With merchant fees rising, many businesses turn to surcharging to offset credit card processing costs.
But surcharging isn’t legal everywhere, and surcharge programs can be a hassle to implement. Plus, customers hate it. Do you really want to lose a long-term customer over a few bucks? I doubt it.
Finding alternatives to surcharging makes a lot more sense for most businesses. You can save money on payment processing without passing costs to your customers—and there’s no need to switch providers or get new equipment, either.
1. Offer Cash Discounts
A cash discount program can essentially give you the same benefits of surcharging, but it’s 10x easier to set up and manage.
Instead of surcharging the price when customers pay with a credit card, you simply give them a discount for paying with cash. It’s that easy.
Let’s say you’re selling a $50 item. $50 becomes the credit card price, and anyone who decides to pay with cash gets a 3% discount—bringing the total to $48.50. You still get an extra 3% for card transactions to cover your costs.
Some businesses choose to raise their prices before setting up a cash discount program. So the new credit card price for the same item might be $51.50, and cash buyers pay $50.
Cash discounting has far less red tape and legal complexities compared to surcharging. You’ll need to double-check your local laws, but a clear disclosure notice is usually enough to suffice. Some states may require dual pricing (listing the cash price and credit card price), but that’s pretty straightforward.
Read More: Surcharging vs. Cash Discounts in Credit Card Processing
2. Negotiate Your Processing Rates
Did you know that your credit card processing rates are negotiable? You do now.
Once you negotiate a better deal, you don’t need to consider surcharging because your processing costs won’t be eating into your profits.
Processors are greedy, and they’re always looking for ways to put more money in their pockets at your expense. That’s just the reality of the payments industry today.
Don’t just chalk this up as something that’s a cost of doing business. You have the power to negotiate.
Pick up the phone and ask for a better rate. They’ll probably tell you that you’re already getting the best rate, but that’s BS, and don’t take no for an answer. Keep trying.
You can also get a free audit from our team here at MCC. We find savings on 96% of statements we audit, and we’ll negotiate a better rate on your behalf directly with your current provider.
3. Set a Minimum Purchase Amount for Card Transactions
Businesses with lots of low-ticket transactions are often plagued by high processing costs. Let’s say you’re running a convenience store, selling items like soda, candy, and chips for $2.
$3 transactions could have close to $1 in processing fees. If over 30% of a sale is going toward processing costs, then you’re likely losing money on those transactions.
To avoid this scenario, businesses can legally set a minimum purchase amount on credit card transactions.
Thanks to the Durbin Amendment of the Dodd-Frank Act, federal law allows businesses to set a $10 minimum on credit card purchases.
This only applies to credit cards, not debit cards.
Debit cards have much lower interchange rates. So it shouldn’t be a problem for your business, even on low-ticket transactions. If your processor is charging you the same amount for credit cards and debit cards, then you need to restructure your contract.
4. Look for Interchange Optimization Opportunities
Most businesses are leaving money on the table because they’re not qualifying for lower interchange rates.
Interchange optimization is basically getting your transactions to qualify for the lowest possible rates by providing the right data during processing. The card networks all have different interchange categories, and if you’re not submitting the right information, your transactions get bucketed into higher-cost categories.
Level 2 and Level 3 processing are prime examples of this.
If you’re selling to other businesses, you can qualify for significantly lower interchange rates by submitting additional data like tax amounts, customer codes, and line-item details.
For B2B transactions, Level 2 and Level 3 processing can save 50-100 basis points.
While automatic interchange optimization is ending, you can still qualify for lower rates by taking steps to collect and submit enhanced card data.
5. Avoid “Downgrades”
Interchange downgrades are the opposite of interchange optimization, and they’re absolutely brutal for your bottom line.
Downgrades happen when transactions that should qualify for a lower interchange rate get bumped into a higher category because something went wrong. Maybe the card wasn’t swiped properly, or the authorization and settlement amounts didn’t match. Or you didn’t settle the transaction within the required timeframe.
Let me give you a real example.
Visa’s interchange rate for retail transactions can be as low as 1.43% + $0.10 for certain credit cards. But Visa’s Non-Qualified Consumer Credit Fee is a staggering 3.15% + $0.10. This is Visa’s interchange downgrade category.
This means you could end up paying more than double what you should have because your transactions are getting downgraded.
If you’re selling $500k per month, that’s $8,600 in additional fees—over $100k in unnecessary processing costs on the year.
Eliminating this expense will result in much higher savings than implementing an interchange program that still wouldn’t cover your costs.
6. Restructure Your Merchant Agreement
If you’re currently on a flat-rate plan or tiered/bundled pricing contract, you’re getting ripped off—period.
Flat-rate processors intentionally try to make this sound simple. After all, you’re just paying the same rate for every transaction. What’s so hard to understand about this?
While it seems transparent, flat-rate processing is crushing your profit margins. Tiered pricing (qualified, mid-qualified, and non-qualified) are arguably worse. Both of these models are designed to maximize profits for the processors at the merchant’s expense.
The only model that makes sense for most businesses is called interchange-plus pricing. With IC+, you pay the wholesale rates set by the card networks at the interchange level, plus a markup to your processor (hence the name).
Do everything you can to restructure your contract to get on an interchange-plus agreement. This is something you can do directly with your existing processor, so there’s no reason to switch providers.
The savings here will be massive, and you won’t have to burden your customers with surcharge fees to offset your high flat-rate costs.
7. Adjust Your Prices to Account for Processing Costs
Credit card processing fees are just another operating expense.
It would be silly to surcharge customers with a fee to cover your rent, utilities, insurance, office supplies, and employee salaries. So why do some businesses think it’s fine to surcharge credit cards to cover their costs?
You just need to factor in your processing costs with the rest of your business expenses.
This may require you to increase your prices by 2-3%. But that transparency is better than surprising your customers with extra fees at checkout.
Some businesses are afraid of raising their prices because their customers are price sensitive. Well, surcharging is actually worse—and the data backs it up.
71% of customers avoid businesses with surcharge fees. Conversely, customer turnover rate increases by just 7% when businesses raise prices.
Would you rather alienate up to 7 out of 10 customers who walk in the door? Or potentially lose less than 1 out of 10? It’s a no-brainer decision.
Increasing your prices is better than surcharging credit cards.
Read More: Pros and Cons of Credit Card Surcharging
8. Look for Hidden Fees on Your Statement
From hidden fees to frequent rate increases, bogus charges, inflated assessments, or just flat-out high rates, there are likely thousands of dollars in overages on your statements every month.
Some processors are undoubtedly worse than others (we always find Global Payments ripping off businesses). But whether you’re a Fortune 500 or small mom and pop shop, I can almost guarantee your processor is overcharging you—regardless of who you’re using.
You need to learn how to read your merchant statement so you can identify bogus charges.
Once found and removed, you can save thousands of dollars every month, which is likely what you’d be recouping as part of your surcharge program.
I get it. Credit card processing statements can be extremely difficult to understand, especially to the untrained eye.
You’ve got a dozen pages with hundreds of line items in what looks like a foreign language with all of the industry jargon and abbreviations. Processors do this on purpose so you don’t know what you’re looking at.
So if you’re struggling, just reach out to MCC and we’ll audit those statements for you to identify hidden fees.
9. Push Back Against Rate Increases
When’s the last time your processor increased your rates? Some processors do this annually, while others increase rates even two or three times per year.
This is another common practice in the payments space that’s incredibly frustrating for businesses.
You sign a merchant agreement for what seems like a good deal. But the second your contract is up, your processor starts jacking up your rates as often as possible (sometimes even before your contract expires). Now you’re paying anywhere from 1-2% more than you did two years ago, with no end in sight.
But your processor markup is 100% arbitrary. It’s just a number that they set as their profit margin on your account.
Say no. Don’t accept the terms.
You have a lot more leverage than you realize in these positions because your processor doesn’t actually want to lose your business.
Final Thoughts
While it sounds simple in theory, credit card surcharging doesn’t make sense for most businesses.
Between the legal complexities, negative customer sentiment, and implementation costs, the 3% you’re recouping may not even cover the cost of operating the program.
The surcharging alternatives listed above are better options. You’ll save money on processing while keeping your customers happy and avoiding extra headaches.
So before you consider surcharging, try to put these in place first. Contact our team at MCC for a free cost-savings analysis. We can help lower your costs without changing processors.