Person Using Credit Card | Credit Card Surcharging: Is It Too Good To Be True?

No matter what type of business you run, you know for a fact that every penny counts. However, payment processing fees can quickly add up and eat away at your profits—especially during these times of economic uncertainty, when most retailers and eCommerce businesses are struggling to stay afloat.

Credit card purchases are back to pre-pandemic levels and show no signs of slowing down either. According to a Forbes Advisor survey, 36% of consumers use their physical (or virtual) credit cards to make both in-person and online payments. To offset the rising cost of credit card processing, credit card surcharging is a good option that businesses can look into.

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This article explores the ins and outs of surcharging including its benefits and drawbacks, surcharging rules, the legalities surrounding it, and everything else you need to know before implementing a surcharge program.

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Understanding Credit Card Surcharging

Credit card surcharging is the practice of transferring the cost of processing credit card transactions over to the cardholder in the form of an additional fee. 

Whenever a business accepts payment from customers via credit cards, credit card companies charge the merchant a certain fee per transaction (called interchange fee or swipe fee). In states where surcharging is legal, merchants can pass this transaction fee to the customer to lower operating costs. Alternatively, they can also point shoppers to less expensive options (e.g., ACH, debit cards, etc.).

In the United States, the maximum credit card surcharge that merchants can charge is 3%. That means, if an item costs $100, a customer has to pay a maximum of $104 if they choose to pay with their credit card. Credit card surcharging is often also known as a “checkout fee” or “merchant surcharge” and is not the same as a convenience fee. 

Businesses may charge a convenience fee to customers if they decide to allow them to use a payment method that is different from the default method. If the regular payment method truly inconveniences the customer, the business can offer alternative forms of payment that may be more “convenient” and charge a convenience fee in turn.

For example, if a business accepts only cash but a customer doesn’t have easy access to cash but can pay using their debit card or a check, the business can charge a convenience fee to allow the customer to pay using a non-cash method. A convenience fee is always a fixed dollar amount but a credit card surcharge is a percentage of the purchase amount. 

Cash discounting is another concept that pops up when credit card surcharging is discussed. In this case, the cost of credit card processing is already built into product prices. Businesses offer a small discount—equivalent to the processing fees—to customers who pay by cash instead of cards or digital wallets.

A cash discount can be seen as an incentive for customers who pay by cash, which saves transaction or processing fees for a business. Although cash discounts don’t have to be equal to the surcharge amount that the merchant just avoided, it is applied to the advertised price of a product only when a customer elects to pay with cash. 

The Pros of Credit Card Surcharging

As a small business owner, making the decision to implement credit card surcharging can be tricky. You must weigh the pros and cons, consider your business projections, and learn about all the applicable local and federal laws surrounding credit card surcharging before taking the step.

Generally, the advantages of implementing surcharging include the following.

Reduces operating costs

It is obvious that with credit card surcharges, you can reduce or even eliminate the transaction fees your business has to pay to accept credit card payments. Credit card processing companies will often advertise their “zero-fee processing” feature because the processing fee is automatically transferred to the customer so that the business does not have to absorb it. 

Encourages cash transactions

When you clearly state why you are adding a credit card surcharge to a customer’s final bill, it can incentivize them to use cash to make purchases. This can also improve the relationship that you have with your customers as you are helping them reduce their final bill amount. 

The Cons of Credit Card Surcharging

Even if they understand that it’s a way for your business to recoup the costs of payment processing, consumers may still choose to shop with a competitor who doesn’t levy a surcharge. 

The good news is that these situations give you the opportunity to have a good dialogue with your customers, in that you can explain the reasons behind surcharges and highlight the alternative payment methods that are available to avoid these fees. This opens up an avenue for better understanding, trust building, and ultimately, customer loyalty.

Best Practices for Implementing Credit Card Surcharging

To implement credit card surcharging for your business, there are a few rules that you must follow. This will ensure that you are following federal and state laws as well as the guidelines set up by credit card institutions. 

  • Inform your customers. Place clear signage at main entrances and points-of-sale in your business indicating that credit card payments will be surcharged. At the points of sale, the signs must include the surcharge rate. For online businesses, the first page of the website should contain information on surcharges. 
  • A separate line item for surcharge fees. The surcharge levied on credit card transactions must be listed separately on receipts. 
  • The surcharge should be less than the processing fee. The surcharge cannot be more than the cost of processing the credit card payment. This means that you can only recover the processing cost and cannot make any profit from surcharges.  
  • Credit card institutions must be notified. Credit card networks such as Visa and Mastercard provide forms that allow businesses to notify them, in writing, of their intentions to charge checkout fees. You can also submit a letter via your financial representative. You need to keep a notice period of 30 days before you start surcharging.
  • Apply surcharge only to credit cards. Even if a customer runs their debit card as credit, you cannot add a credit card surcharge. Prepaid cards are exempt from credit card surcharges too. 
  • A surcharge is refundable. Even for partial refunds, you must refund the surcharge the customer paid during the initial purchase. For example, if you are issuing a 75% refund, this should include 75% of the surcharge collected. 

Final Words

Each business is different, so you must understand yours thoroughly when deciding if credit card surcharging is the way to go. Think about your projected savings from surcharging, your customers’ mindset, whether credit card surcharging would work well in your industry, and the applicable laws before making the decision.

To learn how CardX automatically handles surcharging while ensuring compliance and elevating the customer experience, contact us today.

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FAQs about Credit Card Surcharging

Q: What is credit card surcharging?

Credit card surcharging is the practice of transferring the cost of processing credit card transactions over to the cardholder in the form of an additional fee. This fee is charged by businesses to offset the cost of credit card transactions.

Q: What is the difference between a credit card surcharge and a convenience fee?

A credit card surcharge is a percentage of the purchase amount that businesses charge to recover the transaction fee from accepting credit card payments. A convenience fee, on the other hand, is a fixed dollar amount that businesses may charge to customers for using a payment method that differs from their default method.

Q: Are credit card surcharges legal?

The legality of surcharging varies across states and countries. It’s important for a business to understand relevant local and federal laws before deciding to implement credit card surcharging.

Q: How much surcharge can a business impose on credit card transactions?

In the United States, a business can impose a maximum surcharge of 3% on credit card transactions. However, the surcharge amount cannot exceed the cost of processing the credit card payment – the idea being that businesses can only recover the processing cost and should not make a profit from surcharges.

Q: What is a cash discount in relation to credit card surcharging?

A cash discount is a small discount offered to customers paying by cash instead of cards or digital wallets. This practice, often discussed in relation to credit card surcharging, works as an incentive for customers who pay by cash, thereby saving transaction or processing fees for a business.

Q: What are the benefits of implementing credit card surcharging for businesses?

Implementing credit card surcharging can help businesses reduce or even eliminate the transaction fees for accepting credit card payments. It might also encourage customers to make cash transactions, thereby reducing the overall transaction fees for the business.

Q: What are the drawbacks of introducing credit card surcharges?

The introduction of credit card surcharges might lead to negative customer response, causing some consumers to shop with competitors who do not levy a surcharge. However, clear communication about the reasons behind surcharges and the availability of alternative payment methods can help build better understanding and trust among customers.

Q: What are the best practices for implementing credit card surcharging?

Businesses should clearly inform customers about surcharges at points of physical and online sale, list surcharge amounts separately on receipts, ensure the surcharge amount equals or is lower than the processing fee, notify credit card institutions in writing about their intention to introduce surcharges, apply surcharges exclusively to credit card payments, and make surcharges refundable in case of partial or full refunds.

Q: Can convenience fees and credit card surcharges be applied together?

A convenience fee is always a fixed dollar amount whereas a credit card surcharge is a percentage of the purchase amount. A business can charge both provided the convenience fee complies with certain conditions and is charged for a bona fide convenience in the form of an alternative payment channel outside the merchant’s regular payment channels.

Q: How does credit card surcharging affect customer behaviour?

Surcharging may incentivize customers to use cash or less expensive payment options to avoid the additional fee. However, it can also cause dissatisfaction among customers if not communicated effectively. Consequently, it is crucial for businesses to be transparent about the implementation of these charges and offer advice on ways to avoid them.

Remember, legalities involved with surcharging differ from state to state and country to country, so always ensure you’re following the regulations specific to your location and industry before implementing a surcharge programme.