The attraction of cash discounting.

In my previous post, I gave some general information about cash discounting, what it is, and Visa’s rules regarding it. 
(View prev post) 

So exactly what is the appeal of cash discounting for merchants then? 

First, it is important to understand that EVERY  time you use a credit or debit card, a percentage of the purchase goes to the credit card company that issued the card. Another  portion of the sale goes to the processing company. The fee is charged to the merchant for the privilege of being able to accept your credit or debit card. 

Since each credit card charge varies depending upon card typeInterchange rates and any additional fees or charges in the merchant agreement. These fees can greatly impact the bottom line. 

So potentially, a small business with $250k per year in sales, with an average of 5% processing charges and fees, could incur 12k in charges and fees.

Cash discounting allows the merchant to essentially pass on the costs of these fees to the customer without imposing a surcharge. (which may be illegal)  This allows the merchant to offset or recoup the fees that would be paid to the credit card processor. for each credit card transaction. 

So for a merchant, cash discounting programs can be an effective way to remain whole when accepting credit cards. 

It will be interesting to see how this will all play out, considering that Visa has drawn a line in the sand. 

What is cash discounting?

You may have heard that last month that Visa came out with a bulletin stating that some programs marketed as “cash discounts”  were “non-compliant” with Visa’s rules. One merchant remarked to me that it’s ok – we don’t surcharge anyway. It’s illegal.” 

This merchant was correct. Surcharges on credit card transactions are illegal  here in New York, as well as 9 other states.  But what I needed to stress to him is cash discounting is not surcharging.

So what’s the difference? Generally speaking, a surcharge is a fee that is added to the cost of goods or products simply for the convenience of paying with a credit card.  So a surcharge is specific to using a credit card. So for example, in some establishments (where it is legal) a purchase made with a credit card has a 2% fee assessed toward the transaction. If you had paid in cash, there would be no additional fee assessed. 

However, in cash discounting, a service fee is applied to all transactions. However, should you pay in cash, the merchant will remove the fee for that purchase since you paid in cash.

Visa’s rule are 
A merchant is permitted to offer discounts for paying in cash, however, the discount must be given as a reduction from the standard price.

So according to Visa, this violates their rule as it encourages merchants to add a fee to the normal price, and then remove it at the register if the customer pays with cash, check or debit.

So why is cash discounting attractive to merchants? We will look into that in our next post. 

Below are some helpful links which explain cash discounting and Visa’s bulletin. 

pymnts.com    Visa says…

CC Sales ProVisa declares…

Visa rules and policy