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The Rise in Surcharging and “Cash Discount” Programs

Is Credit Card Surcharging Right for Your Business?

Driving revenue and improving cash flow have always been key goals for businesses. The ability to better manage operating costs is a major contributor to achieving these goals. Because of this, many businesses are more actively seeking ways to cut their expenses. This includes reducing credit card costs.

One area that seems to be the buzz in our industry today is credit card surcharging as a way to offset processing costs. But is surcharging or similar programs such as cash discounting right for your business? Let’s review the fundamentals so you can make that determination.

What is surcharging?

Essentially, surcharging means adding a fee to your customers’ purchase or payment amount if they pay by credit card. The intent is for this fee to offset the fees you pay to process and settle the credit card transaction.

Surcharging is legal in most states, but not all of them. Laws prohibiting surcharging are on the books in Colorado, Connecticut, Kansas, and Massachusetts. As a result, if you operate in one of these states, surcharging is not a good idea. There are other options you may want to consider. We’ll explore those in this post.

What are the Card Brand rules for surcharging?

In order to surcharge, you must do it according to the rules of the major credit card brands. First of all, you can only surcharge up to the amount you are paying in credit card fees (up to four percent). This prevents businesses from using credit card surcharges as a profit center.

Secondly, there are some transactions that do not qualify for a surcharge. This includes purchases paid by debit cards or prepaid cards. American Express only allows surcharging if it is equally imposed on all other credit payment products.

Thirdly, signage needs to be clearly posted so customers understand, in advance, there will be an additional fee if they use their credit card.

There are a number of other rules such as notifying the card brands in advance of imposing the fee and breaking out the surcharge as a separate line item on the transaction receipt. If you fail to follow these rules, you’ll be notified by your processor that you must take corrective action or potentially face a financial penalty.

Considerations before imposing a credit card surcharge

Surcharging can offset your credit card costs, however, there are other factors to consider as you review your options.

Depending on your business, competition, and customers’ acceptance, surcharging could have unintended impacts.

A couple of examples are:

  1. Customer Experience: Adoption of contactless payment methods is continuing to gain momentum. And, the 2020 health crisis has only accelerated the trend. That being the case, how will paying more for using convenient and more hygienic payment methods affect your customers’ experience? Consider that “tap and go” and NFC methods are becoming quite popular, and both are credit card-based transactions. Customer experience is a key driver of repeat business and loyalty. Depending on how the surcharge is perceived, it may negatively impact the customer experience.
  2. Loss of Revenue: In many businesses, credit card customers have higher average purchases than cash customers. A recent article, The Cost of Cash on Your Business, describes the pros and cons of cash versus credit. One of the cons of cash is that its average transaction is often significantly less than a credit card transaction. This varies by individual business, of course.
Cash Discount – an alternative to surcharging

Cash discount is another method of reducing payment acceptance costs. In this scenario, merchants raise their prices across the board, then offer customers a discount if they pay with cash or check. If it sounds familiar, it’s probably because gas stations have employed this method for years.

To avoid customer confusion, posted prices should clearly reflect either the credit card price or the dual price points.

What about “No Credit Card Fee” programs offered by Payment Processors?

A growing trend is payment processors offering cash discount programs as a way to “stop paying credit card processing fees.” In many cases, these are incorrectly named and misleading. Often, they are really just surcharging programs that are being packaged and sold as a way of not paying any fees.

Companies that are offering this service are surcharging the merchant’s customers the maximum four percent. This is happening even though a competitive rate for that merchant may be much lower. So if the merchant’s rate is 2.5 percent, its customers end up paying an additional 1.5 percent to the payment processor.

Checklist if you are considering a surcharge or cash discount program.

Reducing your credit card costs by applying a surcharge or cash discount can get a little complicated due to the many rules, state laws, and internal preparation.

Below is a high-level list of tasks that must be completed prior to launching a surcharge or cash discount program. There may be others – depending on your unique business.

  1. Notify the card brands. Advanced notice is required by all the card brands if you are surcharging.
  2. Determine your surcharge or cash discount percentage.
  3. Identify how you will distinguish between credit, debit, and prepaid cards at POS. Remember, you cannot surcharge debit or prepaid cards.
  4. Contact your POS provider to make the necessary software changes.
  5. Make the necessary changes to your payment page and shopping cart for ecommerce purchases.
  6. Create and display the required signage and customer notifications in-store and at POS.
  7. Train your staff. This is essential to avoiding confusion and delays at check-out,
Is Surcharging or Cash-Discounting Right for Your Business?

Surcharging or cash-discounting may or may not right for your business. If it is, just make sure you’re clear on your state’s laws and the rules of the various card brands before implementing. If it turns out that it’s not right for you, there are other ways you can reduce your payment acceptance costs.

Feel free to reach out to me directly. We can explore multiple approaches. Examples may include passing additional data during processing and settlement to qualify for a lower rate. Or, you may reduce your costs by cutting out any unnecessary added fees on your invoices.

Identifying the best method for reducing your payment-related costs comes down to doing what’s right for your unique business and, most importantly, what’s right for your customers.


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