Credit Card Surcharges – Do or Don’t?

As a business owner, you are no doubt aware that accepting credit cards is a key component of doing business. Hardly anyone carries cash or checks anymore, so a business that does not accept cards is likely to lose customers to other businesses that do. However, opting to accept credit cards meaning paying processing fees for those transactions.  In a business with a tight profit margin, like a coffee shop where most transactions are $10 or less, those fees can add up over the course of a month and take a big chunk out of profits.

Many businesses simply accept these fees as a cost of doing business, and customers are unaware as they casually swipe their cards. But a growing number of merchants are frustrated to keep paying credit card processing fees and are looking at ways to pass them onto their customers.

Can they charge a fee for credit card processing? And should they? Here’s the lowdown:

The Legal Perspective

In 2013, the major credit card issuers ruled that merchants can add a surcharge up to 4 percent of the total purchase amount made via credit card (not debit). This surcharge is called a “checkout fee” and was designed to help merchants recoup the costs of processing.

Since then, very few major retailers have opted to add the fees. In addition, it’s become illegal in 10 states: California, Colorado, Connecticut, Florida (although this is in court), Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas).

Further complicating matters is the fact that only Visa and Mastercard currently allow merchants to pass on the fees; American Express and Discover do not. The laws state that surcharges must be applied to all cards accepted or none at all, this means that merchants that wish to charge the “checkout fee” would only be able to accept Visa and Mastercard.

Moreover, businesses must also comply with several other rules. The card issuers must be notified that the merchant will be adding the fees, and the customers must be notified with clear signage at checkout or written in the terms before they sign their cards. The fee must also be a separate line item on the receipt.

The Financial Perspective

The surcharge comes with its own pros and cons, and the benefits need to be weighed against the costs. The benefits are fairly obvious: it can help a merchant’s bottom line and allow merchants to potentially charge lower and more competitive prices.

However, surcharging also comes with several disadvantages. Mainly, a surcharge may drive away customers. Adding the “checkout fee” is not recommended if a merchant’s customer base generally uses credit cards, if it would be easy for the customers to find alternatives that don’t add a surcharge, or if the typical transaction is a large dollar amount where the fees would appear more prominently.

It’s important to view the surcharge from a customer’s perspective and carefully consider if the fees would make up for any loss in revenue.  Surcharges are a great way for merchants to recoup credit card fees, but not at the expense of lost sales.