Some retailers use discounts to encourage consumers to choose a particular payment instrument over others. For example, gas stations might offer a discount for paying with cash. Lately, as consumers worry about inflation and their household budgets, you might be seeing more discount offers.

Merchants have been able to offer discounts since 2012, when proposed legal settlements made it possible for them to do so. Another settlement between merchants and card networks, proposed this spring, would permit merchants to use discounts to distinguish among different types of a network's cards. (The settlements also encompass surcharging practices.)

In the years since 2012, discounting at the retail point of sale to steer consumers toward the merchant's preferred—usually lower cost—payment instrument has remained rare. New data from the Survey and Diary of Consumer Payment Choice, released June 3, show that the practice was unusual in fall 2023, with fewer than 5 percent of payments of any type receiving a discount. Compared to 2022, increases in the shares of payments discounted were tiny, around one percentage point for cash and credit card payments and less than one-half percentage point for debit card payments.

When a discount is offered, it's most likely to be at a gas station.

  • Discounting is most likely for credit card payments. Overall, 4.5 percent of credit card payments included a discount in 2023. At gas stations, 8.4 percent of credit card payments received a discount, presumably for using a store-branded card.
  • Cash payments were less likely to receive discounts. In 2023, 3.6 percent of cash payments were discounted. At gas stations, 6.7 percent of cash payments received a discount.
  • Debit card payments were the least likely to receive discounts—2.3 percent of all debit card payments and 4.7 percent of debit card payments at gas stations.

Why are merchants passing up the opportunity to discount for payment choice? Four factors make the decision to discount complicated.

First, will merchants cannibalize their own income?
Research by economists at Bank of Canada points out a potential downside for merchants, stating that discounts are unprofitable because they subsidize consumers who would already be using the merchant's preferred payment instrument. Why offer a discount for paying with a store-branded card when the consumer is already using that card, goes the thought.

Second, will administrative costs eat up any savings?
Merchants that discount may need to trade off increased administrative costs against any savings that result from steering consumers to use lower-cost payment instruments. Acceptance cost consists of an amalgamation of many items, among them hardware, software, theft prevention, and employee training.

Third, will differential pricing degrade the customer experience?
In our time of frictionless payments, a complicated discounting scheme could slow down the checkout line or irritate consumers who do not have the preferred payment instrument at hand.

Fourth, does discounting change consumer behavior?
Boston Fed economist Joanna Stavins has found that consumers are somewhat likely to switch to cash when offered a discount. With a discount, "the probability that a cash transaction is conducted by a consumer who prefers other payment methods increased by 19.2 percent, after controlling for merchant category and dollar value of the transaction." So, discounts can make a difference even though we have deeply ingrained payment habits.

Will you drive an extra mile to get a discount? Do you think more merchants should shift gears and offer discounts for payment choice? Are you surprised by their relative importance at gas stations?