Credit card surcharging has been arguably the hottest topic in the payments space over the last two years. It’s one of the few payment trends that’s equally talked about by consumers and businesses alike—with strong feelings and opinions from both sides.
On the surface, adding a surcharge fee to credit card transactions seems like an easy way for businesses to offset some processing costs (which are constantly on the rise).
But your customers ultimately end up burdening the cost, and frankly, they don’t like it. Consumers have become even more price-sensitive recently due rising costs everywhere and inflation eating into their purchasing power. This alone is one of the main reasons why businesses should NOT surcharge credit cards.
That said, there are still a few scenarios where surcharging actually makes sense for certain businesses. Read on to see if it’s right for you.
1. It’s Legal in Your State
First and foremost, you need to make sure that surcharging is legal in your state. If it’s not, you can stop everything and just move on—surcharging isn’t for you.
We have a guide on the credit card surcharge laws in all 50 states that you can use as a quick reference.
But keep in mind that these laws are constantly changing. Even if surcharging is legal in your state, you may need to follow strict disclosure rules to remain compliant, and the maximum allowable surcharge could be capped.
For example, some states cap credit card surcharges at 2% of the transaction. Others prohibit merchants from charging a surcharge that exceeds their cost of acceptance.
Talk to a local lawyer to verify the rules in your state before you do anything else.
2. Your Current Processor Supports It
Reach out to your credit card processor and inquire about any surcharge programs that they might offer.
You’ll need a robust POS system that can be customized to comply with local laws, disclosures, and make it easy for your staff to remove the surcharge on debit cards (debit card surcharging is illegal nationwide under federal law).
If they have everything you need, then you could potentially move forward. But you shouldn’t switch processors just to set up a surcharge program.
Switching processors is more expensive than you might realize, especially if you have an integrated payments system that’s already embedded into your operations.
Here’s something else to keep in mind. Your current processor might be thrilled to have you inquire about surcharging because it gives them a good reason to increase your fees. After all, if you’re passing these costs to your customers, why would you care?
This could come back to bite you down the road and your acceptance costs could get out of control.
3. Most of Your Transactions Are In Person
Surcharge programs really only make sense for in-person payments, and there are a few reasons for this.
First, many laws governing surcharges and convenience fees have stipulations that only allow fees on non-standard payments. Meaning if cash is your primary acceptance method, you can charge customers for the convenience of using a credit card.
But this doesn’t apply to online transactions and ecommerce stores. Obviously, you’re not taking cash—and you shouldn’t be charging customers to pay using the most reasonable payment method (a credit card).
The same concept applies if you’re accepting payments over the phone. How else do you expect your customers to pay?
It’s also worth noting that if you do set up a surcharge program for card-not-present transactions, you need a robust system to identify the buyer’s location. If they’re located in a state where surcharging is illegal, then you need to abide by those state-specific laws—not the laws where your business is located. This is messy, difficult to track, and could result in hefty penalties if you’re not careful.
4. You Accept Other Fee-Free Payment Methods
You should be offering customers an opportunity to avoid your surcharge fee when paying for goods and services.
Let’s not forget the root of what you’re doing here—implementing a surcharge fee on credit card transactions to offset your processing costs.
You’re not paying those high fees if the customer pays by cash, check, or ACH transfer.
If you’re a cashless business or you don’t offer other payment methods that would be fee-free, surcharging probably isn’t right for you.
5. You Were Unsuccessful in Negotiating Lower Rates With Your Current Processor
This is a big one that’s often overlooked.
Before you consider surcharging credit card transactions, you should exhaust all other means of trying to reduce your processing costs.
Pick up the phone and contact your processor. Push back against those high rates, and demand they get lowered. Threaten to switch providers as leverage.
Many businesses don’t realize this, but your processing costs are negotiable. In addition to high transaction rates, your processor might be adding lots of other hidden fees and bogus charges to your account that should be identified and removed.
Going through this process can save you thousands of dollars every month on processing costs, and that reduction could eliminate your need to burden your customers with extra fees.
Contact our team here at MCC if you need help auditing your merchant statements. If we can’t find savings opportunities, then you could consider adding a surcharge program.
6. You Have Loyal Customers Who Are Unlikely to Leave if You Charge Extra
How loyal are your customers?
Don’t assume that they’ll gladly pay for a portion of your operating costs. This assumption could be a huge mistake for your business.
Over 7 in 10 consumers say they avoid businesses with surcharge fees. An additional 57% of people believe surcharging should be illegal.
Can you afford to lose customers? Getting an extra 3% per transaction likely isn’t worth it if your customers stop buying.
So think twice before you pass merchant fees to your customers.
7. You Haven’t Raised Your Prices in a While (and Don’t Plan to)
A recent study from Deloitte found that about 54% of customers feel that businesses raise prices to take advantage of customers. This is just related to price hikes, and totally unrelated to surcharging.
Another 75% of consumers say they’re concerned about rising prices.
Customers lose trust in a business when they’re paying more for the same goods and services without the perceived value changing.
So if you just raised your prices, there’s a good chance your customers are not happy about it.
Adding another 3% or 4% surcharge on top of that could be the breaking point for your customers who are already unhappy. It can feel more like a money grab and less about you just trying to offset your costs.
8. New Surcharging Laws Won’t Crush Your Margins
Contrary to popular belief, surcharging is not great for businesses with razor-thin margins.
In theory, it sounds reasonable that if your margins are already thin, and processing fees are eating into your profits, then you need to offset those costs to remain profitable.
However, this misconception could push you out of business if you’re not careful.
As previously mentioned, credit card surcharge laws are constantly changing—and they tend to change in favor of consumers.
Your state could pass a new law tomorrow that bans surcharging in six months. Now what?
If your margins are so thin that new regulations could put you in the red, then you have a bigger problem to deal with and surcharging won’t save you. Fix that first, and make sure that your business model still works with or without the surcharge fee.
9. All Your Competitors Are Surcharging
This only applies to local businesses where consumers just don’t have another option.
Let’s say you’re one of just five dry cleaners within a 30-mile radius. If the other four dry cleaners are all surcharging credit cards, you could safely do the same because your customers probably won’t jump ship to one of your competitors doing the same thing.
That said, you could always turn this around and use your fee-free payments as a competitive advantage. You’ll probably make more money this way if you can steal your competition’s customers—more than you would by charging an extra 3% to your current customers.
Final Thoughts
Adding a surcharge fee to credit card transactions is a big decision—something that shouldn’t be rushed into.
You need to account for local laws, federal laws, and card network rules. Even if all of the stars align, you’re still dealing with some unpredictable factors, like ever-charging legislation and how your customers will react to paying for your expenses.
Before you do anything else, look for other ways to lower your processing costs.
Contact our team at MCC for a free audit and statement analysis. We’ll help you determine how much money you can save on credit card processing without switching processors or surcharging your customers.