Cash Discount (Card Payments)

A cash discount (in card payments) is a reduction from a posted price that a merchant offers to customers who pay with cash, a cheque or another method that costs the merchant less than a card. The posted price is the card price; everyone else pays less.

The term is mainly used in the United States, where federal law protects the merchant's right to offer it. A cash discount is the mirror image of card surcharging: both create a gap between card and non-card prices, but a surcharge raises the card price above the posted price, while a discount lowers the non-card price below it. The difference matters legally, because some US states that ban surcharges still allow discounts. "Dual pricing" programmes sold by processors are a variant that shows both prices.

Picture a petrol station with two numbers on its sign: one price per gallon for card users and a slightly lower one for people paying with notes and coins. The station has not added a fee for cards; it has simply knocked a little off for cash, because cash saves it the fee the card company would have taken.

From the shopper's side, the effect can look much like a surcharge, since card payers end up paying more than cash payers. The difference is in which price is treated as normal. With a cash discount, the higher card price is the standard price on the shelf or menu, and the lower price is a reward for paying another way. Laws and card network rules care a great deal about that distinction, even when the money at the till comes out about the same.

The federal right to discount for cash dates from the Cash Discount Act of 1981, which amended the Truth in Lending Act so that a discount offered to all customers for paying by cash or cheque is not treated as a finance charge on card purchases. The same law extended the federal ban on credit card surcharges, which lapsed in 1984.

The Durbin Amendment, section 1075 of the Dodd-Frank Act of 2010, went further. It bars card networks from stopping merchants offering discounts for paying by cash, cheque, debit card or credit card, provided the discounts do not discriminate between issuers or between networks. The same section allows merchants to set a minimum purchase of up to $10 for credit card payments. In 2017 the US Supreme Court, in Expressions Hair Design v. Schneiderman, treated New York's rule allowing discounts but banning surcharges as a regulation of how merchants describe their prices, a ruling that has shaped later state cases.

With a cash discount, the posted card price is reduced by the discount rate:

• $P_{\text{cash}}$ is the price paid by a customer using cash or another non-card method.
• $P_{\text{card}}$ is the posted price, which card payers pay.
• $d$ is the discount rate, written as a decimal.

A discount of $d$ is not the same as a surcharge of $d$. The equivalent surcharge on the cash price is $\frac{d}{1 - d}$. Suppose a café posts a sandwich at $10.00 and offers a 3.5% cash discount. The cash price is $10.00 \times 0.965 = 9.65$, or $9.65. Measured from the cash price, the card payer pays $\frac{0.035}{0.965} \approx 0.0363$, about 3.63% more, which is why the two methods can produce slightly different results for the same advertised rate.

Many US payment processors sell "cash discount" or "dual pricing" programmes, often marketed as a way to cut card fees to almost nothing. The terminal shows a cash price and a card price, and the gap is set to cover roughly the merchant's merchant discount rate. These programmes are an alternative to flat-rate pricing and other pricing models in which the merchant absorbs the fee.

The network rules on discounts are looser than those on surcharges: the card price must be the regular, posted price, and both prices must be clear to the customer before payment. The main compliance risk is a programme that posts the cash price as the regular price and adds a "non-cash adjustment" at the till, which networks and regulators treat as a surcharge. In that case the surcharge rules apply, including caps, disclosure and the bar on surcharging debit cards.

Cash discounts let a merchant shift part of its effective acceptance cost onto card users without breaking surcharge bans. They also weaken the card rewards cross-subsidy, in which customers who pay cash help fund rewards through higher prices for everyone. They are most visible at US fuel stations, which have long posted separate cash and credit prices, and at small businesses using processor-run programmes. Handling cash has its own costs, such as counting, security and bank deposits, so a discount only pays off when it is smaller than the card fee it avoids.

Outside the United States the issue is framed differently. In the European Economic Area, where PSD2 bans surcharges on most consumer cards, the directive still lets merchants offer a reduction to steer customers toward a particular payment method, so discounts remain the main lawful price signal there.

• Supreme Court of the United States: Expressions Hair Design v. Schneiderman (2017)
• Federal Reserve: Regulation II (Debit Card Interchange Fees and Routing)