Credit Card Surcharges vs. Cash Discounts: What’s the Difference?



Credit card processing can be expensive for merchants, and it is harder for them to allow the customers to pay with a credit card. On the contrary, customers want some flexibility as they prefer to pay with a credit card. The merchants are looking for ways to save money on credit card processing. Because the credit card processing companies impose processing fees to the merchants that cut their profit margins. They implement surcharges onto the customers. According to the rules of the credit card brands, the surcharges had been outlawed that were modified after the settlement agreement. What is the difference between the credit card surcharges and cash discounting program, and how do merchants and card associations deal with surcharging? Here you will learn everything you need to know about Cash Discount Credit Card Processing and surcharges.

What is a Surcharge?

A surcharge is a fee that merchants add to the customer’s every credit card transaction to cover the costs associated with credit card processing. Every credit card brand and credit card processing company has its own guidelines for applying the surcharges. Surcharging is prohibited in four states, including Massachusetts, Connecticut, Kansas, and Colorado. The card association is a group of banks that set the transaction terms and process transactions for card brands like Master Card, American Express, Visa, and Citi. If the merchant wants to apply the surcharges, it should not be exceeded 4% of the transaction value. But many merchants likely to charge a flat surcharge fee e.g., a small business owner might charge a $0.40 surcharge on a $10 ice-cream, which is 4% of the transaction.

How to Register

If a merchant wants to register with a card association to permit them to apply the surcharges, it is not a hassle-free process. First off, every state has its own law and regulations, and you must know which states permit credit card surcharges and where it is banned. Then, you need to look at the credit card brand that you accept like MasterCard, Citi, and Visa and check their guidelines for a surcharge. They have several requirements that the merchants should meet before applying. The credit card companies generally ask you to provide the business name, contact info, business locations where you want to apply, business type( e-commerce or crick or mortar), and the surcharge types (product or brand).

Compliance Requirements

The card associations don’t ask you to discourage the customers when they want to pay with credit cards.

Almost all the card associations have the same guidelines for surcharging.

  • Maximum transaction limit is 4% 
  • Post notice at the point of sale about the credit card options. 
  • Surcharge should be listed as a separate line on the receipts. 
  • You can choose either brand surcharges or product surcharges. You can’t choose both. 
  • Notify the credit card processor and card associations in writing at least one month in advance that you are going to surcharge transactions. 
  • Also, comply with your state laws in terms of surcharges.

What is a Cash Discount?

If you are in one of these states where surcharging is banned, then offering the Cash Discounting might be a practical way for your business. As its name suggests, merchants offer discounts to their customers when they pay with cash. The main concept of Cash Discount Merchant Processing is that when the customers pay with cash, they receive a discount off the advertised sale price of the product. At the time of sale, when the customer preferred other payment methods than cash, he does not receive any transaction discount.

Pros of Cash Discounts 

Cash discount comes with a lot of benefits e.g., a merchant is giving the customers the incentive to save money when he pays with cash. When you offer a cash discount, most of the customers save money that makes them happy. For smaller stores or small businesses, cash discounts can make a big difference in offering cash discounts to help you get more sales. Moreover, the merchants don’t need to any requirement or follow the guidelines to set up a cash discount. You can set cash discounts on your own, and it only depends on your discretion.

Cons of Cash Discounts 

While there are numerous benefits to offering cash discounts to the customers, but there are some disadvantages that you need to take into account. The main drawback of the cash discount program is that people are likely to shop more when they don’t pay with cash and use credit cards. People are likely to add more items onto their purchases because they can’t see the money physically leaving their wallets.

Cash Discounts Compliance

For a cash discount, you need to provide the notification; you can display it around your shop, on your store’s door, and with the POS system. Also, give the detailed recipient to your customers that should have the complete information for cash discount transaction. Moreover, you should know about the laws of your state you are in because most of the states encourage the cash discount rather than surcharging as it is illegal. It is recommended that you check your state’s law if you are planning to start cash discounting.

Difference Between Surcharges and Cash Discount: 

One of the significant differences between cash discounts and surcharges is that with a cash discount, you provide the discount off the regular sales price to the customer when he pays with cash while with surcharges, you add around 4% fee to the credit card transaction. Moreover, the surcharging is regulated and required authorization with the credit card associations. On the other hand, cash discount programs require fewer laws and rules.

Bottom Line: 

Before setting up the cash discount program and surcharges for your business, check your record books. Do you have a lot of customers who pay with cash? How many customers pay with a credit card? How much fee do you need to pay to the credit card company? Also, consider your customer’s behavior. Would your customer react positively or negatively to the surcharge? Either cash discount helps you to get more sales or cut your profit margins? Ask all these questions to yourself before deciding to set up the surcharges or cash discount program. You can consult with consultants and business owners that help you to make the best decision.