Are Cash discount programs scams or what is the catch?
Let us break it down for you. A cash discount is not the same thing as a surcharge. A surcharge program may be labeled a cash discount program and vice versa, but they are quite different, and the difference is a big deal. Let’s dive in to give you a better understanding of what the difference is, and why it matters.
Cash discount. Are they real, and what is it exactly?
Yes, cash discounts are in fact a real thing, and here is what one is. A cash discount is simply the price you advertise a product at that has already accounted for the credit card processing fee, so when customers pay in cash, they are given a discount. Here’s an example to give you further clarity.
Cash Discount vs Surcharge
Charlie’s Candy has a variety of candy that is advertised with the credit card processing fee already included in the price customers see. A customer comes in to buy a candy bar for $2.00 and he pays with a credit card. He would be charged the $2.00 dollar amount which includes the credit card processing fee into his purchase, which we will say is 2.5% of every transaction. With a cash discount a customer who buys the same $2 candy bar would only pay $1.95. The customer receives a discount for paying with cash and avoids paying the card processing fee. Now $.05 may not be a big deal but look at the next example.
Tito’s Tech charges $2,500 dollars for a phone. The customer pays with a credit card and is charged the full amount of $2,500. If that same customer would have paid in cash instead of using his credit card, he would have only paid $2,437.50. This means that he saves $62.50, and that Tito’s Tech also save $62.50 dollars on transaction processing fees.
The upside to a cash discount program?
The upside is you save money on credit card processing fees, but you are making your transaction time slower tending with cash.
Surcharging. What is it and is it legal?
A surcharge is essentially the opposite of a cash discount. A surcharge is simply the fee charged for processing a payment. Instead of the business absorbing this cost, the customer paying with a card covers the cost of processing their transaction. Meaning that on top of the advertised price of the product, an additional fee or surcharge is charged for customers to pay with a card.
The upside for you as a business owner? Allowing customers to conveniently pay with credit cards without the business having to absorb the cost of processing the payment.
Why does this difference matter? In some states a surcharge fee is illegal. Yes, surcharges are illegal in the states of Colorado, Connecticut, Kansas, and Massachusetts. In all other states, surcharges are perfectly legal. Whereas cash discounts are legal everywhere in the United States.
Tito’s Tech is selling a phone for $2,500. The customer makes their purchase with a credit card and is charged the surcharge fee of 2.5% (using the same rate as the previous example) and would be charged a total of $2,562.50. Thus, charging the customer an additional fee to make the purchase by card. The customer can conveniently use a credit card to make their purchase and cover the cost of processing the transaction.
By now, we hope that we have made the difference between a cash discount and a surcharge clear. Surcharging has become quite popular among many merchants, especially when it comes to minimizing operating costs. Merchants have found surcharging a great way to still offer customers the convenience of making purchases with credit cards while avoiding the fees that come with processing credit card transactions. Although this is a good option to lower operating expenses, one solution does not fit all merchants.