In a bulletin released yesterday by Visa, they stated emphatically that Cash Discounting as it exists in the merchant services industry is not compliant with Visa rules.  “Models that encourage merchants to add a fee on top of the normal price of the items being purchased, then give an immediate discount of that fee at the register if the customer pays with cash or debit card, are NOT compliant with the Visa Rules and may subject the acquirer to non-compliance action.”

What does this mean for the merchant services industry and the ISOs who are offering “Cash Discounting” programs that fit this description?  This action by Visa has left acquirers and ISOs with 3 options:

 

#1 – Ignore this bulletin out of a belief that Visa rules are unconstitutional and, thus, unenforceable.  This is an interesting approach.  My guess is that much of the industry will go this route.  Visa will then be forced to take the “non-compliance action” they threaten in the bulletin and take one of the major acquirers to court.  Most likely a long and drawn-out court battle will result which would carry a huge risk for Visa.  If the courts were to side with the acquirer, it would nationalize the concept of service fees on credit card transactions.  I personally believe that the courts would look at current cash discounting as a thinly veiled attempt to make surcharging legal in all fifty states and on all card types.  However, I don’t think Visa would win.  Instead, I believe the courts would rule that surcharging is protected by the first amendment (as they have already done.)  They would order that it become legal in all fifty states.  Not only this, but the courts could also rule the restrictions against surcharging check and debit cards as unconstitutional as well.

 

#2 – Pivot to a new model that would take these programs outside the scope of Visa rules.  Imagine a scenario where there was an energy shortage in a particular geographic area.  This caused a temporary spike in energy prices that affected local merchants.  Now imagine that those same merchants decided to implement a surcharge or service fee of 4% on all transactions (cash and credit) during this time.  They put up a sign at the counter stating, “Due to increases in energy prices, we have temporarily implemented a service fee of 4% on all purchases.”  Would this action be covered under the Visa Rules?  I cannot imagine how it could be.  It has nothing to do with card payments at all.  As long as the service fee was clearly listed on the receipt for all cash and credit transactions, how could it be construed to fall under Visa rules?  Now imagine this same merchant had previously implemented a cash discount of 4% off the regular price on all purchases.  The concept of providing a discount to pay with cash is clearly protected nationally by the Durbin Amendment.

 

So, how could we as an industry pivot to allow cash discounting?  We could instruct the merchant to run ALL transactions through the terminal and create a terminal program that added the service fee to ALL transactions.  When the merchant paid in cash, the receipt would print out with the service fee and, directly below that, the cash discount.  The service fee line item would exist on every transaction receipt provided to the merchant.  The merchant would then post a sign saying, “Due to increased costs to process credit card payments, we have implemented a 4% service fee on all transactions.”  Then a separate sign could offer the cash discount.

 

#3 – Switch to a surcharging model.  I had a very interesting conversation this morning with Jonathan Razi, the CEO of CardX, who has been leading the charge on surcharging.  His company, through legal action, has helped to establish surcharging as a legal option in California, Florida, Texas, and hopefully soon winning the case in New York.  If they do, Jonathan believes surcharging will possibly be legal in all fifty states by the end of next year.  Cash Discounting programs were primarily created to pass the cost of processing to the consumer in states where surcharging was illegal.  Also, cash discounting is permitted on card types such as check and credit cards where surcharging was not allowed under Visa rules.  Now that so many of the big states are back in play with surcharging, it might be worth a second look.  It is 100% compliant with Visa rules.  Merchants could be signed up with no fear of the necessity to change tactics down the road.

 

Here are some other benefits to surcharging which Jonathan pointed out to me.
  • First of all, merchants are always hesitant to implement these programs that pass the cost of processing to the consumer.  However, merchants always have a “no fee” option to offer customers with surcharging since it isn’t allowed on check and debit cards.  Customers can always choose to use their check or debit card instead of their credit card to avoid the surcharge.
  • In addition, because the cost of processing check cards is passed to the merchant with standard mark-up, the margins on surcharging are roughly the same as a reasonable cash discount program.
In the coming weeks and months, I am sure there will be announcements coming from the major acquirers about their position on cash discount programs.  Make sure you are aware of changes as they happen.  Battle lines will be drawn.  You need to understand which of the three options above your processor or acquirer has chosen and plan accordingly.  As an industry, let’s face this problem head on.  Don’t keep selling your current program, hoping nothing bad will happen to you or your merchants.  Be proactive!  Gather information and decide how you will respond to this change in the payments landscape.

Read the next post:  Should I Still Sell Cash Discounting – The Individual Rep

Should I Keep Selling Cash Discounting? – The Individual Rep

 

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