Why would a restaurant offer a very large cash discount?

Question

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.

Answer 1

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.

Answer 2

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.

Answer 3

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.