Cash Discounting when Accepting Credit Cards

The pricing type known to business owners as Cash Discounting is a cash cow to both processors and card processing agents. It is presented to business owners as a way to get rid of costs for credit card processing by letting the customer pay for using their card at checkout. I need to make clear to business owners that if you are charging a service fee, then removing for cash or check, then you are violating Visa rules and may be subject to huge fines. Both raising prices to create a cash discount and applying a service fee (unless government or school) violate Visa. You won’t receive a letter, they will just fine you through your processor.

You may ask how Cash Discounting is a cash cow. If you recall, in the blog on rates and profits, we said that Interchange + Dues & Assessments + Profits equals the total fees being paid. By dividing the total fees by the total sales, you get the effective rate. Most retail stores are between 1.9% to 2.6%. Let’s say the calculation for your store comes to 2.25% for $100,000 in credit card sales per month and that 1/3 of your customers use credit cards (sales are $300,000 overall). This would mean that you pay $2250 a month for processing. The profit would be the $2250 minus the Interchange and D&A. Now say you do the cash discounting and don’t lose any customers. Your customers are paying 3.99% so the processor collects $3990.00. Since Interchange and D&A remain the same, this adds $1740.00 in profit while you hold the risk for being fined or having customers mad at you.

No one faults a business owner for wanting to reduce costs or increase profitability. My friend Bill Scott wrote a book called Retail is Detail about building profit through inventory control. If you are looking for ideas on building profit, the inventory and pricing blogs may be of interest to you.

When sales agents present the Cash Discount program, they ask you about the fees you pay and stir anger at the costs. Then they present the Cash Discount option as a way to remove the cost altogether. Could be the perfect deal. (NOTE: According to recent research, accepting cash costs 4-15%. See blog in Costs of Accepting Cash Introduction for link to the research.)

But that is not quite the case. Did you know that if you raise price across the board about 5%; you stay competitive, all customers pay the same, and you can make more profit? With Cash Discounting, you are telling your customers that they will pay more. Even on a $1000 item, a 5% increase is only $50. If you have a convenience store, items under $2.00 just increase a dime. Now, if you do not offer a discount for cash, then for 67% of your customers the full increase goes to your bottom line. The remaining 33% that use credit cards (from example above) you are collecting 5% more and paying up to 2.5%. So; although your customers are paying more, you are not telling them they are paying more, AND you keep the difference between the price increase and the cost of processing.

So the real question that is being presented is would you prefer violating Visa rules and risk a large fine to piss off your customers where you don’t make anything off of it while the agent and company make up to 10 times more than on a normal account OR would you prefer a small increase in prices where you keep the difference between the costs of the processing and your price increase.

If you would like an evaluation of your processing statements, or have any questions please email me at I will only contract with merchants in my geographic area, but I will be happy to help anyone who asks, if I can.

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