Can a business offer discounts to customers who pay with cash?
While some states still ban credit card surcharges, cash discounts are allowed by federal law
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com. Her book, “The Million-Dollar, One-Person Business,” was released in 2018. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.
I would like to give my customers a discount for paying cash. Is this legal in Connecticut?
Connecticut is one of the few states where adding a surcharge to customers who pay with a credit card is not allowed.
However, under federal law, businesses everywhere can offer discounts to those customers who pay with cash.
You'll need to make sure that the way you offer and communicate such discounts to your customers is compliant with credit card network and state rules.
Dear Your Business Credit,
Hi! I would like to know if giving my customers a discount for paying cash is legal in Connecticut.
I do not charge a fee for credit card purchases, I absorb the fee, but I thought I could reduce my fees by offering a cash discount? Can I do this? Thanks. – Laura
As you may know, Connecticut is one of the states that does not allow merchants to add a surcharge of up to 4 percent to consumers who pay with a credit card. Here is a research report on the subject and a later update.
See related: Credit card surcharges: How they work, rules
Debate over credit card surcharges
Surcharges are a hotly contested area, so I would suggest setting a search engine alert for yourself to keep up with the news and your options on this front.
Check out our recent story “Credit card surcharges grow more common” for an overview.
Some observers believe that a recent tentative settlement that will allow merchants in New York to add surcharges could pave the way for states such as Connecticut to drop their ban on surcharges. That will be a development worth following.
Cash discounts are permitted
Merchants are allowed to offer cash discounts under the Durbin Amendment of the 2010 Dodd Frank Wall Street Reform and Consumer Protection Act.
As you can read in the first paragraph of the amendment, “A payment card network shall not, directly or through any agent, processor, or licensed member of the network, by contract, requirement, condition, penalty or otherwise, inhibit the ability of any person to provide a discount or in-kind incentive for payment by the use of cash, checks, debit cards or credit cards.”
Further, a few paragraphs below, you can read, “the network may not penalize any person for the providing of a discount that is in compliance with Federal law and applicable State law.”
How to offer cash discounts
As noted, merchants must notify customers that a discount for paying cash is available.
Now here’s the tricky part. Merchants must also follow the rules that credit card issuers have set out when it comes to surcharges and discounts. Compliance may take time, so you’ll need to do a cost-benefit analysis.
Visa recently released a bulletin saying that many merchants’ cash-discount programs are not compliant with its rules.
Under Visa’s rules, merchants are not allowed to add a fee on top of the usual price of an item and then give a discount at the register if the customer pays cash.
Visa said the proper way to give a cash discount is the way many gas stations do it: They post a price for both the discounted cash/debit card price and for credit card payments at the pump.
In Connecticut, the state has issued guidelines for how the prices should be posted at gas stations, in case you need a model to follow.
Tip: If your business only accepts checks and cash in order to avoid paying credit card processing fees, you might want to run some numbers to see if that practice make business sense. Spending time chasing around late or noncomplying payers who pay by check might be more expensive than paying card processing fees. Read "How much it really costs your business not to accept credit cards?" to learn more.
How to handle cash discounts before the public
One other consideration is how customers will react.
While some consumers may like the option of paying cash to save a little money, those who pay by credit care may not appreciate paying more.
You know your client base and will have a sense of how a cash discount will go over, so you will have to use your best judgment.
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