Payment companies are promising to eliminate credit card processing fees altogether. Here's why I think you should stay a mile away from these programs.
The credit card and merchant processing industry never fails to disappoint.
Every few years they come up with a new idea on how they can make credit card payments more confusing. Always trying to add some extra hidden fees.
I've been watching this now for many years and I find it amazing that there are still so many sleazy sales reps out there. They use deceptive practices to make a quick buck and oftentimes lock up small business owners in contracts they didn't want to be in.
Their latest and greatest idea: cash discounting programs.
The promise is simple: get rid of all payment processing costs and basically have your clients cover the 2-3% fee that you'd normally pay.
The way it's done is not as straightforward as you might think. It turns out that "surcharging" or adding an extra cost for paying by credit card is illegal in many states in the US.
So instead, cash discounting works the opposite way:
First you raise the total of your sale ticket by 3%
Then you give a 3% discount to everybody who pays in cash
Hence the name "cash discounting"
The result is that everybody paying by credit card effectively pays about 3% more. Same result as adding as surcharge. Oh, did I mention surcharging is illegal in many places?
In practice, this is oftentimes done by some kind of credit card terminal or POS system that automates the process of first increasing the total, then discounting for cash payments.
At this point, as a salon or spa owner, maybe you actually think this isn't such a bad idea. But hold on a second. Let's take a closer look.
Why cash discount programs never work for salons and spas
In the salon and spa industry we're all about hospitality and providing a great experience to our clients.
Personally, I think that by far the biggest factor of your success is whether your clients have a good time when they come to you to get their haircut, facial, massage, mani/pedi, or whatever it is that you're providing them.
The last moment of their interaction with your business is when they pay and are ready to leave. It is in this very crucial moment when surcharging can turn an otherwise great experience into a bad one.
Why do I need to pay extra for using a credit card??
At this point, in most of the developed world, payment by credit card is the standard form of payment for consumer goods and services. People simply expect it. If you start asking them to pay 3% more simply because they decided to not carry cash, you're gonna get nothing but a lot of upset clients. 😡
We have thousands of people using Mangomint every day and not a single one so far has told us that they are successfully doing cash discounting for more than a few months. It never works.
Maybe in other industries, like if you're a used car dealership or something where people don't have high expectations to begin with, maybe then you can pull it off. But in our space of beauty and wellness where loyalty is everything, cash discounting is always a bad idea.
Here's the crazy thing - merchant service reps sort of know that. There's a reason why they try to talk you into it anyways.
In case there's any doubt left - I don't think very highly of the merchant services industry in general. There are definitely some good, honest people out there and we always try to be careful when we decide who to partner with at Mangomint.
However, a lot of the folks who sell cash discounting programs to salons and spas are fully aware that it will not work. So why do they keep doing it anyways?
Well, while different sales reps will have different motivations, and some of them might just simply be inexperienced and not know any better, a lot of them will try to talk you into cash discounting because it allows them to lock you up in contracts for 12-24 months.
Often times this comes indirectly in the form of a terminal lease. So it's not necessarily that you can't close your merchant account, it's more that you'd be on the hook for paying for the hardware terminals.
Sales reps just simply hope that by the time you realize cash discounting doesn't work you will be too jaded to switch again to another payment company and instead just simply stay with them.
That's it. Merchant service companies know that their product is completely undifferentiated - at best you just forget about it and it does what you expect - and so they are tempted to jump on any opportunity to tie you up in an effort to keep you longer.
The bottom line
Unfortunately, credit card processing fees are just a reality and part of doing business.
Nobody likes them, and it's understandable that the promise of not having to pay them is very attractive. However, as with many things in business, if something sounds too good to be true, it usually is.
If you have a different experience with cash discounting that you'd like to share, I'd love to hear it. Also if you are more confused now than before or just simply want to talk with somebody about it, please send me a message.
Daniel Lang is co-founder and CEO of Mangomint, a leader in salon and spa software.
