Free Credit Card Processing: How Does It Work and What’s the Catch?

Small businesses researching credit card processors will have certainly come across providers advertising free or no-fee processing. Sounds attractive, right? No upfront costs. Some don’t even charge for terminals, and there are no pesky monthly fees either.

That is mighty tempting. Yet, that old saying, “Nothing ever comes for free,” is probably ringing in the back of your mind, and it’s wise to wonder, “What’s the catch?”

Commercial businesses can’t exist purely for the love of offering a great service. Every payment processing solution provider has to cover its costs, and profits need to be made somehow. So how is it possible you can accept credit card payments without paying any credit card fees?

Let’s unpack the concept of zero-fee processing, how it works and where there may be a catch.

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What is Free Credit Card Processing?

Zero-fee, no-cost, no-fee.

All of the above cover the free credit card processing messaging that many companies are promoting to attract fiscally cautious business owners.

This solution is actually not new at all. Instead, it’s more of an advertising update on an existing solution that most credit card processors already offer: credit card surcharging.

It certainly doesn’t have the same ring to it as “free,” but credit card surcharging is an option that lets merchants pass on the credit card processing costs to customers. Rather than paying the interchange fees on the business account, a surcharge is added to the customer using their credit card.

How Does Zero-Fee Processing Work?

Zero-fee processing passes the fees onto customers through surcharges. Some will have options to bundle fees—even beyond the usual credit card processing fees—into the customer’s surcharge.

The processing is often zero-fee to the business, but there are other costs involved, such as the terminal costs, monthly service fees, and PCI compliance fees.

Surcharging Versus Free Credit Card Processing

Essentially one and the same, free credit card processing can be considered as a marketable bundle leveraging the surcharging processing option that all the vendors already had.

You can theoretically set up surcharging with any traditional processor. But there are setup tasks that you will need to handle. Your processor will reprogram the terminal so that invoicing programs list surcharges as a separate line item. They will also make sure that only credit card transactions attract this surcharge.

Businesses will then be responsible for contacting credit card providers—Visa, Mastercard, American Express, and Discover—to update them on this change and secure signage that lets customers know your business surcharges.

Zero-cost credit card processors take the concept a step further. They take care of everything—taking on all the setup, programming of the POS system, contacting the credit card brands, and doing all the tedious paperwork. The only thing businesses still have to do is stick their signage in the store.

Legal Issues Around Zero-Fee Processing

Surcharging is a bit of a taboo topic in some States. It used to be illegal in many, but these restrictions have been undone in a number of locations over recent years.

At the time of publication, surcharging is legal in all but two states: Connecticut and Massachusetts.

However, there are still some requirements to meet. It also pays to be aware of the legal cases going on regarding this realm of payment processing.

Disclosure of surcharge credit card processing fees

The main requirements are that customers must be aware you are adding surcharge fees, and these have to appear on the customer’s receipts as a separate item.

Mastercard and Visa both have requirements for merchants regarding signage. This needs to be positioned at main entrances and all checkout areas. The entrance signs will notify customers that your business adds surcharge fees, and the point of sale signs must disclose how much those fees are per transaction.

eCommerce businesses and their virtual terminal also have to meet similar requirements. Customers must be notified on a page that lists credit card brands that surcharge fees apply when using a credit card for online payments.

Should small businesses use “no-fee” processing?

While “no-fee” processing sounds amazing for most small business owners, it is not exactly a great deal for customers, and many States have been in legal battles to fight for or against this payment option.

The question is not so much whether it’s right or wrong to make customers pay for these fees. The issue is that reduced legal restrictions open the door to less than honorable providers that seek to hook merchants into long-term contracts without fully realizing what they “pay” in exchange for this “free” service.

What to Consider Before Looking at a Free Credit Card Processor

As with all free services, there are trade-offs, and they should be considered carefully before jumping into an agreement for a no-fee deal.

Free credit card payment processing does not include debit cards

One big factor not yet mentioned is that “free-processing” only applies to credit cards. Debit cards cannot incur a surcharge, so that tantalizing no-fee processing only applies to one form of payment. POS debit card transactions and prepaid cards, as well as gift cards, will have processing rates incurred by the business.

Some merchants have thought there is a way around this, by running a debit card as credit, but it doesn’t work. A debit card goes through as a debit card, no matter how you try to swipe it.

All those free credit card processing services can potentially add up

Free credit card processing is often most appealing because it encourages business owners to think about all the things they can get for free. Who doesn’t want a free terminal and free setup on their credit card processing solution? It’s a dream, but it does come at a cost.

Remember that everything you save will be passed on to your customers. So, if a company offers no-fee credit card processing that includes free setup fees, equipment, and other bells and whistles, they will likely charge a higher markup, which your customers may end up paying through their transaction fee. This can go up to 4%. How many customers do you know that will happily pay an extra 2-4% to use their credit cards? Probably not many.

This is why it’s essential to work with a provider that’s transparent with what they’re charging and how much. If they have surcharging capabilities, clarify exactly what’s being passed on to the customers. Is it just processing fees or are other expenses added to those costs? How much is their markup? Asking these questions will help you determine whether or not the processor’s surcharging practices are above-board.

Does your competition have competitive pricing?

If your competitors accept a range of payment methods without passing on the fees, the price of your goods or services will look unappealing by comparison.

Businesses leading the competition may be able to afford to increase prices. But if you’re in a highly competitive space where customers can easily find what they need elsewhere, add-on customer fees could seriously hurt your bottom line.

One of two things will happen with customers that don’t like this fee structure:

  • They will use their debit card and let you deal with the fees
  • They will go somewhere else

No-Fee Payment Processor Red Flags

Not all no-fee payment processors are shady, but there are some bad apples on the market. They tend to look the most enticing on the surface, but if you think it’s too good to be true, it’s likely you’re looking at a dodgy provider.

Promises to eliminate 100% of your processing costs

There are no merchant accounts available from any provider in existence that can waive 100% of processing costs. Any company trying to suggest this is being deceitful. No-fee processing contracts don’t eliminate debit card processing fees; card brands do not allow surcharging on these transactions. In addition, debit cards already have lower interchange rates.

What’s more, there are legal limits of what can be marked up to the customer: 4%. If your business type is classed as high-risk, your processing rates will likely go above that 4% (2% in Colorado), and your payment processor will 100% make you pay the difference.

Charging everything as a credit card payment

While this one is particularly unethical and uncommon, it does happen and is very much illegal. As we’ve discussed, setting up surcharging requires modifying the payment gateway to apply the surcharge to credit card purchases. Some providers deliberately program the software incorrectly to apply the surcharge to all purchases. Debit cards included. This is an automatic violation of the credit card associations’ processing agreements and is illegal in many jurisdictions.

Implementing Surcharges with Stax

If you’re planning to implement surcharging in your business, make sure to go with a trusted credit card processor like Stax.

Stax surcharging allows you to easily pass along credit card fees to your customers through our robust payments platform. Stax meets PCI Level 1 compliance and complies with federal law, so you can rest easy you’re meeting all legal requirements.

Final Words

There is more than one way to minimize credit card processing fees. That could be a zero credit card fee solution like surcharging with Stax, or it could be shopping around for the best rates with traditional processors. Weigh up both options, and whatever you decide, Stax has you covered. We provide transparent, fair, regulatory, and legally compliant solutions to meet all your payment processing needs.

Contact our team to learn more.

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