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WRITTEN & RESEARCHED BY

Jon Millikan

Expert Analyst & Contributor

Beginner's Guide to Cash Discount Processing

Updated: Sep 29, 2023

Cash discount processing is an emerging payment solution that can help businesses save on credit card processing fees. With traditional credit card processing, businesses pay a percentage fee (usually between 2-4%) for every credit card transaction. These fees can really add up, especially for businesses with tight profit margins. Cash discount programs offer an alternative way to offset these fees.


What is Cash Discount Processing?

With cash discount processing, businesses offer a discount to customers who pay with cash, check, or debit card. This discount essentially offsets the credit card processing fees - instead of the business paying the fee, it is passed onto credit card customers in the form of a higher price. Customers who pay with non-credit card methods get a discount from the credit card price.


For example, a business could charge $100 for credit card purchases but offer a 2% discount, so cash/debit customers would pay $98. The $2 difference covers the approximate credit card processing fee.


How Cash Discounts Work

  • Businesses set a credit card price that covers the processing fees

  • They offer a cash discount from that price for non-credit card payments

  • Customers pay either the credit price or discounted cash price

  • The discount offsets the credit card fees so the business earns the same net amount

Cash discounts must be clearly communicated to customers with proper signage. Businesses should post the credit price and cash discount rate up front so customers understand their options.


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Benefits of Cash Discounts

There are several potential benefits to offering cash discounts:


1. Reduce Credit Card Processing Costs

The main appeal of cash discounts is reducing credit card processing fees, which are a major overhead expense for many businesses. Cash discounts let you pass these fees onto credit card users rather than absorbing the costs yourself.


2. Increase Cash Flow

By incentivizing non-credit card payments, businesses can increase cash flow. Cash/debit payments mean the funds are available right away unlike credit card payments where funds are held until batching/settlement. More cash flow gives businesses more working capital.


3. Attract Price-Sensitive Customers

Price-conscious consumers may be attracted by the discount for using cash or debit. This can help draw in customers, especially for industries like gas stations, grocery stores, and retailers targeting budget shoppers.


4. Level the Playing Field

Cash discounts create a more even pricing field between cash and credit card customers. Without discounts, cash customers essentially subsidize the reward points/miles earned by credit card users. Discounts take away this imbalance.


5. Possible Tax Benefits

Cash discounts count as a price reduction, which lowers your taxable income. By offering discounts, businesses pay taxes on their net revenue after discounts rather than the full credit card price.


Videos explaining the benefits of cash discount processing



Videos explaining the difference between Cash Discount | Surcharge | Convenience Fee


Best Practices for Cash Discount Programs

If you're considering implementing cash discounts, here are some best practices:

  • Clearly communicate discount policy with signs at checkout, on website, etc. Customers need to know the pricing structure and discount rate upfront.

  • Get customer-facing staff on board and trained on the policy so they can explain it to customers and answer questions.

  • Use consistent discount rates across all products/services to avoid confusion. Don't discount some items but not others.

  • Offer discounts for all non-credit payment types - cash, check, debit cards, mobile wallets, etc.

  • Integrate cash discounts into your POS system and train staff on applying discounts at checkout. Automate it as much as possible.

  • Review processing statements regularly to confirm fees are covered by discount amounts. Adjust rates if needed.

  • Stay compliant with card network rules. Discounts cannot be made contingent on paying additional fees the card networks don't allow.

  • Assess if discounts give your business a competitive advantage. Advertise discounts to attract deal-seeking customers if so.

Cash Discount Requirements and Regulations

If you decide to implement cash discounts, there are some requirements and legal considerations:

  • Discounts must be clearly disclosed - All discount policies must be visibly posted for customers. Do not obscure or hide the fees.

  • Card network rules - Cash discounts are generally allowed but cannot violate the terms set by Visa, Mastercard, etc. Review the latest network regulations.

  • State laws - Several states restrict surcharging credit cards but allow cash discounts. Know your state's regulations. See the state-by-state guide.

  • Compliant signage - Use approved language like "cash discount" not "credit card surcharge." Avoid words banned by card networks.

  • Receipts - Print separate amounts for the cash price and credit price on receipts to show the discount was applied.

  • Only charge once - Apply the discount or surcharge, not both. Do not double dip on fees.

  • No minimums - Discounts must be allowed for all transaction amounts, even small purchases. Minimums are not permitted.


Below is some information regarding the states that are the hardest to setup Cash Discounting Systems:

State

Challenges/Requirements

California

Requires businesses to apply for a special license with the Department of Business Oversight.

Texas

Has a regulation under the Office of Consumer Credit Commissioner for cash discount programs.

Wyoming

Cash discounts are limited to up to 5%.

General

Federal guidelines focus on transparency, proper disclosure, and non-discriminatory business practices. Penalties for noncompliance can be significant, with fines imposed by bodies such as the Electronic Funds Transfer Act (EFTA) and the Truth in Lending Act (TILA).


Cash Discount vs. Surcharging

Cash discounts are often compared to credit card surcharges - what's the difference?

Surcharges add fees onto credit card transactions only. Discounts reduce prices for cash/debit customers from the credit card price.

The key differences:

  • Surcharges are prohibited by some card networks while discounts are generally allowed.

  • Many states ban credit card surcharges but permit discounts.

  • Customers can perceive surcharges more negatively compared to receiving a discount.

  • With surcharges, customers see the additional fee on their receipt which looks punitive. Discounts show a reduced price.

In practice, cash discounts and credit card surcharges achieve a similar outcome - offsetting processing costs. But cash discounts have more legal flexibility and better customer perception.


​Aspect

Cash Discount Processing

Surcharge Processing

Definition

A pricing model that offers a discount to customers who pay with cash or debit card.

A fee added to the total purchase amount when a customer pays with a credit card.

Purpose

To encourage customers to pay with cash or debit, which can save money on processing fees.

To offset some of the costs associated with the card payment process.

Legality

Legal in all states.

Legal in some states but prohibited or restricted in others, including Colorado, Connecticut, Kansas, Maine, and Massachusetts.

Customer Perception

May be more appealing to customers as they receive a discount for paying with cash or debit.

Customers might be turned off by the idea of paying an additional fee for using a credit card.

Operational Considerations

Businesses must handle and manage paper money, which can be time-consuming and costly.

Simplifies accounting, bookkeeping, and tax prep since all payments happen electronically.

Risk

Reduces the risk of chargebacks since transactions are in cash.

Still exposed to the risk of chargebacks from credit card transactions.


Cash Discount Processing Solutions

If you want to implement cash discounts, you will need a payment processing solution that supports discount rates. Here are a few options:

  • Point-of-sale integration - Many modern POS systems like Clover allow businesses to program cash discount percentages. Discounts can be automatically applied during transactions.

  • Online payment gateways - Solutions like X-Pay Cash Discount integrate with ecommerce platforms and directly apply discounts for eligible payment methods.

  • Billing software - Look for billing/invoicing systems that let you set credit card prices and cash discount rates at the customer or global level. FreshBooks is one option.

  • Accounting systems - Modern accounting software like QuickBooks Online lets you create separate income accounts for credit card sales vs. cash sales. This makes discount reporting easy.

No matter what solutions you use, ensure they allow flexible discount configuration and make rate changes easy. Make sure staff can seamlessly apply discounts during transactions.


Best Practices for Integrating Cash Discounts

Follow these tips for smoothly integrating cash discounts into your business:

  • Update prices and billing systems to have credit card rates programmed in

  • Post new prices with cash discount details across in-store menus, online platforms, etc.

  • Train staff on new prices and how to apply discounts at checkout

  • Set discounts to be automatically applied in POS and payment systems

  • Adjust accounting practices to track discounted cash sales separately from credit

  • Inform customers of new pricing and discounts through announcements, social media, and advertising

  • Monitor success of program by pulls reports showing discount amounts and credit fees offset

  • Tweak discount rates and policies as needed based on results and customer reception

Properly rolled out, cash discount programs can be a major cost-saver for merchants. Just be sure to communicate the changes clearly, integrate discounts across all systems, and provide staff training. With the right setup, your business can benefit from lower processing overhead.


Below is an infographic explaining the average time lines and steps to setting up a new merchant service provider:

Switching Merchant Service Providers

Is a Cash Discount Right for Your Business?

Here are a few signs your business could benefit from cash discounts:


✔️ You have high credit card processing volume and fees

✔️ Your profit margins are tight due to high processing costs

✔️ You want to incentivize more cash/debit payments

✔️ Your competitors offer discounts you could match

✔️ Your average customer transaction size is high enough to offer meaningful discounts

✔️ You have flexibility in adjusting product/service pricing

✔️ Your business has regular cash flow needs and wants to speed funds availability


If these factors fit for your business, a cash discount program can help lower costs and provide a competitive pricing edge. Just make sure you follow best practices and legal requirements when rolling out discounts. Careful implementation and thorough consideration is key to ensure smooth adoption and maximum benefits.


Frequently Asked Questions

Here are answers to some common questions about cash discount programs:

Are cash discounts legal?

Yes, cash discount processing is legal in most areas as long as they follow card network regulations and state laws. Discounts must be clearly posted and cannot have prohibited terms like setting minimums.

Do I have to offer discounts on all of my products/services?

How do I know what discount rate to use?

Can I offer discounts on some payment types but not others?

Do employees need special training?

How do I advertise my cash discount? (Cash Discount Signage)

Cash discounts can benefit many types of businesses - retailers, restaurants, service providers, ecommerce stores, and more. If your business is looking to offset credit card processing costs, a structured cash discount program is worth considering. Just make sure to follow best practices and legal requirements. With the right implementation, both your business and customers can benefit.


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Jon Millikan

Expert Analyst & Contributor

Jon has been writing for Xsellarate about small business solutions and financing since 2022. He started writing professionally about business related topics in 2012. Jon has been featured in Business Insider, OC Journal, the OC Wave, Entrepreneur Magazine & other publications. He has a bachelor's degree in Business Administration from California State University Monterey Bay and currently resides in Huntington Beach, California.

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