15

I understand that in many cases, merchants would put surcharges on credit card purchases, or offer cash discounts, in order to pay for transaction fees charged by Visa, etc.

However, a restaurant I go to rather often recently started offering a very high cash discount: 15%. As far as I know, not even the most reward-laden credit card would charge so much to the merchant, and besides Interac debit cards (which most people use) have very small transaction fees.

Why would such a large discount make business sense to the restaurant? Are there other costs related to processing plastic payment cards? Or can I assume that the restaurant is trying to avoid leaving a paper trail so that they could avoid paying tax?

Even if that's the case, it seems like one would have to hide basically all the cash transactions in order to break even with such a big discount, and that'll be very suspicious.

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    I would guess that they're having cash flow problems and don't want to wait to receive money from the credit card companies. – mkennedy Nov 27 '16 at 18:04
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    Double bookkeeping and I don't mean double entry bookkeeping. – doug Nov 27 '16 at 19:11
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    15% isn't a "very large" discount at all. There was once a "Dine Rewards" credit card that offered 15% off and several delivery services negotiate an even lower price. I've even had restaurants offer me 50% off if I don't use groupon (groupon gives me 33% off but the restaurant gets less than the remaining 67% so it's still a good deal for them). Restaurants have a high markup, and are fairly generous with discounts. – barrycarter Nov 27 '16 at 21:08
  • @mkennedy That doesn't seem to explain why debit cards (which I assume are processed instantly?) do not get a discount. – ithisa Nov 27 '16 at 21:18
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    A deviant general manager could be robbing the owner blind via cash transactions which are more easily hidden. This is not unheard of especially if you regularly watch shows like Bar Rescue or The Profit. You will see that there are plenty of hands-off owners which are either too busy or always on vacation due to a steady stream of effortless income. I am not saying that owning a business is so easy that all owners are like this but some are more well-off than others. – MonkeyZeus Nov 28 '16 at 21:16
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Why would such a large discount make business sense to the restaurant?

The legit reasons could be;

  1. In his specific case, he is seeing quite a bit [above industry average] of credit card frauds and charge back. This generally shouldn't happen, could be due to large number of card swipes that are issued out of country, etc. Thus losing substantial amount of money and wants to mitigate this.
  2. There are substantial migrant community in the area who have cash. Showing a discount of 15% on cash would make this community visit this restaurant more often, thereby increase the sales.
  3. Most of the payments he makes are in cash. i.e. the merchant is paying to part time employees, or for raw materials in cash. Going to bank and getting the cash would mean 2-3 hours loss of productivity [depending on where he is banking].
  4. General cash flow issue. The banks have refused over-drafts. i.e. the business has taken on substantial amount of debt. Or in worst case; The accounts are frozen by court order and / or agreed with Bank. Thus every payments / withdrawal from Bank account needs permission from the bank and is being scrutinized. This makes it difficult to operate and in general delays payments to vendors who would be unhappy.

Or can I assume that the restaurant is trying to avoid leaving a paper trail so that they could avoid paying tax?

The illegal reasons could be;

  1. Yes the restaurant is trying to evade taxes
  2. It could also be that the restaurant works as a partnership; the person on cash counter wants to hide the cash from his partner and corner the funds.
  3. Some of point 4 described above.
  • The so-called "black" economy is an enormous part of "the economy"; it's very unlikely the world would continue to function if the so-called "black" economy disappeared. As Dheer explains just one aspect is that they're simply increasing the cash component. – Fattie Nov 28 '16 at 12:19
  • In my country it is mandatory for any business to give the customer a receipt that includes the sales/VAT tax. It is almost impossible to evade tax if that receipt is given out. – Mindwin Nov 28 '16 at 14:33
  • Hmm. It does seem that 3. and 4. could be possible. The vast majority of servers are university students working part-time and paid in cash, and the restaurant seems to in some financial trouble (despite it being extremely popular). Once the place was locked up with an "rent unpaid, lock changed" notice from the landlord, though eventually it came back to business. – ithisa Nov 30 '16 at 0:39
  • Seems like reason #1 makes less sense, this will reduce the number of legitimate credit card purchases at the expense of 15%, while the frauds certainly aren't going to start paying cash. @Mindwin How does your country detect fake receipts? – Andy Oct 22 '18 at 20:56
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    I don't think reason one could possibly right. Far from mitigating the problem, it will make it much worse. If I'm going to charge back or am using someone else's credit card, I won't take the 15% discount and pay cash. I'll have no problem with the extra 15% since I'm not paying it anyway. The discount will be accepted only by people who are willing to pay cash and those aren't the people who were committing the credit card fraud. – David Schwartz Oct 23 '18 at 22:41
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Another possible reason for this is to benefit the servers. When patrons pay with a credit card, they usually tip on the credit card too. If patrons are more likely to pay with cash, then the servers will get more cash tips. Even if the restaurant is completely honest with their books, the servers may not be. Having a restaurant where tips are mostly cash might attract better servers, or perhaps enable the owner to pay servers slightly less than otherwise.

  • How does collecting cash for tips benefit the servers? They (legally) have to pay tax on the tips regardless of whether the tips come in as cash or via the credit card. Or are you implying this will attract servers who seek to commit tax fraud but are otherwise better at doing the job of a server? – ChrisInEdmonton Nov 28 '16 at 20:44
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    @ChrisInEdmonton - the latter. Sad but true (IMHO). – TTT Nov 28 '16 at 20:59
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    @ChrisInEdmonton Although I heavily doubt that an owner would implement a 15% discount to help the servers I have no doubt that servers only report as much income as necessary to hit minimum wage and the rest is gravy. I know that the country tag is Canada but $2.13 per hour in the US seems like enough incentive to do such things. – MonkeyZeus Nov 28 '16 at 21:25
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This could be a case of the new chip card technology and dealing with slow reimbursement turnaround time. I recently visited a restaurant who was not using the chip technology, and it refused my card after several attempts. I found out from my bank it was because the restaurant was not set up for chip and I had not eaten there before....I know at the other end it takes far longer for the funds to get to the merchant; banks don't want to part with other people's money.

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