Credit card processing companies are popping up left and right offering “cash discount” programs to eliminate your credit card processing fees. Are they legal and are they permitted in merchant agreements?
The short answer: yes, when done correctly.
The longer answer is that there’s a lot of confusion about the difference between “cash discounts” and “surcharges”, and that confusion has led to labeling surcharge programs as cash discount programs. Let’s look at the differences between the two and how you can stay on the right side of laws and card brand regulations.
Cash Discount vs. Surcharge
A cash discount is when you post credit card prices and offer a discount on that price for customers who pay with cash.
A surcharge is when you post cash prices and charge an additional fee on top of that price for customers who pay with a card.
In the first situation, a customer pays less than the listed price. In the second case, they pay more than the listed price.
If you charge more at the register than the listed price, it is a surcharge, regardless of what processors call it. Even if a processor tells you that you’re simply adding a “service fee” or a “non-cash adjustment” it is still a surcharge.
While it may sound like a minor difference, it’s actually very important in terms of legality and compliance with card brand rules. Getting it wrong means risking fines or having your merchant account shut down.
Sources – Visa, The Durbin Amendment, CardX
CardFellow reached out to Visa and MasterCard to confirm the distinction between cash discounting and surcharging. At the time of publication, MasterCard has not replied to CardFellow’s request for clarification on cash discounts. However, Visa provided a clear statement.
When asked about cash discounts, Visa told CardFellow: “A discount for cash is different from a surcharge. The rule states the posted price must be for cards, however, merchants can provide a lower price for cash acceptance. Discounts for cash are allowed by Visa. However, merchants are not permitted to post a price for cash, and then charge a higher price for cards”[Emphasis added].
In this statement, Visa clearly explains that a business offering a cash discount is allowed, but that the posted price must be for cards. Businesses can offer a lower price from that posted (card) price as a cash discount.
The Durbin Amendment
Visa’s statement squares with definitions found in The Durbin Amendment as published on the Cornell Law School website, which states that payment card networks will not restrict business’ ability to offer a discount for cash and check payments. It defines “discount,” stating: “The term “discount”— (A) means a reduction made from the price that customers are informed is the regular price; and (B) does not include any means of increasing the price that customers are informed is the regular price”.
This section clarifies that a discount must be a reduction in price – not an increase in price. Some processors may argue that the “regular price” is the cash price. However, if the regular price is the cash price, then no discount on the regular price is being offered.
We also reached out to CardX, a company that offers surcharge programs. CardX founder and CEO Jonathan Razi, a Harvard Law School graduate, explains that the definition of “regular price” comes from the Truth in Lending Act, specifically U.S.C. §1602(y).
“…The term “regular price” means the tag or posted price charged for the property or service if a single price is tagged or posted…” [Emphasis added].
The “posted price” refers to prices posted on shelves, menus, or in advertisements. So, if a business posts a $10.00 price on a shelf, they would need to charge cash-paying customers less than $10 at the register in order to be offering a cash discount. Otherwise, it’s a surcharge.
Razi confirms, “If the price on the shelf is $10.00, any fee added at the register constitutes a “surcharge” under U.S.C. §1602(r).
“The term “surcharge”…means any means of increasing the regular price to a cardholder which is not imposed upon customers paying by cash, check, or similar means”.
Like Visa, Razi is unequivocal in his explanation. “The bottom-line is that most purported “cash discount” programs are non-compliant, because they list the cash price on the shelf and then add a fee at the point of sale. This brings them under the card brand rules for surcharging … Instead, a true “cash discount” program must increase the price listed on the shelf and then reduce it at the register when customers choose cash”.
Some processors are becoming aware of the distinction. Razi mentions that First Data’s Clover removed all “cash discount” programs from its app marketplace, stating in an email to users, “A ‘true cash discount’ does not add any fees or surcharges at the register”.
First Data confirmed to CardFellow that the cash discount apps have been removed but that it’s possible to surcharge through the Clover system.
In some jurisdictions, it may be possible (or required) to post both the cash price and the credit price in dollars and cents with equal prominence.
States Where Surcharging is Banned
Primarily, while cash discounts in their true form are allowed in all 50 states, a handful of states have laws against surcharge programs. If you surcharge in a state with a law against it, you’re breaking the laws of that state. As of 2019, surcharging is prohibited by law in California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas, according to the National Conference of State Legislatures. Puerto Rico also has a no-surcharge law.
Surcharge laws have come under scrutiny in recent years, and several states have gone to court over the practice. State laws where surcharges are prohibited may change in the future. We’ll update this map as those laws change, but it’s a good idea to check with your lawyer or state Attorney General for the latest information before surcharging.
Surcharge Prohibitions on Debit Cards
Secondly, surcharges are never permitted on debit cards. This is true even if cards are “run as credit” and even in states where credit surcharges are legal. Visa’s FAQ on surcharging clearly spells out that surcharges cannot be applied to debit.
Visa debit Surcharge
If you’re adding a surcharge to a debit transaction, even if you’re calling it a “non-cash adjustment” you’re risking your merchant account.
Razi explains: “You cannot apply a fee above the listed price to a debit card, no matter what the fee is called. When you list a price and then add a fee at the point of sale, it is by definition a surcharge under the law, and must comply with the card brand rules (and state laws, where applicable). For this reason, the fee (whether labeled a “surcharge”, “non-cash adjustment”, “service fee”, or anything else) can never be applied to a debit card, and “cash discount” programs that add a fee to debit are exposing their merchants to fines and shutdowns by the card brands”.
The consequences for surcharging debit or for implementing a cash discount program that’s really a surcharge program without complying with surcharge rules can be serious. Processors can shut down accounts when they’re informed by the card brands of non-compliance. Furthermore, both Visa and MasterCard have forms on their websites that allow cardholders to easily report being charged a fee for card use.
For violations of the card brand rules, Razi states that businesses can be fined $1,000 per occurrence, increasing to $5,000, $10,000, and $25,000 per occurrence for repeated violations. Ultimately, the merchant may be added to the Terminated Merchant File (“TMF,” or MATCH list) which makes it difficult to secure a merchant account from any processor in the future.
For the sake of your merchant account and your wallet, be sure you’re on the right side of laws and card brand regulations before surcharging or signing up for a cash discount program.
Spotting a Surcharge Program
The tricky thing is that many processors offering “cash discount” programs are actually offering surcharge programs but labeling them as “cash discount” programs. How can you tell if a processor is offering a true cash discount program, or if it’s a surcharge program in disguise? Look for the following:
Reference to a “non-cash adjustment” or a “service fee”.
If a processor states that customers paying with cards will receive a non-cash adjustment or service fee when they check out, it’s a surcharge program.
Explaining you’ll post “cash prices”.
Processors offering surcharge programs may explain that your business will list “cash prices” on shelves and will add a fee for customers that don’t pay with cash. If you’re not posting credit card prices and offering a discount for cash, it’s a surcharge program.
In the screenshot below, a company introducing a “cash discount” program incorrectly states that charging a service fee is not a surcharge program.
Looking at the first sentence with the phrase “customer service” removed shows more clearly that it’s a surcharge program. The sentence would read, “This program enables merchants to charge a fee to their customers that pay with any form of payment other than cash…” Charging a fee for paying with a card is, by definition, a surcharge. Claiming that it’s a “customer service” fee doesn’t change that. Tellingly, the company also references a 4% cap, which is the maximum Visa and MasterCard allow for surcharges.
Unfortunately, some processing companies wrongly address the difference between a cash discount and a surcharge. For example, you may see a FAQ section with a question like, “How is a cash discount different from a surcharge?” In the screenshot below, a company answers that question by saying that a cash discount means offering a lower price for cash, with the posted prices being cash.
Surcharge vs. Cash Discount
As covered thoroughly in this article, the posted prices must be for cards, with the discount offered on that posted price. Posting cash prices and then implementing a fee at the register is a surcharge.
Of course, not all surcharge programs are misleadingly called cash discount programs. Many processors offer surcharging capabilities and can help you implement surcharges as long as they’re legal in your state. Read more about adding a fee for credit card transactions.
Should You Implement a Cash Discount?
Implementing a true cash discount program sounds like a no-brainer, but keep in mind that to do so, you’ll need to list credit prices on the shelves. If you’ve already priced your goods and services to account for the cost of credit cards, implementing a cash discount program is easy. You won’t need to change your shelf or menu pricing and can simply offer a discount on those prices to cash customers.
For most businesses, there’s no harm in offering a cash discount if you’ve set prices to account for cards. It simply means that you’re passing the credit card processing fee savings to your customer. However, be aware that some customers think that cash-preferring businesses may not properly pay taxes, which can negatively affect perception of your business.
By contrast, surcharge programs add a fee at the time of checkout. Some surveys indicate the customers react negatively to added fees, so you may find more resistance to a surcharge program than to a cash discount program. Additionally, surcharges cannot be added to debit cards, so be aware that you’ll still pay the costs associated with processing debit cards. This is true even if you don’t accept PIN debit and run the debit cards “as credit”.
Cash Discounts and Surcharge Programs Aren’t Actually Bad Ideas
However, surcharge programs disguised as cash discount programs can open you up to negative repercussions. If you want to take advantage of a cash discount program to lower your processing fees, be sure to choose a processor that will help you correctly implement it. Avoid processors peddling surcharge programs under the “cash discount” name.
Contributor: ELLEN CUNNINGHAM, CardFellow
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