping in. Especially since there are alternatives such as the cash discount program that essentially does the same thing with out all the headache.
Credit card surcharge plans have their limitations.
Unfortunately, you can’t just decide to pass the fees on to your customers and begin adding a surcharge immediately in order to recoup your costs. There are rules and regulations and timelines that must be followed. Surcharging has many more limitations and the regulations will vary from state to state, so staying on top of the rules to ensure continued compliance is much more time involved.
And that is only if you are not operating in one of the 10 states and Puerto Rico that prohibit surcharges altogether (California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas). But even if you live in a state where it is allowed and regulated keep in mind that the use of surcharging has been addressed and strictly disallowed in the terms of agreement for both PayPal and Square so if you are using either for your payments needs you would not be able to surcharge anyway. One big limitation of credit card surcharges is that they are literally only applied to credit card use. Merchants are not allowed to add a surcharge to purchases made with a debit card, even if it is run as a “credit”, or to gift cards. Businesses need to do some research to figure out just what percentage of their sales actually go to credit as opposed to other forms of payments in order to decide if surcharging would benefit them.
Surcharge practices can also be sketchy for businesses that regularly sell high ticket items. It’s not likely that a customer would squawk at an extra 3% on a cup of coffee, but a $2000 dining set is another thing altogether.
Studies have shown that people do have an aversion to being charged an extra fee. While it may encourage the consumer to pay with cash, it could inturn leave a bad taste in one’s mouth. The last thing we want is to make our customers bitter at us. Business owners need to consider their business type as well as clientele before trying to implement any program of this type.
Implementing a cash discount program has it’s advantages beyond cutting down on credit card processing costs in that it is legal and much easier to remain compliant. Whereas surcharges can only be applied to purchases made with a credit card, a cash discount program allows for application in both credit and debit cards usage capturing a larger percentage of the sales.
In businesses like grocery stores, coffee shops, discount stores and gas stations where debit use outweighs credit card use a surcharge would just not be as good of a fit as a cash discount program.
Signage in the store would notify consumers of the discount when they choose to pay with cash. Merchants would display a sign letting them know that all listed prices include a cash discount. At the counter, a sign would be posted that could display something like “Would you like to save 4% with a cash payment or use your card?” This language helps to advise customers that the service charge applies to all transactions and is only discounted when paying with cash.
Discounts are generally much more welcome to consumers than when they hear the word “fee”. By offering a discount incentive to those customers who would like to pay in cash you achieve the mission of offsetting your credit card fees without your customers leaving feeling penalized.
There are distinct actions that must be taken to remain compliant such as specific signage clearly notifying the customers of the workings of the program as well as reprogramming the terminal to clearly notate, as a separate line item, the discount on the customer receipt. But all of these are easily accomplished and will be provided for you. And, of course, you have to make sure you do not forget the fee when you are crediting any customer a refund.
As more business owners see other businesses having success with the program it will not only become more of an accepted practice with businesses but also more accepted by the consumers patronizing those businesses. Cash discounts are already well recognized and accepted by consumers who have experienced this at places like gas stations for decades. It is very common for a gas station to display the price of gas for both credit use and if the consumer pays in cash.
Merchants can sometimes be a little bit skeptical that this is a legal and compliant solution, but as we see more and more reference in the daily payments news as well as greater everyday exposure in different types of markets they will begin to realize that this is not only viable, but a fair way to manage costs and help to keep costs down for all of their customers.
Both merchant surcharging and cash discount programs are viable methods for reducing and recouping the higher costs associated with accepting credit cards. Only the cash discount program allows you to effectively keep costs on merchandise down for all consumers, without the worry of too much red tape and state compliance to stay on top of.
One of the best things about the program is that merchants are not locked into it for any length of time. The program is totally flexible, can be implemented quickly as well as halted if the merchant finds that it is not working well for the business or its customers.
Bankcard Brokers makes implementing the cash discount program quick and easy for both your business and your customers. Rest assured that you are represented by only ETA Certified Payments Professionals who are deeply educated in the regulations surrounding the industry and dedicated to making sure you are too. Automation adds to the simplicity of the program allowing you to forget about figuring out calculations and focus on your customers needs creating a hassle free transaction process. EMV compatible terminals that accept all types of credit cards, accept on-screen signature capture, and are PCI-DSS compliant will be programmed for you with the proper fields to make the cash discount transaction friction-less while still hitting all compliance procedures.
In order to make sure you are abiding by all guidelines and regulations make sure you call us immediately and do not try to just start to implement this yourself. If you’re caught utilizing a cash discount program that has not been setup properly and notification was not made properly to the card brands you risk having your merchant account shut down.