Personal Finance: The Rise of Cash Discounts

Key Points

• An increasing number of businesses are providing financial incentives for customers who pay with cash instead of credit cards.
• Consumers can save between 2% to 4% on purchases by opting for cash, with debit cards also offering potential savings.
• Higher costs associated with credit card processing fees are prompting businesses to encourage cash payments.

Sometimes, paying with cash can actually save you money. More merchants are now offering discounts to customers who choose cash over credit cards, making it financially advantageous in some cases.

How Much Can You Save?

Typically, cash discounts range from 2% to 4%, although savings can sometimes be even greater. While cash discounts are still relatively rare—making up only about 3% of all cash transactions in 2022, according to the Federal Reserve Bank of Atlanta—that figure has increased by over 60% since 2015, when it was just 1.8%. Although cash incentives aren’t mainstream yet, experts believe they are likely to become more common.

Credit Card Surcharges

Some businesses impose surcharges on credit card transactions, making cash payments a more attractive option. Nearly 70% of credit cardholders report having been charged extra for using a credit card, according to a recent LendingTree survey.

This shift comes as consumers are gradually moving away from cash; in 2022, only 18% of payments were made with cash, down from 31% in 2016, while the share of credit card payments rose from 18% to 31% during the same period.

Matt Schulz, chief credit analyst at LendingTree, notes that “sometimes, it can make sense to just go ahead and pay cash,” even when considering credit card rewards. The highest general cash-back rate on most credit cards is around 2%, often less than cash discounts.

Why Offer Cash Discounts?

Businesses provide cash incentives primarily to reduce the costs associated with credit card transactions. Processing companies like Visa and Mastercard typically charge merchants 2% to 4% per transaction, making these swipe fees a significant expense, second only to labor costs.

As Adam Rust, director of financial services at the Consumer Federation of America, explains, “the merchant is looking at your dollar and getting 98 cents in the end because you’ve chosen to use a card.”

To mitigate these costs, businesses can either offer discounts for cash payments or add surcharges for credit card transactions. However, surcharges are not permitted in all states. As of May 2023, states like Connecticut and Massachusetts have banned surcharges, while others have set limits.

When to Pay with Cash

Research from Joanna Stavins, a senior economist at the Federal Reserve Bank of Boston, shows that cash discounts significantly influence consumer behavior. When a cash discount is available, the likelihood of a consumer switching from a noncash to a cash payment increases by over 19%.

Small, independent businesses are more likely to offer cash discounts than large chains. For instance, gas stations have traditionally provided cash incentives, and this trend is expanding, with major retailers starting to implement similar policies. The average cash discount at gas stations is around 5 to 10 cents per gallon.

Cash discounts are also prevalent in healthcare payments, and for larger expenses like tax bills and tuition, where processing fees can add up.

Credit Cards vs. Cash

While cash has its advantages, credit cards also offer unique benefits, such as fraud protection and ease of tracking expenses. Schulz advises that using a credit card might be better for first-time purchases or fragile items, where you may want to return the product.

For those who struggle to pay off credit card balances, it’s often wiser to avoid them to prevent accumulating interest charges, especially given the current high rates.

Debit cards can also be a good alternative; merchants typically can’t impose surcharges on them, making them a cost-effective choice in situations where credit card fees apply.

In conclusion, while cash discounts are becoming more common, it’s essential to weigh your payment options carefully based on the specific circumstances and potential savings.