You may have heard of credit card surcharging if you’re a business owner. While passing a credit card fee on to customers can reduce costs, you need to understand everything it entails before starting.
This business owner’s guide aims to make sense of surcharging and explain how it works and might benefit your business.
In this guide, we’ll look at:
- What is surcharging?
- The pros and cons of surcharging
- How to set up surcharging: merchant best practices
- What to consider – surcharging or dual pricing
Contents
What is surcharging? A simple definition
When you make a sale, and the consumer pays by credit card, you pay or absorb the fee. Absorbing credit card fees has historically been seen as a cost of doing business. Still, credit card fees can crush your business since payment processing costs are often the next highest cost after labor for many businesses. Credit card surcharges are receiving renewed attention.
A credit card surcharge is:
- a percentage fee added to the final transaction total when a consumer uses a credit card at checkout
- used only to offset the cost of credit card processing
- added to eligible Visa, Mastercard, Discover, and American Express Opt Blue credit card sales as an itemized line item at checkout
Many business owners are considering shifting credit card processing fees to customers to protect their profit margins. Surcharging allows businesses to directly show customers the cost of using credit cards compared to other payment methods like cash or debit cards
The benefits and drawbacks of surcharging
When considering whether to pass credit card processing fees to your customers, you must to understand the pros and cons of surcharging.
What are the pros (benefits)?
Credit card surcharging offers two significant benefits:
Lower costs
If your business absorbs the processing fee on credit card sales, credit card processing is often the highest expense after labor. Consider this example. A small business has an average sale of $25 and is paying 2.9% + $0.30 on each credit card sale; that business is paying $1.03 in swipe fees alone. Imagine if that business did 3,000 transactions, a $3,090 expense, which could be eliminated with surcharging.
Other convenient payment methods lower the final cost
When you show your customers, they have payment options that don’t incur high processing fees. You’ll enhance the customer experience when you help them see they get a lower final purchase price when using cash or debit cards.
The cons or drawbacks
Like most things in life and business, with surcharging, there are good and not-so-good things to consider.
Your sales could take a hit.
Conventional business wisdom suggests that a price increase typically leads to lower sales. With surcharging, you are not raising prices but shifting the cost to those who pay with a credit card. A survey of 2,500 consumers found that of consumers choosing not to pay the surcharge, 71% defaulted to cash. Generation Z cardholders used debit cards 72% of the time “as have 53% of millennial cardholders and 51% of bridge millennial cardholders.”
The same survey found that eighty-five percent of those who faced surcharges agreed to pay them.
If merchants in your industry include a credit card surcharge on sales, you would likely see only the cost-benefit. However, if your industry and competition absorb credit card processing fees, adding a surcharge to your customers could reduce your competitiveness.
It can impact customer’s perception of your business
Customers may prefer to avoid having to pay an extra fee to be able to pay with a credit card.
It only works for credit cards.
Surcharging is only for credit card transactions. Debit and prepaid card transactions cannot be surcharged.
It can complicate your accounting.
One reason why adding surcharges increases accounting complexity is that surcharges don’t show up on statements. So, you or your accountant would need to review each card transaction to see which has a surcharge. Another is processing fees, ranging from 1.3% to 3.5%.
Best practices for getting started with credit card surcharges
If you want to proceed after considering the pros and cons of surcharging, you must ensure your business complies with card brands (Visa, etc.) rules and all laws and regulations.
Checking your local laws and regulations
Currently, two states, Massachusetts and Connecticut, and the territory of Puerto Rico ban surcharging; however, other states may impose additional requirements. For example, New Jersey and New York limit surcharging to the cost of processing. New York also requires merchants to “clearly and conspicuously post the total price for using a credit card” in such a transaction, including the surcharge. Therefore, we recommend checking with a local business accountant, tax specialist or lawyer to ensure compliance before implementing a surcharge. Please see our complete surcharging guide here.
Register with acquirer/payment processor.
Before April 15, 2023, to surcharge, your business had to register with the card brands, such as Visa and Mastercard. That requirement has been changed to notifying your acquirer/payment processor 30 days before introducing surcharging.
Must inform customers of surcharges
If you’re a brick-and-mortar business, you must post signage at your store entrance and at the point of sale that using a credit card will incur a fee and what the fee is. Some states have additional requirements, New York and Maine.
Online businesses must provide a surcharge notification before checkout and have a place where customers agree to accept the charge. On all receipts, in-person or online, the surcharge must be a line item and include the fee.
Understand the maximum allowable surcharge.
The surcharge must be, at most, your cost of processing the payment or up to 3% of the transaction amount.
Should your business add surcharges?
Is surcharging right for you? That depends on your business, industry, and other local factors. You must consider whether it is prohibited in your area, what your competitors are doing, and the impact of adding a fee on your customers compared to the savings you would see by surcharging. If surcharging doesn’t fit your business well, consider dual pricing.
Dual pricing has an advertised price that includes the processing costs and a cash price that is typically 4% lower than the advertised price for paying with cash. Learn more about the differences between surcharging and dual pricing here.