There’s a lot of debate over whether or not it’s okay or not for a business to surcharge customers to cover their credit card fees. We are asked constantly by merchants if adding that extra percentage to their customer's bill is a good business decision.
The truth is it’s a bit complicated.
Asking your customers to pick up the cost of processing for you by adding fees on their transaction sounds appealing, but it can have negative repercussions.
So what’s the right course of action?
Keep reading and we’ll tell you if it’s a good idea to surcharge your customers to cover your processing fees.
Up until recently, surcharging was something you could be fined by the state for doing, as well as losing your merchant account. Surcharging was essentially charging a “convenience fee”, or an “online payment fee” if a customer paid by credit card. Currently, it is only illegal to surcharge customers in eleven of the states.
The way a lot of merchants got around this rule against surcharging was by offering a “cash” or debit card discount, as the processing costs are much lower for debit cards, and cash doesn’t have any. Doing a Cash Discount worked by advertising all your items as the cash price, and then adding 3-4% automatically to the customer’s transaction if they paid by card.
You could get away with passing the cost of processing credit cards onto a customer this way, although we should mention most customers hate this practice. Essentially it was the same result, but offering a cash discount was considered legal where surcharging was not.
In recent years, however, surcharging has been ruled as perfectly legal in most of the states. Although it may explicitly be against your processor’s rules in your contract to have your merchant account with them, it’s not technically illegal in most states.
However, it’s still not something you should really be doing to your customers and can leave a bad taste in their mouth.
If you want to offer a cash discount (which is seen as more acceptable), you still run into a few problems. The main reason surcharging and offering cash discounts is so appealing is because paying processing costs is not fun.
Sure, they can be small, but all those percents and basis points add up and take away from your profits. We understand how hard it can be to cover expenses as a small business, and it’s tempting to pass on the cost to your customers.
There are unexpected repercussions your business might face that are counter-intuitive to the benefit of saving money via surcharging.
When customers are asking about surcharging customers, we generally ask why they don’t just list their prices as higher to reflect the cost. They generally say “I can’t raise my prices, it’ll cost me, customers.” What merchants don’t realize when they surcharge a customer it’s exactly the same as raising their prices.
Granted, a customer may say no upfront and go to a competitor if you’re more expensive, but they are going to be mad at the register when it costs more than they expected. They might go to your competitor anyway because they don’t stick them with a charge for paying via credit card.
You may cover that extra 4% out of your profits by surcharging, but you may lose 4% or more of your customers by doing so.
Some business will say nothing under $5 on a credit card. Some customers might grab another item, others might walk away. If you have to be competitive, will you lose customers? And what percentage?
The struggle for more and more retail locations is competing with online. Margins are thin but customers can come into your location, scan an item with their phone and see if it is cheaper somewhere else. Do you want to make your products more expensive to drive more people to online options?
We personally find it a risk to try and pass the cost along to your customers and do not recommend surcharging your customers.
While there is always going to be costs for interchange, you should look around to see if you can lower your processing costs before passing that onto your customers and risk losing them.
If you’re paying too much with your processing rates, one of the ways you can skip passing the cost along to your customers is searching for better credit card processor.
Contact us for a free credit card rate analysis and we’ll see if we can give you a lower processing rate.
