Cash Discount Merchant Services
It’s tough to increase EBITDA margins, but businesses can do it by optimizing every step in the value chain. One area that doesn’t get nearly enough attention, even from experienced business owners, is the cost of payment processing.
Payment processing is often seen solely as a cost center. However, payment processing fees can add value to your business. The key to uncovering its potential value is to be proactive.
Many more businesses are doing that by implementing a cash discount program and removing interchange-plus charges.
A cash discount program is a strategic way to decrease or eliminate credit card payment processing fees and interchange-plus fees. You do it by raising prices across the board, then offering a matching discount on cash payments.
It’s important to understand the difference between a cash discount and a surcharge:
Cash Discount: The customer pays less than the posted price when paying in cash.
Surcharge: The customer pays more than the posted price when paying with a card.
Most credit card brands disallow surcharges, but cash discounts are always allowed. This gives customers the opportunity to pay less than they normally would, rather than having to take extra steps to pay for a transaction at its advertised price.
Cash discounts are legal in all 50 states. In fact, implementing a cash discount program can help you to comply with the Truth in Lending Act by ensuring credit card prices are posted.
How Does a Cash Discount Program Work for You, the Merchant?
Cash discount programs generally start with a uniform increase in prices. An increase of 4% is recommended for businesses to effectively offset their payment processing costs. Your customers have the opportunity to effectively “opt-out” by choosing to pay in cash.
For example, a $100 item would have its price raised to $104.
Customers choosing to pay with their credit or debit card would be charged this amount. Those using cash would pay just $100. This encourages future cash transactions and allows savvy shoppers to save more money.
For merchants like you, there are clear benefits to a cash discount program:
- You can continue to offer the convenience of payment cards at no added cost to you.
- The program is extremely easy to implement and easy to explain to your customers.
- Cash payment means greatly reduced delays in accessing the funds you are paid.
- Your business gets additional protection against the volatility of card chargebacks.
- Customers love the chance to save 4%, and you can even use it in your marketing.
A Cash Discount Program is the Fastest Way to Reduce Your EBITDA Margins
Naturally, there are implementation issues to take care of with any new discount program. You are required to post signage explaining the discount. Your sales receipts must reflect it.
But these are minor hurdles for a reduction in cost that translates to far better EBITDA.
Other methods of improving EBITDA require detailed planning and substantial changes to your daily operations. By comparison, a cash discount program may take only a few days to implement and requires no ongoing maintenance. The only change is in customer behavior.
While it is true some customers don’t carry cash, this does not translate to lost business. People who habitually use credit for card-present transactions will rarely change their buying behavior in response to the program, while those who use cash raise their average purchase size well beyond 4%.
A pilot program at a few locations can confirm the benefits with minimal risk.
Businesses in many industries have taken the plunge: Now it’s your turn.