Cash Back: What is it & should you offer it?

Now with even your favourite coffee store accepting plastic, does anyone even carry cash anymore? While paying with cash is becoming more and more obsolete but there will always be those individuals who prefer to pay with this method.  And with the ever growing concern of debt and money management, more and more experts are touting the benefits of paying by cash out of predetermined budgets as a means to watch your spending.  With this being true, perhaps as a merchant, it’s time to consider offering cash back to your customers as an added benefit.

What is Cash back?

The functionality itself is very simple.  A customer asks for a certain amount back in cash back and as a merchant, you simply tack that amount onto their total transaction and charge their debit card for the final amount.  So for example, if a customer’s purchase is $40.00 and they ask for $60.00 in cash back, you would process $100.00 as their total transaction.

Cash back has several benefits for both the merchant and the customer.  Cash back is seen as a benefit that a merchant can offer their customers to help with managing their time.  They can save themselves a trip to the bank or an ABM to take out the cash they need.  Also, customers can save money.  While merchants will typically charge an additional transaction fee for cash back (usually about 50 cents) this is still less than the typical $1.50 that their bank will charge them.  The convenience and the savings alone could drive a customer to choose your store over your competitors.

But cash back also benefits merchants.  On top of the value adds to the customers, many merchants use cash back as a means to help with cash management.  The less cash in the till means the less that has to be deposited to the bank at the end of the night, which helps in savings of bank deposits.  Also, less money in the cash register means becoming less of a target for criminal activity, either by collusive employees or criminals coming in to rob your store.

If you’re interested in offering this option to your customers, the first step is to contact your Acquirer to see if this function is available to you.  While many Acquirers do not regulate this functionality, it is always a good idea to give your Acquirer a heads up on the activities you’re planning to offer.  Typically, your Acquirer will place a flag on your account indicating that you offer cash back, in case any thing does come up.  There are some Acquirers who do have this as an available function and even have their terminals programmed to prompt when the customer is completing the transaction.  If this is a function your Acquirer offers, asked to have your terminal upgraded to one that does the prompting.  It not only saves you time and effort in the transaction process, but it will properly track the transaction as well… make your reconciling at the end of the month a lot easier.

By offering more value added features to your customers, not only do you add convenience but you continue to build loyalty which will ensure your customers are choosing you every time they need to make a purchase.

Cash Back: What to be careful of

Now that we’ve got your excited about a new function and value you can provide your customers, you need to also be aware of what risks are involved with offering cash back.

Before you run out and have your “Cash Back Available” signs made up, there are a couple things you need to consider.  In a magswipe environment (if your terminal has not been chip and pin enabled), cash back is a bit of a free for all.  Meaning, there is really no way for Acquirers or the card brands to track these types of transactions.  If your Acquirer does not have this functionality built into their terminals, there is nothing currently in the transaction information being sent that indicates what portion of the transaction is actually the purchase and what part is the cash back.  And this is very attractive to fraudsters.  What the fraudsters have been known do is take stolen debit card information and make up counterfeit cards.  They will then go to merchants that they know are providing cash back as a service and make a small initial purchase (like a pack of gum) and ask for a large amount of money in cash back.  And because there is no way to track this, the trail runs cold as soon as the fraudsters have the money.   This activity has been very difficult for law enforcement to deal with but it is quite evident seen by the shift in fraudulent activity to merchants who are known to offer cash back.

While the liability of these transactions do not rests on the merchants, you may be wondering why you should care.  Well, first of all, be aware that these fraudsters are not using the funds they steal to provide programs to go back to the community or to provide training programs.  No, these activities are orchestrated by organized crime and the money is going to fund unsavoury activity.  But even more important is the reputational risk involved. Financial institutions and law enforcement are not allowed to divulge the names of merchants involved with fraudulent compromises but leaks cannot be controlled and sometimes, information does get out to the media.   Anytime a merchant is linked to any type of fraudulent incident, it is proven that customers lose faith in that merchant.  Lost faith equals lost customers.

So if cash back is an option you’d like to offer, consider these options. First, speak with your Acquirer to see if they offer this functionality and if they do, see if there is a chip and pin device you can upgrade to.  Because the chip has not been compromised, there is no way for a fraudster to use a fraudulent debit card in your chip terminal.  They will not have the right information to process the transaction.   If you are staying with your magswipe terminal because you are waiting to be upgraded, consider setting a voluntary limit on the amount a customer can ask for in cash back.  Setting a smaller transaction limit (such as $60.00) will limit the total amount that is at risk and also make you a little less attractive to the fraudsters who will know they are only able to get a certain amount of money from you.

By taking the necessary precautions, you are protecting both you and your customer against potential fraud and losses.

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Matthew Hunt has been helping small businesses get set-up with Canadian Merchant Account Services since 2007 and helped 1000's do so. Join Matthew on Google+.

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