Merchants are increasingly confused about the concept of credit card surcharging and its implications on the respective business. Eventually, it is pretty natural for companies to think that passing on the credit card fee to customers might lead to decreased sales. Still, businesses are expected to manage the respective costs at the same time. To top it all, both brick-and-mortar and online merchants end up getting surprised at how much credit card fees can eventually cost.
What is Surcharging?
A surcharge on credit card transactions can be referred to as the percentage fee during checkout (expected to be paid by the end customers) on eligible Mastercard, Visa, American Express, and Discover credit card transactions. Costs associated with surcharging are usually added to the ultimate transaction that is totaled and itemized during checkout.
Surcharging is effectively used by businesses to process regulatory and credit card fees. However, there are several different types of surcharges that companies across multiple industry verticals can think of using.
Getting absorbed by credit card fees can ultimately eat away at the profits of your business. Moreover, credit card issuer and regulation fees can vary from time to time. Due to these reasons, most companies consider passing down the credit card processing fee to the end customers. Instead of only raising prices on account of the given fee, the addition of the surcharge helps businesses showcase to customers exactly what it will cost to utilize a credit card rather than other forms of payment -like debit cards or cash.
In some cases, surcharging is also referred to as ‘zero-fee’ or ‘free’ credit card processing. You might have come across the term ‘cash discounting.’ It is the scenario in which a customer will receive a discount equivalent to the cost of credit card processing in case they advance with cash payment.
While both payment methods aim at passing the overall cost of credit card processing onto the respective customers, the difference between the two methods is that in the case of surcharging, the additional cost is added to the advertised price. On the other hand, with cash discounting, the charge is deducted from the respective advertised cost when the credit card is not utilized.
Benefits of Credit Card Surcharging
Some of the primary benefits are:
- Reduced Costs: A significant benefit is that your business will not be absorbing the processing fee on every sale, which the customers will be paying with the help of a credit card. Instead, you can go ahead with passing the same on to the customers. Over a specific period of time -like a week, a month, or even a year, these costs can eventually add up towards representing a significant form of cost saving.
- Improved Appeal in Comparison to Other Payment Methods: Another benefit of credit card surcharging is that you are able to offer customers other methods of payment that are not known to incur any processing fee. This will provide your business the chance to improve the overall customer experience by assisting them in minimizing the final price that is expected to be paid.
Drawbacks of Credit Card Surcharging
Before you implement the concept of credit card surcharging on your business, it is important to think about the potential drawbacks of credit card surcharging. Here are some points to consider:
- Sales Taking a Hit: Traditional business practices depict that increased pricing can eventually lead to a significant downturn in terms of overall sales. If merchants in the given industry include a credit card surcharge on the respective sales, any effect of introducing the concept of surcharges for your own business will be net-positive. However, if your competitor’s business will absorb the overall credit card processing fees, launching the idea of surcharges in front of the customers will reduce your overall competitiveness while harming your sales at the same time.
- Impacting Perception of Your Business: Customers can go ahead with taking a dull view when they are made to pay an extra fee while making payments with credit cards.
- Working on Credit Cards Only: Surcharging is made possible only for credit card transactions. Prepaid and debit card transactions are not able to include the concept of surcharge by law.
- Making Accounting Complicated: There are some reasons why the addition of surcharges can increase the complexity of accounting processes. Firstly, surcharges usually do not appear on statements. This implies that your accountant might have to go through individual card transactions to identify which one contains a surcharge and which one do not. Secondly, credit card providers can differ in the processing fees levied by them -ranging between 1.3 percent and 3.5 percent.
What are the Best Practices for Implementing Credit Card Surcharges?
Once you have considered all possible merits and demerits of credit card surcharging, it is essential to ensure that your business is abiding by all national and regional laws & regulations. Here are some practices to consider:
- Checking the Legal Obligations: In the United States of America, specific states might operate varying surcharge laws. Therefore, it is crucial to make sure that you are not breaking any federal or state laws. You can ensure the same with the help of a tax specialist or a business consultant.
- Registering with Credit Card Issuers: To implement the concept of surcharge, your business is expected to register with different credit card issuers or brands -including Mastercard and Visa. If you wish to begin surcharging with Visa, you are expected to register at least 30 days before the final process.
- Informing Customers About Surcharges Clearly: You should go ahead with posting the signage at the store entrance and at the POS (Point of Sale) that credit card fees will incur in the surcharge while including the exact prices in the process. On the respective receipts, you should aim to have the surcharge as a specific line item and include the fee.
- Getting the Right Equipment: You are expected to make use of a specialized POS or Point of Sale equipment set required for identifying the types of credit card that is being used. Due to this, a particular surcharge is added to the transaction.
- Understanding Surcharge Limits: The surcharge is not expected to exceed the overall cost of processing the payment or be more than 4 percent of the given transaction amount.
Should Your Business Consider Adding Surcharges?
Surcharging has become a widespread concept. Currently, there are only two states in the United States of America -Massachusetts and Connecticut, along with the territory of Puerto Rico, that have outlawed the practice. Moreover, since the advent of the global pandemic, a number of merchants have implemented the concept of surcharging due to highly complex economic conditions. This has been eventually assisted by a more comprehensive drive towards supporting local businesses.
It will all come down to your business. Eventually, every merchant will have unique conditions. It is a general rule to consider what your competitors are executing, the potential impact it will have on the end customers, and the total cost saving you will receive upon passing the costs onto the customers. For most business organizations, levying surcharges on credit card transactions will lead to losing more customers. However, the notion of cost-saving of not having the need to pay the respective processing fees will be much more than offset such losses.
In case your merchant fees are getting exceedingly higher, you can start searching for a new processor rather than considering the implementation of a surcharge. If you are following the flat-rate or tiered pricing plan, it is recommended to consider the interchange-plus option -turning out to be more transparent and affordable.
Moreover, if your business has a unique product and you have a more robust customer following, or you might have some other unique proposition, you might not feel the overall pressure of conforming to the practice of surcharging. You are expected to come across a reputed, professional company that can help with the implementation of the right technology -either on the website or in the store.