By now, you have probably heard of the Cash Discount Program, which if implemented correctly can eliminate your payment processing fees. But, is the Cash Discount Program right for your business? In this article, we’ll explain exactly how it works so that you can determine if it is the right fit. First, we have to get our legal disclaimer out of the way!
Legal Disclaimer: The author of this post is not an attorney and nothing contained herein is legal or accounting advice. Please seek the advice of a competent legal or accounting professional for all such questions that may result from reading this post to clarify any opinions created from this article.
As a business owner, you already know about the extraordinary cost of card acceptance. Credit card processing fees rank as some of the highest expenses for most small businesses. These costs do two things each month: eat away at your margins and cause mass confusion after trying to decipher the cryptic numbers on your monthly statement.
Why are these costs so high?
Great question! U.S. consumers love spending money on credit cards. We absolutely the rewards points, frequent flier miles, and cash back. We also enjoy the convenience of “buy now and pay later.”
Unfortunately, the credit card issuing banks aren’t just giving these rewards away for free. These wonderful consumer benefits are being paid for by you, the small business owner. In fact, U.S. businesses pay almost 2% in interchange fees to the big banks. Small business owners must also bear the cost of these fees from card brands like Visa and MasterCard. On top of that, most small business owners pay additional monthly and annual fees.
Cold, Hard Facts.
According to the Nilson Report, merchants paid an estimated $53.6 billion in Visa and Mastercard credit card interchange fees in 2019. Which was an 8% increase from the prior year and an increase of 107% since 2012.
What is the Cash Discount Program?
A few years ago, the F.T.C. added the Durbin Amendment to the Dodd-Frank Act which states: “A PNC [payment card network] cannot stop you from offering your customers a discount or another incentive for using a certain method of payment, as long as you offer it to all of you customers and disclose the offer clearly and conspicuously.”
In other, simpler words, the Cash Discount Program is designed to help business owners cover the cost of card transaction fees, and allow discounts for cash payers. You are already familiar with other types of business that use a similar model: gas stations, universities, energy companies, cell phone providers, and you department of motor vehicles. Do you recall the last time you paid a bill online with your credit card and paid an additional fee?
How does it work?
Step #1: Apply a price increase on all products or services.
Relax! Don’t go running away yet. Applying this price increase doesn’t involve changing the prices on store shelves or in the menu. The latest legislation under the Durbin Amendment and the landmark Supreme Court case Expressions Hair Design vs. Schneiderman offers valuable information for this situation. You can a draw up a compliant sign at the entrance of your store and at your checkout station that implements a small price increase by informing the consumer of your new regular price.
Step #2: Offer a Cash Discount
If some customers want to use their card to get cash back or some other incentive, shouldn’t they be the only ones who pay for these benefits? Why should your cash paying customers be charged so that credit card users get extra benefits?
Tens of thousands of other small business owners nationwide have implemented this program with great success. If executed correctly, you have the opportunity to take total control of the payment options offered in your business.
Consumers love to have choices. For customers using cash in your business, offer a discount that is in line with what it costs you to accept a credit card transaction. Increase your regular price to generate the needed revenue to cover the cost of processing. Then offer a cash discount to customers who choose not to pay by card. As a result, you offset the growing costs of payment acceptance while also giving your customers a clear choice.
The results of these two steps is simple. Your listed prices become your cash price. You must display compliant signage and notices to ensure your customers are aware of this change. The regular price is increased above the “Cash Price” or “Sticker Price” to cover the cost of processing payments.
Step #3: Apply the extra revenue collected to pay your processing costs.
This final step is especially tough to complete on your own. If you are like most business owners, you don’t understand all of the fees on your monthly processing statement. To make matters worse, they tend to change from month to month. The banks make processing statements difficult to read so that you get confused, accept it as the cost of doing business, and file it away without giving it much more thought.
The key is to collect exactly the right amount of money from your card paying customers in order to offset the cost of accepting payments. There are specific rules and regulations from the card brands, banks, federal and state legislatures, and most likely, from your processor.
What if my customers get upset?
There is no doubt that this is common concern when considering The Cash Discount Program. Recent studies indicate:
- 95% of consumers will not notice this small price increase if implemented correctly.
- 92% of consumers don’t look at their transaction receipts.
- 73% of consumers still carry cash.
A few customers who do notice the price increase will probably ask questions. Communicating your new pricing correctly is absolutely critical. Customers understand the simple concept that as your costs increase over time, you must periodically make small price increases to stay in business.
50 years ago, everyone believed that ATM’s would fail because of a single concern: Who would pay a service fee to access their own money? Unexpectedly, the popularity of the ATM exploded and are still in use today for one reason – CONVENIENCE! Consumers love convenience. It is more convenient to grab cash from a machine than it is to drive to your bank, stand in line, fill out a form, talk to the bank teller, and take out cash. Why do we purchase movie tickets online and pay an extra fee? Because we can reserve seats in advance and avoid standing in line, which saves us time. It is called a convenience fee for a reason.
The Cash Discount Program is the same concept. If a consumer finds it inconvenient to access cash or write a check, they will use a credit card because it is more convenient. Plus, some customers will even justify the higher price by telling themselves that they are earning more flier miles or cash back to get that dream vacation.
A recent article from the American Civil Liberties Union.
In an article by Jay Stanley, dated August 2019, he discusses the disadvantages of a cashless future for consumers. I strongly recommend that you read the article in it’s entirety. Jay makes several suggestions for consumers who encounter businesses that do not accept cash payment. I’ll highlight two of those points here as they validate the benefits of implementing a Cash Discount Program.
- Bad for many merchants. Merchants pay roughly 2-3% of every transaction to the credit card companies, which can be a significant “tax,” especially on low-margin businesses. With the credit card sector dominated by an oligopoly of 2-3 companies, there is not enough competition to keep these “swipe fees” low. Big companies have the leverage to negotiate lower fees, but small merchants are out of luck, and the amount that they pay to the credit card companies is often greater than their profit. If cashless stores are allowed to become widespread, that will harm the many merchants who either discourage or flat-out refuse to accept credit cards due to these fees.
- Understand why some stores charge fees for credit card use. If you visit a store or restaurant that charges a higher price for credit card purchases, understand that this is a socially beneficial policy and be supportive. Merchants are explicitly permitted to pass swipe fees (also known as “interchange fees”) along to customers, which among other things is fairer to low-income customers who don’t have credit cards and shouldn’t have to absorb the costs of those cards. If you are a business, consider passing along those fees to increase fairness as well as customer awareness of how the current system works.
Why do you need a qualified payment processing expert?
Along with most business owners, you probably understand these three simple steps want to apply them. The benefits of eliminating payment processing fees is obvious! What you need is an expert to provide you with a streamlined, compliant program.
Here is how we do it:
- Provide compliant signage at your business entrance and at your checkout counter, or on your menu, to inform customers of your new regular price.
- Provide the correct cash discount percentage notification which ensures that you are offering the correct discount to cash paying customers.
- Collect the extra revenue each day and send those funds to pay your processing fees. Our responsibility is to ensure that your program is setup to collect exactly the right amount of revenue each month.
You can visit our Cash Discount Program page here.
Final thoughts, is the Cash Discount Program right for your business?
The benefits of this program are clear, but it does come with a risk. Will you lose customers? Maybe and maybe not. It’s obviously a tradeoff decision. Small business owners have the opportunity to save thousands, even tens of thousands, of dollars per year. Is that worth exploring when 5% of customers might disagree? Well, that would mean that 95% of your customers don’t notice or don’t care.
At Summit Payments, we allow our clients to test the waters of the Cash Discount Program and if they are experiencing a negative impact on their business at any time, then we switch the account back to traditional processing.
If you decide to try it out in your business, then we suggest doing so for an entire month. After that first month, review the processing statement and verify that your total payment processing fees have been eliminated. If so, it is highly likely that you will never go back to traditional processing ever, ever again.