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Cash Discounts: Surcharges by Any Other Name?

Cash discounts are all the rage as merchants seek to lower payment card acceptance costs. But critics say cash discounts all too often are surcharges in disguise.

Few topics last year drew more interest from independent sales organizations and merchant acquirers than cash discounts. Sessions about the pricing strategy were packed at several regional ISO trade shows. And while the number of merchants offering cash discounts isn’t many yet, salespeople in acquiring operations are eagerly peddling the comparatively new service.

So what’s ahead for cash discounts in 2019? Supporters predict the tactic will draw more merchants increasingly fed up with paying what they say are high card-acceptance costs, especially for rewards credit cards.

George Sarantopoulos, chief exec­utive of Access One Solutions, a Brooklyn, N.Y.-based ATM ISO that also offers a cash-discount program, says one high-end restaurant client that recently signed on is reaping the benefits. “We save this guy $5,000 a month,” Sarantopoulos says.

Trouble could be brewing, however, because a growing number of critics say cash discounts are really surcharges in disguise.

Cash-discount programs offered by different providers to ISOs vary in their operational details, but information on the Web sites of several discounting programs reviewed by Digital Transactions bears one thing in common: The store or restaurant raises all prices upon starting the program, typically by adding a fee, then gives a discount to cash-paying customers. That would seem to take the actual amount paid back to the original price.

“A cash-discount program itself is surcharging in disguise … because nothing is discounted,” says Alex Nouri, president of EFT-Direct, an Ann Arbor, Mich.-based agent. “It all starts with the first step, which is adding the fee. They’re using ‘cash discount’ to not call it ‘surcharge.’”

Widespread Confusion

Proponents say there nothing inherently wrong with cash discounts, or surcharges for that matter, but any card-accepting merchant employing either tactic must abide by payment card network rules governing their use. State laws also come into play in some cases; seven states still ban surcharging.

Meanwhile, confusion about the rules governing cash discounts is so widespread that Visa Inc. in October felt compelled to issue reminder guidance to the acquiring community. Acquirers are charged with enforcing Visa and Mastercard Inc. network rules.

“Visa has received an increasing number of questions in relation to discount offers, or what are commonly called ‘cash discounts,’” Visa’s notice says. “While there are many different programs being offered to merchants by their processors or agents, the Visa rules on discount offers should be consulted when considering whether a program of this type would benefit the merchant.”

Before Visa issued its notice, the big payment processor First Data Corp. reportedly removed several cash-discount apps from its Clover application marketplace for small and mid-size merchants because they violated the rules. Clover offers a so-called smart terminal that can run various business applications in addition to payment acceptance.

The actions by Visa and First Data call into question how long cash discounting will remain the hot new service from ISOs. Strong backers such as Matt Nern, senior vice president of sales and marketing at SignaPay, an Irving, Texas-based ISO that provides the PayLo cash-discount program, predict growth will continue.

More than 7,000 merchants have adopted PayLo since its September 2017 introduction, and a number of other ISOs, including Access One Solutions, offer it to their own clientele.

PayLo merchants “are applying a unified increase, call it convenience fee, service fee, non-cash adjustment, to all forms of payment, that would apply to all store sales,” according to Nern.

‘You’d Think They’d Look’

For merchants, the economic rationale for cash discounts is obvious: they serve as a buffer against card-acceptance costs. But at first glance, cash-discount programs seem counter-productive for the profitability of ISOs.

“If a consumer pays with cash rather than card, ISOs don’t get paid,” notes payments attorney Jill M. Miller, a partner at Varnum LLP in Novi, Mich.

But there’s more to it than that, say processing executives. Cash discounts can be positioned as an additional service, something to distinguish the ISO in an industry still trying, despite an infusion of new tech-oriented applications from independent software vendors and the like, to fight price-driven commoditization.

Sarantopoulos of Access One Solutions says he works with a number of sub-ISOs across the country. “The ATM market is pretty mature, so a lot of our guys were looking for another product to sell,” he says.

SignaPay’s Nern says PayLo “gives you something to talk about,” and “it certainly does create stickiness.” And stickiness, or greater merchant retention, translates into lower operating expenses.

SignaPay was expecting to lose some payment card transaction volume when it rolled out PayLo, but that hasn’t happened, according to Nern. Millennials, he notes, love their cards.

“We haven’t lost anything out there,” he says. “People aren’t carrying cash.”

Yet many ISOs take the opportunity to pad their margins by raising discount rates up to 4% of the sale when they roll out surcharging and cash-discount programs, critics say.

Network rules cap credit card surcharges at 4% or the merchant’s processing costs, whichever is lower. But since cash discounts can be applied to both debit and credit card sales, ISOs often raise the merchant’s processing rates for debit, too. Higher rates on card transactions often go unnoticed by small businesses, which are satisfied just to off-load some of their overall card costs.

“You’d think they’d look, but they don’t,” says Adil Moussa, principal of Omaha, Neb.-based merchant-acquiring consultancy Adil Consulting LLC. “Very, very few people look and understand what they’re signing.”

‘A Wild, Wild West’

Payment executives agree merchants, and even people in the industry, get confused about cash-discount and surcharging rules.

Some of that confusion arises from a changing legal environment. Interest in cash discounting and surcharging has risen partly as a result of various legal actions—including the 2012 settlement of a big credit card interchange case and wording in the 2010 Dodd-Frank Act’s Durbin Amendment—that have loosened old network restrictions on merchants’ freedom regarding what to accept, and at what price.

State law also is in flux. As recently as two years ago, 10 states prohibited credit card surcharging, but surcharge bans have fallen recently in California, Texas, and Florida. New York’s ban is under appeal.

In its notice, Visa pointed to gas stations, which for years were the most prominent example of the few merchants that offered cash discounts off of prices paid by credit card-using customers.

“It is important to note that the discount is taken from the regular price of the fuel, and does not constitute any additional fee or surcharge that is removed when the customer pays with cash or a debit card,” the notice says.

Visa then goes on to say that “models that encourage merchants to add a fee on top of the normal price of the items being purchased, then give an immediate discount of that fee at the register if the customer pays with cash or debit card, are NOT [Visa’s emphasis] compliant with the Visa rules and may subject the acquirer to non-compliance action.”

That wording would seem to question the permissibility of many existing cash-discount programs. “There’s only one way to do it right: Everything in the store is two prices,” says Moussa.

Jonathan Razi, chief executive of CardX LLC, a Chicago-based technology provider that offers a surcharge program to ISOs, calls cash discounts questionable.

“The Visa bulletin probably said it best … any time you add a fee, it’s noncompliant,” Razi says.

Despite requests, Visa did not make someone available to Digital Transactions to discuss the guidance. And First Data did not reply to requests for comment about the Clover app removals.

SignaPay’s Nern says “we’re following all the rules” with PayLo. But when asked what was behind Visa’s recent guidance, he says “there is a lot of confusion. We’ve been a bit of a wild, wild West out there.”

Attorney Miller agrees many questions have arisen within the ISO community about cash-discounting and surcharges over the past couple of years.

“That topic comes up over and over again,” she says. “ISOs are always looking for a way to add value to their merchants.”

‘The Pain Point’

While there is interest in both pricing strategies, surcharges apparently still are more popular than cash discounts.

“None of my clients have asked about cash discounts,” says Miller, whose clients include ISOs, payment gateways, and software providers. “I would say a good 40% of my clients are doing surcharge programs.”

The rules about surcharging and cash discounts vary little from network to network, according to Miller and payments executives. While common elements govern both surcharging and cash discounts, the rules have some important differences (box).

ISOs whose merchants violate the rules run the risk of having their merchant accounts closed down. Despite all the recent questions, Miller says “compliance really isn’t all that difficult.”

Since ISOs often hire tech firms to implement cash-discount or surcharge programs, “it’s important to have a partner that has done the legwork,” Miller says. “Also, they have to be on top of state laws.”

The operational tasks include identification of the card in a qualified transaction, proper calculation of the final price, notification in the case of surcharges of an ISO’s merchant-acquirer partner and the card networks, and proper signage, according to CardX’s Razi.

“The compliance overhead is so significant—how are merchants going to do this?” Razi says. “That’s the pain point.”

‘Just a Little More Clarity’

In light of all the recent questions, just how much enforcement of the rules can ISOs and merchants expect from their acquirers and, above them, the card networks? The answer depends upon whom you ask.

Anecdotal evidence indicates that enforcement so far has been uneven. One speaker at a regional ISO conference in September said some merchant and ISO violators “just get away with it” (“Surcharging and Cash-Discount Programs Continue To Attract ISOs,” October, 2018).

“I have never heard or had any client discuss with me … a network or card brand start an investigation,” Miller says. But she adds that “it could just be my clients are coming to me asking for guidance, not for forgiveness,” since as a group they’re inclined to abide by rather than evade the rules.

Nouri of EFT-Direct says “I highly doubt Visa is going to do enforcement.” But he adds that “I applaud Visa for putting out the statement.”

Razi calls Visa’s notice “a step in the right direction” and believes more enforcement is coming. “As that market grows and grows you are going to see more enforcement from the card brands,” he says. “We are a strong advocate for more enforcement.”

Razi argues that surcharges are a more straightforward way of enabling a merchant to reduce its card-acceptance costs than cash discounting. Despite the negative connotation of the word “surcharge” compared with “discount,” a surcharge program can actually grow the card-accepting merchant base by giving low-margin businesses an option for offsetting costs, he says.

“We signed more than 3,000 locations this year,” Razi said in early December.

Cash-discount backers believe the good programs will survive the heightened scrutiny. “The sky is the limit for all of us,” SignaPay’s Nern says. All that’s needed, he says, is “just a little more clarity” from Visa and Mastercard.

Sarantopoulos of Access One Solutions says he has many merchants in New York City who are getting hit by rising rents, a tightening labor market, and higher minimum wages taking effect at the end of 2018 and 2019. Small businesses that brushed off Access One’s cash-discount program six months ago are now highly motivated to defray costs, including card costs, he says, adding, “I would say in the next 30 to 60 days our phone is going to blow up.”

A Quick Guide to Surcharging And Cash-Discount Rules

Surcharges can be applied only to credit card transactions, but discounts for cash can be offered on would-be credit and debit card sales.

Cash discounts are legal in all 50 states.

Credit card surcharging is now legal in 43 states and may soon become legal in New York, depending on the outcome of an appeal.

Surcharges are limited to the lower of 4% of the sale or the merchant’s processing costs.

Merchants wishing to surcharge must give 30 days’ notice to their acquirer and the card brands.

A surcharge notice must be placed by the merchant’s front door, at checkout counters, and on receipts.

Programs that add a fee to normal prices, then give an immediate discount for cash or debit card payment, do not comply with Visa’s rules.

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