By Charla Wallace June 4, 2025
As credit card usage continues to rise, businesses are finding themselves paying more in transaction fees. These costs, typically ranging from 2 to 4 percent of each transaction, can have a noticeable impact on profit margins, especially for small and medium-sized enterprises. To manage these expenses without raising prices for everyone, many merchants are turning to alternative pricing models that recover processing costs more strategically.
Two of the most common approaches are surcharging and cash discount programs. Both methods aim to shift the financial burden of credit card processing onto the customer, but they go about it in different ways. While surcharging involves adding a fee when a customer pays with a credit card, a cash discount program offers a reduced price for customers who pay with cash or debit. On the surface, they may appear similar, but the legal rules, customer reactions, and implementation requirements can be quite different.
Understanding the Basics
Before comparing the models side by side, it’s important to get a clear picture of what each program entails. The differences begin with how the pricing is presented to the customer.
What is a Surcharge Program?
A surcharge program adds a small percentage fee to the customer’s total if they choose to pay using a credit card. This additional fee is clearly communicated before the sale is completed. The idea is that instead of the merchant absorbing the credit card processing fee, the customer who opts for the credit card covers it directly.
The surcharge is typically capped at a maximum of 4 percent and must not exceed the actual cost of processing. It only applies to credit card payments. Debit cards, cash, and checks are not affected. The receipt must reflect the surcharge as a separate line item, and the merchant must clearly display signage at the point of sale informing customers of the policy.
What is a Cash Discount Program?
A cash discount program offers a lower price to customers who choose to pay with cash or debit cards. In this model, the posted price is generally the credit card price. When a customer pays with cash or another non-credit method, they receive a discount at the register.
This approach avoids labeling the fee as a surcharge. Instead, it rewards customers for using lower-cost payment methods. Unlike surcharging, a cash discount does not involve modifying the total for card users. Rather, it incentivizes alternative payments by offering savings for non-credit transactions.
Legal and Regulatory Landscape
While both models are designed to recover processing costs, they are governed by different legal frameworks. Businesses must ensure they are compliant with both state laws and card network rules.
Surcharging Laws by State
Surcharging is legal in most U.S. states but banned or restricted in a few. As of now, Connecticut and Massachusetts do not allow credit card surcharges. Other states like New York and Maine have specific conditions under which surcharging is allowed, such as requiring disclosure and price transparency.
Visa and Mastercard also require that merchants notify them 30 days before implementing a surcharge program. Merchants must also notify their acquiring bank. These programs must include appropriate signage and cannot apply to debit card transactions.
Cash Discount Legality
Cash discount programs are legal across all states as long as they are implemented correctly. The key is transparency. The customer must see the higher price upfront and receive the discount at checkout. This means the signage and receipt must reflect that the cash price is lower, not that a fee has been added for credit cards.
One common legal misstep is mislabeling a surcharge as a cash discount. If the posted price is the lower cash price and an additional fee is added at checkout for card users, it becomes a surcharge and must follow those legal guidelines.
Customer Experience and Perception
Customer reactions to each program vary depending on how they are communicated and the environment in which they are used. Business owners need to consider customer psychology when implementing either model.
Surcharge Reactions
Customers may view surcharges negatively, especially if they feel surprised by the added cost. In highly competitive markets where other businesses do not use surcharges, this model may create friction. Some customers may perceive it as a penalty for using a preferred payment method.
However, if implemented with clear signage and polite explanation, many customers understand the rationale. It tends to be more accepted in service industries or businesses with loyal client bases.
Cash Discount Responses
Cash discounts tend to be better received because they feel like a reward rather than a penalty. Customers appreciate being offered a discount for using cash, and it is often perceived as a positive experience. There is less risk of disputes or complaints, provided the pricing and discount are clearly displayed and explained.
This approach also avoids the need to add fees to transactions, making the checkout process more consistent with traditional pricing expectations.
Operational Differences
Each model has specific implementation requirements that affect daily operations, training, and system configurations. Understanding these logistics is important when deciding between the two.
Setup Requirements
Surcharging requires advanced POS configuration to apply the fee correctly and separately display it on the receipt. It also requires registration with the card networks and acquiring bank. Businesses must ensure they have compliant software and printers to meet disclosure standards.
Cash discounting also requires updated POS systems but tends to be easier to implement. The main task is setting the standard (card) price and offering the discount at checkout for eligible payment methods.
Staff Training
Staff need to be trained differently depending on the model. For surcharging, employees must know how to explain the reason behind the fee and when it applies. For cash discounting, the emphasis is on offering the discount and correctly processing it at the point of sale.
Clear communication is essential in both cases to avoid customer confusion and maintain trust.
Financial Impact on the Business
Both models offer financial relief from processing fees, but the impact may vary based on business type, transaction volume, and customer behavior.
Surcharge Model Savings
With surcharging, the business recovers nearly all of the processing cost directly from customers using credit cards. Over time, this can lead to significant savings, especially in businesses with high volumes of card transactions.
However, if customers shift away from using credit cards or begin favoring competitors that don’t apply surcharges, the financial benefit may be reduced by lost sales or customer churn.
Cash Discount Model Benefits
A cash discount program also helps reduce processing fees by incentivizing low-cost payment methods. It may not eliminate credit card fees entirely, but it reduces the percentage of transactions that incur them.
The benefit here is twofold. The business still saves money, and it avoids potential pushback associated with added fees. The discount may even increase customer satisfaction by creating a sense of added value.
Industry Suitability
The success of either model often depends on the industry and customer base. Some sectors are more receptive to these pricing strategies than others.
Best Fit for Surcharging
Surcharging tends to work well in service-based industries where customer loyalty is strong and price sensitivity is lower. Examples include salons, repair shops, medical services, and boutique retail. These customers are often willing to pay a little more for quality service or convenience.
It is less suitable for highly competitive retail settings where a few dollars can influence purchasing decisions.
Best Fit for Cash Discounting
Cash discounting is popular in convenience stores, gas stations, local retail shops, and restaurants. These businesses often deal with smaller ticket items and a high volume of transactions, making even small processing savings add up quickly.
Because it focuses on rewarding customers rather than charging them extra, it fits better in fast-paced, price-sensitive environments.
Choosing the Right Model for Your Business
When deciding between a surcharge or cash discount program, several factors should guide your decision. These include your customer base, average transaction size, location, industry regulations, and the competitive landscape.
Evaluate Customer Payment Preferences
If your customers heavily rely on credit cards and are unlikely to switch to cash or debit, a surcharge program may be more effective in recovering costs. If your customers are open to using cash or already do, a cash discount program might make more sense and feel more natural.
Understand Local Laws
Check your state laws and card network policies before implementing either model. A solution that works legally and logistically in one state may not be permissible in another. If you’re unsure, consult with legal professionals or your payment processor to stay compliant.
Test and Adapt
You don’t have to make an all-or-nothing decision right away. Some businesses test one approach at a single location or on select items before expanding. This allows you to gauge customer feedback and operational impact before committing fully.
Conclusion
Both surcharging and cash discount programs offer viable paths to reducing credit card processing costs, but they operate differently and come with distinct legal and customer implications. Surcharging shifts the cost directly to the customer through an added fee, while cash discounting offers an incentive for using non-credit payment methods.
Choosing the right model depends on your business type, customer behavior, local laws, and how you communicate pricing. With the right preparation and compliance, either model can help preserve your profits and promote fairer transaction practices.
The key is to be transparent, respectful of your customers’ expectations, and fully informed about the legal and operational responsibilities involved. Done correctly, these pricing strategies can provide long-term financial benefits without compromising trust or customer satisfaction.