How Does a Cash Discount Program Work?
The twenty-first century is a period of rapid progress. Significant changes occur relatively quickly, making it challenging to keep up. Everyone is always in a hurry and looking for methods to make their life simpler and everything more convenient. That might be one of the reasons why so many people use a credit card rather than cash as their preferred payment method.
Even though credit appears to be the simplest mode of payment, the ever-increasing processing costs might be a massive disadvantage for business owners. Because these costs may be modest to their capital, major commercial enterprises do not have to be concerned about this as much as small businesses.
If you operate a small business, you’ve undoubtedly heard of the cash discount program, which, according to the 2010 Durbin Amendment, is used to help you save processing fees while also attracting clients. Several entrepreneurs have embraced this notion to help their businesses thrive, but if the concept is still a little hazy, we are here to explain it in more detail.
What is a Cash Discount Program?
While the notion may appear to be new to some, gas stations have been using it for several years. The idea is that if you pay cash for your fuel, the cost per gallon will be somewhat lower than if you pay with a credit card.
A cash discount program uses the same concept. Customers are given separate cash and credit pricing by a firm that runs a cash discount program. Customers who pay with cash receive a discount, while those who use a credit card pay a slightly higher price. The reason for this difference is that by raising the price for credit card customers, you can pay the processing expenses that would otherwise reduce your profit margin.
How Does It Work?
Before we explain how the program works, firstly you should know that there are two ways in which you can offer a cash discount:
- Cash discount – in this situation, you will need to raise the price of all your items in order to manage increasing business expenses but offer a discount for people who pay with cash.
- Reverse cash discount – in this case, you add a checkout fee on all purchases but offer a discount to people who use cash.
Eliminate Processing Fees
One of the most prominent features of a cash discount program is that it helps eliminate one major problem for businesses, which is processing fees. On average, processing fees vary between 1.5% and 3.5% of each transaction’s total, which means that if you have a $100 purchase, the credit processing fees will be somewhere between $1.50 and $3.50.
For a large company, these fees would be insignificant, but they could damage the profit of a small business.
By applying for a cash discount program, you slash the additional fees your business has to pay to banks and processors. Basically, when you receive payment in cash, it will go directly to your cash register, with no other fees added, which will help you save money you can invest into upgrading your business.
An Equipment Upgrade Might Be Necessary
When transitioning from a traditional processing fee to a cash discount program, it is important to keep in mind that many traditional terminals are not designed for such procedures. Since the technology used by most standard terminals does not allow cash discounts to be introduced, you would have to do that manually, which can take unnecessary time.
Even if a processor has a cash discount appliance, it might not be compatible with your terminal, increasing the risk of surcharge, which is prohibited in 10 states.
In order to avoid such difficulties, many cash discount programs provide you with free equipment that generates detailed and clear receipts for your customers. This type of equipment is installed by a dedicated team who will also inform and assist you in how to use it.
Processing Cash vs Processing Credit
Besides all the advantages of working with cash, the most obvious one is that it is much easier. Many people believe that using cash is a more reliable method. Cash is simple, and everyone knows how to use it, so by encouraging your customers to use paper bills, you can increase your cash flow without waiting 30 days for card payment.
Another major advantage of using paper money instead of credit is that it reduces the risk of ‘friendly fraud,’ also known as a chargeback. Such charges are not only expensive, but they can also pose a threat to your business in the long run. Cutting off some of the bank’s influence may be the best choice of securing your profit.
Inform Your Customers
Last but not least, it is good to keep in mind the fact that not many customers are aware of the cash discount program, so it is your duty as a merchant to inform them. The best course of action is to put up informational posters in visible places and to generate transparent receipts, where the customer can see the way the discount works.
A great additional tip that will also strengthen the bond between you and your customers is to explain to them directly, briefly mentioning the benefits of using cash instead of credit. The majority of customers understand the importance of such procedures, but there might still be some of them who will not understand, so take your time to inform them and have patience.
Final Words
Finally, the most crucial aspect of any transaction is to be truthful with your customers. In addition to a fair deal and high-quality items, transparency is the key to acquiring regular customers who are comfortable making purchases from your company. Regular clients keep your business running, so taking advantage of one of the cash discount programs might be the best way to keep your business stable and profitable.