Sometimes You Just Can’t Win, Even When Merchants Offer a Cash Discount!

cash discount, off, saving money

So, over the weekend I was pumping gas, and when I went inside to pay I noticed the local gas-station had a big sign up promoting a cash discount - “Pay in cash, and receive a 2 cent off per liter off of your total gas purchase – NO Credit”.

This is a decent cash discount. For 60 liters of fuel I pumped at $1.30 per liter, the total came to $78. However, I decided to pay cash, and take the merchant up on the two cent discount they were offering – so instead I paid a total of $76.80 and saved a whopping $1.20.

This wasn’t the first time I seen something like this. There seems to be a growing demand to offer discounts to dissuade people from using their credit-cards. However, this trend is most noticeable amongst the small business owners. Very rarely do we see such offers at big-box stores, high-end retailers or any form of franchise establishment.

Most of us know WHY stores do it – CC fees are significant. Anytime merchants accept payment from you in the form of a credit card, there’s a cost associated with that – somewhere between 2-4% of the sale price in any transaction for which they accept a credit card.

Let’s use my above purchase as an example, and say that I hypothetically paid my $78 gas purchase with my credit card, the merchant would get charged a fee on the transaction. Let’s also say that they got charged 3%. Once my transaction was complete, the retailer would have never seen the $78, and instead would have seen roughly $75.66 – therefore losing $2.34 in profit. The same $2.34 is then split between the merchant’s payment processor (someone like Visa or MasterCard) and the shopper’s credit card company (most often a bank).  The credit card companies make a killing on the fee they charge retailers – upwards of $4.5 billion in 2008 – and retailers are left stuck.

That’s the cost of convenience for using a credit-card. Sadly it doesn’t stop there though for the credit card companies as they (like most big players today) like to double dip – they charge us (the retail customer) an annual fee, and they also charge the retailer (merchant) a fee for using their service. The more premium your credit card the higher the fees that the retailer pays. American Express credit cards carry some of the highest fees, and by no surprise many retailers flash large signs that read: NO AMEX.

Some credit users are foolish to believe that their credit card provider out of the goodness of their heart is willing to give cash back for every time you spend money using their card. NOTHING IS FREE!!! You may not be paying for it directly, but that mom-and-pop store you always shop at is getting murdered.  That’s how The Bank can afford to offer you so much “cash back”.

Bigger stores pay less in transaction fees since the cost of an electronic transaction falls as the volume increases, which means smaller retailers pay a disproportionately higher cost for accepting your card.

So, despite all the negatives of paying with credit cards for obvious reasons and double dipping that the banks and credit card companies embrace, why don’t more retailers offer cash discounts? Even when taking out any type of cash loans, you get some discount.

Reasons are truly unknown. Even if retailers promoted a 2% discount on a 3-4% transaction they’d still be up. More money in their pocket, less to the rich financial institutions, and a total no brain er for the customers. However, much like many other financial products, Canadians are lagging behind United States. Our friends south of the border are more open to the cash discount concept. In fact, some states make it mandatory to promote a cash price and a non-cash price, giving the consumers greater choice.

store credit card, credit, credit card

Catch 22?

Through my research on credit card payments, I came across a really interesting research paper. The Federal Reserve Bank of Boston conducted some research on cash paying consumers, merchants, and those consumers who pay with credit cards and discovered that merchant fees and reward programs generate an implicit monetary transfer to credit card users from non card users according to this report; Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations.

The report suggests that those who pay for cash actually supplement those who pay with credit cards, and in particular those with high end reward cards – most noticeably cash back credit cards. In other words, when I paid cash for my gas, some percentage of my transaction was used to give a cash back credit-card holder some money back.

And if you think I was smiling when I was reading this…..well you’re wrong!

The report went on to say the following:

“On average, each cash-using household pays $149 to card using households and each card using household receives $1,133 from cash users every year. Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low income to high income households in general.”  Source: Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations

Furthermore, the report went on to say;

“On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $21 and the highest-income household ($150,000 or more annually) receives $750 every year. We build and calibrate a model of consumer payment choice to compute the effects of merchant fees and card rewards on consumer welfare. Reducing merchant fees and card rewards would likely increase consumer welfare.”

After reading the first paragraph, I was left in awe. Essentially those people who can’t afford premium cards don’t benefit from the rewards. They are the ones who end up paying more for a given product. Unfortunately, even after reading this, people will still continue to pay with credit. Cash is not making a comeback anytime (if ever), and reasons like the ones above are why there’s so much talk about going to a cashless society. Everything through plastic.

If I had to make a prediction, I would bet that in the next 20 years we will see a UNIVERSAL debit card, which is connected to individual banks and will also act as a universal ID card. Private credit card companies will vanish (go ahead call me crazy), and be replaced by a debit-card type credit car such as Master Card debit in United States.

Interact is too powerful in Canada, and credit-card companies hate it. That’s why credit merchants such as Visa and Master Card want to introduce their own debit card. That’s why every single major retailer in Canada has their own credit card – Shoppers Drug Mart, Lowe’s, Home Depot, Rona, Future Shop, Best Buy and President’s Choice are just some of the few to name. Many of these big stores would never meet their quarter forecasts, year end’s or appease shareholders if they pushed for cash payments. Even with a 2-4% hit per every credit-card transaction, there’s still a lot of profit in the price, which begs the question; How BIG is the markup rate?

All of the above spells out one thing – middle class is vanishing (virtually on the border of extinction), and why the despair between the rich and the poor continues to grow. It’s true, just like the saying:  “The rich keep getting richer, and the poor keep getting poorer.”

Cash back credit-card readers, how do you feel about your cash back reward card now? Does it bother you that you’re contributing to the despair between the rich and the poor?

Share your thoughts, I’d love to hear how you feel.



Photo Credits (zen, eric731)


  1. Really interesting stuff, Eddie. It makes sense though that the poor get taken advantage of in the credit card offers: (1) they can’t spend as much and therefore don’t get as many rewards and (2) they typically are going into debt, can only pay the minimum payment (maybe slightly more) and and accruing interest at an alarming rate.

    Maybe the reasoning that more retailers don’t promote cash discounts is because they know people spend more when buying on credit. A report I read awhile back stated that people buying with credit spend 16-18% more than those paying with cash. I think that makes up for their 3-4% fee…
    Jason recently posted..Wising Up – Students and Credit Card DebtMy Profile

  2. jefferson @seedebtrun says:

    i love it when merchants offer cash discounts like the gas station that you mention.. i wish they would extend the same discounts to debit as well.. i have heard that with credit cards, the merchants bear the weight of the costs, but with debit– the banks bear the weight.. is that true?

    • Hi Jason!
      I’m not too sure who bears the cost of debit or if there are even any charges – since there is no middle man – the money is directly transferred from your bank account.
      Wait though, isn’t Interact a middle man? Hmmm, gotta look into this.

      • Eddie,

        a great post! With the debit card, the cost of transactions reduced to about half. I think that visa or master card are still the middleman for it.

        For me, I still use the credit card because usually with the gas station, I get 5% back and usually 10 or 20 cents off are still below 5%. I think that if they match the 5% back, I might use cash, but I don’t see that happening. That’s just me, though.
        John @ Calling the Puts recently posted..Save Money by Learning to Spend WiselyMy Profile

        • Hi John!
          I don’t think CC companies are middlemen for debit transactions. I think it’s Interact.
          I don’t use reward cards – especially cash back cards – rewards are minimal unless you’re spending thousands every month.

  3. I’ve never seen a merchant offer a discount for paying with cash! Although its a small amount I like the idea of saving money and would be more willing to pay with cash if I could save some!
    Chelsey recently posted..Another day another dollar!My Profile

    • Mostly smaller merchants will offer cash discounts – especially in small towns. Even if the cash discount is not advertised, it’s always worthwhile to ask about it. You’d be surprised how many places say “Yes”.

  4. I have seen cash only discounts – and places that will only take cash. For me, the reward credit cards are worth it – I don’t pay any annual fees at all on them!
    My Canuck Buck recently posted..Tips for dealing with your insurance company for medical and dental claimsMy Profile

    • Having only 1 credit card for personal use, and 1 CC for business – I don’t dwell into reward cards. Unless you’re spending thousands a month on your CC – the rewards are minimal.

  5. I noticed this back last year mainly with Canadian Tire. I noticed they would have a timed gas sale from 7am to 7pm and it would be 5 cents cheaper. I think we will start to see dicounts, deals and the like all over with competition getting fierce for any consumer products and services. I use my CT credit card for everything as I like the perks that come with it. I don’t know about paying cash really as I’d have to be getting a better deal than what my Credit card would give. Spending money to go to the bank to take money out now also is factored in. Time is money and so is petrol. Paying a credit card bill from home is priceless if you pay it off each month. Cheers … great post mate. Mr.CBB
    Canadianbudgetbinder recently posted..The Grocery Game Challenge August 13-19 2012 End Of SeasonMy Profile

  6. Sometimes their are other reasons a retailer might off a cash discount. You see my friend works as a traveling carpet sales man. He likes to use the cash he recieves from his sales to supplement his daily day to day expenses. Lunch, coffee, gas etc. He looks at his credit card check at the end of the month as profit.

    So when he’s running low on cash in his pocket he’ll offer a cash discount. I’ve seen him do as step as 10% before. I remember once he had an item listed for $750 came down to $600 (before the payment options came up) customer pulled out his plastic to which my friend said “Look if you pay me in cash I’ll give you a 5% discount to which the guy said 10 and they settled on 7% that’s a savings of $42. My buddy was happy though cause had $550~ in his pocket.