Cash Discounts vs Surcharging: Which Zero Fee Credit Card Processing Program is Better?
If you’ve ever done research on how to lower or eliminate your credit card processing fees, you’ve likely come across the concept of “zero fee credit card processing” — a program that promises to help businesses escape the dues and assessments that come with accepting credit cards.
Many sales agents are keen on selling zero fee programs, but how exactly do they work?
Here’s the short answer: zero free credit card processing programs pass the fees onto your customers so that you, the merchant, won’t have to pay credit card fees.
You can do this in two ways: implementing cash discounts or running a surcharge program.
Let’s take a look at each of these options.
Surcharging Credit Cards
Surcharging works by adding a fee to any credit card transaction. This is the most straightforward approach where the merchant adds a percentage to the transaction when the shopper chooses to pay via credit card.
For example, a merchant could decide to add a 3.5% surcharge to all credit card transactions. In this scenario, if a customer purchases a $10 product, they would need to pay an additional $0.35 making the total $10.35.
Cash Discount Program
With cash discounts programs, all prices in the store are marked up to credit card prices — meaning the fees are already baked into your product prices. But if someone chooses to pay using cash, a discount is given at the point of sale.
As an example, let’s say a merchant prices all items in their store as credit card prices. In this instance, that $10 product we mentioned above is now priced at $10.35. If a customer buys that item and chooses to pay via cash, they can get a discount of $0.35, so they end up paying just $10.
Cash Discount Program vs Surcharging
An easy way to think about this is that if you ADD a fee to the listed price, that is a SURCHARGE. If you SUBTRACT from the listed price then that would be a CASH DISCOUNT.
Some agents are offering programs that use a “non cash adjustment.” In this type of program, all of the prices in the store are marked as the cash price, and if someone uses a credit card, they add a “non-cash adjustment” fee. The program is marketed as a cash discount, but since a fee is ADDED, it would be considered a surcharge program.
As Visa points out on 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.”
How to Decide Which Zero Fee Program is Right for You
If you’re wondering which zero fee approach is best for your business, here are some steps you can take to determine the right move.
Calculate your effective rate
The first thing you should do is to calculate your effective rate, which is the total average percentage that you pay for credit card processing.
You do this by taking your monthly fees and dividing it by your total processing volume.
This will give you a baseline of where you currently stand, and it will inform the amount of fees or discounts you should implement. For example, if your effective is 3.5% then that’s the percentage you should use when implementing a cash discount program or surcharge program.
It’s important to note that most surcharge and cash discount programs have fixed rates at 3.5%-4%. If your effective rate is lower than that range, then a surcharge program isn’t the best fit because you’ll end up overcharging your customers.
Look at your debit card processing volume
You are not allowed to add a surcharge for debit card payments, so you need to know if debit cards make up a large amount of your payment volume. If you find that most of your customers prefer debit card payments, then surcharging isn’t the best option for your business.
Determine the price sensitivity of your customers
Zero fee programs — surcharging in particular — may rub your customers the wrong way, especially if they’re price sensitive.
So, try to discern how your shoppers would react to your cash discount or surcharging program and aim to implement an initiative that doesn’t diminish the customer experience.
There are some businesses where it makes sense to add a surcharge for customers who want to pay by credit card. If your customers are not very price sensitive or if credit card payment is truly a convenience for them, a compliant surcharge program may be the best thing for your business.
What To Do When You Decide on a Program
Taking the above steps will help you figure out the best approach to use in your business.
If you opt to implement cash discounts, you don’t need a new processor to implement this. You simply have to determine your effective rate, then raise your prices by that amount to offset your processing fees and avoid confusing adjustments.
For example:
Let’s say you process $65,000 and pay $1,200 in processing fees per month. Your effective rate is 1.84% If you just raise your prices by 1.5% to 2% you can offset the fees that you pay to your processor.
In a case like this, it makes more sense to just raise your prices by a little rather than passing a 4% surcharge on to your customers.
On the other hand, if you have a high effective rate or if your profit margins are too thin, then a surcharging program may be the best option. In this case, talk to your credit card processor about setting up a compliant surcharging program.
As Payment Depot, we can help you implement a compliant surcharging program by doing the following:
- Register your business with the card brands
- Provide signage for your business to let your customers know about the program.
- Provide you with a terminal that can detect debit cards to ensure that you’re not implementing surcharges on these cards
Ready to Implement Zero-Fee Credit Card Processing?
Implementing zero fee credit card processing may be a good way to lower your costs — as long as you do it properly.
Make sure you understand the difference between surcharging and cash discount programs, then run the numbers in your business to determine the best program for you and your customers.
Be sure to partner with an excellent credit card processor. The right provider doesn’t just ensure that you get the lowest rates; they should also help you implement the program efficiently.
That’s exactly what we do at Payment Depot. Our membership pricing model gives all merchants the lowest possible effective rate that they can get since we pass the fees directly to you with no markup.
And if you decide to implement a zero free credit card program, we’ll have your back 100%. We’ll get you up and running and ensure that your business stays compliant.
FAQs about Zero Fee Credit Card
Q: What is zero fee credit card processing?
Zero fee credit card processing is a program that helps businesses reduce or eliminate credit card processing fees by passing these expenses onto the customers.
Q: How does zero fee credit card processing work?
Zero fee credit card processing operates either by implementing cash discounts or running a surcharge program. In a cash discount program, all prices in the store are marked up, with discounts given at the point of sale for cash payments. A surcharge program works by adding a percentage fee to any credit card transaction.
Q: How does a surcharge program operate?
A surcharge program operates by adding a percentage fee to any credit card transaction. For instance, if a merchant addeda 3% surcharge to all credit card transactions so that if a customer purchases a $10 product, they would pay an additional $0.30, making the total $10.30. However, there are a variety of laws and restrictions regarding surcharging, so be sure review your payment processor options and select one with automated surcharging if you decide to go this route.
Q: What does a cash discount program entail?
In a cash discount program, all prices in-store are increased to credit card prices with the fees already included. If a customer chooses to pay using cash, a discount is given at the point of sale, which effectively deducts the additional value meant to cover the credit card fees.
Q: What is a “non cash adjustment”?
A “non cash adjustment” refers to a fee added when someone uses a credit card to pay in a store where all prices are marked as cash. Though often marketed as a cash discount, as a fee is added, it’s generally considered a surcharge program.
Q: How do I determine which zero fee approach is best for my business?
To determine the best approach for your business, you should first calculate your effective rate by dividing your monthly fees by your total processing volume. This lets you know your credit card processing expenditure and informs you of the amount you could save with a specific type of card processing. Moreover, understand your customer’s payment preferences and their sensitivity to price changes.
Q: What do I need to know if I opt to implement cash discounts?
If you choose to implement cash discounts, you need to calculate your effective rate and raise your product prices by that amount to make up for the processing fees. This avoids confusing adjustments and unnecessary overcharging.
Q: When is a surcharging program the best option for a business?
If your business has a high effective rate or thin profit margins, a surcharging program may be best. Additionally, businesses with customers who are not highly price-sensitive and find credit card payment convenient would benefit from implementing a compliant surcharge program.
Q: Can I surcharge debit card payments?
No, you are not allowed to add a surcharge for debit card payments. If debit cards make up a large portion of your payment volume, surcharging may not be the best option for your business.
Q: What role does a credit card processor play in implementing zero fee credit card processing?
A good credit card processor doesn’t just ensure that you get the lowest rates; it also helps you implement the program efficiently and legally. They can register your business with the card brands, provide signage to let your customers know about the program and provide you with a terminal that can detect debit cards to ensure you’re not imposing surcharges on those.