Did you know that U.S. businesses paid over $77 billion in credit card processing fees in 2021 alone? For the average merchant, these "swipe fees" can eat up 2-4% of every credit card transaction. With 77% of consumers now saying they would abandon a card without their preferred payment option, those fees can quickly devour your profits.

But what if there was a way to offset those rising costs? Enter cash discount and surcharge programs.

These programs are becoming increasingly popular among businesses of all sizes looking to reduce their credit card fees. But while they may sound similar, there are some important differences you need to know.

In this guide, we'll break down exactly how cash discounts and surcharges work, the pros and cons of each, and how to decide which one (if either) is right for your business.

What is a Cash Discount Program?

A cash discount program allows merchants to offset credit card processing fees by offering a small discount to customers who pay with cash or check instead of credit.

How Cash Discounting Works

Here's a step-by-step overview of how a typical cash discount program works:

1. The merchant sets their "regular" prices to include the cost of credit card processing fees (usually 2-4% per transaction).
2. At checkout, customers who pay with cash or check receive a small discount off the regular price (usually equal to the processing fee).
3. Customers who pay with credit cards pay the full regular price, effectively covering the cost of their transaction fees.
4. The merchant saves money on credit card fees for customers who take advantage of the cash discount.

Benefits of Cash Discount Programs

The biggest benefit of cash discounting is that it's legal in all 50 states (more on that later). This makes it an attractive option for businesses nationwide looking to reduce their processing fees.

Cash discount programs can also:

• Encourage more customers to pay with cash or check
• Reduce your overall credit card transaction fees
• Improve your cash flow with more immediate access to funds
• Position the "discount" as a reward for customers rather than a penalty

Potential Drawbacks to Consider

Of course, no solution is perfect. Here are a few potential downsides to cash discounting to keep in mind:

• Some customers may still prefer the convenience of paying with credit cards
• You'll need to handle and deposit more cash than before
• It can slightly complicate your pricing and checkout process
• You may need to update your point-of-sale (POS) system to track discounted transactions

However, for many businesses, the benefits of lower fees and more cash sales outweigh these concerns.

How to Implement a Cash Discount Program

Ready to start saving on credit card fees? Here's how to set up a cash discount program for your business:

1. Choose your cash discount percentage. Look at your current credit card processing fees and profit margins to set a discount percentage that makes sense for your business. Most merchants offer 2-4% off, with 3% being the average.
2. Update your prices. Raise your regular prices to incorporate the cost of credit card fees.
3. Notify your customers. Clearly display signage about your cash discount program at your entrance, point-of-sale, and on any physical menus.
4. Train your staff. Make sure your employees understand how the program works and how to communicate it positively to customers. Emphasize that you're offering a discount for cash, not penalizing card users.
5. Update your systems. Depending on your POS, you may need to configure it to automatically apply the cash discount and track those transactions separately. Consider working with your payment processor to ensure everything is set up correctly.

With some planning and preparation, implementing a cash discount program can be a simple and effective way to offset your credit card fees and boost your bottom line.

What is a Surcharge Program?

A credit card surcharge program is a way businesses pass on credit card processing fees to customers. However, instead of offering a discount for cash payments, a surcharge adds an extra fee to credit card transactions to cover the cost of processing.

How Credit Card Surcharging Works

Here's a quick overview of how surcharging typically works:

1. The merchant adds a surcharge fee to all credit card transactions. This fee is usually around 3-4%, which covers the cost of the processing fees.
2. At checkout, customers who pay with a credit card will see the surcharge fee added to their total purchase amount.
3. Customers who make cash payments, use debit cards, or other non-credit methods avoid the surcharge fee.

Benefits of Surcharge Programs

The primary benefit of surcharging is that it allows businesses to assess credit card fees only for customers using credit cards. This can help businesses keep their prices lower overall rather than raising prices across the board to account for processing fees.

Surcharging can also:

• Maintain a simpler, single-price structure instead of having different cash and credit prices
• Encourage customers to pay with cash or debit, which have lower processing costs
• Offset the rising cost of credit card fees, which can be 2-4% per transaction

Potential Drawbacks to Consider

While surcharging may sound like an easy solution, there are significant drawbacks to consider:

• Legal restrictions: Surcharging is currently restricted in several states, including Connecticut, Massachusetts, and Maine. In some states like California and New York, it's allowed but with strict limits on the amount. Breaking these laws can result in heavy fines.
• Complex requirements: Even where surcharging is legal, businesses must follow specific rules set by the card brands.
• Customer frustration: Many consumers view surcharges as an unfair penalty for using credit cards. According to a survey by the Strawhecker Group, 64% of consumers would consider taking their business elsewhere if a retailer implemented a surcharge.
• Brand perception: A credit card surcharge can make customers feel nickel-and-dimed, negatively impacting your brand's reputation, especially if other businesses don't charge them.

Due to these considerations, many merchants choose not to implement surcharge programs, even where they are legally allowed.

How to Implement a Surcharge Program (Where Legal)

If you've weighed the pros and cons and decided to implement a surcharge program, here are the key steps to do so compliantly:

1. Check your state and local laws. Verify that surcharging is legal in your jurisdiction and understand any limits on the amount you can charge.
2. Notify your payment processor and card brands. At least 30 days before you start surcharging, you must inform your payment processor, Visa, and Mastercard of your intent to surcharge. Your processor can guide you through their specific requirements.
3. Decide on your surcharge amount. Most businesses charge around 3-4% to cover the full cost of processing, but some states cap it lower.
4. Disclose the surcharge to customers. To comply with card brand rules, you must clearly notify customers of the surcharge at your entrance and point-of-sale, both in-store and online. This includes signage at the register, receipts, and your website's checkout page.
5. Train your staff. Ensure your employees understand your credit card surcharge policy and how to communicate it to customers. They should be able to explain the purpose of the fee and which payment methods allow customers to avoid it.
6. Update your payment systems. Work with your payment processor to configure your POS and online checkout to properly calculate, disclose, and process surcharge fees.

For many businesses, the potential downsides of surcharging – legal complexity, customer dissatisfaction, brand risk – outweigh the benefit of offsetting processing fees. However, for some, it can be a viable way to recoup costs on credit card transactions.

Cash Discounts vs. Surcharges: What's the Difference?

While cash discount and surcharge programs share the same basic goal – offsetting credit card processing fees – they accomplish it differently.

Legality and Regulation

One of the key differences between cash discounts and surcharges is their legal status. Cash discount programs are legal in all 50 states, as they simply offer a discount for cash payments.

On the other hand, Surcharges are restricted or banned in several states. Implementing a surcharge program requires careful research into your state and local laws and ongoing compliance with complex regulations.

Customer Perception and Brand Impact

Many consumers view cash discounts positively, as they feel they're getting a reward for paying with cash. By contrast, Surcharges often penalize customers for using credit cards.

Ease of Implementation

Both cash discount and surcharge programs require some legwork to implement, however, surcharge programs come with the added complexity of complying with card brand rules and state regulations. This includes notifying processors and card networks in advance, displaying compliant signage, and ensuring your systems properly calculate and disclose surcharge fees.

Flexibility in Eligible Payments

Cash discount programs typically apply to payments made with cash, checks, and sometimes debit cards. However, surcharge programs can only apply to credit card transactions – not debit cards, even when run as credit.

Surcharges may impact fewer customers overall, But a cash discount program can more holistically shift customers away from card payments and their associated fees.

Pricing and Checkout Flow

With a cash discount, you raise your base prices to build in your credit card fees, then offer a discount at checkout for eligible payments. This means cash customers pay less than your listed prices.

With surcharging, your base prices remain the same, but an extra service fee is added at checkout for credit card payments. Credit card customers pay more than your listed prices, while cash customers pay the regular amount.

Both require clear communication at checkout to avoid confusion. But a surcharge may feel more jarring to credit card customers, as it adds an unexpected fee on top of the listed price.

Is a Cash Discount or Surcharge Program Right for Your Business?

So, should your business implement a cash discount or surcharge program? As with most business decisions, there's no one-size-fits-all answer. The right approach depends on your specific circumstances, goals, and clientele.

Here are some of the key factors to consider:

• Your location: If you operate in a state where surcharges are banned or restricted, that may take the decision out of your hands.
• Your margins and fees: A cash discount or surcharge program could make a big difference if you're in a low-margin business where 2-4% fees eat up a significant chunk of profits. But if you're in a high-margin business, you may decide it's not worth the potential customer pushback.
• Your average transaction size: If you rely on high volume to cover your costs, anything discouraging sales (like a surcharge) may do more harm than good.
• Your customers' payment preferences: What percentage of your customers currently pay with credit cards? You may want to survey customers or look at payment data from your POS to gauge the potential impact.
• Your competition: Being the only one to surcharge could put you at a competitive disadvantage. However, being the only one to offer a cash discount could be a selling point.
• Your brand and values: If you position yourself as a premium, customer-centric brand, a surcharge may undermine that. But a "cash discount" may fit right in if you're a discount brand.

Ultimately, the best approach is the one that aligns with your business goals, brand values, and customer base. There's no shortcut to weighing the pros and cons based on your unique circumstances.

Take Control of Your Credit Card Fees With Zen Payments

Credit card processing fees are a growing burden for businesses of all sizes. That’s why implementing a cash discount or surcharge program can help offset the cost of credit card fees by either incentivizing cash payments or passing the cost onto customers who choose to pay with credit.

Even if a formal discount or surcharge program isn't right for you, finding the approach that works for your specific business, clientele, and bottom line is key.

So if you're tired of watching your profits get chipped away by credit card fees, now's the time to take action. Zen Payments is a trusted merchant account and service provider. Our experience in e-commerce, retail, and high-risk merchant accounts allows you to get processing quickly.

Contact us today to explore your options and implement a strategy that makes sense for your business. Your bottom line will thank you.