Cash Discount vs. Surcharge: What’s the Difference and How to Use Them
As consumers become more aware of fees and extra charges, businesses are racing to increase transparency in their prices and transactions. With the increasing prevalence of online and in-store credit card payments, surcharges and cash discounts are getting a lot of attention from customers.
In this article, we’ll review what credit card surcharges and cash discounts are, how they impact customers and how you can use them to your business’s advantage.
Let’s begin by exploring credit card surcharges.
What is a surcharge?
Credit card usage is increasing, leading to higher costs associated with using and accepting cards for payments. Between 2021 and 2022, credit card transactions in the United States increased by 22.5%. As more people use credit cards, businesses face the burden of covering processing fees, as every card transaction incurs service fees due to the complex, multi-step process of processing card payments. Many companies are passing these costs on to their customers in the form of surcharges.
Credit card surcharges are additional fees businesses charge customers who use credit cards to compensate for the costs incurred in processing credit card transactions. Typically, these surcharge fees range from 1-4% of the total transaction amount, depending on the business, card type, and purchase location.
Is a credit card surcharge legal?
Credit card surcharge laws and regulations vary depending on the location. While surcharges are legal in many countries outside the United States, they are often regulated to safeguard customers from unfair practices. Several regions, particularly in the EU, have restricted or prohibited surcharges for customer transactions.
Credit Card Surcharge Laws by State
In the United States, most states permit credit card surcharges, but remember: surcharge amounts are always capped at a maximum percentage of each transaction, and laws prohibit merchants from profiting from surcharge fees. Currently, Connecticut, Maine, Massachusetts and Oklahoma outlaw or limit surcharging, while others have laws that regulate the practice. Wherever you are located, it’s important to research and understand your specific practice and disclosure requirements.
Experts expect credit card surcharge laws and regulations to continue evolving, so it’s vital to ensure that you’re compliant with local laws and work with your payment processing partner, such as Payway, to ensure compliance.
What about debit cards? Adding a surcharge to debit and prepaid card transactions is prohibited, even if the customer bypasses the PIN for a signature-based debit transaction. If your establishment has an on-premises cash machine, remember that ATM surcharge fees are also illegal.
How do businesses need to disclose surcharges?
Merchants in many locations are required to inform customers about any surcharges before they complete their purchases. For in-store transactions, businesses must clearly indicate if a surcharge will be added based on the final transaction amount. Many companies display signs at the store entrance and checkout counter to ensure customers know about the additional fee.
For online transactions, merchants must explicitly disclose their surcharge practices and rates on their website, specifically on the page where customers select their payment method.
All receipts must list the surcharge and identify it as a credit card fee, whether for an online or in-person purchase.
What types of cards can merchants apply surcharges to?
Businesses can add surcharges to most credit card transactions, including those from major card companies like Visa, Mastercard, Discover and American Express. Keep in mind that even if a debit card is associated with a credit card brand, businesses cannot add a surcharge to the transaction.
Since rewards credit cards often have higher processing fees, some merchants will add higher surcharges to those transactions. However, if a business chooses to surcharge one brand or type of credit card, it might be required to surcharge all other credit cards equally, depending on card network rules and local regulations.
The regulations regarding credit card surcharges vary significantly between countries and individual U.S. states. Therefore, being familiar with and adhering to the specific laws in your area is vital. Communicate with your credit card processor regularly to ensure that you remain compliant.
How do you calculate surcharges?
To determine surcharge fees, businesses in the U.S. must follow several steps:
Step 1: Calculate the processing fee
Surcharge fees are based on the interchange and processing fees businesses incur when accepting card payments and typically range between 1.3% and 3.5% of the total transaction amount.
Step 2: Determine the surcharge rate
Surcharges cannot exceed the total cost of processing the credit card payment. This is generally capped at 4% but differs based on local regulations and the card brand.
Before implementing a surcharge program, you must be aware of the requirements of each card brand, as surcharge limits vary. For example, Mastercard limits surcharges to 4%, while Visa specifies that merchants cannot impose surcharges exceeding 3%.
Step 3: Inform the card networks
Businesses must notify the card networks at least 30 days before implementing surcharges.
Step 4: Inform customers
Perhaps the most crucial step in preserving customer satisfaction is for businesses to disclose the surcharge program to customers before completing a purchase. This can be done via signage in brick-and-mortar establishments and through notices on checkout pages online.
Step 5: Surcharge consistently
Businesses must surcharge all credit card transactions uniformly to maintain compliance.[1]
Since surcharge regulations and practices are complex, we recommend working with your payment processor, such as Payway, to ensure your program runs smoothly and within legal boundaries.
What is a cash discount program?
Cash discount programs allow businesses to increase their prices overall to cover credit card transactions and processing fees while offering a discount to those paying with cash. Many companies opt for cash discount programs to eliminate most or all their credit card processing fees. Those who choose to pay via card pay the standard, increased price without hassle, while those who select cash enjoy a small discount.
Remember: cash means more than just paper money. Cash discounts can apply to ACH and check payments, too.
Increasing prices across your business or adding credit card surcharges based on specific items, card brands and regulations can sound time-consuming and intimidating. Fortunately, with a robust payment gateway and credit card processing partner, you can access the support and tools you need to simplify both processes. Learn about Payway’s cash discount program features >
A cash discount program differs from surcharges since it shifts the onus of the credit card processing fee. Some key differences:
- Card brand rules state that merchants can provide lower prices for cash transactions
- Businesses are not allowed to post a price for cash and then charge a higher price for cards unless both options are presented to cardholders (think of how gas stations present current pricing)
- Cash discounts can increase cash handling and may lead to security concerns
What is the legality of surcharges vs cash discounts?
Like surcharges, cash discount regulations vary by region. Since discounting can lead to unfair pricing practices, some locations have laws to protect customers that impact the legality of cash discount programs.
How do credit card surcharges and cash discount programs impact customers?
Implementing and using both cash discount programs and surcharges has benefits and challenges. While there are many variables and factors to consider for your specific business needs, here are some of the most common benefits and challenges for both surcharges and cash discount programs:
| Credit Card Surcharges | |
|---|---|
| Benefits | Challenges |
| Offset or eliminate your card processing fees | Reduced customer satisfaction among card-paying customers |
| Encourage more cash payments | Required to implement signage to inform customers of surcharges |
| Lower product prices for customers | Must manage complex regulations |
| Cash Discount Programs | |
|---|---|
| Benefits | Challenges |
| Reduced processing fees from more cash payments | Customers may be confused about pricing and may perceive it as a surcharge |
| Legal across the United States | Increased cash transactions pose security risks |
| Positive customer perception of discounts | Cash-paying customers may make fewer impulse purchases |
Navigating the Future of Payment Processing
Both credit card surcharges and cash discount programs are great strategies for businesses to reduce the costs associated with card processing. While surcharges allow businesses to pass these costs directly on to customers who choose to pay via card, cash discount programs incentivize cash payments with an attractive discount. Each method has its own legal considerations, benefits and challenges, so take the time to determine which strategy is right for your unique business needs.
As we look ahead, the landscape of payment processing will continue to evolve and change, driven by technological advancements and new regulations. Consumers are becoming more aware of the fees businesses impose, making it more important than ever for merchants to increase transparency.
If you’re considering implementing a credit card surcharge or cash discount program for your business, reach out to our concierge support team for help, determining which strategy is right for your business and the right path towards implementation. Contact our experts today to get started.
Sources:
[1] The Ultimate Guide to Credit Card Surcharging for 2024 (highradius.com)
What are credit card surcharges? | Fortune Recommends
Guide to Credit Card Processing Fees (with calculation) (highradius.com)
The Ultimate Guide to Credit Card Surcharging for 2024 (highradius.com)
Pros & Cons of Cash Discount Programs – Microbiz Cloud POS
Discover Where Surcharging Is Allowed: A Comprehensive Guide (staxpayments.com)
Merchant Surcharging Considerations and Requirements (visa.com)
Credit Card Surcharge Rules & Fees for Merchants | Mastercard