Credit card usage in the US has grown steadily over the past few decades. According to a report by TransUnion, the number of credit cards in Q3 of 2022 stood at 510.9 million. This goes to show that credit card payments aren’t going to slow down anytime soon.
Unfortunately for businesses, this also means greater processing costs—that can quickly add up. Not surprisingly, surcharging is increasingly becoming an attractive option for more and more businesses to offset these costs.
As such, SaaS companies that offer integrated payments would be wise to tap into this opportunity and upsell surcharging to their sub-merchants. In this article, we’ll explore the case for upselling surcharging and how to do it right.
TL;DR
- Credit card brands or networks like Visa, American Express, Mastercard, and Discover charge certain fees per transaction when customers use credit cards to make payments at a business. Usually, the merchant shoulders this fee but as they start adding up, they can cut into their profits.
- Credit card surcharging allows businesses across a wide range of industries to offset processing fees, which can be immensely beneficial for merchants that have a slim profit margin.
- As a SaaS provider that offers integrated payment processing to sub-merchants, upselling surcharging can be a great way to build better relationships with customers and increase user adoption. Stax Connect ensures you can offer a surcharging add-on easily—without any substantial developmental or financial investment—all while ensuring compliance and security for your users.
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Understanding Surcharging
Credit card brands or networks like Visa, American Express, Mastercard, and Discover charge certain fees per transaction when customers use credit cards to make payments at a business. Usually, the merchant shoulders this fee but as they start adding up, they can cut into their profits. That’s why, almost every American state (with a few exceptions) now allows businesses to pass this transaction fee on to the customer in the form of a surcharge.
Legal and regulatory considerations
A credit card surcharge is also known as a “merchant surcharge” or a “checkout fee.”
In the United States, Visa has made major changes to its surcharging policies—effective April 15, 2023—one of which is to lower the surcharge rate from 4% to 3% for its network in the United States. This will require merchants to lower the surcharge to 3% for all brands’ credit cards when Visa is accepted.
As of now, credit card surcharging is only banned in one US territory and two states—Puerto Rico, Connecticut, and Massachusetts.
Current market trends related to surcharging
Credit card surcharging allows businesses to offset processing fees, which can be immensely beneficial for companies that have a slim profit margin.
As such, when it comes to customer perception about surcharging, it seems to be quite positive. A survey by PYMNTS and Payroc found that 85% of cardholders paid surcharges being fully aware of them in their most recent transactions.
The same survey also revealed that only 21% of cardholders felt their satisfaction dropped when asked to pay a surcharge. Clearly, customers react favorably to surcharges when they are properly informed about them as well as why they are required.
What’s more, surcharging can also prompt customers to pay using a less expensive method—such as debit cards or ACH.
Common Industries and Business Types That Implement Surcharging
Credit card surcharging has been successfully used in many industries to offset the cost of accepting credit card payments. Here are a few examples.
Financial and legal services
Businesses that offer financial or legal services such as accounting, tax management, law offices, etc. collect credit card surcharges from their clients to manage processing costs.
Service industry
Accepting credit cards is a great way to accommodate a bigger customer base. In return for allowing credit card payments, plumbers, contractors, repairmen, handymen, landscapers, and other such service providers add surcharges when their customers pay by credit cards.
Health and wellness industry
In the healthcare and wellness industry, certain professionals such as estheticians, plastic surgeons, veterinarians, and dermatologists provide services that are often not covered by insurance. Apart from paying by check and cash, many patients make payments with credit cards for which these businesses add a surcharge.
The Case for Upselling Surcharging to Sub-Merchants
For a SaaS company, offering payment processing to its customers can be a lucrative option. Offering integrated payment processing makes your product a full-service solution for customers, thereby increasing customer loyalty and confidence.
As a SaaS provider that offers integrated payment processing to sub-merchants, upselling surcharging can be yet another way to build better relationships with customers and increase user adoption. To understand why, let’s take a look at the payment processing costs sub-merchants typically have to bear.
Payment processing costs for sub-merchants
There are three main kinds of processing fees that sub-merchants pay on every credit card transaction: interchange fees, assessment fees, and payment processor fees.
Of these, the first two are set by card networks and are unavoidable. The third fee is set by the payment processor depending on the pricing structure they use (flat-rate, tiered, interchange-plus, or membership-based).
All of these, put together, may cost a merchant between 1.5% and 3.5% of the transaction amount—which is quite substantial.
How surcharging can offset these costs
With surcharging, merchants can easily pass on these costs to the customer. All they need to do is inform customers that they will need to pay a surcharge if they choose to pay by credit card.
They will also need to mention the percentage customers need to pay as a surcharge, which will need to be shown as a separate line item on the receipt. And of course, merchants will need to make sure that they abide by all applicable federal and state laws related to surcharging while they’re at it.
Benefits of upselling surcharging for SaaS companies
As a SaaS company providing integrated payment processing, if you can show your sub-merchants how they can easily mitigate their credit card processing fees through surcharging on your platform, you are likely to build stronger customer relationships and bring in more revenue.
Plus, sub-merchants can benefit from the following.
Convenience. For one, it will be more convenient for them to pay for an add-on surcharging feature on the same platform instead of looking for a third-party surcharging tool.
Guaranteed compliance. If your solution handles surcharging-related compliance automatically, it takes away a lot of headaches for sub-merchants.
Steps to Take Before Upselling Surcharging
Of course, before you upsell surcharging capabilities, you must identify how popular credit card payments are among your users. Surcharges will have a minimal effect on a business’s bottom line if most of its customers don’t use credit cards.
Secondly, credit card surcharges are not a flat rate but a percentage of the transaction amount. Customers may be more willing to pay a 4% surcharge on a few dollars than a large purchase of, say, $1000.
Also, there are some state-wide regulations where surcharges cannot be applied for transactions below a certain limit. Understanding all this will help you figure out which sub-merchants may be most receptive to your surcharging upselling efforts.
Helping your sub-merchants adhere to legal and regulatory policies is another great way to improve customer satisfaction. You could also offer advice on how they should inform their customers about surcharging and how they can ensure that surcharges are listed clearly on receipts. By increasing the level of confidence that sub-merchants have in your expertise on surcharging, you can increase your chances of success.
Best Practices for Upselling Surcharging to Sub-Merchants
Keep the following in mind before you think of upselling surcharging to your SaaS users.
Knowing your sub-merchants
Analyze payment data and show your users how they can recoup some of the costs of credit card processing by adding surcharges. Some sub-merchants might be hesitant to surcharge fearing customer dissatisfaction and even backlash.
However, there are surveys that show that if customers are informed properly, they are more willing to pay surcharges. You can work with your customers to come up with a surcharging plan that works best for them.
Successful communication strategies
The pros and cons of surcharging should be clearly communicated to your sub-merchants. Surcharging may help them increase profits but there is a cost associated with setting up surcharging and complying with national, state, and brand-level regulations. All this should be clearly communicated to sub-merchants with the promise that as their payment provider, you will be able to guide them through the transition.
Providing ongoing support and education to sub-merchants
After you have successfully upsold surcharging to a sub-merchant, you need to notify them if there are any changes in regulations, updates from credit card networks, or in your own company policies. Going this extra mile will not only reassure your customers but also ensure that they aren’t unknowingly breaking any rules. You should also provide ongoing customer support to sub-merchants so that they can get their surcharging questions clarified and issues fixed.
Being aware of common objections
The most common objections against surcharging are customer dissatisfaction and complicated rules and regulations. Show them how customer dissatisfaction can be mitigated with proper information and education of end users. When it comes to legal and regulatory hurdles, show your sub-merchants that you are willing to educate them when they decide to purchase your surcharging add-ons.
Final Words
Offering a surcharging option that can be plugged into your payment platform is an excellent way to bring in more revenue. Stax Connect helps you create a complete payments ecosystem from scratch—in as little as 30 days. It also ensures that you can offer a surcharging add-on easily without any substantial developmental or financial investment—all while ensuring compliance and security for your users. To learn more, contact the award-winning customer support team at Stax today.
Quick FAQs about Upselling Surcharging
Q: What is surcharging in the context of credit card payments?
Surcharging is the practice of adding a fee to a customer’s bill when they choose to pay with a credit card. This fee helps businesses offset the processing costs imposed by credit card companies.
Q: Why should SaaS companies consider upselling surcharging to sub-merchants?
SaaS companies should consider upselling surcharging to sub-merchants to help them mitigate the costs associated with credit card processing fees, thereby enhancing client satisfaction and increasing revenue through integrated payment solutions.
Q: How can surcharging benefit sub-merchants with slim profit margins?
By implementing surcharging, sub-merchants can pass the cost of credit card processing fees onto customers, which can significantly reduce the impact of these fees on their profit margins.
Q: What are the legal considerations for implementing surcharging in the United States?
As of now, surcharging is permissible in most U.S. states, except for Puerto Rico, Connecticut, and Massachusetts. But while many states allow surcharging, each state maintains specific restrictions, such as percentage caps or “total price” disclosure. It’s crucial for merchants to understand and comply with both federal and state regulations, which may include limitations on surcharge percentages and disclosure requirements.
Q: How can SaaS providers ensure compliance when offering surcharging solutions?
SaaS providers can ensure compliance by integrating automatic updates for legal and regulatory changes, providing clear communication and guidelines to sub-merchants, and ensuring that surcharging practices align with the latest Visa and Mastercard rules.
Q: What are the common objections to surcharging, and how can they be addressed?
Common objections include potential customer dissatisfaction and the complexity of regulations. These can be addressed by educating customers about the necessity of surcharges and ensuring that sub-merchants are well-informed about compliance requirements.
Q: What best practices should SaaS companies follow when upselling surcharging to sub-merchants?
SaaS companies should analyze sub-merchant payment data, communicate the benefits and costs transparently, provide ongoing support and education, and address any legal and regulatory questions thoroughly.
Q: How does surcharging influence customer payment behavior?
Surcharging can encourage customers to opt for payment methods with lower processing fees, such as debit cards or ACH transfers, potentially lowering overall transaction costs for the business.
