Applying a surcharge to a transaction has never taken hold in the U.S. as merchants were lukewarm to the idea when the card brands added the charges for credit cards only during an attempt to settle the swipe fee litigation six years ago.

Plus, most merchants realized too many states banned the practice, regardless of what the card brand rules were stating. And the card brand rules for surcharging were cumbersome to most acquirers and independent sales organizations as well.

But surcharging isn't the only option merchants explore in order to reduce the costs of accepting card payments. Cash discounting, or informing customers that items in the store are priced less expensively if purchased with cash, does not have the legal barriers of straight surcharging, which is simply charging more for products to cover card fees.

Bloomberg News

"I've probably been doing it longer than anyone, having started a surcharge program in New York in 2015 before a ban was upheld there," said Michael Kaplan, co-founder and co-owner of A-1 Merchant Solutions.

After obtaining some legal advice, Kaplan decided he should operate his merchant acquiring business with a major emphasis on cash discounting, which is legal in all states.

"Basically, you have to be upfront in telling the customers with signs at the point of entry into the store and at the point of sale," Kaplan said. "You have to let it be known that everything in the store is priced at a cash discount, and that infers that they are going to pay more if they pay with plastic debit or credit."

For Delray Beach, Fla.-based A-1 Merchant Solutions and its 80 agents, cash discount has been a powerful tool for obtaining merchant accounts, Kaplan said. At least 90% of the company's 300 merchant clients, mostly convenience stores or small local businesses, are involved in a cash discount program.

While pushing the concept of not paying for credit card processing, A-1 Merchant Solutions is like any other acquirer or ISO in knowing that the merchant certainly has to accept card payments if the consumer prefers them. A-1 sets up merchants with traditional processing capabilities with EMV chip readers and terminals, tablet POS terminals, and development of mobile apps to accept transactions.

Surcharging and cash discounting represent two of the four most common practices for merchants to reduce costs. Convenience fees are sometimes applied, as are service fees, which are limited only to government or education-related merchants.

By late 2016, legal teams for merchants and their acquirers were reporting far more questions and requests coming in to establish surcharging at their businesses. The trend made sense, in that other options to tame credit card fees, such as the Merchant Customer Exchange initiative, were flaming out.

Last year, the Supreme Court took up the credit card surcharging question and ruled that it was a free speech violation in terms of the networks dictating how the merchant could describe the fees — and sent it to lower appeals courts for further discussion.

In addition, momentum was building earlier this year among merchant groups seeking to topple state laws banning surcharge fees, though it is clear it will take some time for a complete overhaul to wind its way through the U.S. legal process.

As much as anything else, all of the rhetoric led processors and merchants to increasingly spend time trying to figure out the best approach for surcharging or other cost-cutting measures.

"Cash discounting is absolutely out there and available, and of course the card networks will think it is a bad idea because it conflicts directly with their world," said merchant acquirer consultant and industry researcher Paul Martaus of Martaus & Associates in Mountain Home, Ark. "A lot of folks are protective of the status quo."

Even though there are potential ramifications and costs to handling more cash, most aspects of cash discounting "are all on the positive side from the retailer standpoint," Martaus said. "It's on the negative side from an industry standpoint because it is essentially telling the customer, 'Don't use that card.' "

Acquirers or ISOs considering instituting a cash discount program for merchant clients still have to deal with a "double-edge sword" within the industry, Martaus said. "Banks have been incredibly good at convincing consumers that using their cards for even the most mundane purchases is a perfectly acceptable thing to do," he added. "In turn, many people don't carry cash anymore."

That scenario is all the more reason that merchants offering cash discounts have to educate their customers about the savings.

Most customers want a cash discount, and understand that concept from other cash-back purchases or rebates, or cash savings for larger purchases like cars or home repairs, A-1's Kaplan said.

"The bottom line is that if I load up a cart at a store and each product has already been priced up for processing fees the merchant is already paying, I should be able to have the choice to pay less if I pay with cash," he added.

The merchant can't broadcast that if a customer pays with a card, they pay 4% more, Kaplan said. Instead, the better approach is, while they're swiping or inserting a card, to remind those who pay with a card that they could have saved money with cash and to think about it the next time, he added.

Mostly, cash discounting takes the merchant out of the complexities of surcharging on card payments.

"All point of sale terminals are different and you have to have the right technology to handle surcharging, which is put through as two separate transactions" on the customer receipt, Shawn Douglas, founding partner of Omnitec, told acquirers at a recent Midwest Acquirers Association conference.

However, if a merchant is operating with a cash discount program, those transactions move through the network as just another tender option, Douglas said.

"The merchant would select cash discount and it would have the discount price," he added. "It would be no different than accepting coupons."

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