Pros & Cons of Surcharging Credit Cards

For businesses that accept credit cards, fees to process them are a constant headache.

Confusing pricing models, changing regulations and new technology often mean expenses that eat into your bottom line.

To help defray these costs, more businesses are turning to surcharging, or adding the cost of processing to customers’ purchases. It’s legal, and it’s picking up steam in some locations.

But there are very real cons to consider in addition to the pros.

Where Surcharges Are Prohibited

Before we go any further, let’s address state law. Nine states prohibit credit card surcharges: Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas. If you do business in one of those states, you may not surcharge credit cards in that state.

Card Usage by Industry

The first thing to know about surcharging is that you can only surcharge credit cards. You cannot surcharge debit cards, including debit “run as credit.” This is an important consideration. If your customer base utilizes debit cards more than credit cards, surcharging might not be the silver bullet you’re hoping for.

The TSYS 2015 U.S. Consumer Payment Study provides an overview of payment types used at different businesses, summarized in this surcharging infographic. In supermarkets, gas stations (pay at the pump), discount stores, and dine-in restaurants, debit usage outweighs credit card usage. Debit is second to cash at coffee shops and fast food restaurants, but still ahead of credit cards.

Of the industries TSYS surveyed, it’s only in online purchases and department store transactions that credit card usage is higher than debit card usage.

That’s not to say that you couldn’t surcharge the credit transactions that do take place. Just be aware that if you’re in a high-debit-use business, surcharging will help you recoup costs on a smaller number of your total transactions and may not help significantly reduce your expenses.

Benefits to Surcharging

The obvious benefit of surcharging is that the burden of expense for processing will no longer fall on you. By passing the merchant credit card fees to your customers, you’ll reduce your expenses while still allowing customers their choice of payment type. For businesses with thin margins, any cost reduction can be a big help.

Drawbacks to Surcharging

As you can see in the infographic linked above, one of the biggest potential drawbacks to surcharging credit cards is consumer opinion. Your customers may dislike surcharging so much that they choose to patronize other businesses instead of yours.

A creditcards.com study found that consumers overwhelmingly respond that they aren’t willing to pay fees to use credit cards. It’s possible that consumers would simply adapt after some initial complaints, but if there are convenient alternatives such as a nearby business that doesn’t surcharge, you could end up losing those customers.

Be honest with yourself about the competitive landscape. Ask yourself:

Are there other businesses nearby that offer the same goods or services that you do?
How will you compete with those businesses if your prices are higher due to a surcharge?

It’s particularly important to consider customers’ alternatives if you’re competing against online retailers that can offer free shipping and fast delivery. If your products aren’t items that customers need to purchase in-person, you could be costing yourself business by adding an obstacle to purchasing from you.

Cash Discounts

Instead of charging more to use credit cards, you could choose to offer a cash discount for customers who choose not to pay with plastic. Price your goods or services as if everyone will pay with a credit card, and then you’ll have some wiggle room to offer a small discount for using cash.

While it has the same basic effect, customers are generally less averse to a discount than to a fee. By offering a cash discount, you’re essentially rewarding cash usage instead of punishing credit card usage.

Steps to Begin Surcharging

If you decide that you do want to surcharge credit cards, the first thing you'll need to do is contact your processor to enlist their help. They'll need to reprogram your credit card machine since surcharges must be listed separately on customer receipts. You'll also need to contact the credit card brands, and make sure you’re following Visa and MasterCard’s rules. Basic requirements for surcharging are as follows:

Surcharges may only be applied to credit cards
The surcharge cannot be more than 4% of the transaction total, or your actual cost to process cards, whichever is lower
You must inform Visa and MasterCard of your intent to surcharge cards at least 30 days before imposing surcharges
You must post signage informing customers of surcharges
Signage must be located at entrances to stores and at the points of sale
Surcharges must be clearly labeled on a receipt, as a line item

Additional restrictions may apply. Contact your credit card processing company before you begin surcharging to inquire about additional requirements.

Assessing the Impact

To accurately assess the impact of surcharging on your business, be sure to carefully track and analyze all variables once you begin surcharging. Look at sales compared to before the surcharge to ensure you aren’t alienating customers and hurting your bottom line unintentionally.

If you begin surcharging and find a strong negative effect, you can reverse the decision and stop surcharging but remember that it can be hard to change a customers’ negative perception. Carefully weigh the pros and cons of surcharging and consider all angles before making your decision.

There's a Fee for That: Pros and Cons of Surcharging Credit Cards