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What’s the Difference for Small Businesses?
Small businesses often need help to maintain profitability in the face of rising costs. And in 2023, that holds true more than ever! In addition to ongoing supply chain issues, limited cash flow, and shifting economic trends, one of the most significant expenses small business owners face is the cost of credit card fees.
Luckily, several payment processing methods have emerged to help entrepreneurs reduce these costs in recent years. In this article, we’ll dive into three popular ways – surcharge, cash discount, and dual pricing – and explore how small businesses can use them to their advantage. So, grab a cup of coffee and get ready to learn how to save money while still offering your customers the best possible service.
The low-down on Surcharging
As a small business owner, you’ve likely heard about surcharges. Surcharging is a payment processing method that involves adding a fee to the total cost of a transaction when a customer pays with debit and credit cards. This fee is typically a percentage of the total transaction amount and is intended to cover the cost of accepting credit card payments. Surcharging is legal in most states in the United States, including Texas, but there are restrictions on how much merchants can charge and how they must disclose the surcharge to customers.
For small businesses, surcharging can effectively reduce the cost of accepting credit card payments without raising prices for all customers. This can be particularly beneficial for small businesses that operate in highly competitive markets where pricing is a major factor in customer purchasing decisions.
However, surcharging can also be a source of frustration for customers who may feel that they are being penalized for using a credit card to make a purchase, especially on large purchases where the surcharge fee can add up. Also, small businesses must comply with all applicable laws and regulations when surcharging to avoid potential legal issues.
Bottomline: Surcharges can help business owners offset credit card processing fees, but it’s not a fan favorite among customers, especially those making large purchases; plus, there’s legal red tape depending on the state you’re in, so proceed with caution.
What about Cash Discounting?
Cash discounting is a payment processing method that offers a discount to customers who pay with cash instead of a credit card. This discount is typically a percentage of the total transaction amount and is intended to offset the cost of accepting credit card payments. There are no registration or regulatory requirements for cash discounting, and it is legal in all 50 states when implemented correctly.
For small businesses, cash discounting can incentivize customers to pay with cash, which helps business owners reduce the overall cost of accepting credit card payments. But here comes the stickler (and it’s in the details):
There are a couple of Cash Discounting variations:
- True Cash Discounting shows the ticket total, with a separate line item displaying the cash discount. However, unless the business posts both cash and credit prices on its shelves, menus, and ads, this may still be a surcharge in disguise. A true cash discount means the price is lowered for customers who pay in cash. If the posted price on the shelf is already the cash price WITHOUT displaying the credit price, then that is not a cash discount. It’s just the regular price for that item. To be compliant, if a business displays a $10 price on the shelf, they must charge cash-paying customers less than $10 at the register to give a cash discount. If you are confused at this point, this is the stickler. But let’s move on.
- Then there is a non-compliant cash discount that adds a line item that shows a non-cash adjustment (or NCA), a service fee, plus the amount. But regardless of what the business calls it, this is a surcharge fee because it adds a charge at the point of sale beyond the posted price.
Visa states the cash discount rule forbids businesses from implementing programs that involve adding an extra fee to the regular price of the items to be purchased and then offering an immediate discount of that fee at the checkout only for customers who pay with cash, debit card, or prepaid card. Merchants participating in this cash discount program may face non-compliance consequences, which may result in severe penalties such as substantial fines and termination of their merchant account. No thanks.
Bottomline: Cash Discounting, when done correctly, can be a great way to save from paying hefty credit card fees, but in most cases, confusion surrounding the implementation of this program often leads to non-compliance.
Dual Pricing is not Cash Discounting. Here’s why.
If you read our latest blog article, “What is Dual Pricing?” you will know that Dual Pricing is the most compliant way to offset credit card processing fees. So let’s break down the requirements:
- Signage is present in-store, notifying customers that TWO prices are available.
- Two prices are listed on the receipt: A cash price AND a card price
Dual pricing is a payment processing method that involves offering different prices for the same product or service depending on the method of payment used, saving the merchant 4% on average per transaction.
Dual pricing is legal in all 50 states, but there are restrictions on how merchants must disclose the different prices to customers. For small businesses, dual pricing can effectively offer lower prices to customers who pay with cash without penalizing customers who prefer to use a credit card. Transparency is the core tenant of Dual Pricing and, most importantly, highly beneficial for small businesses that operate in markets where credit card fees are a large portion of their overall expenses.
However, dual pricing can also be a source of confusion for customers who may need help understanding why the price is different depending on the method of payment used. Hence, displaying signage upon entry, on the shelf or menu, and at the register is critical. Additionally, small businesses must be careful to comply with all applicable laws and regulations when using dual pricing to avoid potential legal issues.
Bottomline: Dual Pricing is the most compliant way to reduce credit card fees, but small business owners must adhere to being transparent by displaying signage and listing both credit card and cash prices on the shelf, register, and on receipt.
Are We Done Yet?
As a small business owner, your time is precious. So, in conclusion, surcharging, cash discounting, and dual pricing are three payment processing methods that small businesses can use to reduce the cost of accepting credit card payments. Each method has its benefits and drawbacks, and the best option for a small business will depend on its needs.
Needing guidance on what method is best for your business? Get a free assessment today from our KokuaPay Merchant Services Team. We got you.