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Is Surcharging a Disservice to Merchants?

Five Unintentional Consequences of Surcharging

When a salesperson approaches a merchant with the offer of no-cost credit card processing, a natural response is “sign me up!” Well, just like lunch, there is no such thing as free processing. The sales rep was selling a surcharge program.

Surcharging sounds so easy and appealing, but did you know that sales tax must be collected on surcharges in many states? Did you know there are major ramifications for your customers? Those are just two of the many surcharging implications merchants need to consider before jumping on board.

There are winners and losers in a surcharging program. Customers lose as they are the ones who absorb this operational cost. This is on top of the inflationary costs of the current economic state of the country – adding an additional pinch to their wallets.

Payment processors frequently emerge the winners as some view surcharging as a license to make exorbitant markup. Merchants need to be mindful of this as the added profit for their processors comes at the expense of their customers.

Merchants often think they are the winners, and in some cases, that may be true. However, in many instances, the unintentional consequences greatly outweigh any benefits surcharging may provide. Allow me to illustrate.

Consequence #1: Dissatisfied Customers

I recently had a vehicle serviced at a local shop. Upon completion, I received a call that the cost was $400, and I could pay by cash, check, or credit card. BUT, if I paid by credit card, there would be a 4% surcharge. I’ll be honest, I was a bit put-off by that. Could I afford the additional $16? Sure. Do I want to overpay by $16? Absolutely not. So, when I picked-up my vehicle, I made sure my checkbook was in hand.

The owner of the shop was apologetic when I asked him about the surcharge. “I’m so sorry, but I have to pass those fees along to my customers. I simply can’t continue to absorb that cost.”

What the owner didn’t realize is that he likely had already accounted for that cost in his pricing model. By charging me a surcharge, he was actually overcharging me. That’s not good for me, his customer, nor is it good for his business, which did not profit from that overcharge.

Read on for the next unintentional consequence in the story.

Consequence #2: Greater Risk

As I was handing over my check for $400, I asked the owner how he knew my check was good. His reply was that he didn’t. Of course, my check was good, but he really had no way of knowing for sure. That results in greater risk for his business.

In 2021, the payment method most impacted by fraud activity was checks. With credit cards, a merchant will know whether a card is good by an approval or decline. Not so in the check writing world. Fraud and non-sufficient funds are always a risk when accepting a check.

While less risky, cash does not come without its costs either. Research and advisory firm, IHL Group, estimates that cash transactions cost anywhere between 4.7-15.3 percent of the value of the cash.

Back to my story.

Consequence #3: Lost Sales

While I was at the shop, I spied some cool accessories I wanted to buy. Total amount – a little over $600. Doing some quick math, I had to ask myself, is it worth an extra $25 to get these accessories now? The answer was no.

Rather than purchase them at the shop, I did a little online research and found the identical items for $200 less and no surcharge. Sold! A few days later, I had my cool accessories and an extra $225 in savings. This was good for me, not so good for the shop owner who lost a sizable add-on sale because of a surcharge.

Ecommerce merchants need to pay close attention here. Cash and checks are not good online payment options. Debit cards may be an option as the rules prohibit a surcharge on debit transactions. That said, credit cards are still the top payment method for online transactions. Remember, if your customer objects to paying a surcharge, your competition is only a click away.

Related article: The Rise in Surcharging and Cash Discount Programs

Consequence #4: Reduced Sales

There are many advantages to accepting credit cards: customer convenience, reduced merchant risk, speeding up the checkout process, and higher average purchase – just to name a few.

Approximately 11 percent of consumers would switch payment methods because of surcharging. The most popular alternative method was cash. The difference between the average cash purchase and the average credit card purchase is often significant. Some studies have indicated a $22 average purchase for cash transactions and $112 average for non-cash. But every business is different, and only the merchant will know the disparity in average spend.

If indeed credit card customers spend more, merchants need to carefully consider the impact of this reduction on their business. Even if only 11 percent shift to cash, do you really want 11% of your customers spending less on every transaction?

Consequence #5: Lost Customers

Americans love their credit cards. In fact, 80 percent of consumers prefer to pay with a credit card as opposed to cash. With such a strong preference for plastic, what is the customer defection risk for the merchant if a surcharge is applied? I have seen estimates as high as 50+ percent of customers indicate they would switch merchants to avoid paying a surcharge. That’s a real risk during an economic time when we’re all trying to make purchasing more convenient and frictionless for consumers.

The shop in my story will continue to get my business only because I don’t have a conveniently located alternative. If there was another shop nearby that didn’t surcharge, I’d move my business.

How Can You Know if Surcharging is Right for Your Business?

Every day at Wind River, our relationship managers get calls from customers that are considering a surcharge program. We spend a great deal of time with them asking questions and reviewing the surcharging rules of the credit card brands. Sometimes it’s worth it to add the surcharge, but more often, merchants decide against it.

To help you, we’ve created a list of five questions to ask before you make the leap to surcharging. You can find those questions here.

Your business is important. Every customer and every sale are important. I encourage you to carefully consider whether a surcharge program will truly offset your credit card costs or result in unintentional consequences.

If you need help making that decision or if you have questions about surcharging rules, please let me know. We’re happy to help in any way we can.

Matt Uselman Wind River Payments
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