The Cash Discount Program vs. Surcharging

Updated on December 17, 2018

There is likelihood that you would have heard about the cash discount programs if you are an active merchant in the merchant service industry. They are becoming popular with the merchant as well as sales agents. But there is confusion about knowing what the cash discount program is and what it’s not. In this content, I will explain about cash discount program in details and also share the opportunity you and your merchant can explore from the program.

For more than two years, my company has been offering the cash discount program, so I have gotten a lot of practical experience with the program. However, nothing in this article should be considered as a legal advice because am not a lawyer. An industry attorney should be contacted in case of any legal questions.

Eliminate processing fees

With the aid of a cash discount program, merchants would be able to eliminate 100 percent of their processing fees by the addition of customer service fee on all sales, and offering cash discount program to customers who pay with cash. There is need for merchants to display a notice (customer pricing) to inform their customers about the customer service fee that is charged on all transactions- keyword being “all.”

I will use a 4 percent service fee to illustrate. This means the cost of every item in the store is 4 percent higher than the amount that is listed on it, and the pricing notice will show that a discount is given which is equal to the customer service fee when customers pay with cash. In this case, if the price of an item is $100 and the customer chooses to pay with other methods apart from cash, the real price of such item is $104. However, the customer will pay $100 if cash is used; this is because a service fee of 4 percent has been discounted.

A cash discount program is different from a surcharge and convenience fee. The Surcharge and convenience fees are those that are generally added to the real price; they are not cash discount. The reason why people are not pleased with this before and still in some states is because some states sees surcharging as a way of punishing customers for paying with credit card – not to talk of MasterCard and Visa having their own rules about surcharging.

It is not the same as surcharging

Due to certain court ruling over some years, surcharging and convenience fees have become widely accepted, but they are not available in all the states. What differentiate a cash discount program is that the customer will not be overcharged when making payment with credit card, because the price has been noticed. However, customers that pay with cash will receive a discount. So, do not misunderstand a cash discount program for a convenience or surcharge fee.

Recently, in the GS Online MLS Forum discussion, one of the members Clearent asked, “Would it not be easier for a merchant to increase price by 4 percent and call it a day?” That is a wonderful question, and it may or may not result to the same goal. For example, cash discount programs are automated; what Clearent proposed could require a manual calculation. The cash discount programs are also very transparent because the customers have the option of paying with cash and save. By increasing the price across board without offering a cash discount will lead to the cash buyer paying the full amount, which would result to higher price.

A marketing tool

Also, for many businesses, the cash discount program when marketed appropriately function as a tool to attract new customers. Most of the customers like the idea of discount, and this is the reason why most stores have a SALE sign displayed throughout the year. A 4 percent price across the board might achieve the goal of the merchant with respect to covering the expenses for processing, but I do not think that it would be as powerful as a cash discount program correctly implemented.

Most merchant love the cash discount program because they would be able to eliminate up to 100% of their processing fees, merchant level salespeople (MLSs) likewise enjoy them because of the higher average margins that they offer, for more than 10 years, we’ve not seen such in the industry.

However, when there is an amazing opportunity in our industry, it is being exploited by some MLSs and ISOs and lead to less than ethical practices. It is also crucial to be careful about your partners when marketing a cash discount program. With it, you could build a solid portfolio with a low attrition rate, while saving a lot of money for your merchants, but it is important for you and the ISO you partner with to understand the cash discount program, so that your merchants would be properly educated.

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