The announcement is designed to boost access to cash, at a time when bank and cashpoint closures have prompted concerns about the availability of physical money.
Lloyds said the new fee will offer more support to retailers, such as newsagents and small convenience stores, and increase the number of places where people can withdraw their money.
It is hoped that the initiative will also give customers more reasons to visit local shops at a time of challenges for high streets.
The cashback incentive will target areas of the UK where access to cash has been identified as being more difficult, such as rural or less affluent areas which often rely on a very small number of ATMs.
Consumers do not have to bank with Lloyds to use the cashback service.
Lloyds said customers of any bank will be able to use it and retailers will still be paid the fee, the value of which will be “set in due course”.
The scheme will initially be rolled out to a small number of merchants, but it is estimated that more than 50,000 merchants may eventually be eligible to participate.
Initially, customers will be required to make a purchase but the intention is that retailers will soon be able to offer cashback without the need for a purchase.
Currently, business owners do not receive a fee when providing cashback to their customers, Lloyds said.
Consumer group Which? said it is essential that communities continue to have access to their money free of charge.
Jenny Ross, Which? money editor, said: “It’s right that banks are taking steps to address concerns about access to cash but these can only attempt to solve the problem in the short-term.
“We need to see more detail about how schemes such as this would work in practice.
“Cashback is not an adequate substitute for ATMs or bank branches, and it’s essential that communities continue to have access to their money free of charge for as long as they need it.”
Lloyds said Beccy’s Greengrocers, an independent shop in Stockbridge, Hampshire, has already been promoting the availability of cashback in the shop.
Beccy Soper of Beccy’s Greengrocers said: “I find that a lot of my customers, especially those who are a bit older, really appreciate being able to deal with a human being when taking their money out.
“From a business point of view, anything that brings extra customers onto our high street is obviously very welcome.
“But there are also other benefits that aren’t as obvious, like paying out more cash from my till which means I don’t need to make as many trips to the bank to deposit my takings.”
Vim Maru, group director retail, Lloyds Banking Group said: “Our new cashback pilot, in partnership with Visa, aims to increase the number of places where people can withdraw their money, particularly in those areas which are currently under-served by free-to-use ATMs where a customer’s access to cash may be more vulnerable.”
Jeni Mundy, managing director, UK and Ireland, Visa, said: “Although digital payments continue to grow in popularity across the UK, we know that many people still rely on cash to manage their day-to-day expenditure.
“This is why we’re extremely pleased to partner with Lloyds Banking Group to increase access to cash.”
The Federation of Small Businesses (FSB) described the move as a “step forward” but national chairman Mike Cherry said he still had some concerns about free access to cash for the vulnerable.