2 Big Problems with Cash Discounting. Have a Better Set-up and Don’t Get Robbed!

My prediction that cash discounting would be big this year has come true.  So, my prediction was right, but I’m not happy about it!  I don’t think cash discounting is the most amazing thing ever.  I feel like everybody in our industry is begging for a target on our back.  The path of cash discounting right now will probably lead to government regulation.  Enjoy the profit of cash discounting quickly, because the end result isn’t going to make us happy.  Learn two big problems with current cash discounting in this episode.

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#1.  Cash discounting is not a great deal for the consumer. I was doing processing for an auto repair shop in my market for years.  Their interchange was about 1.3% because they are larger transactions, doing a lot of check card business.  With my markup, they were at about 1.8%.  That was their cost of processing.  Then they flipped to somebody doing cash discounting at 4%.  The law about surcharging clearly stipulates you can only do a surcharge to the consumer that matches the cost of processing for you as a business owner.  All the cash discounting places decided to fix that by charging their customers more money.  No problem, right?  They just decided to charge 4%.  That now means they can pass 4% through to the consumer because the new cost is 4%.  And that further means their profit just went up to 300 basis points.  I understand there are people in the industry making tons of money with this arrangement.  I expect negative comments from them on this.  I get it, and I don’t begrudge you the money.  Nor do I feel you are dishonest or a terrible person to sell it.  My point is this is a very short-lived opportunity.  The more processors who jump on board with this model of 4%, 4%, 4%, the shorter the time frame will be.

By being unfair to the consumer we are waving a red flag to the government.  Consumer watchdog groups are not going to allow every business in America to surcharge 4% for the next five years.  That is not going to happen.   Here is my opinion of a better way to handle the situation of cash discounts.  I’ve talked to multiple processors about a better set-up which is in accordance with the spirit of the law.  Get the last three (or at least one) processing statements from the merchant.  Charge the effective rate from the statements.  Don’t reduce their price.  You get to charge them what they are currently paying, so that increases the margins a little bit.  But they get to pass it through to the consumer at the actual cost of processing for them.  This works for everybody all the way around.

In the current arrangement, the consumer is the one being ripped off.  The most dangerous thing you can do as an American business is rip off the consumer.  The government may “wink” at a rip off for small business owners.  But they won’t allow a rip off of the consumers!  This episode is to send out a heads-up to the industry.  You might want to make some options available in preparation for the time the regulators figure out what is going on in the industry.  You want to say, “Yes, we let the sales rep have options just like all the other pricing programs.”  However, this attitude of “We cash discount at 4% always – every single time” is stupid and makes no sense!

#2.  Sales agents are being robbed with the cash discounting program!  I totally recognize that there are certain software and technology realities to moving this money around in the cash discounting world.  A lot of people are using DTI and some others that do have a legitimate cost.  There are some per item and per transaction fee costs associated with cash discounting.  They do have to be passed through to the sales rep.  I understand that.  You need to understand as a sales rep your cost for cash discounting on your Schedule A is going to be inflated a little bit.  But the idea it should be all a buy rate of 2.75 or 3% and the rep makes everything over that is ridiculous.  It is not legitimate.  This is a case of the processors keeping way more of the profits than previously.  You already have a Schedule A.  The processor should, of course, pass the cost on to you of doing cash discounting.  There are some reasonable per item and basis point costs associated with cash discounting because of the extra terminal cost and programs.  Ask your processor to explain that to you.  Don’t do this on a crazy arrangement where the processor is getting an extra 100 basis points before they even do the split.  If you are going to sell it at 4% and the actual cost is 1.5%, that means there is 2.5% (250 basis points) of profit.  As the rep you should get 30% or 50% or whatever percentage you are at.  You should get your percentage of that total profit.  However, right now in our industry so many of the larger, mid-size IOS’s, and especially smaller IOS’s are implementing these crazy programs which are just totally ripping off the sales rep and the office.  I think it’s crazy.

I do know several companies in the industry who are doing a true split.  They are doing what I consider as good a job as they can, giving sales reps the pricing flexibility deserved and passing through only the legitimate costs.  If you are looking for such a company, email me at james@ccsalespro.com.  I’ll be glad to make some recommendations.

You may be getting the same emails as me saying, “Come sell cash discounting for us.  We are going to do this and do that.”  Reading between the lines, these basically say, “Come sell for us so we can rip off the consumer and the merchant.  You are going to profit from it.”  As for me, I actually live in this community and don’t want everybody here to hate me!

In January I have plans to share some cool things on which I’m working now with Congress – petitions and other ideas.  Don’t miss that!  In the meantime, I’m always glad to interact.  Shoot me an email.

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