Credit cards are one of the most convenient and popular payment methods today. Almost every business owner allows their customers to make credit card purchases. However, they are processed by credit card networks that charge merchants an extra fee per credit card transaction.
For small businesses, these processing costs can quickly add up and have a significant impact on the bottom line by eating away at their hard-earned profits. This is where credit card surcharging comes in. It’s one of the main ways that merchants can pass on the costs of credit card processing to customers.
In this article, we’ll explore how to minimize credit card fees for merchants via surcharging and the things to keep in mind before you implement it at your small business.
TL;DR
- In credit card surcharging, businesses add a small fee to the transaction amount for every credit card payment made by the customer. Surcharge fees can be considered as a charge to the customer for giving them the convenience of paying by credit card.
- In the United States, businesses can charge a maximum of 3% of the transaction amount as a credit card surcharge. As of now, surcharging is legal throughout the US except in Massachusetts, Connecticut, and Puerto Rico.
- Before implementing surcharging, businesses must evaluate their feasibility, understand the rates and calculations, and choose the right payment processor for their needs. They should also clearly disclose surcharges to customers and train their staff on surcharging procedures.
Understanding Credit Card Surcharging
In credit card surcharging, businesses add a small fee to the transaction amount for every credit card payment made by the customer. Surcharge fees can be considered as a charge to the customer for giving them the convenience of paying by credit card.
It’s a strategy to mitigate the credit card fees that the different card issuers (or card brands) charge merchants. Hence, credit card surcharging is sometimes also called “merchant surcharge” or “checkout fee.”
Although surcharging is quite common in the US, businesses looking to implement it must comply with both federal laws and state laws related to surcharging. They must also ensure that they meet all applicable guidelines set by credit card companies.
Moreover, customers need to be informed clearly that they will incur an additional fee—in the form of a credit card surcharge—if they make payments with their credit cards online or in person.
Tips on Implementing Surcharging to Minimize Credit Card Fees for Merchants
Now that we’ve covered the basics, let’s take a look at some surcharging best practices that merchants should keep in mind.
1. Evaluate the feasibility of surcharging for your business
Small businesses that offer a unique product and have a strong customer base will be able to implement credit card surcharging more successfully than, say, businesses in highly competitive markets. You must also consider the payment options your customers mostly prefer.
For example, if your customers mostly pay by debit cards or cash, your credit card fees will be low. As such, you may encourage customers who use credit cards to switch over to an alternative payment method like cash by implementing cash discounting. A deep dive into your sales data and industry trends will help you evaluate if surcharging could be a viable option for your business.
2. Understanding surcharge rates and how to calculate them
In most states, the surcharge rate is capped at 3% while the average credit card processing fee that merchants are charged is between 1.3% and 3.5%. The processing fee depends on factors like merchant category code and credit card type.
The aim of surcharging is to offset the credit card processing fees that your business is being charged. So, you need to know the effective rate. This is the processing rate that your merchant services provider is charging your business. Divide the total amount charged for processing by your total monthly sales to get the effective rate.
3. Communicating surcharges to customers
Customers need to be clearly informed that they are paying credit card surcharges on their purchases, so be honest and upfront about it. For online purchases, you should have surcharge information on the first page of your website. In-store, signs at points of sale, and at main entrances should clearly communicate that your business will surcharge credit card payments.
Further, the surcharge rate should be visible on the signage at points-of-sale in-store. Once the purchase has been made, the surcharge needs to be a separate line item on purchase receipts.
OR Hope, a business that offers regenerative health services, was incurring credit card processing fees to the tune of $3,000+ a month. By using CardX’s zero percent processing solution, the company was able to implement surcharging and offset processing fees, saving the business thousands of dollars per month. In addition, using CardX enabled OR Hope to have better conversations with clients about payments, ultimately strengthening client relationships.
4. Choosing the right payment processing solutions
Credit card fees typically include assessment fees, payment processing fees, and interchange fees. Payment processing fees are charged by a merchant’s payment processor that handles credit card transactions for the merchant. The overall fee that you end up paying your processor may also include transaction fees, monthly service fees, and equipment fees.
Small businesses must carefully consider these different types of fees charged by payment processors to understand which one is best for their business. Based on your sales history, volume of credit card sales, fraud prevention history, etc. you can negotiate credit card fees with your processing solutions provider too.
As such, leveraging a 0% processing solution like CardX can lead to substantial financial savings, improved customer relationships, and more efficient operations. If you’re looking to implement a surcharging program that’s fully seamless and compliant, get started with CardX and discover how you can benefit from 0% credit card processing.
5. Training staff on surcharging procedures
Staff, especially those at points-of-sale, need to be educated on credit card surcharging. This will allow them to field any questions that customers have and will also help prevent card fraud, which can affect your processing fees. They also need to be aware of state and national laws on surcharging and credit card network-related rules.
6. Monitoring and adjusting surcharge practices
Over time, you will be able to gather enough sales data so you can analyze how to improve surcharging practices in your business. This can help you negotiate better deals with your processor, which could lead to lower surcharge rates for your customers.
You can also use the data to figure out if you need to implement surcharge alternatives like cash discounts or minimum purchase requirements. Apart from your internal data, you also need to track industry trends, legal changes regarding surcharges, and updates from credit card networks to tweak your surcharging practices for the better.
Final Words
Implementing credit card surcharging can be daunting for small businesses, but as operating costs rise and profit margins get thinner, it is often an essential practice. With a thorough understanding of surcharging laws, your customers’ mindset, credit card fees for merchants, and card network guidelines, you can confidently apply surcharging in your business.
Whether you are just starting out or have successfully implemented surcharging, it’s best to consult financial and legal experts who can help you optimize surcharging for your business.
FAQs about Credit Card Surcharging
Q: What is credit card surcharging for businesses?
Credit card surcharging is a strategy where businesses add a small fee to the transaction amount for every credit card payment made by the customer. Often referred to as a “merchant surcharge” or “checkout fee,” this fee helps to mitigate the credit card fees that the different card issuers charge merchants.
Q: What are the laws regarding surcharging in the United States?
Surcharging is legal throughout the United States, except for Massachusetts, Connecticut, and Puerto Rico. Businesses looking to implement surcharging must comply with both federal and state laws related to surcharging and meet all applicable guidelines set by credit card companies.
Q: What is the maximum credit card surcharge that businesses can charge in the US?
In the United States, businesses can charge a maximum of 3% of the transaction amount as a credit card surcharge.
Q: How are surcharge rates calculated?
The aim of surcharging is to offset the credit card processing fees that your business is being charged. You need to know the effective rate—this is the processing rate that your merchant services provider is charging your business. You can calculate this by dividing the total amount charged for processing by your total monthly sales.
Q: How to communicate surcharges to customers?
Customers need to be clearly informed that they are paying credit card surcharges on their purchases. Information regarding surcharge should be displayed on your website for online purchases and in-store, signs at points of sale, and at main entrances should clearly communicate that your business will surcharge credit card payments.
Q: How to choose the right payment processing solutions for a business?
When choosing a payment processing solution, small businesses should carefully consider the different types of fees charged by the processors, such as assessment fees, payment processing fees, and interchange fees to understand which one is most advantageous for their business.
Q: What are the advantages of using a 0% processing solution like CardX for businesses?
Leveraging a 0% processing solution like CardX can lead to substantial financial savings, improved customer relationships, and more efficient operations as it offers a fully seamless and compliant surcharging option that can help offset credit card processing fees.
Q: How can businesses monitor and adjust surcharge practices?
Businesses can leverage sales data and industry trends to analyze and improve their surcharging practices. Insights from this data can also help negotiate better deals with processing service providers, thus potentially leading to lower surcharge rates for customers. Tracking legal changes regarding surcharges and updates from credit card networks can also assist in refining surcharging practices.
Q: Are there surcharge alternatives businesses can consider?
Based on the analysis of internal sales data and industry trends, businesses may decide to implement surcharge alternatives like cash discounts or minimum purchase requirements to encourage customers to choose other payment options.
Q: Is professional consultation recommended for businesses looking to implement surcharging?
Yes, it is often beneficial for small businesses, whether just starting out or having successfully implemented surcharging, to consult financial and legal experts. These professionals can help optimize surcharging practices for the business.
