SINCE THEIR INCEPTION, CREDIT CARDS HAVE WIDELY BEEN ADVERTISED AS A MAJOR BENEFIT TO THE BUSINESS OWNER TO BE ABLE TO ACCEPT CREDIT FOR GOODS AND SERVICES.
Now, as more than 80% of all transactions in the United States are credit and after many years of funding customers’ airline miles, merchants are looking to pass credit card processing fees to the consumer. The generally accepted methods of conveying these fees to the consumer can be classified as either “Cash Discount Processing” or “Credit Card Surcharging”…here are the key differences and how they may affect your business:
The Difference Between Cash Discount Processing and Credit Card Surcharging
While both methods accomplish the same goal of passing a pre-determined amount to the consumer for each credit transaction, for the purpose of covering the expense of credit card processing, the key difference lies in how these additional charges are presented to the consumer. It is also important to note that Cash Discounting is legal in all 50 States, while Credit Card Surcharging is not. Additionally, some States that allow surcharging have requirements for things like transparency; i.e. posted signage, receipt presentation/verbiage, etc.
How Credit Card Surcharging Works
With Surcharging the consumer is presented with a check for payment in which there is an additional line item, like you would see for “Tax,” that specifies a fee for processing. You may see this line item called “Credit Surcharge,” “Technology Fee,” or “Credit Fee” to name a few. The percentage or amount can vary dependent upon the merchants average cost per transaction. A business owner’s cost per transaction can vary greatly with each differing customer card-type. For example, a Business Amex or high-rewards card can cost upwards of 4% per transaction. Visa and Mastercard have some limitations in place for merchants to abide by as well; registering each surcharging merchant and not setting the surcharge fee to any amount greater than 4% of the sale price are both important ones. Sample surcharging receipts can be found at www.backpay.biz.
How Cash Discount Processing Works
Cash Discount Processing is where merchants offer consumers a discount for the use of cash for payment. This can be seen at gas stations all over the United States for more than 10 years. With Cash Discounting, the consumer who pays with credit will simply see a normal check/receipt for goods and services rendered, without any additional line item or expense for credit processing. This would be considered the equivalent to a store-wide price increase of 4% (for example) with “Cash Discount” line item of 4% applied to each check/receipt in which the customer opted to pay with cash. The Cash Discount amounts may differ depending on what type of card you accept or what type of merchant discounting offers may be available through your processor.
Which Is Better?
Cash Discount Processing versus Credit Card Surcharging? For us, the winner is Credit Card Surcharging…and for one simple reason; transparency! If there needs to be a price increase due to outside factors or increased cost, we believe it is important to be as transparent as possible with your customers about those additional expenses. If the cost increase is directly related to cost-of-goods, a storewide price increase would be more sensible. While both Cash Discounting and Credit Card Surcharging accomplish the same end-result, which solution is best for your business really comes down to two factors:
1. How do you think your customers will feel about it? Which would they respond best to?
2. What are your State regulations?
Conclusion
Unfortunately, the average business owner that lacks an understanding of the credit card processing industry has been seeing money simply flowing out the door by not understanding how these fees are levied. Consumers have also been under the false notion that their credit card issuers have been paying them rewards to the use of their card, while in fact, those airline miles and cashback rewards have always been the burden of business owners. We will continue to see a paradigm shift in the value proposition of credit cards as both consumers and businesses become more aware of how it all works. It is BackPAY’s hope to continue to advocate for small business by shedding light on an industry that has historically thrived by means of ambiguity. For many small business owners with ever-shrinking margins, thousands of dollars per annum in processing fees can be the difference between struggle and profitability…good wages and being poorly staffed…or simply being able to afford the technology that will allow them to compete in today’s market.
