Should you Pay Credit Card Fees or Surcharge Your Customers?

February 12, 2018

Businesses often face a double-edged sword when accepting credit cards. Credit card processing comes with fees that can eat into your profits, but defraying the cost with a surcharge for shoppers can turn away business. As a business owner, it’s important to decide which option makes sense for your business as a growing number of states now allow businesses to offer a cash discount or add a fee for electronic payments. Here’s a look at the pros and cons of defraying your costs, when legal.

Can You Add a Fee for a Card Payment?
Before you even consider adding a fee for shoppers who pay with a credit card, make sure you are allowed to do so. Currently, nine states forbid surcharges, including Colorado, Connecticut, Florida, Maine, Massachusetts, Kansas, Texas, Oklahoma, and New York. Even if your state allows it, you will likely want to be careful of restrictions and regulations. In general, it’s always advised to place signs warning customers of the charge, especially near your credit card machine. The sign should be legible and include the amount of the charge and when it applies.

Why Surcharging Makes Sense
The clear advantage to adding a fee at the register for credit cards is the ability to offset the cost of your merchant services. With surcharging, you receive the full $100 for every $100 you sell without subtracting up to 4% in fees for credit card processing.

In the past, businesses had few tools available to manage these merchant costs. While costs increased in the U.S. in recent years, they were lowered in countries that allowed merchants to pass the cost onto shoppers.

You may even find that surcharging allows your small business to accept credit cards when merchant services were previously too costly. Surcharging tends to work best when credit cards make up a large share of your total transactions or when you have many small-dollar purchases.

Reasons to Avoid Surcharging Customers
The biggest reason to avoid surcharging is it can reduce public opinion of your business. Some shoppers may not appreciate having a fee added to their transaction enough that they patronize a competitor instead. A recent survey conducted by creditcards.com found that an overwhelming number of people report they are unwilling to pay a fee to use their credit card, but this result is not necessarily accurate. It’s possible many customers will adapt to the fee after initially being upset or switch to another payment method.

If your business has high debit card use, surcharging is unlikely to help and may only damage your reputation or reduce business. This is because the fee will only recover costs on a small share of your transactions without reducing your expenses. Remember: surcharging is only an option with credit cards, not debit cards. In general, credit exceeds debit transactions in department stores and online businesses but not gas stations and discount stores.

What About a Cash Discount?
Another option is pricing your merchandise as if shoppers will pay by credit and offering a cash discount. This option can have the same advantages of surcharging without negative opinions. After all, shoppers will be less averse to receiving a discount if they choose to pay cash rather than a fee to cover your payment processing costs.

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Business, Credit Card Processing, Durbin Amendment, Small Business, SMBs, Surcharge

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