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As the interchange fees that retailers pay to card issuers continue to climb, many merchants are turning to “zero-cost” or “cash discount” programs that promise to eliminate processing expenses. These models enable the processor to add a service fee to every card transaction, which is not charged when customers pay with cash. The processor bakes the interchange charge and markup into its service fee, so the customer ends up paying those costs.
Zero-cost and cash discount programs are usually offered by smaller processors and independent sales organizations (ISOs), and at first glance, they seem like a win-win for retailers. Passing fees on to customers helps a company protect margins amidst inflation and rising costs. Yet beneath the appeal, they introduce serious compliance, cost, and customer-trust risks that businesses often don’t see until it’s too late.
One key issue is that many programs blur the line between a legal cash discount and a regulated surcharge. As a result, merchants may run into compliance issues and unexpected costs.
Some states do not even allow surcharging. Connecticut and Massachusetts ban surcharging outright, while Colorado tops it at 2 percent. States like New Jersey and New York mandate that surcharges reflect the actual processing cost and that they’re clearly disclosed to consumers.
On top of state laws, card networks such as Visa and Mastercard enforce their own detailed rules around registration, transparency, and how surcharges must be presented at checkout—guardrails that a lot of merchants don’t realize they have to follow. For example, the card networks require any business that wants to surcharge to notify them before it starts doing so, typically 30 days in advance. The merchant, not the processor, is the one that has to register, and failing to do so can lead to fines or loss of the ability to accept certain cards.
At the same time, the card networks require merchants to post clear signage at the entrance and the point of sale explaining that a surcharge will be added to card transactions. At checkout, the surcharge must appear as a separate line item on the receipt, not be rolled into the price, and it has to be no more than the merchant’s actual processing cost. Visa is especially strict about this.
This is where “zero-cost” programs often fall out of compliance. If a merchant’s fee is inflated, if the business does not properly disclose it, or if the merchant hasn’t registered for this type of program, it is technically violating card-brand rules, even if its processor has said everything was covered.
Merchants that fail to meet regulatory and card-network requirements can face fines or even lose processing privileges. Yet many processors gloss over these details when selling “zero-cost” programs, leaving businesses to shoulder unexpected legal and financial risks. Even when compliant, these programs may fail to deliver the savings promised.
Some processors hide markups behind complex pricing structures, inflating their margins while claiming the program is “no cost.” Merchants end up paying more than expected, just in less visible ways. For example, a merchant may be told that the processor will be set up to pass along a 3 percent surcharge, which will cover the processing fees, by adding 3 percent to every credit card sale. So a $100 sale will become $103. The merchant’s understanding is that the $3 will cover its credit card processing fees. However, in some cases, the processor will actually deduct 3.6 percent from each sale, collecting $3.60 on the $100 purchase. It will use $3 of that amount to cover the credit card fees but then take an extra 60 cents in additional fees. Such poorly communicated surcharges can erode customers’ trust in and loyalty to the merchant, especially if their price sensitivity is high.
Before adopting any “zero-cost” program, businesses should verify that the program is compliant with state and card-network requirements. They can start by checking state government websites for surcharging rules. For card-network compliance, merchants should consult directly with Visa or Mastercard for guidance on registration, disclosure, and acceptable fee structures.
They should also pay close attention to designing a program that preserves customer relationships. Best practices include clearly explaining the program up front, such as posting signage at the entrance and at checkout; adding the surcharge as a separate line item on receipts; and training staff to answer questions confidently. Saving on processing costs should never come at the expense of compliance or consumer confidence.
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