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Marketing 360® Blog

How to Avoid Credit Card Processing Fees (Here’s How to Pay 0% on Credit Card Transactions)

Post By Scott Yoder | Payments and POS

Tired of sharing your profits with credit companies?  There is a way that you can, in effect, pay 0% processing fees and pass savings on to your customers.  Here’s how it’s done.

Let’s start by being clear.  There is a processing fee that credit card companies charge for credit card transaction to take place.  That fee is how they make money on a transaction, and it will always be there.

So how can your business pay a 0% processing fee?

The answer, in short, is to change the nature of the fee.  Instead of there being a processing fee, there is a service charge for using a credit card.  This also means that there is a discount for paying with cash.

For merchants, it’s not free processing, but rather a processing cost offset.

To do this, you set a percentage of every credit card transaction (including debit) for each sale.  The legal maximum is 4%.   So credit card paying customers are charged 3.99% of the transaction.  Cash customers are charged regular price with no surcharge percentage.

Cash discount programs of this nature are legal in all states, but it is required that your business use signage about the discount program, with these requirements:

  • You must state that all sales will be charged a service charge of 3.99%.
  • Prices on menus and products must all be the cash price.  The service charge is added at checkout.
  • The signage must explain that as an incentive, all cash sales will have the service charge waived at checkout.
  • Signage must be posted at entrances and at the point of sale.
  • The dollar amount of the service fee must be printed on every receipt.

Here is an example breakdown:

cash discount program

Here’s a simplified breakdown.

If you pay the credit card processing fee:

  • You sell an item for $100
  • Your processing fee is 3%, so you pay $3 on each credit card transaction.
  • You net $97.

If you use the service charge/cash discount program:

  • You sell an item for $100
  • The surcharge on all credit card transactions is 4%, so customer pays $104 for the item.
  • You net $100 for all sales, credit card or cash.

 

Considerations

Most merchants look at this program and think great.  I’m netting more per sale without the processing fee.

But many pause.  Most customers today pay with a credit card.  Will this “service charge” cost me sales? 

It depends.  If you’re just pocketing the difference, then you’re basically inconveniencing your customers.  Not usually a good strategy.

However, if you do, in fact, turn this into a cash discount, then you can lower the asking price for an item.  Remember the list price is the cash price.  The processing fee surcharge is added during checkout.

So let’s take that $100 item.

If you’re rolling the credit card processing fee into the cost of the item, you’d charge $104.  When evaluating profit margins, this is what many merchants do.  They know there is a processing fee for credit cards so they calculate that in when determining profit margins.

But if you offer a cash saving, then you can charge a $100 for the item knowing that the processing fee will be picked up on a per transaction basis by customers who chose to pay with their card.

So, if you’re knocking 3-4% off your asking price, it gives you a competitive advantage.  If you’re in the type of business where that advantage will boost your overall sales volume, it may translate into more sales and overall revenue.

This does need to be evaluated on a business by business basis.  In general, you need to be a business that has low-cost items that people will pay cash for (restaurants and retail shops).  However, it could be made to work with higher-priced items where the customer could pay with something like a cashier’s or personal check.  For example, if you’re selling a $10,000 motorcycle, many people might be willing to do a cash transaction if you save them 3% or more ($300 is worth a trip to the bank).

One way or the other, the processing fee is there.  But if you can save customers money by giving them the chance to pay less with cash, you can leverage that competitive advantage to increase your sales volume and overall revenue.