Credit cards may be convenient for a customer to pay for online purchases, as well as services, such as haircutting, restaurant service, or doctor’s appointments, but it is not so easy from a business owner’s perspective. When a business accepts credit cards as part of their business operations and transactions, they incur additional fees and costs to process these credit card transactions.
Interchange fees are percentage based charges that individual merchants must pay in credit-card or debit-card based transactions. In the United States alone, the average interchange fees for online merchants is approximately 2.13%, whilst gas stations face an average interchange fee of 1.92% and brick-and-mortar retailers face an average interchange fee of 1.56%. Add on top of this processor and gateway fees and the total cost can be closer to 4%.
So, is there an option out there that would allow for businesses to minimize this cost while giving customers the flexibility to use credit cards as their payment option?
Surcharging meets the bill: It passes the responsibility of being charged to the credit card fee alongst to the consumers. A transaction fee is added to the purchase price at the point of sale to offset the fees. This means that businesses have more flexibility in their margins to remain afloat without worrying about the credit card expenses.
For example, when a leading retailer of rare gold coins decided to use a data-driven, transparent agency around surcharging, in their business transactions, it has “has saved the client over $700,000 in credit card processing fees since May 2019, and reported zero customer complaints regarding the surcharge and no change in conversion rate or customer retention.”
Surcharging though is a double-edged sword. Here are the top listed benefits and limitations of implementing surcharging into your business model:
Increase or Widen Your Margins
If your margins are relatively tight and you are barely afloat, the credit card expense could make or break your business, so be wary and alert that little things such as eliminating credit card risk whilst retaining credit card customers could help you in very tight financial situations. The only way that someone can avoid surcharging is by deferring to an alternative option such as cash.
Regardless of the payment option that a customer uses, your net business margins can be improved by 25% overnight.
Surcharging is only available on credit card transactions, not on debit card transactions. So, you may suffer the debit card expense if the customer decides to go through that route.
According to a 2019 study that tracked consumer spending over a 3-day period, debit cards are the most used payment option, being used 28% of the time. About 23% of the time did customers utilize credit cards as their form of payment.
Unfortunately, surcharging is not accepted everywhere. Surcharging is currently accepted in 40 US states, including New York, Arizona, and Oregon. Some states not accepting surcharging or have strict surcharging regulations include Washington, California, and Florida.
Surcharging is a very transparent process for all parties involved, so even the customer would know if they were getting the extra surcharging cost added to their bill. Some customers may take offense if they are getting past the surcharging cost and may even decide to move their business transactions elsewhere, if you never gained their consent to perform this type of activity with them.
Rules of the Road
To satisfy customers about surcharging and abide by the law, here are some rules of the road when trying to start surcharging into your business model:
- It is important to write a letter of intent to the card association, account representative and merchant provider about implementing surcharging.
- There is a limit or cap however on surcharging costs. It is around 4% of the credit card transaction amount (depending on state regulations.
- You must list surcharging as a separate item on the receipt and online sales page, so that the customer is aware that surcharging is being accounted for in their expenses.
If you are considering surcharging in your business model and are interested in how to implement and stay compliant, contact us at firstname.lastname@example.org.