Credit card processing fees have long been a massive expense in the hospitality industry, but now that most customers prefer to use credit cards and other electronic payment methods, business owners are really starting to feel the pinch.
As food, labor, and other expenses rise, it's becoming even more important for restaurant owners to find areas to cut costs. Given the necessity of accepting credit card payments, it's nearly impossible possible to avoid processing fees entirely, but there is a way you can cut costs significantly: cash discounting.
What is Cash Discounting?
Cash discounting is a pricing strategy that businesses can use to encourage customers to pay with cash instead of using credit or debit cards. By offering a discount when customers pay with cash instead of a card, the business can effectively offset the costs of credit card processing fees. With this approach, the customer wins by paying a lower price for their purchase, and the business wins by avoiding credit card processing fees.
How does Cash Discounting Work?
Here's a simple explanation of how cash discounting works:
Set a Regular Price: The restaurant sets its regular prices for menu items based on the assumption that customers will pay using credit or debit cards, which incur processing fees.
Set a Cash Price: To incentivize customers to pay with cash, the restaurant offers a discount on the regular prices for those who choose to pay in cash. This discount is usually a small percentage (e.g., 3% or 4%) of the total bill, which typically covers the cost of credit card processing fees.
Make a Price Adjustment: When a customer pays with a credit or debit card, the restaurant applies the regular prices to the bill. However, when a customer pays with cash, the restaurant applies the discount, reducing the total bill amount.
Offset Credit Card Fees: By offering cash discounts, the restaurant can offset or mitigate the overall cost of credit card processing fees. The idea is that the savings from customers paying in cash help cover the fees associated with accepting credit cards.
Cash Discounting vs. Credit Card Surcharging
Cash discounting and credit card surcharging are two different pricing strategies that are often confused with one another. However, a key difference lies in how the pricing is structured. Cash discounting offers a discount for cash payments, whereas credit card surcharging adds an extra fee for credit card payments. It's also important to note that credit card surcharging is not permitted in all states, and each state has regulations regarding how, when, and how much in fees can be applied.
Benefits of Cash Discounting for Restaurants
As restaurant owners get creative to find ways to cut costs, cash discounting is an effective approach that offers clear benefits for restaurants:
- Improved Profit Margins. Since credit card processing fees can eat into a restaurant's profit margins, cash discounting provides an opportunity to preserve those margins by offsetting the cost with cash purchases.
- Better Cash Flow. Cash payments are typically processed and deposited into the restaurant's bank account faster than credit card transactions. This can improve cash flow for the business, as there is no need to wait for payment settlement periods or deal with potential chargebacks.
- Pricing Flexibility. By setting prices assuming customers will pay with credit cards and offering cash-paying customers a discount, restaurants can maintain competitive prices while still managing their expenses effectively.
- Increased Customer Loyalty. Cash discounting programs are designed to be transparent to customers. By clearly communicating the pricing structure and the cash discount offer, restaurants maintain transparency and avoid surprising customers with additional fees or surcharges. This can contribute to a positive customer experience and satisfaction.
Potential Challenges of Cash Discounting
While cash discounting can offer several benefits to restaurants, there are also potential obstacles that owners should be aware of before implementing such a program. Here are some of the challenges that restaurant owners may face with cash discounting:
- Customer Perception. Implementing a cash discounting program may require educating customers about the pricing structure and the reason behind offering discounts for cash payments. Some customers may be unfamiliar with the concept and could perceive it as an additional fee or surcharge, leading to confusion or frustration. Clear and transparent communication is crucial to avoid any negative customer perception.
- Operational Complexity. Introducing a cash discounting program requires restaurants to adjust their point of sale (POS) systems and train staff accordingly. It may involve reconfiguring pricing structures and ensuring that the discount is accurately applied to cash transactions while regular prices are maintained for card payments. Restaurants need to ensure that their POS systems can support, accurately calculate, and implement the discounts.
- Compliance with Regulations. Restaurants need to understand and comply with state regulations, including providing clear disclosures about the program and adhering to any signage or notification requirements.
- Reduced Credit Card Usage. While cash discounting encourages cash payments, it may result in fewer customers choosing to use credit or debit cards. Some customers prefer the convenience and benefits of card payments, and the introduction of a cash discounting program could discourage them from using cards. This potential reduction in credit card usage may impact revenue and customer satisfaction for those who prefer electronic payments.
- Tracking and Reporting. Cash discounting programs require accurate tracking and reporting of cash transactions, discounts applied, and reconciliations alongside the tracking and reporting of card payments. This highlights a need for a powerful, capable point-of-sale system that streamlines accounting and reporting and offers the ability to reconcile cash and card transactions separately.
Cash Discounting Legality, Regulation and Compliance
Cash discount programs are legal in all 50 states according to the Durbin Amendment (which was part of the 2010 Dodd-Frank Act, a federal consumer protection law), but there are rules regarding the implementation and execution of the approach. The legality, regulations, and compliance requirements surrounding cash discounting can vary depending on the state and jurisdiction in which the restaurant operates, but here are some important considerations:
- Legal Implications. While cash discounting programs are generally legal in all states, consulting with legal professionals or experts familiar with local regulations is advisable to ensure compliance. Some jurisdictions may have specific requirements or restrictions on how cash discounting can be implemented.
- Disclosure and Transparency. One of the key aspects of cash discounting is transparency. In many jurisdictions, restaurants are required to provide clear disclosures to customers about the cash discounting program.
- Advertising and Marketing Practices. Restaurants should be mindful of any regulations governing advertising and marketing practices related to cash discounting. It's important to ensure that promotional materials or advertisements accurately represent the pricing structure and clearly communicate the cash discount offer.
- Card Network Rules. Before implementing a cash discounting program, restaurants should review the rules and guidelines provided by credit card networks such as Visa, Mastercard, or Discover. These networks may have specific requirements or restrictions on how cash discounts are communicated to customers or applied at the point of sale.
- Compliance Monitoring. Restaurants that use cash discounting should establish processes to monitor and ensure ongoing compliance with the applicable regulations. This may involve regularly reviewing and updating disclosures, training staff on the program's requirements, and maintaining records related to cash transactions and discounts.
Bottom Line
Cash discounting can be an effective strategy for restaurants to cut costs associated with credit card processing fees and improve profitability. By offering discounts to customers who pay with cash, they can offset the expenses incurred from accepting credit or debit card payments, allowing them to improve cash flow, provide pricing flexibility, and increase customer satisfaction.
In order to establish a successful discounting program, restaurant owners must pay careful attention to implementation, compliance, and effective communication as they launch and manage the program. That said, the most critical piece in determining the success of your cash discounting program is having the right point of sale system. Find out how the RPOWER advantage can help.