Cash Back Debit Transactions

Table of Contents

1. How Does the Debit Card Cash Back Process Work?
2. Why Should Merchants Offer Cash Back?
3. Can Cash Back Transactions Lead to Chargebacks?

The world of retail can be a challenging place, and brick-and-mortar merchants know that the more conveniences and add-on services you can offer your customers, the easier it is to build loyalty, repeat business, and a solid reputation. One benefit that many retailers offer is cash back on debit card transactions.

Customers appreciate having an easy way to get cash without added fees, but offering cash back does place some additional responsibilities on the merchant. What’s the process behind cash back debit card transactions, and what do merchants need to be aware of before they start offering them?

Grocery stores originated the practice of allowing customers to receive cash back on debit card purchases, but many different types of establishments now offer this service for the convenience of their customers at no additional charge.

For many merchants, the value this adds to the customer experience outweighs the minor increases in labor and costs that come along with it.

Merchants do need to follow certain rules that the card networks impose for processing cash back debit card transactions. Cash exchanges are always going to be a ripe target for fraud and abuse, so merchants need to make sure they are able to meet the requirements for security and reporting necessary for these transactions to occur safely.

Merchants must also be mindful of how any changes to their transaction processes might affect their susceptibility to chargebacks.

Cash back can only be given on debit card transactions, not credit cards (although Discover offers an exception to this rule).

Merchants can decide how much cash back they're willing to offer, but there are maximum upper limits, set by the card networks, which vary from region to region.

On the back end of the transaction process, cash back requires some special handling. What this means for merchants is that their payment terminals must have cash back functionality. They must be able to track the transaction and cash back amounts separately so they can be identified in authorization and clearing messages, and they must be able to handle issuer responses related to the cash back service.

Another rule is that merchants cannot process cash-back-only transactions; the total transaction amount must be higher than the cash back amount. If a customer wants only cash back, they should be directed to an ATM.

The idea of the cash back transaction was originated by the British supermarket chain Tesco. According to Tesco, the main reason for the practice was that it reduced the amount of cash that store employees had to count and deposit at the end of the day.

Of course, this was a larger concern in the days when non-cash payments were less common than they are now, but for many merchants the same reasoning holds true today.

More cash means more security risk, more time spent handling it, and more trips to the bank, so it’s often beneficial to allow customers to take it off your hands.

These days, however, the primary reason to offer cash back is to meet the expectations of customers. How important this is depends on the type of business. Merchants who operate a small hobby shop, for example, might never even be asked for cash back. A convenience store, on the other hand, might frequently run into frustrated or disappointed customers if getting cash back isn't an option.

Some merchants may find themselves attracting customers who are making a purchase specifically to get cash back. ATM fees can be quite high, and many cardholders would rather make a small purchase like a snack or magazine to get cash back, rather than “waste” several dollars on a fee. To protect themselves from losing money on interchange fees, some merchants impose a minimum purchase limit on cash back transactions. Others simply take the hit and trust that future purchases from those customers will make up for the loss.

Because debit cards usually have an EMV chip and require a PIN, it's far more difficult for a thief to get cash back with a stolen debit card than it is to make a purchase with a stolen credit card—at least in the US, where credit cards don't usually have PINs. Even if that does happen, however, the merchant is still protected.

Let’s say a fraudster buys a frozen pizza for $5 and gets $200 cash back. When the cardholder finds out and files a chargeback, the merchant will only be liable for the $5. The bank will typically cover the cash back amount.

Exempting cash back amounts from the chargeback process is an important way to make it possible for merchants to offer the cash back service without exposing themselves to additional risk.

Cardholders can trust that the security measures in place for card-present environments will protect them from fraud related to unauthorized cash back requests.

The cash advance service that Discover offers their credit card customers is not a debit card transaction, and therefore follows different rules than most cash back transactions. Much like debit card cash back, however, merchants aren't usually liable for the cash back portion if a chargeback occurs.

There is one exception: Reason code AW (Altered Amount) can include the cash back amount in some cases. Typically, this would mean that the cardholder has claimed they either didn't receive the correct amount of cash back or didn't request cash back at all. These chargebacks are rare, and merchants can fight them if they have proof that the proper amount of cash was provided.

Cash back debit card transactions provide merchants with a safe and low-cost way to offer a valuable service that can save their customers from having to hunt down in-network ATMs or pay high fees. They’ll appreciate it, and they’ll remember where they can shop next time they need to pull out some extra cash.

The only downside for merchants is the possibility of a small uptick in interchange fees, and you can relax knowing that offering cash back won’t necessarily impact your chargeback defense strategy.

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