A Merchant’s Guide to Cash Back Debit Card Transactions
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 customer, 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 to 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 about how any changes to their transaction processes might affect their susceptibility to chargebacks.
How Does the Cash Back Debit Card Process Work?
The idea behind debit card cash back transactions is as simple as making change for any payment over the exact amount. At checkout, the customer can enter an amount of cash they would like to receive back. That amount is added to their purchase total, and the merchant gives the overage back as cash from the register. 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 they are willing to offer back, 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.
Why Should Merchants Offer Cash Back?
There are a number of benefits associated with offering cash back on debit card transactions. One of them—cited by the British supermarket chain Tesco as their reason for starting the practice in the first place—is that it reduces the amount of cash that store employees have to count and deposit at the end of the day.
More cash means more security risk, more time spent handling it, and more trips to the bank, so it’s a good thing when customers can take it off your hands.
The primary benefit, of course, is that it creates a positive experience for your customers, strengthening their loyalty and making them more likely to come back and spread positive word-of-mouth about your store. This is especially true if your business type or location makes it likely that your customers will have the expectation that they can get cash back on purchases.
In other words, if you’re running the local convenience store, your customers might be actively frustrated by the fact that you don’t offer cash back. On the other hand, if your store sells antiques and curios by appointment only, it might not be much of an issue.
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.
Can Cash Back Debit Card Transactions Lead to Chargebacks?
There’s one big question that hasn’t been addressed yet: what happens when a cardholder disputes a cash back debit card transaction?
The good news is that according to the card networks, the cash back portion of a transaction is not subject to chargebacks. If a cardholder disputes a cash back transaction, only the purchase amount can be returned to them via chargeback. The cash back amount will not be included.
Let’s say a fraudster buys a frozen pizza for $5 and gets $200 cash back. The cardholder only gets $5 back from a chargeback—the merchant is not liable for the cash 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, such as requiring EMV chip and PIN entry for debit card transactions, will protect them from fraud related to unauthorized cash back requests.
While the cash advance service that Discover offers at checkout is not a debit card transaction, note that such transactions, including the cash advance amount, may be disputable under reason code AW (Altered Amount).
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.