Is a Cash Discount Program Legal?
Updated: Nov 7, 2018
Yes, and Here’s Why
The fact is, cash discount is a thing, and that’s it’s good news for your business. In effect, it allows a business owner to accept credit cards, while eliminating 80-90% of the associated fees. (If you don’t know what a cash discount is, read this article.)
Of course, it doesn’t matter how cost-effective it is if it’s against the law. More than one client has asked, “is a cash discount program legal?” Get ready for a little legalese, because we’re going to clear this up for both federal and state laws.
Thankfully, cash discount systems have been legal under federal law since 2011, thanks to the Dodd-Frank Wall Street Reform and Consumer Protection Act. (Fun Fact: this is the same act that confirmed businesses may choose not to accept credit cards for transactions under $10.) The FTC addresses this directly on their site:
"A PCN [payment card network, like Visa] cannot stop you from offering your customers a discount or another incentive for using a certain method of payment, as long as you offer it to all your customers and disclose the offer clearly and conspicuously. For example, you can offer your customers a discount or a coupon if they pay with cash or a debit card rather than a credit card. But the new rules do not address other PCN restrictions that may prevent you from offering discounts or similar incentives that vary based on the use of a card from a particular issuer or a particular PCN."
To be clear: a business may absolutely offer a cash discount, as long they clearly explain it to their customers. A good cash discount system will handle this in four ways:
Signage at the entrance to a business, explaining the cash discount. Signage at the counter (or, for an online business, before checkout). A verbal offer of the discount, for example: “your total is $31.20. Would you like to save $1.20 by paying cash?” A receipt system that defines the cash discount, alerting customers to exactly what was charged, and why.
At Coastal Payment Systems, when we offer merchants a cash discount solution, it includes the entrance and counter signage. When setting up a new merchant, we also make sure to train them, and any employees, on how to offer the cash discount to their customers. Terminals, whether physical units or an online gateway, are also preset to define the cash discount.
This covers federal law; what about individual states?
When we explain the cash discount system to our clients, one of their first comments is often, “that’s not legal in my state.” While that may have been correct twenty years ago, it’s no longer accurate. Here is a list of states where a Cash Discount program is not legal:
No, that’s not a typo: a Cash Discount can legally be implemented in all 50 states. While some states prohibit surcharges (more on that below), cash discount programs are valid everywhere, when the federal law requirements are met, and the merchant’s customers are notified of the discount. Massachusetts law, for example, notes that “Notwithstanding any agreement to the contrary between a seller and the issuer of a credit card, the seller is permitted to offer a cash discount to consumers who pay cash instead of using the credit card.”
Keep in mind that gas stations in all 50 states have been using cash discount programs for years. The only difference now is that federal law has made clear that any business may use them. At Swoop Pay, we provide each of our cash discount clients with information specific to their state. (If you’d like information on your state, reach out in the comments below, or contact us here.)
What about Surcharges?
A common misconception is that a cash discount and a surcharge are the same thing. We’ll address this more in a different article; a major difference is that legally, surcharges are usually treated as fees, and aren’t allowed in all states. (Customers, and payment card networks, also tend to react more negatively to them.)
For business owners, this is all good news: cash discount programs are legal, they’re working, and they’re here to stay. Keep an eye out for future articles on customer reactions, and more details on which industries are already using cash discounts with great success.