In a recent post, I reviewed the structure of credit card surcharging programs that a panel discussed at the Southeast Acquirers Association conference earlier this year. Since that post, some of my colleagues who have encountered cash discount programs asked me if they were simply the flip side of credit card surcharging. While there are some similarities in the requirements of the two programs, there are some key differences.
Cash discount programs became legal across the United States in October 2011, following the passage of the Durbin amendment of the Dodd–Frank Act. That amendment permitted merchants to offer a discount to cash (or check) customers as an incentive to use those payment methods instead of cards. The way it works is that the merchant charges a service fee to all transactions that the merchant then reverses or discounts if the customer pays with cash or check.
The sample receipts below illustrate the difference between a purchase made with a payment card and a cash payment from a merchant who uses a flat service charge pricing option.
Unlike surcharges, which apply only to credit card payments, service fees are applied against all types of card payments. And while surcharge program fees are always a certain percentage of the transaction, a cash discount program can use a flat fee (usually based on the average ticket size) or a percentage of the transaction amount. Businesses with a wide range of sales values would best be served using the percentage model, while a flat fee works better for businesses with relatively consistent ticket sizes. Credit card surcharge program rates are capped at 4 percent of the transaction amount, but cash discounting has no restriction. Of course, the higher the service fee the more likely the customer will be to notice and possibly move to another merchant who does not have such a program.
As with surcharges, the cash discount merchant must prominently display consumer notices at the entry points of the store as well as at the register about the service charge—that the customer can reduce or avoid by using cash. In addition, the sales receipt must explicitly display the service charge and, when applicable, the cash discount.
Among the possible benefits, merchants can lower their effective card processing expenses by collecting the service charge. Colleagues at the Boston Fed authored a discussion paper titled "Why Don't Most Merchants Use Price Discounts to Steer Consumer Payment Choice?" in late 2012 that reviewed a number of factors that might cause merchants to think twice about implementing a cash discount program. I believe the factors they reviewed are as relevant today as they were at the time of the paper. As for the credit card surcharge, the merchant has to consider customers' potentially negative response to such a fee, especially if they believe that the merchant has already built much of the cost of payment acceptance into the goods and services.
Merchants have to register credit card surcharge programs with the card brands prior to implementation. However, cash discount programs have no such requirement, so their adoption rate among the merchant community is difficult to quantify. One indicator may be from the Federal Reserve's 2015 Diary of Consumer Payment Choices. According to an analysis of the data, the national sample of respondents indicated they received a cash discount on 1.9 percent of their non-bill transactions that had a median value of $20. Interestingly, in a breakdown by industry type, transactions at automobile/vehicle-related and entertainment/transportation businesses were more likely to offer a cash discount—of 8.2 percent and 5.1 percent, respectively.
What has been your experience with cash discount or credit card surcharging programs? Did such a program cause you to change your initial form of payment?
By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed