If you have never shopped at a business that offers discounts for paying by cash you might not be aware that this practice is completely legal and is even commonplace in some areas. One place you often see two different prices listed for paying by cash versus credit card is at the gas pump. Gas stations were one of the first businesses to embrace a cash discount program as it leads customers into the store to pay where they often make additional purchases. Some people think this is a special case that only applies to service stations, but in truth every merchant can take advantage of this pricing structure.
In 2013, the major credit card networks dropped rules that blocked merchants from adding transaction surcharges to cover card processing fees. As a result, only some state laws remained to deter merchants from imposing surcharges on each swipe.
Prior to 2017, ten states in the U.S. had laws against credit card surcharges, but even these states say that cash discount programs are a-okay.
A cash discount is when a business offers a discount to customers who pay by cash or check, instead of paying with a credit or debit card. The business owner adds a customizable service fee (or surcharge) to all credit and debit card transactions, and then rewards customers who pay by cash or check by giving them a discount in the amount of this service fee. Alternately, the posted price of goods in store is the credit card price and those paying by cash receive a line item discount as either a percentage of the sale or as a flat discount on each purchase.
Even those states with laws on the books against surcharges may shortly be changing their tune as local and Supreme Court decisions overrule the surcharge ban. Last January the 9th Circuit Court of Appeals in California ruled that the state’s no surcharge law conflicts with merchants’ constitutional rights to recover the costs of card transactions.
In 2015 the 11th Circuit Court of Appeals in Florida ruled that barring surcharges on credit card purchases is unconstitutional.
And in 2017, the U.S. Supreme Court similarly ruled against New York’s surcharge ban. They did so to eliminate confusion over the state banning surcharges but allowing discounts for using cash. The decision was based on semantics and free speech as a surcharge and a cash discount are two sides of the same coin.
Following the 2013 settlement between merchants and credit card companies, businesses are allowed to charge up to 4 percent on the credit card transactions they accept as long as they participate in an acceptable Cash Discount Program. And if your business is located in one of the states with laws against surcharges, you are still allowed to charge a “service fee” on credit card purchases and to offer a discount for cash transactions as long as you offer the cash discount to all customers, and display clear signage telling customers about the policy.
Offering cash discounts is a great way to reward customers for taking these transaction costs out of the system. It also allows you to begin accepting credit cards without raising prices for all customers. As surcharges are replaced with cash discounts around the country, the cash discount programs is becoming increasingly popular with merchants and customers alike.