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Xsellarate Blog


Jon Millikan

Expert Analyst & Contributor

Understanding Cash Discounting & Credit Surcharging: A Guide for Merchants

Updated: Sep 29, 2023

Cash In Cart

1. Introduction

In the ever-evolving world of commerce, staying informed about the financial landscape is more than just a smart business move—it's essential for survival. Today, with a rising number of consumers reaching for plastic rather than paper, merchants face a challenging decision on how to handle the costs associated with credit card transactions.

Understanding the intricacies of cash discounting and credit surcharging can make a world of difference to a merchant's bottom line. With an estimated rise in credit card usage over the last decade, small businesses, in particular, stand at a crossroads. They need to decide whether to absorb these costs, pass them on, or adopt alternative strategies to encourage cash payments. And with the balance of profit margins and customer satisfaction on the line, this decision is anything but trivial.

2. What is Credit Surcharging?

When you hear the term 'credit surcharge,' what comes to mind? For many, it might sound like another business jargon. But for merchants, it's a crucial tool in the financial toolkit. In essence, credit surcharging is the practice of adding an additional fee to transactions made using a credit card. This fee is meant to cover the costs that merchants incur when processing these transactions.

There are a handful of compelling reasons why a business might opt for credit surcharging:

  • Mitigating Costs: Every time a customer swipes a credit card, merchants have to pay a fee. Over time, these fees can accumulate, taking a significant bite out of a business's revenue. By implementing a surcharge, businesses can offset or even nullify these costs.

  • Transparency: Instead of hiding the costs in product prices, merchants can be upfront about the fees associated with credit card transactions. This can create a more transparent relationship with customers.

  • Encouraging Other Payment Methods: By making credit transactions slightly more expensive, some customers might opt for other payment methods, such as cash or debit, which could be more cost-effective for the merchant.

But how prevalent is this practice? It's more common than you might think. According to recent statistics, just over half (51%) of small businesses in the United States have incorporated credit surcharges into their payment systems.

With the rise in credit card usage and the financial implications attached to it, understanding and potentially adopting credit surcharging could be the key to maintaining profitability for many businesses in the modern marketplace.

3. Benefits of Credit Surcharging for Merchants

In today's fast-paced business environment, efficiency and strategic decision-making are at the heart of success. With the increasing use of credit cards for everyday transactions, merchants are more frequently facing the dilemma of high processing fees. Enter the solution: credit surcharging. This financial maneuver comes with several tangible benefits for merchants, particularly those operating on slimmer margins.

  • Absorbing Processing Fees: One of the primary advantages of credit surcharging is that it directly addresses the problem at hand. Instead of the merchant shouldering the entirety of the processing fee, a small charge is passed onto the consumer. This ensures that businesses don't lose out every time a credit card is swiped or inserted.

  • Boosting Profit Margins: For small businesses, every cent counts. Narrow profit margins can be the difference between thriving and merely surviving. By implementing surcharges, these businesses can protect and potentially enhance their profit margins, making them more resilient against financial fluctuations.

  • Enhancing Customer Transparency: On the surface, adding an extra fee might seem like a deterrent for sales. However, being upfront about these charges can be perceived as transparency by customers. Rather than covertly embedding these fees in product prices, merchants can clearly communicate the costs, allowing consumers to make informed decisions.

  • Potentially Driving Sales Elsewhere: While surcharging tackles the problem of credit card fees, it also indirectly promotes other forms of payment. If a customer wants to avoid the surcharge, they might be more inclined to use cash or other payment methods that don't carry additional fees for the merchant.

A woman in a red shirt holding cash and a credit card

4. What is Cash Discounting? Learn More

If credit surcharging is one side of the coin, cash discounting represents the other. But what exactly is it? Simply put, cash discounting is the practice where merchants offer a discount to customers who choose to pay with cash instead of credit. It's a proactive way to encourage consumers to opt for a payment method that doesn't come with added processing fees.

At first glance, cash discounting and surcharging might seem like two sides of the same strategy. While both methods aim to offset the costs associated with credit card transactions, they approach the problem differently. Surcharging adds a fee to credit transactions, while cash discounting provides an incentive (a discount) to those who forgo credit in favor of cash.

Current Trends in Cash Payments:

The move toward digital payments and credit transactions has been undeniable, but cash remains a significant player in the game. Recent statistics provide a glimpse into consumers' payment preferences:

  • In 2019, 23% of consumers preferred to pay with cash, marking a 4% decrease from 2016. This data underscores the gradual shift towards electronic methods of payment but also highlights a substantial segment of the population that still leans towards tangible currency.

The introduction of strategies like cash discounting gives merchants a dual approach. While credit surcharging addresses the immediate financial concern of processing fees, cash discounting plays a longer game, incentivizing behaviors that could lead to a more sustainable and cost-effective business model.

5. Benefits of Cash Discounting for Merchants

With the technological wave sweeping across industries and digitizing payment methods, the timeless allure of cash might seem to fade. However, cash discounting breathes fresh life into this age-old medium of transaction, bringing along a plethora of benefits for merchants.

  • Boosting Cash Transactions: A significant benefit of cash discounting is its direct influence on consumer behavior. By offering tangible savings for those who pay in cash, merchants can motivate a noticeable portion of their customer base to revert to this traditional mode of payment.

  • Reducing Processing Fees and Costs: Credit card transactions invariably come with associated processing fees, eating into a merchant's profits. Cash transactions, on the other hand, eliminate these fees. So, every customer that opts for cash over credit due to the discount indirectly contributes to the merchant's savings.

  • Attracting Cost-Conscious Customers: In a world where consumers are perpetually hunting for deals and discounts, a cash discount can serve as a beacon. By advertising a price reduction for cash payments, merchants can appeal to the vast demographic of budget-conscious consumers, potentially boosting footfall and sales.

6. Average Interchange Fees: A Closer Look

The financial world behind swiped or tapped credit cards is intricate, with several players making the process seamless. Central to this ecosystem are the card networks, entities that facilitate the electronic movement of money between merchants, banks, and consumers. These networks, while making transactions smooth, impose certain fees called interchange fees. These are essentially costs paid by merchants to the cardholder's bank as a part of credit card transactions.

To better understand the weight of these fees, here's a table detailing average interchange fees by major card networks in the U.S., as reported by various sources:

Interchange Fee by major card networks

Understanding these rates can empower merchants to make informed decisions regarding pricing and payment methods, ensuring profitability and customer satisfaction.

7. Payment Processing Rates Explained:

The dynamics of the modern financial ecosystem have revolutionized the way merchants handle payments. Integral to this change are the various pricing models associated with payment processing. These models, though seemingly similar, can have distinct implications for merchants.

Explanation of Various Pricing Models:

  • Membership (Subscription): Under this model, merchants pay a monthly membership fee and get the benefit of wholesale rates on transactions. This is popular among merchants with high-volume sales as it often results in predictable monthly costs.

  • Tiered Pricing: This is a three-tier system - qualified, mid-qualified, and non-qualified. The rates a merchant pays depend on the type of card used and how the transaction is processed.

  • Flat-Rate Pricing: With this model, merchants pay a fixed percentage regardless of the card type or transaction method. It's straightforward and best suited for businesses with smaller transaction volumes.

Sample Rates:

  • Cost Implication for Merchants: The choice of a pricing model can substantially impact a merchant's overall costs. While the flat-rate is transparent and predictable, the tiered model can sometimes result in higher fees, especially if many transactions fall under the non-qualified category. On the other hand, the membership model might be cost-effective for merchants with consistently high transaction volumes.

8. Customer Preferences: Credit Card Usage Insights:

As the financial landscape continues to evolve, so do consumer preferences. To navigate the intricate terrain of modern business, merchants must understand their customers' inclinations.

  • Breakdown by Purchase Type:

  • International Perspective: Non-Cash Transactions by Country

Cash Usage Insights:

  • By Age:

    • Under 25: 34%

    • 25-34: 18%

    • 35-44: 19%

    • 45-54: 27%

    • 55-64: 31%

    • 65+: 33%

Cash Usage by Age

  • Amount of Cash Carried by Average Individuals:

    • <$40: 42%

    • $41-$99: 30%

    • $100-$199: 17%

    • $200+: 11%

Amount of Cash Carried By Average Individuals

  • $10 Purchase Payment Choice: When faced with a modest $10 purchase, the average person's inclination is almost evenly split between debit cards and cash, with 37.7% opting for the former and 37.5% for the latter. Credit cards account for 24.7%, while mobile wallets are rarely used at 0.1%

$10 Purchase Payment Choice

Understanding these insights provides merchants with a holistic view of the current market scenario, helping them cater better to their clientele and optimize their business operations.

Credit card machine accepting payment from credit card tap, and digital wallet tap

9. How to Choose Between Credit Surcharging and Cash Discounting for Your Business

The decision between credit surcharging and cash discounting isn't a one-size-fits-all approach. Different businesses have varying needs, and what might work for one may not necessarily be the best for another. Here's a guide to help you navigate this choice:

  • Factors to Consider:

    • Business Model: A subscription-based business may have different payment dynamics compared to a traditional retail store.

    • Average Transaction Value: For high-ticket items, the fees from credit card transactions can significantly add up, making surcharging a viable option.

    • Customer Demographics: Younger audiences may be more inclined to use cards, while older demographics may prefer cash. Knowing your audience can help you cater to their preferences.

  • Pros and Cons:

    • Credit Surcharging:

      • Pros: Helps offset transaction fees, possibly increasing overall revenue. Provides a level playing field when competing with larger businesses.

      • Cons: May deter some customers from making a purchase if they feel they're being penalized for using their card.

  • Cash Discounting:

    • Pros: Encourages cash payments, reducing the burden of processing fees. Can be an enticing offer for cost-conscious customers.

    • Cons: If not communicated effectively, it might confuse or even upset customers who feel they're getting a worse deal when not paying in cash.

  • Expert Tips and Recommendations: Our team of financial experts at Xsellarate has extensively studied both methods. See Our Cash Discount Insight Page for insights on the nuances of each strategy and how it fits different business models.

10. Real-world Case Studies Detailed case studies can be found here

Understanding the theory behind credit surcharging and cash discounting is essential. Still, there's nothing like real-world examples to truly grasp the impact of these strategies:

Chalet Basque

  • Background: A Basque Restaurant in Bakersfield California was grappling with high processing fees.

  • Strategy: They introduced credit surcharging after analyzing their customer demographics and noticing a high percentage of credit card transactions.

  • Outcome: Within six months, their overall revenue saw a noticeable boost of 8.96%. Additionally, an unexpected advantage was an increase in customer inquiries about the policy, leading to more in-store engagement.

All Angles Brand

  • Success Story #2: All Angles Brand

    • Background: A apparel start-up near Salt Lake City Utah needed a solution that would support their growing business. Interchange fees were becoming taxing on the financial structure of the business.

    • Strategy: Given the preference for cash transactions, they implemented a cash discounting system.

    • Outcome: Not only did they reduce their processing fees by $1341, but they also saw an increase in customer loyalty as patrons appreciated the savings they received.

  • Lessons Learned and Takeaways:

    • Clear Communication is Key: Whether opting for surcharging or discounting, ensure customers understand the policy. This reduces potential friction and enhances transparency.

    • Stay Adaptive: Regularly review the strategy in place. As customer behaviors and market dynamics change, it's crucial to adapt and evolve.

    • Customer Feedback Matters: Listening to customer feedback can provide invaluable insights. After all, they're at the receiving end of these policies.

These sections offer businesses insights into the practicalities of implementing credit surcharging and cash discounting, with concrete examples and actionable lessons.

Looking at metrics, people icons

11. Additional Resources for Merchants

Navigating the world of financial strategies for merchants can sometimes feel like a maze, but the right resources can help illuminate the path. Here are some key resources that can aid in your journey:

  • Further Reading: Dive deeper into the nuances of credit surcharging and cash discounting. Understand the global trends, the legislative implications, and more.

  • Frequently Asked Questions (FAQs): Have a specific query? Our comprehensive FAQs section is designed to address the most common questions that merchants have.

  • Dedicated Support: Whether you're an existing client or a business considering your options, our dedicated support team is here to help. Connect with industry professionals and get real-time assistance. Visit our support section for more details.

12. Conclusion

In today's fast-paced, digitized marketplace, understanding the intricacies of financial strategies like credit surcharging and cash discounting is no longer just an added advantage—it's imperative. As consumer behaviors shift and industries evolve, merchants must remain agile, making informed decisions that safeguard their profitability and foster growth.

The choice between surcharging and discounting is not binary. It's a reflection of your business's unique needs, challenges, and objectives. As we've explored throughout this piece, each strategy comes with its own set of benefits, and the onus is on businesses to discern which aligns best with their model.

In closing, we encourage merchants to continually assess their financial landscape. Evaluate the data, consult with experts, and above all, listen to your customers. The right strategy, implemented thoughtfully, can not only impact your bottom line but also enhance the overall customer experience.

Here's to making informed, impactful choices in your business journey!

13. See For Yourself

Navigating the financial intricacies of today's business landscape might seem daunting, but remember, you're not alone. Tailored advice, custom solutions, and hands-on support can transform the way you approach credit surcharging, cash discounting, and more.

At Xsellarate, we pride ourselves on understanding the unique challenges merchants face. Whether you're at the crossroads of deciding between surcharging and cash discounting or simply seeking to optimize your current financial strategies, our team is here to guide you every step of the way.

Dive into our specialized packages designed with businesses like yours in mind. Let's collaborate, innovate, and elevate your financial journey together.

🔗 Reach out to Xsellarate today and discover a world of possibilities tailored just for you.

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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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