There is one question which I get often: “What is the deal with cash discounting?” Sales agents, ISOs, and processing company executives all wonder. I want to discuss what IS going on in the marketplace right now. I want this episode to address the current situation at this date. I decided to entitle this “Is Cash Discounting Dead?” because cash discounting as it was known six months or a year ago in some ways is starting to die off a little bit. However, it is actually transitioning into some other things.
I’ll start by defining “cash discounting” and answering some questions such as “Why do people do cash discounting?” and “Why do I sell cash discounting?” Cash discounting is generally predicated on the Durbin Amendment. The Durbin Amendment says nobody, including a card brand, can prohibit a merchant from offering a cash discount or an in-kind incentive to encourage consumers to pay with another form of payment like cash. Most processors today who are doing a cash discount program would cite the Durbin Amendment if asked why they feel they are allowed to do it. Two issues that have gotten more attention in the last sixty to ninety days have changed some of that perception.
Cash discounting a year ago was hinged on a basic idea. Merchants would post a sign to raise the price at the register and then immediately discount the price by offering a cash discount. Thus, every $100 item would cost $103.99 if the sign indicated a 3.99% price increase. But an immediate cash discount of 3.84% [or whatever amount] would get rid of that increase, taking the cost back to $100.
The first issue of focus recently is the Durbin Amendment definition for “discount.” The Amendment says, “For the purposes of this section, this is what ‘discount’ means.” I’m not an attorney; none of this information is legal advice. But in my personal opinion, this section of the Amendment is interesting. I’m inserting it here for the information of my readers:
OF PAYMENT.— (A) IN GENERAL.—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 to the extent that— (i) in the case of a discount or in-kind incentive for payment by the use of debit cards, the discount or in-kind incentive does not differentiate on the basis of the issuer or the payment card network; (ii) in the case of a discount or in-kind incentive for payment by the use of credit cards, the discount or in-kind incentive does not differentiate on the basis of the issuer or the payment card network; and (iii) to the extent required by federal law and applicable state law, such discount or in-kind incentive is offered to all prospective buyers and disclosed clearly and conspicuously. (B) LAWFUL DISCOUNTS.—For purposes of this paragraph, the network may not penalize any person for the providing of a discount that is in compliance with federal law and applicable state law.
The wording does say this is the idea of discounting from the regular price about which the customers have already been informed. It seems to indicate just posting a sign for a cash discount may not be compliant under the Durbin Amendment. This might be a little bit tricky. The interpretation is not completely plain. Using a sign to raise the regular price of everything could go either way. I could certainly understand some ISOs who are still doing it that way; they could interpret it to be compliant. However, I could also understand ISOs who are saying, “No, no, no, you can’t do that!”
The second issue of focus recently is the Visa bulletin. There has been much misinformation concerning this bulletin. Nowhere in the Visa bulletin did Visa say anything negative about the concept of cash discounting. What they said is that many programs in the industry are not truly cash discounting. Those businesses are where the compliance problems come into play. Visa even named a few instances where cash discounting was used appropriately, and they were good with it. The bulletin seemed to side with the definition that just posting a sign, adding a service fee, and then giving an immediate cash discount is not in compliance with Visa rules. That is not a true cash discount, because prices are raised at the counter instead of where the prices are listed.
There are three possible solutions for these issues which I would like to suggest.
#1. Traditional cash discount programs. These do make a lot of sense for certain verticals. For instance, consider professional services. Their prices can easily be adjusted. They can increase their regular price and offer the cash discount programmatically on an invoice. There are many verticals where that still makes a ton of sense, and it is definitely compliant to do a true cash discount. If done the right way, the traditional cash discount makes good sense for these verticals.
#2. In-kind incentives. Several larger ISOs are shifting away from the concept of cash discounting altogether and not going to surcharging. (I’ll discuss the ones going to surcharging later.) The Durbin Amendment specifically says that it protects the idea of the cash discount, and right with that it also says, “discount or in-kind incentive.” Unfortunately, the Amendment did not define the term “in-kind incentive” even though other terms like “discount” are defined. So, we’re left to wonder, “What does ‘in-kind incentive’ mean?”
“In-kind incentive” is clearly not a “discount.” Otherwise, it would be superfluous language since “discount” is already defined. So, while “in-kind incentive” is not a “discount,” it is another way to incentivize people to pay with cash or some other form of payment. I’m seeing many people move towards just having a one-line item. After reading the Durbin Amendment definition of a “discount” and reading the Visa bulletin, using the term “cash discount” seems a bit shaky ground to many people. Rather than operating on the shaky ground of a cash discount, they are naming the program something else. They can say, “No, this isn’t a cash discount at all. It’s an in-kind incentive. We are going to call it ______ [a ‘non-cash adjustment,’ ‘non-cash service fee,’ etc.]” The idea is using something like “a non-cash fee.” That “non-cash fee” is an in-kind incentive which is clearly protected by the Durbin Amendment, and it seems to be something which could apply to everything that is not cash.
The irony is this idea started with the concept of cash discounting. But due to the language confusion, there is probably more of a solid footing to do a non-cash fee that is actually an in-kind incentive which is more broadly protected by the Durbin Amendment. Then merchants can say, “We’re not offering an immediate discount. This isn’t a cash discount program at all. We are just doing an in-kind incentive. It’s a non-cash ________ which is an in-kind incentive to incentivize people to pay with cash. But it’s not a cash discount.” That’s very interesting.
#3. Surcharging. More people are beginning to use surcharging. Although I really like cash discounting programs and think they’re simple to sell, surcharging has benefits as well. To simplify surcharging and how it works, it is the same thing as a non-cash adjustment, only applying it to credit cards and excluding check cards and debit cards. It’s not applied to signature debit or pin debit. Surcharging programs, ironically, can be helpful in getting past the biggest objection sales reps will get while going through the pitch. That objection is, “My customers won’t like it because they don’t carry cash.” My response to that objection: “Well, do you think they carry a bank card with them, a card that is attached to their bank account? Of course, they do! That’s great! Well then, they have an alternative. They can use their bank card and not have to pay the fee. But when they do choose to use a rewards card or whatever, now you are collecting it.”
I’m trying to keep my ear to the ground here to listen to the field. What I’m hearing from sales people is that understanding the cash discount programs or non-cash adjustments (or whatever name is used) is a bit easier for new sales people. The philosophy of just erasing all fees is simpler. But the more experienced agents who go in with a compliance pitch and do surcharging are actually making more sales. Those sales are a little less profitable, though, because of applying the fee to only part of it. So, to do surcharging is maybe 30% or 40% less profitable. An experienced agent does seem to be able to make 30% or 40% more sales, which is very interesting. Cash discount programs and surcharge programs are on equal footing in my mind right now. I think there are a lot of interesting things here to talk about.
I’ve been doing a lot of consulting around this. I’d be happy to talk with you. I could schedule an hour or two in a remote consulting session or come to your ISO. I’ll be more than happy to train your agents. I’ve helped a lot of ISOs through the transition, setting them up with our tool to do surcharge proposals or cash discount proposals, running pricing models to see the differences. I’m always here to help. Go to ccsalespro.com and just click on “contact us” anytime.
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