by Grace Barone
Both cash discounts and credit card surcharges have definitely appeared to you as a customer or business owner at some point in your life. Businesses frequently utilize surcharges and cash discounts as pricing tactics to encourage or discourage particular payment methods. But, have you ever thought about how these pricing techniques can affect both customers and businesses? Both techniques can have an impact on a company's bottom line. But, they have differing effects on customers and may or may not be morally or legally acceptable. It's important to have an understanding of the benefits and drawbacks of cash discounts and surcharges, whether you're a business owner or an informed consumer. We'll get into the specifics and consider how these tactics may affect your financial situation in this blog. So, fasten your seatbelt and get ready to learn everything there is to know about cash discount vs. surcharge.
What's the Difference?
Cash discounts and surcharges are very similar. People often get confused by the two and don't understand how they differ. Both strategies are used to cover the cost of processing fee's for the business. In all honesty it is a little confusing, but understanding how they differ is crucial. The reason for this is, cash discounts are legal in all states. Surcharges are illegal in some states. So it's important for both business owners and customers to be aware of the two, to avoid any issues.
When a business implements a cash discount program, there is a discount given to customers that choose to pay with cash. The posted price of the businesses goods is the price when customers pay with a card. The initial price posted takes into account the processing fee. Since there are no processing fees that need to be paid with a cash transaction, the price is lowered. The discount is typically a percentage of the total purchase price and is offered to encourage customers to pay in a way that is less expensive for the business.
If a customer chooses to use a credit card in place of cash or a check, an additional fee is added to the price of the goods or services. The initial posted price is the cost when you pay with cash. The surcharge fee is added on at the end of the transaction, similar to the tax. The surcharge, which is usually imposed to offset the cost of processing credit card transactions, is often calculated as a percentage of the overall purchase price.
The Pros and Cons of Cash Discounts
- Increased sales: Customers may buy more or purchase sooner when there is a cash discount available. Customers are more likely to react positively to a cash discount program rather than surcharge fees.
- Lower costs: Since cash payments do not involve the fees connected with credit card processing, they are less expensive for businesses than credit card payments. With a cash discount program businesses can significantly lower their processing fees or get rid of them all together.
- Enhanced cash flow: Processing cash payments more quickly than credit card payments can help a business's cash flow.
- Reduced Revenue: Cash discounts lower the amount of money a company makes from each transaction.
- Higher Risk of Fraud: Fraud risk is higher since cash payments are more likely to be misplaced or stolen.
The Pros and Cons of Surcharges
- Increased Revenue: Surcharges can boost income for businesses by helping cover the expense of accepting credit cards.
- Fair Treatment: Equal treatment is ensured by surcharges, which prevent passing on the expenses of credit card processing to all customers and instead make sure that customers who choose to pay with credit cards do so.
- No effect on sales in cash: Surcharges do not impact cash sales because they only apply to credit card transactions.
- Customer Backlash: Customers may view fees as unjust or punitive, which could lead to reaction from them and harm a company's reputation.
- Legal and moral issues: Since some states forbid or restrict surcharges, businesses must make sure they are abiding by all relevant rules and laws.
- Visa's New Rules: Visa recently changed their rules around surcharging. They have capped the percentage businesses are allowed to charge at 3%. This may not be enough to offset the processing fees for card transactions.
The Legalities and Ethics: Cash Discount vs. Surcharge
Cash discounts are generally permitted and do not call for any additional disclosures or rules. However, companies must make sure that customers are aware of their cash discount policies and that they do not discriminate against credit card users.
Compared to cash discounts, surcharges are more complicated legally. Some states forbid or regulate credit card surcharges, while others permit them with conditions including transparency and dollar limits on the cost. Before implementing a surcharge policy, businesses should become familiar with the legal framework in their state. Not following the rules around surcharges can cause major issues for business owners.
It is very important that business owners clearly disclose either their cash discount program or surcharge fees to avoid issues with their customers.
From an ethical perspective, cash discounts can be viewed as a strategy to encourage responsible financial behavior. It may also help deter customers from accumulating credit card debt. Businesses should be cautious and avoid punishing customers who use credit cards for valid purposes, such accumulating rewards or establishing credit.
Some customers can consider credit card surcharges to be exploitative or unjust, especially if they are not made clear or if the charge is excessive. Because of Visa's surcharge rules, the issue of excessive charges has dwindled. Businesses should think about how surcharges will affect how their customers view their reputation and brand.
Implementing a Cash Discount Program or Surcharge Fees
To implement a cash discount program, businesses must make sure that the discount amount is communicated clearly, that it is applied regularly and fairly, and that it does not discriminate against customers who pay with a credit card. To accommodate clients who would rather not use cash or checks, they might want to think about providing additional payment choices, such as mobile payment apps or electronic bank transfers.
Before implementing a surcharge program, businesses should make sure they are in compliance with all applicable rules and regulations. They should also make sure to clearly explain the fee amount and any restrictions or conditions. Finally, they should avoid placing surcharges at levels that are unreasonably high and might turn off customers.
At VMS our POS machines have the ability to be pre-programmed with cash discount abilities. If you'd like to learn more about cash discount vs. surcharge, visit getvms.com or fill out the form below! We can help you better understand both cash discounts and surcharges, so you can decide which is more beneficial to your business!