Credit card surcharging and cash discounting are practices used by some merchants to recoup processing fees, either by adding a small premium to any purchases made with a credit card or offering a small discount on any purchases made with cash. Both are becoming increasingly popular as merchants look to recoup some or all of the fees they pay on card transactions, which are the dominant payment method for purchases over $10. 

Despite growing popularity, surcharges and cash discounts are still only used by a small minority of merchants, leaving plenty of room for the practice to grow. And while it might seem counterintuitive on its face, surcharging and discounting represent an opportunity for ISOs and payment facilitators looking for new ways to attract merchants. So, what are surcharging and cash discounting, why are they becoming more popular, and how can a fee reduction strategy help ISOs and payment facilitators earn more?


What are Surcharging and Cash Discounting?

Credit card surcharging is the practice of adding a small fee – or surcharge – onto the transaction whenever a customer pays with a credit card, in order to offset the fee paid on the transaction by the merchant. For instance, if a merchant pays 2% to their processor on each credit card transaction, they can add an equivalent surcharge onto the customer’s total so that the money going to the processor comes out of the customer’s pocket instead of their own. 

Cash discounting is the process of offering the customer a discounted price on the purchase at the register rather than tacking on an additional fee. For instance, the customer may get to the cash expecting to pay $100, only to be told they can save $2 by paying with cash instead. 

merchant surcharge example
Neither surcharging nor cash discounting are new. Surcharging has been around for almost a decade, and many consumers in the U.S. are already familiar with it, whether they realize it or not, thanks to its widespread use at the gas pump, where stations often clearly display a separate price per gallon for cash and credit purchases. But, beyond the pump, surcharging and cash discounts are popular in a variety of sectors, including B2B, B2G, medical, and more. Today, the list is growing rapidly, and more and more retailers, restaurateurs, and service providers are embracing surcharges and cash discounts. 

So, What’s the Real Difference Between a Merchant Surcharge and a Cash Discount?

The most obvious question might be, what’s the material difference between a surcharge and a cash discount? In both cases, the merchant gets the same amount of money. In both cases, the customer pays more for using a card. However, the two pricing tactics are not the same.

In a surcharging structure, the price displayed to the customer must be the lower of the two prices – the cash price – and at the cash register, the customer is informed that a small additional fee is charged for credit card payments. In a cash discounting structure, the displayed price must be the higher price – the credit price – and the customer is then offered a discount. It’s a subtle but very important difference, and while the end result to the merchant is effectively the same, the way they go about achieving that result matters. 

For one thing, there are customer psychology implications to both options which make one or the other more appropriate depending on the business. But, even more importantly, there are compliance factors to be considered. Cash discounting is legal in all 50 states and requires nothing of the merchant except to display the higher credit card price on signage and advertising. But surcharging (which is not legal in Connecticut, Massachusetts, or Puerto Rico) requires merchants to follow some rules set out by the card companies, including:

  • Merchants must alert the card companies of their intention to surcharge at least 30 days in advance.
  • Merchants must limit surcharges to transactions made with credit cards (not including branded debit cards.)
  • Merchants must limit surcharges either to the rate they’re charged on transactions or the maximum rate outlined by state law, whichever is lower. 
  • Merchants must clearly disclose their surcharging practice to customers at the point of sale and on receipts at a minimum. 

Failure to comply with any of the rules could open up merchants to steep fines. All that added complexity might make it seem like cash discounting is a clear winner, but surcharging does offer some benefits that make it an attractive option for merchants, not the least of which is the ability to do it with ecommerce transactions where cash payments (and therefore cash discounts) aren’t possible.


Why Merchant Surcharging Programs are so Important for ISOs and PayFacs

It’s clear why surcharging and cash discounts are so beneficial for merchants, but what do they do for acquirers like independent sales organizations and payment facilitators? The answer to that question is simple: what’s good for the merchant is, ultimately, good for their processing partner. 

Helping merchants understand and implement surcharge or discount programs helps save them money and shows a level of attention to their needs which, in turn, makes an ISO or PayFac a more attractive partner – a potentially important competitive advantage. 

Merchants are Looking to Minimize Fees in an Increasingly Cashless World

The COVID-19 pandemic saw widespread acceleration in contactless in-store payments and the adoption of ecommerce as a primary shopping channel. While there has been some retracement in those trends as the pandemic has receded, many of the habits consumers learned during lockdowns and restrictions are here to stay. That means merchants are faced with a higher volume of credit card transactions and, in turn, more fees. Naturally, merchants are looking for ways to offset the difference, and failing to support them in that search could easily lead them into the arms of a competitor. 

According to a survey conducted by The Strawhecker Group, 23% of merchants currently levy a surcharge on credit card transactions, with 76% of those merchants doing so specifically to recoup their fees. However, only 58% of merchants surveyed reported having a clear understanding of what surcharging is, indicating that, as the practice becomes more widely understood over time, the number of merchants doing it could grow significantly. 

As demand for surcharging programs grows, ISOs and PayFacs that are ready to explain, support, and facilitate them for merchants will naturally be at an advantage over competitors slow to embrace the practice or appreciate the impact fees have on merchants in a tight economy. 

Why Would an ISO or PayFac Encourage Cash Use?

Surcharging and cash discounting both reward cash use, and it may seem odd that an ISO or PayFac – companies that make their money almost entirely on fees collected on credit card transactions – would want to promote or enable anything that nudges customers towards cash. But, it’s important to take a wider view from a competition angle. 

There are two alternatives to embracing surcharging or cash discounting: ignore merchant demand for them entirely and do nothing, or reduce fees to stay competitive. The first option is obviously impractical, as merchants will simply go elsewhere in an industry with so much choice. The second option is also poor, since it would see fees reduced across the board – including on debit and prepaid card purchases.

So, while surcharging and cash discounting do nudge customers towards cash, they are a new reality of doing business. Ensuring merchants can access both fee reduction options as easily as possible is a competitive necessity and actually represents an opportunity for ISOs and PayFacs to stand out and generate good will by putting their merchants’ bottom line first. 


How ISOs and PayFacs Can Help Merchants Set Up Surcharging and Cash Discounts

Understanding the growing popularity and importance of surcharging and cash discounting, there are a few things forward-thinking ISOs and PayFacs can do to help merchants with each. Namely, acquirers need to ensure their merchants understand the options available to them, ensure merchants are compliant when engaging in surcharging, and help set merchants up with the technology that will make their surcharging or discounting programs as frictionless as possible, both behind the scenes and at the point of sale. 

Ensure Merchants Understand Both Tactics

The first thing an ISO or PayFac can do for merchants is be ready to educate them about the benefits and drawbacks of discounting and surcharging and the differences between the two. For instance, acquirers should be ready to answer questions like:

  • How do customers perceive discounts vs. surcharges?
  • Does a merchant stand to benefit more from cash discounting or surcharging based on their industry, business model, and customer base?
  • Do price changes at the point-of-sale lead to more customer confusion than they’re worth?
  • Does two-tiered pricing and promotion of cash use result in customers spending less than they otherwise would’ve?
  • How much can merchants expect to save annually based on state laws and card company caps on surcharging? 

Make Sure Everything is Compliant When Using Merchant Surcharges

Surcharging outside of the rules puts a target on a merchant’s back and subjects them to potentially hefty fines, both from state regulators and the card companies. Assisting with and ensuring compliance is one of the most important services an ISO or PayFac can offer to merchants engaged in surcharging, offering value to the merchant while simultaneously helping acquirers mitigate their own risks as well. 

Enable Merchants with the Right Payments Technology

Ensuring merchants both have the right technology and know how to use it is key to facilitating a frictionless surcharging or discounting program. If a merchant has to manually adjust prices at the point-of-sale, the result is almost certain to be slower checkouts, frustrated customers, and a less successful rollout. While most modern payment terminals and POS systems are capable of handling price adjustments with ease, merchants using older hardware may need to upgrade to make surcharging feasible. 

ISOs and PayFacs can also offer merchants more robust systems to help them both deliver and monitor their surcharging or discounting programs. Systems like CardX have been designed specifically to facilitate surcharging programs and ensure all regulations are met while requiring little to no effort from the merchant. Monitoring systems, like the reporting tools included in IRIS CRM, make it faster and easier for merchants to keep tabs on their card transactions and profitability, helping make it clearer whether a surcharging or discounting program is paying off as expected. ISOs and PayFacs using IRIS CRM can extend reporting tools to their merchants at no extra cost, representing a major value addition to merchant services. 


Embracing discounting programs represents an effective way for ISOs and PayFacs to put merchants first and compete better in a tight industry. IRIS CRM – the payments industry’s top customer resource management tool – is also designed to help merchants improve service, maximize efficiency, and generate a sustainable competitive advantage. To find out more about how its wide variety of sales, productivity, and ISO operations tools can help your business, reach out to a member of the team or schedule a free guided demonstration or IRIS CRM today.