The Cash Discounting Trap

Some processors are making cash discounting complicated and costly for merchants.  The method they use to pay interchange for cash discounting merchants is vitally important.  A confusing situation recently stumped the merchant and the reps, so they called me.  The answer took at least twenty minutes of intense study of the statement!  We discovered a BIG avoid issue.  Cash discounting does have great benefits.  But you should be informed about this costly trap.  In this episode get the insight you need to save your merchants money.

The basis of this complicated issue is tips.  The explanation is rather difficult for me.  Hopefully this will be helpful, even if you must think it through and refer to the episode more than once.  This issue can be very significant.  I just saved a merchant $1,000 a month by switching to a different cash discounting company.  That is a BIG deal!

At its core, cash discounting is simple.  The service fee is being collected from the consumer on every transaction.  Suppose a consumer is ready to purchase a $100 hat.  (So, it’s a nice hat!)  There is a sign on the counter which says, “We have instituted a customer service fee of 3.5% on everything in the store.  The sticker price is the purchase amount if paid in cash.”  So, the consumer who uses a card for payment will pay 3.5% more than the sticker price.  In this example, the hat will cost $103.50.  The extra $3.50 should not go to the merchant but to the processor.  The processor in turn uses that $3.50 for interchange cost and whatever other Schedule A costs are associated with the transaction.  Any remaining money becomes profit for the sales rep.

The complications come by how the processor gets the $3.50.  The money shouldn’t even show up on the merchant’s credit card processing statement.  It should be held by the processor in an escrow account.  That account should accumulate throughout the month with each transaction.  At the end of the month, the processor should pay the interchange from escrow.  Any remaining money is profit for the residuals.  However, very few processors are equipped to separate those funds in an escrow account.  There are a few legitimate cash discount companies who are correctly using the escrow system.  Other big companies who didn’t want to lose reps rashly decided to use the daily discount process which is already in place.

The daily discount is a very different concept than the escrow account.  Daily discount was established a long time ago.  A merchant might owe $1,000 a month in credit card processing fees.  Rather than taking the entire payment once a month, processors began withholding 2% or 3% of the daily volume.  That money would be applied to the fees at the end of the month.  Processors decided this method would work the same for cash discounting.  However, this presents a big problem with the 20% or 30% of merchants who do tipping.

The customer service fee in cash discounting must be disclosed to the consumer at the time of the sale.  Consider the situation of someone spending $100 in a restaurant.  The receipt will have the 3.5% fee of $3.50 on it.  Then the customer adds a 20% tip.  So, $20 has been added to the order.  The receipt is signed, and the customer leaves.  3.5% may not be charged on that tip since the customer could not be notified before leaving.  If the processor is holding the money in escrow, this makes no difference.  Usually if a rep is collecting 3.5% or 3.75%, that is plenty to cover interchange and produce a healthy residual profit – as long as the processor is collecting correctly!   The daily discount method means the merchant collects 3.5%  on $100 while the processor collects 3.5% on $120.  This means the processor is collecting fees from the merchant on tips, money which the merchant is not actually collecting.

Using the daily discount method, the processor has no way of knowing how much of the daily volume is tips and how much is not.  Thus, at the end of the month the processor has collected 3.8% effective rate on the merchant.  AND the merchant still owes several hundred or a thousand dollars!  This is the reason I was able to save $1,000 monthly for the merchant I mentioned.  The processor who conducts cash discounting in this way is making a massive profit.  They have no reason to collect anything else other than a couple monthly fees.  But the tips cause all this confusion and unhappy merchants.  The current processor has no way to fix that problem.  The merchant must switch to another cash discounting company who uses the escrow system.

I can offer help if you need processors using the escrow system.  Go to ccsalespro.com.  Click on “partner with James” and fill out the form.  I’d be glad to talk to you.  Don’t get caught in this BIG avoid issue!

Read the previous post here:  http://www.ccsalespro.com/cash-discounting-learned-pizza-shop/  Cash Discounting:  What I Learned from a Pizza Shop

Read the next article here:  http://www.ccsalespro.com/two-extremes-successful-selling/  Two Extremes of Successful Selling