There’s a Fee for That: Pros and Cons of Surcharging Credit Cards

What is surcharging?

Surcharging is the practice of adding an extra charge to consumer purchases to offset credit card fees. Retailers add surcharges only to credit card transactions, not cash, check or debit card purchases. Surcharging helps businesses recover payment processing fees and is sometimes referred to as “zero-fee” or “free” credit card processing.

What are the pros of surcharging?

Surcharging can benefit a business’s bottom line in the following ways:

1. Surcharging brings higher margins.

The obvious benefit of surcharging is that the burden of processing expenses no longer falls on you. By passing merchant credit card fees to your customers, you’ll reduce business expenses and add to your bottom line. For businesses with thin margins, any cost reduction can be a big help.

2. Surcharging helps you provide customer convenience without the cost.

Part of providing a great customer experience is allowing customers to use their preferred payment method. According to a Federal Reserve report, 68 percent of consumers prefer using a credit card for in-person payments. Surcharging is a way to support your customers’ preferred payment method while shouldering little to no cost (depending on your payment processor plan). 

3. Surcharging may slightly accelerate your cash flow.

In some cases, a credit card surcharge may encourage customers to pay with cash. In these instances, you’ll receive your sales revenue immediately instead of waiting for the credit card processor to transfer your funds, which typically takes one to three business days.

4. Surcharging may indirectly help consumers. 

It’s no secret that credit card issuers get a cut from merchants in the form of processing fees and card users in the form of interest. By making credit cards a less favorable payment method, you may ultimately help customers avoid higher interest payments. This is particularly beneficial to lower-income customers, who are less likely to pay off their credit card balances each month.

What are the cons of surcharging?

While offsetting credit card fees is a huge advantage for businesses, surcharging has some distinct downsides:

1. Customers don’t like surcharges.

One of the most significant potential drawbacks to surcharging credit cards is customer opinion. Your customers may dislike surcharging so much that they’ll opt to patronize other businesses instead of yours. In fact, according to a Lending Tree survey, most Americans (57 percent) think charging consumers to offset credit card processing fees should be illegal. Consumers clearly resent when businesses pass along the cost of doing business, at least in such an obvious way. 

Consumers may adapt to your surcharges after some initial complaints, but if there are convenient alternatives, such as a nearby business that doesn’t surcharge, you could end up losing customers.

2. Surcharging raises your effective prices.

If most of your customers pay with a credit card, a surcharge effectively increases your prices, putting your business at a competitive disadvantage. For businesses that compete in a price-sensitive market, surcharging can hurt your bottom line because customers may decide to buy from your competition.

Be honest with yourself about the competitive landscape. Ask yourself these questions:

• Are you alienating your customers?
• Are there other businesses nearby that offer the same goods or services you do?
• How will you compete with those businesses if your prices are higher due to a surcharge?

It’s particularly important to consider customers’ alternatives if you compete against online retailers that offer free shipping and fast delivery. If your products aren’t items that customers must purchase in person, you could be costing yourself business by adding an obstacle to purchasing from you.

3. In some places, surcharging is illegal.

Credit card surcharging is against the law in some states and Puerto Rico. In other states, laws restrict surcharging. If you live in one of these states, you could get into legal trouble for surcharging or for doing it in a prohibited way.

4. You can’t surcharge debit card transactions.

Even if a customer uses a debit card without the PIN as credit, you cannot surcharge the transaction. Some credit card processors automatically remove the surcharge from debit card transactions; if yours doesn’t, you must oversee each sale, creating a lot of extra work. If most or a significant portion of your sales come from debit cards, surcharging won’t help you much and probably isn’t worth pursuing.

What are the steps to start surcharging?

If you decide to surcharge credit cards, consider the following steps: 

1. Contact your credit card processor to inform it of your wish to surcharge. It may impose specific requirements and restrictions you must abide by.
2. The processor will reprogram your credit card machine so that surcharges are listed separately on customer receipts. 
3. Contact the credit card brands to ensure you follow Visa and Mastercard rules surrounding surcharging.

You must ensure you meet all surcharging requirements, including the following; 

• Surcharges may be applied to credit cards only.
• The surcharge cannot exceed 4 percent of the transaction total or your actual cost to process cards, whichever is lower.
• You must inform Visa and Mastercard of your intent to surcharge cards at least 30 days before imposing surcharges.
• You must post signage informing customers of surcharges.
• Signage must be located at entrances to stores and points of sale.
• Surcharges must be clearly labeled as a line item on a receipt.

How do you assess the impact of surcharging?

To accurately assess the impact of surcharging on your business, track and analyze all variables once you begin surcharging. Compare sales totals before and after the surcharge to ensure you aren’t unintentionally alienating customers and hurting your bottom line.

If you begin surcharging and experience adverse effects, you can reverse the decision and stop surcharging. Still, it can be hard to change a customer’s negative perception. Carefully weigh the pros and cons of surcharging, and consider all angles before deciding.

What are some surcharging alternatives?

Surcharging isn’t the only way to reduce credit card processing fees. Consider the following alternatives:

1. Offer cash discounts.

Instead of charging more to use credit cards, consider offering a cash discount for customers who choose not to pay with plastic. Price your goods or services as if everyone will pay with a credit card; you’ll have wiggle room to offer a small discount for using cash.

While a cash discount has the same basic effect as a credit card surcharge, customers are generally less opposed to a discount than a fee. By offering a cash discount, you’re rewarding cash usage instead of punishing credit card usage.

2. Establish minimum purchase amounts.

Requiring a minimum purchase amount can encourage customers to use cash for at least some purchases or to buy more so they can use a credit card. For businesses whose credit card processor charges a percentage plus a flat fee for each transaction, excluding small purchases from credit card payments can reduce overall processing fees.

3. Charge convenience fees.

Businesses can charge a convenience fee when customers use a nonstandard payment form or pay differently, such as when paying with a credit card by phone or online. Convenience fees are typically between 1.3 and 3.5 percent. The rules regarding convenience fees vary by card type.

Here are Visa’s rules for convenience fees:

• Convenience fees can’t be charged for in-person transactions.
• Convenience fees can’t be charged for general acceptance of Visa cards.
• Convenience fees must be disclosed before purchase completion.
• Convenience fees must be a flat or fixed fee, not a percentage.

Here are the rules for Mastercard’s convenience fees:

• Convenience fees must be disclosed as a separate fee for using the payment channel.
• Convenience fees may be used for in-person, phone, online, kiosk or mail payments.
• Convenience fees can’t be higher than other card-based payments.

American Express has the following rules for convenience fees:

• Convenience fees must be disclosed to the customer.
• Convenience fees must be the same for all forms of payment in that payment channel (such as phone, online or mail).
• Convenience fees may be used for in-person, recurring and installment payments.

4. Raise prices.

Although raising prices can result in higher credit card fees, it can also increase your profit margin and avoid the negative backlash of customers who don’t feel appreciated. To some extent, customers expect prices to increase over time because of inflation, so raising prices can effectively mitigate credit card fees. However, use this strategy only if your customer base isn’t price-sensitive, if you have an exclusive product or if competition is scarce.

5. Use a credit card processor with interchange pricing.

Not all credit card processors charge the same way. While all credit card processors charge the interchange rate (the amount set by the card brands Visa, Mastercard, American Express and Discover), some processors make their money with a flat monthly fee instead of adding a percentage on top of the interchange rate.

If your credit card volume is high, using a credit card processor with interchange pricing can be a good way to minimize costs.

Where are surcharges prohibited?

Two states prohibit credit card surcharges: Massachusetts and Connecticut. Puerto Rico also prohibits them. Additionally, some states have limited anti-surcharging laws or laws that have been rendered unenforceable, including California, Florida, Kansas, Maine, New York, Oklahoma, Texas and Utah. Maine and New York also require specific disclosures related to surcharging, and Colorado caps the maximum surcharge amount to 2 percent of a transaction. Surcharging rules and regulations change frequently; always check with your state before surcharging your customers.