If you’re a merchant, you already know that credit and debit cards are the most common payment method today, but did you know that, as of 2018, 70% of consumers say they use cash for some or all of their purchases? That’s a lot of customers that are potentially willing to pay in cash. However, that doesn’t mean you should become a cash-only business — though that might be tempting to avoid the fees that come with credit card processing. With a cash discount program, you can allow customers to pay however they want, without it costing you extra. Implementing a cash discount program today is a timely strategy for reducing credit card processing fees, improving cash flow, and staying competitive.
Accepting cash can reduce costs compared to electronic payments and can attract customers, especially those who are unbanked or underbanked. By encouraging cash payments, you can also engage customer segments that might otherwise be overlooked and potentially increase store traffic and sales.
This guide will discuss what a cash discount program is and how you can leverage it to help both you and your customers.
Cash discounting is permitted under the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act. It is legal in all 50 US states as long as businesses comply with all federal and state regulations, including clear disclosure of the pricing structure. Businesses must ensure they meet all legal requirements related to cash discounting to avoid penalties and fines.
Understanding Cash Discounts
When you see part of your profit margins go to credit card processing fees, you may be tempted to pass those fees onto the customer by charging extra when a customer uses a card. Unfortunately, this practice — known as surcharging — is banned in certain states. In states that allow surcharging, you’ll have to be transparent about any fees you’re charging your customers, and you can expect customers to be upset by seeing an extra charge on their receipt.
A better solution is cash discount processing. This is a pricing strategy that encourages customers to pay with cash by offering a reduced price, rather than adding a fee to card payments. In a cash discount program, you adjust the listed prices to include the cost of credit card processing, so the standard price covers the processing fees for card payments. When a customer pays with cash, check, or ACH, they receive a discount that offsets these fees, allowing businesses to maintain their cash prices while passing the cost of card payments to those who use cards. This approach differs from surcharging, which adds a fee to card payments, whereas cash discounting reduces the price for cash payments.
To ensure transparency and compliance, it’s important to clearly display both cash prices and card prices on pricing labels and receipts, so customers understand the difference. Proper signage must inform customers about the cash discount program, and receipts should show both the cash and standard prices. The two main types of cash discounts are percentages and fixed dollar amounts. For example, you could offer anyone who pays in cash three percent off their total bill or $0.50 off. However, in the case of fixed dollar amounts, you’ll want to have a minimum purchase amount, so customers don’t buy a pack of gum and get 50% off.
Advantages of Cash Discounts
Why do companies offer cash discounts? Cash discounts are important for any business that wants to save on payment processing fees and preserve profit margins, especially in low-margin industries. By reducing payment processing costs, cash discounting allows more of the sale price to stay with the merchant. Additionally, offering discounts for cash payments can attract cash paying customers and drive customer loyalty.
There are five great benefits you can enjoy when you implement a cash discount program at your business. Cash discounts can help your business:
1. Reduce or Eliminate Processing Fees
The main attraction to a cash discount program is that they save your business from having to shoulder the costs associated with credit card processing. For a small business, every penny counts when it comes to reducing processing fees and maximizing profit. Companies who handle credit card processing, known as merchant service providers, or MSPs, charge fees to cover the services they provide and to pay banks and credit card associations who take the majority of the fees you pay. These parties have to get paid, but you don’t need those fees to eat into your profit margins. By implementing a cash discounting strategy, small businesses can lower cost, reduce their payment processing expenses, and improve overall profitability. With a cash discount program, it will be just as if that fee were nonexistent since you’ve accounted for it with your prices.
2. Keep Profit Margins Consistent
It’s also important for a business to be able to maintain consistent margins so they can accurately budget and make financial decisions for the future. If you don’t have a cash discount program in place, processing fees can become wild cards. Cash transactions won’t involve a fee, but card transactions will involve different fees depending on the type of card used. With a cash discount program, you eliminate this unknown. Instead, your margins remain consistent across all transactions.
3. Attract Bargain Hunters
Who doesn’t love to get a discount? Cash discounting can help businesses attract customers whose preferred payment method is cash. When bargain hunters see they can pay less by using cash, they’ll leave your store feeling like they got a great deal and will likely come back next time with cash in hand, ready to take advantage of the discount again. A significant portion of the US population is unbanked or underbanked and prefers to pay in cash, reflecting diverse customer preferences. If you have customers who were around before you raised your prices to accommodate the cash discount program, they can pay in cash to continue enjoying the lower prices they were used to.
4. Increase Cash Flow
When customers pay in cash, it can mean more access to cash on hand for your business. Cash payments provide immediate access to funds, eliminating the waiting period required for card processor settlements. Whether you need cash for purchasing equipment or giving change to customers, it’s always helpful to have cash on hand. However, if you work with a good MSP, expect to receive funds from your credit card transactions fairly quickly.
5. Reduce Chargeback Risks
In addition to the fees that automatically come with credit card transactions, these transactions can sometimes lead to additional fees. If a customer looks back over their receipt or credit card statement and thinks something is wrong, you’ll have to pay to go through the various parties involved to investigate the issue and settle it with the customer. Chargebacks only occur with credit card payments, so when you encourage customers to pay in cash, you reduce the risk of a chargeback.
Types of Businesses that Benefit
A wide range of businesses can see significant advantages from implementing a cash discount program. Retail stores, restaurants, service providers, and convenience stores are especially well-positioned to benefit, as they often process a high volume of credit card transactions and, as a result, incur substantial processing fees. By incentivizing cash payments, these businesses can reduce their processing costs and boost their profit margins.
For example, a coffee shop that offers a cash discount can encourage more customers to pay with cash, leading to more cash transactions and less money lost to credit card processing fees. Gas stations and restaurants, which frequently handle large purchases, can also realize substantial savings by implementing a cash discount program. Even convenience stores, which see a steady stream of small transactions, can benefit by encouraging customers to pay with cash and minimizing card processing fees. Ultimately, any business that wants to save money on processing costs and improve its bottom line should consider how a cash discount program could work for them.
Understanding Customer Perception
Customer perception plays a vital role in the success of any cash discount program. It’s important for businesses to ensure that customers understand the benefits of paying with cash and the reasons behind offering a cash discount. Clear signage and open communication at the point of sale help customers feel informed and valued, rather than confused or penalized for their choice of payment method.
When customers see that they can save money by paying with cash, they are more likely to view the program positively and feel rewarded for their choice. This approach not only enhances customer satisfaction but can also foster greater loyalty and repeat business. By effectively communicating the advantages of the cash discount program and ensuring transparency, businesses can create a positive customer perception and encourage more customers to take advantage of the savings.
Overcoming Common Misconceptions
Despite the clear benefits, some business owners hesitate to implement a cash discount program due to common misconceptions. One frequent concern is the belief that cash discount programs are illegal or not compliant with federal regulations. In reality, when set up correctly and in accordance with all applicable laws and card network rules, cash discount programs are fully legal and can help businesses reduce their processing costs.
Another misconception is that offering a cash discount will alienate customers who prefer to pay with credit or debit cards. However, many customers appreciate having the option to save money by paying with cash, and businesses can continue to accept card payments alongside their cash discount program. By understanding and addressing these misconceptions, businesses can confidently implement a cash discount program and enjoy the benefits of lower processing costs and improved profit margins.
Implementing a Cash Discount Program
Successfully implementing a cash discount program involves several key steps. First, businesses should determine the appropriate discount amount, typically based on the average credit card processing fee. Next, it’s important to update pricing displays to clearly show both cash and card prices, ensuring transparency for customers at the point of sale.
Staff training is essential so employees can accurately process cash discount transactions and effectively communicate the benefits of the program to customers. Additionally, businesses must ensure compliance with all relevant federal regulations and card network rules to avoid any legal issues. By carefully planning and executing these steps, businesses can implement a cash discount program that reduces processing costs, maintains profit margins, and keeps customers informed and satisfied.
Evaluating Program Effectiveness
To ensure a cash discount program is delivering the desired results, businesses should regularly review their sales data and monitor the number of cash transactions compared to card payments. Tracking the amount saved on processing fees provides a clear picture of the program’s cost savings. It’s also important to gather customer feedback and assess overall customer satisfaction to make sure the program is not negatively impacting the customer experience.
Regularly reviewing and analyzing this data allows businesses to make informed adjustments, such as modifying the discount amount or updating the pricing structure, to maximize the benefits of the program. Ongoing evaluation also ensures continued compliance with all relevant laws and regulations. By consistently monitoring and refining their cash discount program, businesses can achieve significant savings, improve cash flow, and enhance customer satisfaction.
How We Use Cash Discounts
At Velocity Merchant Services, we help you take full advantage of the benefits a cash discount can offer. Working with a reputable payment processor that specializes in cash discount programs is essential to ensure compliance and ease of implementation. It’s also important to choose the right payment processor that supports cash discounting and provides the necessary tools to manage your program effectively. Using a reliable POS system can enhance your cash discount program by automatically applying discounts at checkout and displaying both cash and card prices as separate line items on receipts for transparency and regulatory compliance. With our cash discount program, you never have to worry about what fee you’ll be charged for various transactions. Instead, we raise all your prices by 4%, covering potential fees if someone pays with a credit card. If someone pays in cash, check or debit card, they’ll get 4% off. In other words, the price increase will be waived since there won’t be a processing fee to account for. We’ll also provide you with clear signage and communication materials to inform your customers of the program, so there is no confusion, and they can take advantage of a cash discount.
Process Payments With VMS
With more than two decades of experience, VMS is a trusted source of merchant solutions that can help your business thrive. Our processing solutions equip you to accept a variety of payment types, so you never miss out on potential business. Offering a variety of payment options, such as credit cards, debit cards, and electronic wallets, ensures you meet customer needs and stay competitive. You can also take advantage of one of our Clover devices to help you facilitate your sales.
Effective inventory management and protection of customer data are essential for smooth business operations and compliance with regulations. When processing payments, safeguarding customer data is crucial to ensure secure transactions and maintain trust.
When you partner with VMS for credit card processing, we’ll help you implement a cash discount program, so you never lose money to processing fees. Cash discounting can help your business keep more money by reducing credit card processing fees, increasing available funds for reinvestment or other expenses. Significant savings through cash payments can also occur on large expenses, such as healthcare and education. Plus, your customers will feel like they’re getting a bargain when they pay with cash. It’s a win-win situation for both you and your customers. Contact us today to learn more.
