With the rise in digital commerce affecting even fully retail-based businesses, allowing customers to use credit cards is practically required to become profitable. It may seem completely illogical to pay with cash instead of a credit card. Maybe you’ve been wondering what is the primary purpose of a cash discount? If so, you’ve come to the right place!
Today we’re going to discuss a rising method that businesses are using to save 4% or more of their profits by using a “cash discount program.”
How Does A Cash Discount Program Work?
To understand how a cash discount program works, it is critical to understand why this kind of program has become more widely utilized in modern day. It is also important to understand how credit card processing has developed.
When credit cards were first introduced to the public, they had multiple issues to remedy:
- Early credit cards didn’t have good cyber security. Fraud and legal issues were concerns around the world.
- Processing credit card sales was time consuming and each transaction had to be printed out on paper for bookkeeping. (Especially in the event that the customer decided to contest the transaction or fraud was detected)
- Digital receipts and business management systems weren’t common until the mid-1980s to late 1990s, when paper based systems were becoming far too tedious. When “POS” systems were introduced, it gave credit card processing a whole new life and convenience. But with more electronic convenience, companies now had new costs to pay for them.
- With these new charges, companies were now able to process credit cards more efficiently and safely, but with new financial barriers. New parties were needed to be brought into each transaction. These included merchant accounts, a gateway (for e-commerce), a credit card processor, and even insurance companies on occasion.
So with that said, let’s discuss how a cash discount program solves a few of these dilemmas.
So What Is The Primary Purpose Of A Cash Discount?
When it was discovered that there were so many fees to process a credit card payment, new creative solutions emerged. An underrated technique that is growing in popularity is a “cash discount program.” The purpose of this program is to encourage customers to use cash for their transactions instead of a credit card. Businesses do this by providing financial incentive. Customers will pay less for what they want as long as they pay in cash.
Not only does this save the business much money in the long run, but the customer will also acquire what they were shopping for at a lower expense, and it offers benefits for the business.
This technique continues to save money for customers and companies around the world, but it isn’t utilized to the degree that you’d expect.
There are a few reasons why cash discount programs aren’t being used everywhere.
- Franchises like Walmart, Starbucks, and even McDonald’s don’t offer cash discounts. This is because if one location offered it, they all would. Franchises that operate on a multi-million to multi-billion dollar scale rarely use cash discount programs. And besides, cash discounts reduce risk of fraud. Many large companies prefer credit cards to keep track of their bookkeeping over cash.
- Many customers don’t carry much if any cash anymore. A cashless society became even more of a reality after Covid-19.
Of course, there are still exceptions, which is why a cash discount program is still totally viable!
Extra Perks Of Using Cash Discount Programs
Besides the obvious perk of saving money on credit card processing, there are other reasons why cash discount programs are used:
- Chargebacks are prevented. (Also known as “friendly fraud”)
- Lowers processing fees. (Paying with cash is not the same as paying with a credit card.)
- Adding a cash discount gives incentive for new and returning customers to make a purchase when item prices are discounted for cash. (This is a great way for customers to remember your business for a standout feature)
Let’s get into each and discuss why these are perks and how they work.
Preventing ‘Friendly Fraud’
When a consumer tries to reverse a charge, it is considered a chargeback. In many cases the reverse is not substantiated which is considered “friendly fraud” activity. While an occasional chargeback doesn’t look too bad, regularly accruing these is a highly negative thing in the eyes of credit companies.You could actually need a “high risk merchant account” if you accrue too many chargebacks. This raises your costs for credit card processing, so this should be avoided if possible.
Processing Fees Being Lowered? How?
Fees are charged when a credit card is processed. But when cash is used, there is no fee to process or accept the transaction. This makes it ideal for companies that want to lower their expenses while also increasing business simultaneously. (Cause who doesn’t like giving customers discounts?)
The only limit to the kind of deals you can create for customers is the business’ imagination. Cash makes transactions far simpler. There are less costs and less risk of fraud. You don’t have to worry about whether a customer has a particular credit card, and you don’t need to pay to process transactions.
There are many reasons why recent years have put a less-than-ideal view on cash, but it remains an ever present aspect of commerce. So why not utilize it? People still carry cash.
As we cover new topics surrounding a cash discount program, not only will you be able to answer the question, “what is the primary reason of a cash discount?” but you will also be able to understand how to use the information we teach here.
Utilizing credit card processing for profit is just one technique for business success. We also teach how to become a business loan broker for massive returns.
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