Payment processing fees are unavoidable for any business that accepts electronic payments, whether credit cards, debit cards, or ACH/e–checks. Though typically set at only a small percentage of each transaction, these fees can quickly add up and affect the bottom line for merchants—particularly those that haven’t already factored these expenses into their pricing structure.
The good news for merchants looking for payment acceptance savings is that there are effective strategies for offsetting those costs. Two particularly popular methods are credit card surcharging and cash discounting. Both can help merchants realize valuable cost savings by encouraging customers to pay with no– or lower-fee methods (such as cash, check, or debit) instead of credit cards.
However, each approach has its own regulatory/compliance rules, advantages, and drawbacks regarding customer experience and business impact. That’s why a thorough understanding of the workings, requirements, and business implications of both credit card surcharging and cash discounting is critical to selecting the method best suited for your business.
Read on to learn more about each option and help ensure you make the right choice.
Understanding the Models
While both credit card surcharging and cash discounting aim to offset the fees merchants must pay to networks, card issuing banks, payment processors, and other parties for processing credit card transactions, they do so differently. Here’s a quick rundown of how each pricing model works:
A merchant using credit card surcharging adds a fee, capped by payment networks at three percent, to all credit card transactions. By implementing a surcharge, merchants pass all or some of their payment processing fees to customers who pay with credit cards.
It’s important to note that federal law prohibits merchants from surcharging debit or prepaid cards; only credit card surcharges are allowed. As a result, it’s important that your systems have the ability to distinguish between a credit and debit card payment.
Alternatively, under cash discounting, a merchant marks up the posted price of all items or services by a percentage amount based on their average credit card processing rate. Then, the merchant offers a discount that effectively removes that mark up at checkout for customers paying with cash, check or ACH/e-check. (Debit and prepaid cards do not qualify for cash discounts under card network rules.)
This structure enables merchants to position the two-tiered pricing levels as a customer benefit for cash payers rather than an extra charge for card users.
Legal and Compliance Considerations
Now that we understand how each payment fee mitigation model works, let’s explore the key compliance requirements each imposes upon merchants under state and federal laws and card network rules.
Credit card surcharging is legal in most U.S. states but, as of May 2025, it is still prohibited in California, Connecticut, Maine, and Massachusetts. Other states allow surcharging with various restrictions and nuances, so merchants must be keenly aware of all applicable laws in the state or states where they operate.
Additionally, both card networks and states have surcharge disclosure requirements that mandate clear signage announcing surcharges at all points of purchase and on customer receipts. Merchants must also notify payment card networks at least 30 days prior to implementing a surcharge. Businesses failing to comply with these regulations risk incurring penalties from networks, possible legal action, and potential loss of business from customers who were unaware of the surcharge at point of purchase.
Meanwhile, cash discounting is legal in all 50 states but comes with compliance implications of its own. For instance, merchants must display signage that clearly communicates what the discount is for customers paying by cash or check. Some states require both the credit price and the cash price be clearly displayed. Also, point-of-sale systems must be configured to apply discounts for cash.
Because of the rapidly changing regulatory landscape around surcharging and cash discounting, merchants using either method should conduct regular reviews to ensure ongoing compliance.
Customer Experience Impact
Along with legal and compliance requirements, the other major implication of a payment fee mitigation strategy is the effect it may have on customers’ perceptions, experiences, and long-term loyalty.
Credit card surcharges can present potential challenges on this front. That’s because many customers may react negatively to what they perceive as an additional fee they must pay for using their preferred payment method.
Merchants can mitigate objections by explaining the rationale behind a credit card surcharge, but those in competitive markets may face lost sales to competitors that don’t surcharge.
Customers seeking to avoid the surcharge may also opt to use debit or prepaid cards, which still impose processing fees upon merchants. Moreover, some businesses, such as those that issue invoices, may experience a delay in receiving payments if their customers pay by check to avoid the surcharge. Funds from credit card payments tend to arrive in 24-48 hours. Checks often take days and weeks to receive from your customers and clear your bank.
Cash discounting, on the other hand, tends to be more positively received because it’s framed as an opportunity for savings rather than a penalty for credit card use. Customers who pay with cash may feel rewarded for their payment choice, which can improve their satisfaction and loyalty. Additionally, cash discounts can encourage more cash payments, leading to improved cash flow for merchants.
Among the main potential drawbacks of cash discounting is the risk of lower average sale volume that may result from shifting more purchases to cash or debit, as those transactions tend to be smaller on average than credit card purchases. In fact, recent data from Capital One revealed that shoppers spend up to four times as much when they pay with credit cards instead of cash. Additionally, cash can’t be used for e-commerce purchases, limiting the applicability of cash discounting to brick-and-mortar channels.
Finally, cash discounts require pre-discount prices for goods and services to be higher across the board due to the added service fee. Even if it is clearly explained that the cost will be removed for cash purchases, some customers may perceive those higher prices negatively.
Making the Right Choice for Your Business
Both credit card surcharging and cash discounting offer merchants the potential to realize significant savings by offsetting payment processing fees. The right option depends upon several factors, including your industry, specific business profile, competitive positioning, customer base, and other key considerations.
It’s an important decision that businesses may not want to make without consulting an experienced, trusted merchant services partner. Wind River Payments offers expertise and technologies to help you determine what’s best for your business and can support a fully compliant implementation of either model.
Reach out to us today to discuss how to make the right choice.
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