This article is part of a larger series on Payments.
A cash discount program allows merchants to implement cash discounting, a zero-cost payment processing strategy that ultimately passes on credit card processing fees to customers by building processing fees into standard pricing. While it is legal in all 50 states, some merchants find cash discounting more work to set up, run, and stay compliant than credit surcharging.
To implement a cash discount program, merchants should work with their current payment processor to reprogram the system, create a strong cash management policy, and ensure that the system is fully compliant with full transparency and employee training.
Related: Learn the basics of cash discounting
Once you have determined that your business can improve its bottom line with a cash discount program, this guide can help get you started with your own.
1. Check for Federal & State Requirements
Every zero-cost credit card processing strategy—cash discounting, credit surcharging, and convenience fee programs—is subject to federal and state regulations.
The federal guidelines focus on transparency, proper disclosure, and non-discriminatory business practices that take effect during preparation and running of a cash discount program, which we will include in the steps below. Card networks that operate under federal laws have similar guidelines in place. To stay compliant, here are a few general guidelines:
- Complete and proper signage must be posted at the entrance and at the checkout counter.
- Receipts should clearly display any service fee or discounts associated with the cash discount program.
- Verbal offer of a cash discount payment option should be given to all customers at checkout.
Penalties for noncompliance
Federal regulatory bodies that impose these rules, such as the Electronic Funds Transfer Act (EFTA), charge fines of up to $1,000 per violation for individuals and up to $500,000 per violation for organizations. Additionally, the Truth in Lending Act (TILA) imposes fines of up to $5,000 per day for each noncompliance violation. This is separate from refunds of overcharges and legal fees resulting from lawsuits or enforcement actions.
Learn more about “zero-cost” payment processing, and why there is truly no such thing.
2. Apply for a State Cash Discount Program License (if needed)
Policies around cash discounting are generally more lax than if you wanted to impose a credit card surcharge or fee. However, there are some states that may require additional steps before merchants can run a fully compliant cash discount program.
For instance, California requires businesses to apply for a special license with the Department of Business Oversight if it wants to run a cash discount program. Texas has a similar regulation under the Office of Consumer Credit Commissioner. If you operate in Wyoming, note that cash discounts are limited to up to 5%. Make sure to do due diligence on your state’s requirements.
3. Reach Out to Your Payments Provider
Most merchant account and payment processing service providers can support a cash discount program. The provider can completely reprogram both payment software and hardware to automate pricing adjustments, including taxation reporting. Ideally, you should be able to work with your current processor to avoid unnecessary downtime.
Before you sign up for a cash discount program, gather information on the following:
- Your average merchant services fees: You will need to determine exactly how much you spend monthly on payment processing (monthly plus per transaction cost) to be able to assign the right fees for your cash discount program. Use our calculator to get an estimate.
- Qualifications and requirements: Some providers require merchants a minimum sales volume before approving a cash discount program. Others require that businesses have been operating for at least a year. If your business does not fall into your provider’s qualifications, there are always competitor payment processors that you can consider working with.
- Monthly fees for using a cash discount program: Most providers charge a monthly service fee for cash discount programs—especially if it initially offers its payment processing services for free.
- Contract length: While there are providers that offer a month-to-month term, there are still some that may require merchants to sign up for a long-term contract of up to three years.
- Cash tracking features: Your provider should be able to support cash tracking features to complement its cash discount program. Ask about any fees involved with this service and available hardware.
- Hardware use: Ask your provider if it offers free reprogramming of your current payment terminals and point-of-sale (POS) hardware.
- Setup/downtime: Ideally, using the same provider would minimize the downtime and setup of a cash discount program. It’s also important to ask if there are any setup fees involved.
- State compliance: As experts in the payment industry, your provider should have consultants or account managers that can assist with meeting compliance requirements in your state. They should be able to help you with getting the correct signages as well as any special licenses that need to be acquired or forms to be submitted.
- Reverting back to traditional payment processing: This point is often overlooked, but it is not uncommon for merchants to change their minds after a while. Ask about any fees involved. Contract terms are also relevant here.
If you find that your current merchant account or payment processing services provider is charging too much, or does not provide the support you need, feel free to check out competitors. Most can offer free demos, trials, and no-obligation quotes that may eventually be a better solution.
Some of the best cash discount program providers are:
Cash Discounting Feature
Tip: You may be able to create your own cash discounting program within your POS system by creating a custom discount option. However, talk with both your POS and payments provider to make sure this is possible.
4. Have Your Hardware Reprogrammed
After signing, your merchant or payment services provider will take care of the entire setup process—including the reprogramming of your hardware. Once reprogramming is completed, it’s important that your provider walk you through the changes that have been made for both the software and hardware. Test the payment processing service, from adding line items to printing of receipts, to make sure that each step complies with cash discounting regulations.
5. Set Up a Strong Cash Management Policy
When you encourage cash payments, your business becomes more susceptible to human errors and theft. To avoid this, you will need to set up a strong cash management policy to make sure that all cash transactions are properly tracked and recorded. If you have reached this step, you should have an idea of how your chosen payment processor can support you with this in terms of both software and hardware.
Most importantly, strong cash management relies heavily on the procedures you set for handling cash payments.
Below are some of the best practices for tracking cash transactions:
- Make sure to have proper change available
- Keep a record of your daily initial cash on hand, including the denomination
- Assign a file or drawer to keep hard copies of your daily cash receipts
- Generate daily cash-in and cash-out reports
- Match daily cash receipts with cash-in reports
- Use manual petty cash vouchers for all small business payments taken from the cash register
- Match each voucher with the daily cash-out reports
- Regulate employee permissions for accessing cash drawer information from the POS dashboard
6. Train Your Employees
Ensure that every customer-facing employee, particularly those who man the checkout counters, are properly trained. This includes everything from operating the cash register to confidently explaining to customers everything they need to know about your cash discount program. Explain the policy to your employees and answer their questions. Then, create a script using the best language to help your employees communicate with customers.
Pro tip: To avoid any compliance penalties, it is vital that employees are trained to verbally offer cash discounts to all customers (regardless if they have already shown their intention of paying with a card) before accepting any payment. It should be clear to each customer that a cash discount is available to all and is in no way a means to penalize customers who prefer to pay with their card (non-discrimination).
In the same manner, employees should also be trained in handling cash transactions. Your cash management policy, procedures, and accountability for opening and closing out the cash register should be clear. It also helps to print out step-by-step guidelines and display easy-to-read reminders at the checkout counter.
7. Update Your Price Tags
Your payment processor can only do so much. Part of the manual work would be to replace all your printed price tags to match the adjustments for your cash discount program. Other printed materials such as price signages, ads, and flyers should all be checked and updated.
Pro tip: It may help to conduct an inventory check—print out an inventory list and go through your displayed products, changing the pricing for each as you go along. This also ensures that employees are aware and familiar with the program.
8. Display the Required Signages
As part of federal, state, and card network compliance, businesses are required to display signages at the store entrance and at the counter, informing customers of the cash discount program. Note that all these signages should be displayed before offering customers cash discounts to avoid any issues with compliance.
The signs should:
- Let customers know that they can save a certain percentage if they pay in cash
- List non-card payment methods you do accept such as cash, check, and foreign currency
- Clarify that debit card purchases are not qualified for cash discounts.
- State that the discount will be automatically applied at checkout
Cash Discount Program Frequently Asked Questions (FAQs)
If you are partnering with your current payment processor for a cash discount program, chances are, you don’t need to submit additional documentation to get approved. However, expect a process similar to a merchant account application if you plan on working with a different provider. Requirements will generally include a completed cash discount merchant application form, business banking documents, previous processing statements, and business owners ID.
Once approved, most payment processors can set up a cash discount program in 24–48 hours.
Technically, yes. By default, merchants do not need software or reprogrammed payment terminals to implement a cash discount program. However, the simple but numerous tasks required to offer cash discounting are highly susceptible to mistakes.
An error in applying a service fee regardless of how small the amount, for example, will be deemed as a surcharge. Even if you are lucky enough to be operating in states where surcharging is legal, by default, your business still lacks the proper procedures needed (such as registering with card networks) before it is considered compliant.
Knowing how to implement a cash discount program the right way can help most small businesses improve their bottom line. And while a manual set up is possible, merchants should consider the benefits of working with a merchant account or payment processing services provider. Automating most of the requirements for cash discounting eliminates the risk of potential errors and associated penalties. At the end of the day, proper compliance should be the main consideration when trying to find the best approach to reducing the cost of doing business.