Navigating credit card processing fees has become a prevalent challenge for businesses today, significantly affecting their profitability. The intricate nature of pricing models, regulatory shifts, and technological advancements amplifies these expenses, necessitating a clear grasp of available fee programs to alleviate the costs tied to credit card payment processing.
To combat these expenses, an increasing number of businesses are turning to surcharging as a strategic avenue. However, questions prevail among merchants: What defines a surcharge, its intended purpose, and the optimal timing for its implementation?
Concerns about limitations on surcharge amounts and the potential benefits and drawbacks further complicate this strategy.
For companies facing hurdles like high processing costs, surcharge fee laws, or PCI guidelines hindering card payment acceptance, this comprehensive guide provides an exhaustive exploration of surcharge fees. It encompasses surcharge fee definitions, types, pre-implementation considerations, a step-by-step implementation guide, and the rationale behind embracing surcharge fees.
A surcharge refers to the additional fee passed on to customers who use credit cards for payment, covering the processing cost imposed on merchants in every credit card transaction, be it in business-to-consumer (B2C) or business-to-business (B2B) transactions.
A surcharge fee is a charge imposed by a merchant to offset the credit card processing fees associated with a customer’s purchase made through a credit card. This fee may be applied universally to all credit card payments or selectively to specific card types or categories.
Implemented as a percentage of the total transaction amount, the surcharge serves as a means for merchants to directly recover their credit card processing costs from cardholders. The surcharge percentage is subject to a cap established by the card brands, although state laws may override these caps.
The disclosure of surcharging fees is typically made in-store and presented as a separate line item in the receipt. Post disclosure about the surcharge fee to the customer, the surcharge fee is added to the total transaction amount at the point of sale, thereby increasing the overall payment obligation for the customer.
A surcharge fee is generally charged as a percentage of the transaction amount and is capped at a certain percentage by the card brand. As described earlier, the surcharge fee offsets the credit card payment processing fee for the merchant by passing on the cost to the customer.
To understand how surcharge fees work let us take an example where a customer buys a television and pays using a Visa credit card at the point of sale.
Transaction Value= $100
Credit card processing fee comprises of Interchange Fee + Assessment + Markup
Let us assume the credit card payment processing fees are as follows.
Credit card payment processing fee for this transaction- $ 3.39
The actual amount received by the merchant is: Sale Price- Credit card payment processing fees.
100- 3.39= $96.61
As this is a Visa credit card the maximum percentage capped by Visa is 3%. So, in this case if the merchant levies 3% surcharge the transaction amount that the customer will pay is.
Payment Due + 3% of payment due
$100+ $3= $103
So, in this case, the amount paid by the customer will be $103 which will help the merchant to offset the credit card payment processing fee of $ 3.39.
Amount received by merchant post credit card surcharge fee implementation.
$103 – $3.39= $ 99.61
The main purpose of surcharge fee is covering the credit card payment processing charges by passing these charges to the customer. This enables organizations to improve their bottom line. Surcharge fee is only applicable in the case of transactions involving credit cards and cannot be used for other modes of payment such as debit cards or checks.
Organizations need to levy a surcharge fee which is a percentage of the payment amount and is capped at 3% by Visa and 4% by Mastercard. Even in cases where the merchant’s average discount rate (payment processing fee) exceeds the capped percentage they cannot charge beyond the capped limit.
The purpose of surcharge fee is to offset the credit card payment processing fee incurred and not to realize more profits.
Some of the most common types of surcharge fees are.
Credit card surcharge fees: These are additional fees that are charged by the merchant based on the transaction amount to offset the credit card payment processing cost. Credit cards have higher payment processing costs as they have higher interchange fees and assessments which makes the bulk of payment processing fees. So, merchants depending on the state’s regulations and laws on surcharge and card brand rules can levy surcharge fees to cover this cost.
Regulation-related surcharge fees: For some industries such as the telecommunications and cable industry, local, state and country-related regulations and service fees can increase the operating cost. In these cases, to offset some amount of these regulations-related costs, organizations in these industries can indirectly offset some of these costs in the form of a surcharge fee that is added to the customer transaction amount.
While both convenience fees and surcharge fees come under the ambit of payment processing, organizations need to realize that both fees are distinct entities, and these terms cannot be used interchangeably.
A convenience fee is an additional amount passed on to the customer for the convenience provided in paying for a service or product through an alternate payment method or channel. These alternate payment methods include paying online or via phone.
For example, movie theaters usually sell tickets physically but when they offer alternate payment methods like booking tickets using online method or phone, they can charge a convenience fee for the additional service offered for which the organization will incur an additional processing fee.
A surcharge fee on the other hand is the additional amount that customers are required to pay for utilizing credit cards as the mode of payment for the product or service. The surcharge fee covers the credit card processing fees that the merchant needs to pay for credit card-based transactions.
Some of the key differences between convenience fees and surcharge fees are.
For both convenience fees as well as surcharge fees organizations need to ensure that both are clearly communicated to the customer prior to them making payment for the product or services.
To start surcharging customers for credit card transactions to cover credit card processing costs, there are several considerations and aspects that merchants need to consider prior to implementation. Based on these factors they can start levying surcharge fees. These include.
First, organizations need to check if surcharging is allowed in the state and country in which they operate from. As of today 48, states in the USA allow surcharges except for Connecticut and Massachusetts where it is prohibited. Businesses that function out of many states can levy surcharge fees only in states where it is allowed.
Merchants need to assess what are the major modes of payment that their customers regularly utilize. If most customers use credit cards, while surcharge fee implementation will improve the bottom line it can impact customer experience. The customers might not appreciate the additional price that they would have to pay, and they might start shopping from other businesses that might not be levying surcharge fees.
Organizations need to gauge if other firms offering similar products and services have implemented surcharge fees as well. If most of these firms are not using surcharge fees, then implementing surcharges can result in loss of customers. Further organizations need to gauge the switching cost for customers. If customers can switch easily then in these cases organizations need to be careful prior to implementation of surcharge fees especially if other similar businesses are not charging the same.
If the average dollar transaction value of customers is medium, they might not be dissatisfied with paying a small surcharge fee. However, if most of your transactions are towards the higher end, that is most of your goods and services have a higher dollar value, then in these cases levying an additional surcharge fee can impact customer satisfaction as here the addition of surcharge fee will impact the prize.
Once organizations decide to implement surcharge fees, they need to follow a series of steps, rules and procedures to ensure compliance with state and card network rules and regulations. These include.
Organizations are required to notify the card networks (Visa, Mastercard) prior to surcharging. Similarly, organizations need to notify the acquiring bank regarding their intent to surcharge 30 days in advance.
Organizations need to decide if they want to surcharge credit cards at the brand level or product level. If they choose a brand level, they need to surcharge all credit cards under that brand. For example, they would need to surcharge all credit cards of Visa at the brand level. The surcharge here cannot be higher than the applicable surcharge cap which in the case of Visa is capped at 3% and 4% for Mastercard.
If organizations were to select product level, then they can decide which credit card (rewards card, cashback card) they wish to surcharge. In this case, the applicable surcharge fee cannot exceed the surcharge cap for that product. Organizations need to choose either brand or product level surcharging and cannot utilize both. Also, organizations need to note that even in cases where the rate of card acceptance exceeds the capped value, they cannot exceed the surcharge percentage beyond the capped value.
Card networks mandate organizations to notify and inform customers about surcharges on credit card purchases before making payments. There needs to be clear signage notifying customers that they will be charged a surcharge fee for credit card transactions both at the store entrance and at the point of sale.
While the sign at the entrance needs to notify customers that they will be charged a surcharge fee, the sign at the POS needs to disclose the percentage they will be charged for the transaction.
For online businesses, the disclosure regarding surcharge fees needs to be present on the first page of the website where they have referenced the card brands.
The surcharge fee needs to be included as a part of the total transaction. Organizations need to clearly disclose the surcharge fee whether online or offline as a separate line item on the receipt. Organizations need to ensure that they include the surcharge amount in the network authorization request and in settlement.
Organizations should leverage payment processors and gateways to implement surcharge fees and automate credit card payment processing. This enables organizations to not rely on manual modification of POS that can be time-consuming and result in issues regarding compliance with state and card network rules and regulations.
Once organizations have implemented surcharge fees, they should endeavor to get customer feedback on this. This is mainly because surcharge fees require a careful balance of improving the bottom line by reducing payment processing costs for merchants while at the same time ensuring customer satisfaction.
By taking customer feedback on the implementation of surcharge fees organizations can gauge what is the ideal surcharge fee.
By passing on the credit card processing costs to customers in the form of a surcharge, organizations can enjoy obvious benefits.
Improvement in the bottom line: By passing on the credit card payment processing fee to the customer, organizations can see a visible improvement in their bottom line due to the reduction of expenses. This leads to a better profit margin and is especially beneficial for businesses that operate with slim margins.
Adoption of alternate payment method by customers: By levying surcharge fees and making customers understand the rationale behind so, many customers might opt for alternate payment methods such as cash, ACH and debit cards. This reduces the payment processing fees because the bulk of payment processing fees for card transactions is dictated by interchange fees and assessment, both of which are lower for debit cards.
Thus, this helps to reduce payment processing fees for the merchant. However, organizations must note that in some cases customers who prefer credit card payment might switch to businesses that do not levy surcharges.
At HighRadius, our B2B payment solutions are intricately crafted to optimize payment processing, providing organizations with a strategic approach to markedly reduce payment processing costs. Enabling organizations to slash card processing fees by as much as 90%, our solution utilizes Surcharge Management, facilitating the calculation and processing of surcharges in accordance with global regulations.
Given the substantial variations in credit card surcharge rules worldwide, our Surcharge Management Fee Configuration offers a flexible solution. This feature allows the configuration of rules based on the merchant’s preferences and global requirements. Empowering merchants to validate card payment requests in real time for surcharge applicability, our solution includes an inbuilt Surcharge Calculator to determine the applicable surcharge accurately.
Through our Surcharge Fee Analysis solutions, organizations gain access to comprehensive reports and dashboards presenting transactional-level surcharge data. This analytical tool aids in identifying valuable cost-saving opportunities. HighRadius’ B2B payment solutions offer organizations an end-to-end capability to reduce payment processing costs further by leveraging our Level 2 and Level 3 processing capabilities. These capabilities not only minimize interchange fees but also contribute to substantial cost savings. The platform’s inclusion of detailed invoice information for each payment transaction request further contributes to the reduction of card processing costs and the achievement of interchange fee savings, ultimately resulting in a notable decrease in the overall processing cost.
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