As a business owner, have you effectively communicated the HIGHEST PRICE to your customer? Have you offered your Discount Program with Notice to every prospective customer? Can you separate the price of goods and services from the price of credit (card processing costs)? The answers to these questions are of the utmost importance when you consider the legalities of your Cash Discount program. Over the years, the payment ecosystem has changed drastically. Where it used to be that only a small portion of customers used a credit card for purchases, we now live in a world in which it is the primary mode of payment. Banks are "rewarding" its customers for using credit cards: Capital One bank asks "What's in your wallet?" in pushing its rewards program. Who should foot the bill for the costs associated with the payment card system? More and more business owners are realizing that they should NOT, and that there exists an option that has been available to them as far back as the 1970s.
In 1981, President Reagan signed into law the Cash Discount Act which mandated that a two tiered pricing system for cash and credit users must be advertised as CASH DISCOUNT. In the 1970s, with the increase in both inflation and credit usage, Congress declared that retailers' "credit plans" were in fact inflationary because the credit issuing banks were contractually preventing business owners from offering cash discounts. The lawmakers' objections to this practice were based on the general belief that some of the cost of providing the credit card services was built into the price of the goods. If there exists an increase in credit card users, then the cost of the goods would increase - effectively forcing the cash customers to subsidize the credit card users.
Congress' intent with respect to the Cash Discount Act was to drive business owners to separate the price of goods from the price of credit (processing costs). However, due to the requirements the Federal Truth Lending Act (TILA), which was passed in 1969, business owners were blocked from offering cash discounts. Under TILA, the difference between the price of a cash sale and price of a credit sale was considered a "cost of credit" and subject to the TILA disclosure rules. These disclosure rules were inherently cumbersome and effectively prevented business owners from implementing a cash discount program.
In 1976, in an attempt to jump start Cash Discount, Congress amended the TILA to prevent sellers from surcharging customers who elected to pay with a credit card: a total ban on surcharges which ran through and up to the Cash Discount Act of 1981. Despite Congress' continued efforts, cash discounting failed to take hold following the 1976 amendments. Ultimately, this failure led to the passage of the Cash Discount Act of 1981 which removed many of the burdensome disclosure requirements and removed the limit on the size of the cash discount (5%). The Act also continued the federal ban on surcharges through February 1984.
In 1984, the ban on surcharging expired, thereby leading to aggressive lobbying efforts by the payment card networks (Visa, MasterCard, American Express, Discover) upon individual States to ban surcharging. By the early 1990s, 12 states had enacted anti-surcharging laws. However, more recently, many of these state anti-surcharging laws have been challenged, overturned and deemed unconstitutional. Aside from the battle over surcharging, the 1981 Cash Discount Act otherwise remained and continues to remain in effect and permissible if "1) such discount is offered to all prospective buyers, and 2) its availability is disclosed clearly and conspicuously."
Over the course the next 25 plus years, the use of credit cards for purchases has exploded. Less and less customers are paying with cash or check. The payment card networks (Visa, MasterCard, American Express, Discover) are making record profits because they have pigeon holed customers and business owners into their payment system. These payment card networks dislike cash discount programs, and attempt to steer business owners away from them for obvious reasons ($$$) - they want business owners in their payment ecosystem. Congress pushed back on the card networks, and provided further codified clarification under the Durbin Amendment in 2011 (which is an Amendment off of the Dodd-Frank Wall Street Reform Act). Under the Durbin Amendment, Congress made clear that the payment card networks could not "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 ----such discount or in-kind incentive is offered to all prospective buyers and disclosed clearly and conspicuously."
When taking a look at the legislative history and Congress' INTENT with respect to Cash Discount, it is advisable to implement a system whereby you relay the HIGHEST PRICE to the customer and discount for cash or check at the payment device. Moreover, when this system separates the price of goods from the price of credit (processing fees), the business owner's intent is truly aligned with the legislative intent of Congress under the Cash Discount Act - to stop forcing cash customers from subsidizing credit customers since a higher proportion of credit customers would cause the price of goods or services to rise. Over the years, the card networks (Visa, MasterCard, American Express, Discover) have attempted to cloud this intent.
Furthermore, by delivering the HIGHEST PRICE to the customer, the business owner steers clear of any potential consumer fraud claims. There is no "bait and switch", or "hidden cost". The highest price includes the cost of goods or services and the processing fees which are displayed clearly - the fee is also provided in total dollars and cents which does not require customers to engage in a mathematical equation.
When taking into consideration the law as currently constituted, the intent underlying the legislation, and consumer protection laws, the following represents the most compliant Cash Discount Program:
(1)The customer is noticed that the price reflects the business owner's HIGHEST price,
(2)The business owner offers the Discount Program to all prospective customers,
(3) Notice of the Discount Program is disclosed clearly and conspicuously, and
(4) The business owner separates the price of goods or services from the cost of credit.
All in all, Cash Discount programs are here to stay, and will become normal operating procedure for any business that accepts credit cards. Proper implementation is critical. If you cover these 4 requirements, you are in compliance and have "covered your bases".
Written & Published by:
Robert Baratta Linkedin: https://www.linkedin.com/in/robert-baratta-63877724/
Attorney & Consultant in FinTech & Payments Industry