How can ISO and Payfac Benefit from Credit Card Surcharging and Cash Discounts?


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With a rise in the popularity of legal cash discounts and various surcharge programs, it becomes very typical to find businesses looking for different tactics to lure customers. Credit card surcharging and cash discounting are the two most extensive tactics.

Although this method is gaining popularity, various credit card processing organizations are running left and right by offering their users “cash discount” programs to eliminate multiple credit card processing fees. Are these legal? At the same time, what are credit card surcharges and cash discounts, and how can merchants benefit from them?

These two alternatives are the practices merchants use to give up on processing fees, adding a small amount of premium to purchases made through credit cards, or offering a discount on cash payments.

Both of these are becoming exponentially famous as merchants recoup partial or complete fees they make through card transactions.

Many merchants are hesitant to use this method, leaving a lot of room to learn and grow. Also, while it may seem otherwise initially, the concept of surcharging or cash discounting can benefit the merchants.

Before moving on to the benefits, let’s understand the basics first.

What is credit card surcharging?

When a customer pays with a credit card, a tiny fee, or surcharge, is added to the transaction to make up for the amount the merchant must pay to process the transaction. This practice is known as credit card surcharging. Surcharging is also known as zero-fee credit card processing.

Credit Card Surcharging
Source: Google Images

For instance, if a retailer pays its processor 2% of each credit card transaction, they can impose an identical extra on the client so that the processor receives payment from them rather than from the customers.

What are cash discounts?

When a customer makes a purchase, cash discounting is the practice of offering them a lower price at the register instead of adding a surcharge. When a consumer approaches the cash, for instance, expecting to pay $100, they can be informed that they can save $2 by paying with cash.

Cash discount program
Source: Google Images

Both of these concepts are pretty old. Surcharging ideas have been in the financial market and payment processing for over a decade. Many consumers in the United States are aware of the concept consciously or unconsciously. Different prices are displayed for cash and credit purchases. One of the most famous examples of the same is at gas pumps, but the list is now expanding rapidly to B2B, B2G, medical and more.

We hope that by now, you have some basic knowledge of both these concepts. Let’s make a quick comparison to enhance the understanding further;

Comparing Card Surcharging and Cash Discounts

Credit card surcharging vs cash discounts

So, the fundamental question is; what exactly is the difference between a surcharge and a cash discount? Both these concepts offer users the convenience of paying the same amount of money; in both cases, the customer pays more with a card. Then where’s the difference?

In the credit card surcharge structure, the price displayed to the consumer should be the lower one, and the consumer is informed that an additional fee would be charged for the credit card payments. Whereas in the concept of cash discounting, the price displayed on the cash register should be higher, and then the consumer is offered a discount. Although the result in both practices stands the same, how that result is achieved is what matters here!

An important parameter here is that both these concepts have some legal and compliance factors that must be followed. Cash discounting is legal in most of the states in the U.S and doesn’t require anything more than the merchant displaying a higher credit card price on the cash register. But if we are talking about surcharging, the concept isn’t legal in some states and requires merchants to follow the rules set by card companies.

Due to this added complexity, merchants consider cash discounting a better option. But at the same time, we should also not ignore the benefits offered by surcharging, which makes it an attractive option.

Why is Card Surcharging and Cash Discounts important for ISOs and PayFacs?

Now that we know what surcharging and cash discounts are, we can understand why they benefit merchants. But if we move beyond this, how are these concepts practical for acquirers like ISOs and Payment facilitators? The answer can be that what is good for merchants is ultimately suitable for payment processing process.

Implementing discount programs helps merchants understand and implement surcharges and discount programs. Since it also shows the needed attention to their needs, which makes the ISO or PayFac, the right partner.

1. Minimizing the Processing Fees in an Increasingly Cashless World

The COVID-19 pandemic accelerated the adoption of contactless payments and the adoption of e-commerce as the primary shopping channel. While the trends that emerged during the pandemic have receded, many habits that consumers developed during that time still prevail.

According to The Strawhecker Group, 23% of retailers presently apply a surcharge on credit card transactions, with 76% doing so explicitly to reclaim their costs. However, just 58% of merchants polled reported having a good grasp of what surcharging is, indicating that as the practice becomes more commonly recognized over time, the number of merchants engaging in it may increase dramatically.

As the demand for surcharging programs grows, ISOs and PayFacs that are prepared to explain, support, and facilitate them for merchants will naturally have a competitive advantage over competitors who are slow to embrace the practice or understand the impact fees have on merchants in a tight economy.

2. Setting Up Surcharging and Cash Discounts with ISOs and PayFacs

Understanding the rising popularity and necessity of surcharging and cash discounting, forward-thinking ISOs and PayFacs as a service may do a few things to assist merchants with both.
Specifically, acquirers must ensure that their merchants understand their choices, that they are compliant when surcharging, and that they are set up with technology that will make their surcharging or discounting programs as frictionless as possible, both behind the scenes and at the point of sale.

3. Ensure that everything is in order while Making Use of Merchant Surcharges

Surcharging outside of the laws puts a bullseye on a trader’s back and can result in significant fines from state authorities and card providers. Assisting with and guaranteeing compliance is among the essential services an ISO or PayFac can provide to surcharging merchants, providing value to the merchant while assisting acquirers in mitigating their risks.

So, what’s next?

Embracing these programs is an effective way for ISOs and PayFacs to put the merchants first and compete better in the competition.

Amit Dua
Amit is the Founder of Signity Solutions, Co-Founder of ValueAppz and Your Team in India. A tech-evangelist, he has an uncanny ability to synergize and build associations, thriving teams, and reputable clients.


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