Pros and Cons of Surcharging

Credit card surcharging continues to be one of the hottest yet most controversial topics in the payment space. My inbox is flooded daily with questions from businesses and complaints from unhappy consumers.

Here’s what it boils down to. Payment processing costs aren’t going anywhere—and neither the merchant nor the consumer wants to be responsible for paying.

For businesses, it’s not quite as simple as deciding whether you want to absorb this cost yourself or pass these fees to your customers. There are other factors to consider, and that’s why I created this guide. 

Read on to learn more about the pros and cons of surcharging so you can figure out if surcharging credit card transactions is a good idea for your business. 

Pros of Surcharging Credit Card Transactions

There are plenty of scenarios when surcharging makes sense for businesses. All of these situations have the following advantages in common:

• Offset your processing costs.
• Keep your profit margins higher.
• You don’t have to raise your prices.
• Let your customers save money by paying cash.

Let’s take a closer look at these surcharging benefits for merchants:

Instant Cost Recovery

The most obvious perk of surcharging is the direct recovery of your processing costs. When implemented correctly, you can pass the processing fees to your customer and end up with a net neutral transaction cost. 

This can easily translate to tens of thousands in savings for your business.

Preserve Profit Margins

Surcharging is particularly beneficial to businesses operating with tight profit margins—like restaurants, retailers, and wholesale distributors. If you’re in an industry where your margins are in the 3% to 7% range, a 3% processing fee would effectively cut your profits in half or eliminate them altogether.

Adding a surcharge program to credit card transactions can help you preserve those profit margins without having to cut costs elsewhere. 

Keep Current Prices

Lots of businesses are afraid that they’ll lose customers if they raise prices on their products and services. Depending on your industry, price hikes can also put you at a competitive disadvantage if your customers can effectively get the same thing you’re offering for less money elsewhere.

By adding a surcharge fee that only applies to specific payment methods, you can keep your existing pricing in place without driving your customers away. 

Incentivize Cash Payments

If surcharges are only applied to credit card transactions, your customers may choose to save money by paying with cash. This is a win-win, as you won’t have to pay a processing fee at all, and your customers feel like they got a good deal by avoiding a 3% surcharge. 

Obviously, this only works if you’re operating a brick-and-mortar business (online sellers won’t have this option).

Cons of Surcharging Credit Card Transactions

If you’re surcharging credit cards, you must be prepared to deal with the negatives, including:

• You’ll probably lose some customers.
• Laws are constantly changing and vary by location.
• Processors may take advantage of you.
• Implementing a surcharging program isn’t always straightforward.
• It’s an administrative hassle.
• Your staff may get fewer tips.
• It can negatively impact your online reputation.

Here’s a more in-depth explanation of each:

Customer Pushback and Lost Business

Consumers are very price-sensitive, and they don’t like the idea of directly paying for a merchant’s operational cost. In fact, 57% of cardholders think surcharge fees should be illegal, and an additional 71% of consumers avoid businesses that surcharge card transactions. 

I can tell you firsthand how much consumers hate surcharges. Despite the fact that we don’t offer any consumer services here at MCC, we get bombarded with emails and comments on a daily basis from people who have strong opinions about businesses forcing them to pay this extra charge. They want their voices to be heard, so I’m simply passing along the message (do what you want with this information).

Complex Legal Landscape

Credit card surcharge laws vary by state. It’s banned outright in some locations, whereas other states permit surcharging with contingencies—like not allowing the fee to exceed the merchant’s cost of acceptance. And debit card surcharging is prohibited nationwide. 

Despite the current regulations in place right now, we’re seeing lots of states change their surcharge laws and adopt more consumer-friendly policies. So if you’re relying on a surcharge and then the laws change in your state, you could be forced to adjust your policies quickly or face hefty fines and legal consequences. 

More Susceptible to Processor Rate Increases

If your processor knows that you’re passing these fees to your customers, it’s much easier for them to raise your rates without any pushback. As a merchant, you may not care whether you’re paying 2% or 4% to accept cards if your customers ultimately absorb the costs.

But rates will continue to creep up and eventually exceed the amount you’re legally allowed to surcharge your customers. So you’ll end up sharing these costs with cardholders. And if the laws change, you could find yourself paying a 6% effective rate that would have likely been under 3% if you didn’t have a surcharge program. 

Implementation Challenges

Setting up a legal and compliant surcharge program is easier said than done. Beyond the state and federal laws, you’ll also have to abide by the card brand rules.

What if your business has locations in multiple states? Can you handle online or phone transactions where the customer is in another state? How will you ensure debit cards aren’t accidentally (and illegally) hit with a surcharge fee?

Impact on Employee Tips

Consumers are already fed up with tipping. The implementation of customer-facing POS systems everywhere and being asked to tip for purchases that have historically not warranted gratuity have led to tip fatigue. Now customers are tipping less—even at places where tips are considered to be a standard practice (like restaurants).

If a person is dining out and plans to leave a 15% tip, that tip is starting to drop to 11% if there’s a 4% credit card surcharge fee. Even though the surcharge doesn’t go to the server, the customer has already made up their mind about how much they’re willing to leave.

This trend can create unhappy employees and higher turnover rates, ultimately leading to expenses that far exceed what you’re recouping from the surcharge. 

Administrative Burdens

Implementing a surcharge program creates additional administrative responsibilities (and headaches) that businesses are often unprepared for. Examples include:

• Training staff on proper disclosure procedures.
• Ensuring compliance with state laws, federal laws, and card network regulations.
• Updating accounting practices to properly handle surcharge revenue and taxation.
• Modifying POS systems and payment terminals.
• Developing protocols to avoid illegal surcharging of debit cards.

These requirements can create operational overhead costs that may effectively offset the financial benefit of the surcharge itself. 

In fact, a study from Ipsos found that merchants applying surcharge fees lose more money in sales than they recoup from the surcharge program. You may get back 3% of your transaction fees, but it’s costing you upwards of 10%. 

Those numbers don’t make sense for businesses.

Online Reputation Damage

Yelp, Google Reviews, Trip Advsior, Reddit, BBB—you name it, all of these sites are flooded with complaints from customers about businesses adding a surcharge fee. Some local forums are even compiling lists of businesses that surcharge credit cards so people in the community can actively avoid them.

One thing that I’ve personally noticed is that the surcharge fee can take away from an otherwise pleasant interaction with a business. Someone may have a great meal or great customer service, but they’re still leaving you a 2-star review because they’re upset about being nickel-and-dimed.

Alternative Approaches to Consider

If you think that the cons above are good enough reasons not to surcharge credit card transactions, then you should explore other ways to save money on payment processing.

These three tend to be the most effective, and they aren’t exclusive of each other (meaning you can apply all three).

1. Negotiate Lower Processing Rates

Most businesses don’t realize this, but credit card processing rates are 100% negotiable.

While the card network fees at the interchange level are set in stone, a major portion of your processing costs come directly from your processor’s markup. You can save thousands of dollars every month by negotiating this rate and eliminating bogus fees from your statements.

I suggest you learn how to read your monthly statement so you have a firm grasp of exactly what you’re being charged. Then pick up the phone and call your processor. 

If they don’t budge, our team here at MCC can help. We’ll negotiate on your behalf so you can reduce your costs without having to switch providers. 

2. Cash Discount Programs

Earlier I mentioned that credit card surcharge programs potentially incentivize cash sales. But a cash discount program takes that one step further. I personally think it’s a much better option for both you and your customers. 

Instead of adding an extra fee to transactions paid with a credit card, you can simply offer a discount on your regular prices for customers who pay with cash. 

This is great because customers who still choose to pay with a credit card aren’t being charged extra to do so—and they’re still happy. And anyone who wants to save 3-5% can do so by paying cash.

Rather than your customers feeling like they’re being penalized for paying with a credit card, they can feel like they’re being rewarded for using cash. The net difference for you is the same, but it results in a more positive customer perception without adding a surcharge fee. 

3. Strategic Price Adjustments

Payment processing costs are just another operational expense. If your manufacturing costs, electric costs, or employee benefits expenses increased, would you add those fees to a separate line item on your receipts to charge your customers? 

I doubt it. So why has this become acceptable for credit card payments?

Instead, you just need to factor your processing costs into your pricing strategy with the rest of your business expenses. If you need to increase your prices, do it. Customers will likely feel better about paying a higher listed price instead of paying extra for using a credit card. 

Final Thoughts

I think that the cons of surcharging outweigh the pros. While surcharging may seem like an easy way to offset your processing costs, this will likely do more harm than good for your business.

The final decision is ultimately on you. Some companies are willing to accept the cons of surcharging as just part of doing business, and they’d rather offset their processing costs. That’s fine, too. Just make sure you take all of the cons into consideration and really crunch the numbers before making a decision that can negatively impact your business.

If you’re struggling with this, reach out to our team here for a free consultation and statement audit. We can look for other ways to help you save money on credit card processing without switching providers or passing extra costs to your customers.