What Every Business Needs to Know Before Surcharging Credit Card Transactions
In Brief: As merchants look for ways to cut operational costs, surcharging credit card transactions has become increasingly popular. While passing along processing fees to credit card users can improve margins, sometimes surcharging programs are accompanied by unintended consequences that can ultimately hurt a business. The purpose of this article is to equip merchants with the information they need to make an informed decision about implementing a surcharge program in their business.
Surcharging Looks Great on Paper
There are many things that sound like a great idea, but when implemented, can backfire in ways no one anticipated. Surcharging, or passing your credit card processing fees along to your customers, seems like a good way to reduce operational costs and improve margins. And this can be true for some businesses – depending on your situation in three key areas:
- Your business
- Your customers
- Your competition
Let’s dive into each of these.
What Kind of Business Are You In?
If your business has customers that make discretionary purchases, surcharging may actually reduce your overall sales rather than just your processing costs. According to Forbes, people are twice as likely to spend more money when using cards than cash. This makes sense as purchases paid by cash or debit are limited by the amount in the customers’ wallet or balance in their checking accounts. Whereas credit card buyers are limited only by the limits on their card.
Conversely, the sales of businesses that primarily serve customers’ needs rather than their wants tend to be less affected by surcharging. For example, people normally get root canals because they need them rather than want them! In this type of scenario, the amount of the transaction would be the same regardless of the presence of a surcharge.
Do the Math
The best way to answer that question is to do the math. We have seen surcharging programs result in a 40-70 percent shift to other payment methods (cash, check, debit, ACH). While that can represent considerable savings in processing fees, is the savings greater than any reduction in their purchases?
To determine that, it is helpful to know the average cash/debit sale for your business and the average credit card sale. Calculate the difference of the two then compare that amount to the potential processing savings a surcharge program would yield. Keep in mind, you can only surcharge credit card purchases (not debit card), and the amount is currently capped at 3 percent.
How Will Your Customers React?
Customers typically do not like surcharging. A recent Business.com article states that over half of consumers think surcharging should be illegal. And it is in Massachusetts, Connecticut, and Puerto Rico.
Consider these variables when weighing how your customers will respond to a credit card surcharge:
- Average transaction. If you add a 3 percent surcharge to a $25 transaction, the surcharge is 75 cents. Likely palatable for your customers. For higher amount transactions such as $150, a 3 percent surcharge (or $4.50) may not go over well. Knowing your average purchase amount can be a good indication of whether your customers will tolerate a surcharge.
- Accessible alternatives. Can your customers easily visit a competitor to avoid your surcharge? In this ecommerce world, many competitors are just a click away. Will your surcharge send them to a competitor?
- Customer value and loyalty. What percent of your highest value customers primarily pay by credit card? Will adding a fee alienate your best customers? What will that do to your business?
What Are Your Competitors Doing?
If your competitors are not surcharging and you are, you may be inadvertently driving your customers to them. On the flip side, if they are surcharging and you are not, you have a couple of paths you can take.
- You can join and surcharge as well.
- You can stand out and potentially lure their customers away with your no-surcharge policy.
Either way, knowing what your competitors’ policies are can help you decide how you want to proceed.
If You Decide to Surcharge
There are a handful of rules and regulations you should know about before implementing your program.
- Visa rules place a 3 percent cap on surcharges. You cannot surcharge more than 3 percent of the transaction amount. This is reduced from 4 percent in 2023.
- Only credit card transactions can be surcharged. Surcharging debit card transactions is prohibited by the credit card companies. Your payment acceptance system will need the ability to distinguish between credit cards and debit cards.
- You must disclose your surcharge policy at all points of purchase. Customers must know in advance of the transaction that a surcharge will be applied on credit card purchases. This includes online, phone/mobile app orders, and in-person transactions.
- Surcharge amount must be displayed on the receipt. The amount you have surcharged must appear as a separate line item on your customers’ receipts.
- Double check your state laws. While Massachusetts and Connecticut are the only states prohibiting surcharges, several states are considering similar legislation or have limitation laws in place.
Visa has stated that it is actively enforcing surcharging rules. They do this through mystery shoppers and customer complaints. Non-compliance can result in merchant fines, so make sure you and your credit card processor are following the rules.
The Bottom Line
While some payment processors downplay surcharging by referring to it in simple terms such as zero-fee or no-cost credit card processing, the truth is, surcharging is a big decision that shouldn’t be made without awareness of all the details. The more you know, the easier it will be to decide whether a surcharging program is right for your business.
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