What Is Cash Discounting? Small Business Guide

Cash discounting is a savvy approach used by businesses to provide customers who pay in cash with an enticing discount. In essence, it’s a win-win scenario: customers get a price break, and businesses sidestep credit card processing fees. This strategy is particularly popular among small or family-run businesses, especially those with a significant cash-paying customer base or those operating on slim margins.

How Does Cash Discounting Work?

In a cash discount program, the pricing of products and services is adjusted upfront to include the credit card processing fee. When a customer checks out and opts for cash payment, their receipt displays a cash discount line item, effectively subtracting a small amount (equivalent to the credit card processing fee). In the end, customers leave satisfied with a discount, while merchants pocket the full value of the product or service without credit card fees.

Transparency during checkout is a pivotal part of this process. Before accepting any payment, cashiers must ensure customers are aware that (1) they can enjoy a discount if they pay with cash and (2) they can still use credit/debit cards but without the discount.

Cash Discounting vs. Credit Surcharging

Cash discounting and credit surcharging share the goal of passing on credit card processing fees to customers, but they differ in several key aspects. In simple terms, with cash discounting, customers pay less than the list price, whereas with credit surcharging, they pay more than the list price. This fundamental distinction underpins how state laws and card networks regulate these zero-cost payment processing strategies.

What about Convenience Fees?

Convenience fees stand apart from cash discounting and credit surcharging. These are fixed amounts added when customers pay online or by phone. While they are legal in all 50 US states, subject to proper disclosure, card networks impose restrictions on their application for certain payment types.

Cash Discounting Regulations in the US

The Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act safeguards the rights of business owners to offer cash discounts in all US states. In general, state and federal regulations for cash discounting align with the standards set by the Durbin Amendment:

1. Disclosure: Clear and conspicuous signage must be displayed at the business entry point and the point of sale, explaining the discount program payment options. It’s essential to communicate that “if a customer chooses to pay with cash or check, the service charge is discounted.”
2. Transparency: Receipts must display the base amount, cash discount, and total sale. This transparency ensures customers know precisely what they are paying for.
3. Non-discriminatory: Federal regulatory bodies like the Electronic Funds Transfer Act (EFTA) enforce guidelines to ensure that cash discounts are offered to all customers who pay in cash without discriminating against those who choose to pay with credit.

In some states, such as California and Texas, businesses may be required to obtain a special license to offer a cash discount program. Card networks have also adapted their guidelines based on federal regulations, emphasizing proper disclosure, transparency, and non-discrimination when using cash discounting.

Cash Discounting Pros & Cons

Implementing a cash discount program offers several advantages for businesses. It grants faster access to much-needed cash for operations, allows businesses to avoid the cost of accepting credit card payments, and transfers credit card processing fees to customers who opt for credit cards. Fewer credit card transactions also reduce the likelihood of chargebacks that can lead to sanctions. Customers appreciate the freedom to choose their payment method.

However, setting up cash discounting can be complex. Businesses must train employees to accurately process sales and effectively communicate the policy to customers. Not all customers may embrace the cash discount program, potentially driving them to shop elsewhere, particularly those who prefer using credit cards. To prevent errors and theft, a robust cash management policy is essential.

What Businesses Should Use a Cash Discount Program

In general, high-volume businesses selling low-ticket products or services stand to benefit the most from a cash discount program. However, other factors come into play, including your business model, customer preferences, and local competition.

Consider implementing a cash discount program if:

• Your business generates enough sales volume to offset cash discount program fees.
• You sell low-ticket products or services, as processing fees are typically flat-rate per transaction.
• Your customer base primarily pays in cash.
• Your products or services are essential to customers.
• Competing businesses in your area also offer cash discounting.
• You have a solid cash tracking policy in place to prevent errors and theft.

In conclusion, cash discounting is a valuable strategy for small businesses looking to save on credit card processing fees while providing incentives to their cash-paying customers. Understanding the regulations and considering the unique needs of your business can help you determine whether cash discounting is the right choice for you.