The Merchant’s Guide to Surcharging (Part I) | What Is Surcharging?
What Is Surcharging?
Every time one of your customers uses a credit card, their card’s payment network (think Visa, Mastercard, Discover, or American Express) charges a processing fee on the transaction. Typically, the merchant (you) bears the burden of paying for those fees. However, the major card brands offer a method to offset these fees: surcharging.
Merchants have the option to apply surcharges at the brand level or the product level:
Brand level surcharges apply to every card under a specific brand (all Visa cards)
Product level surcharges apply to particular types of cards under a brand (only Visa Signature cards)
Both options are useful but mutually exclusive, meaning that you can only apply a surcharge to one level, not both. Merchants that choose to surcharge must follow certain guidelines, including rules of disclosure.
Rules of Disclosure
The feasibility of surcharging rests heavily on the impact it will have on your customers. The law requires that merchants disclose their intention to surcharge ahead of time and at multiple touchpoints throughout the customer’s time in your store.
Your customers should first encounter a surcharging notice at the point of entry. This can be a sign in front of your store or on your door. Next, they should see a similar notice at the point-of-sale. In a brick-and-mortar store, this will most likely be the cash register or checkout desk. Finally, the customer should see the surcharge dollar amount on their sales receipt. These rules will ensure your surcharging program is ethical and transparent while leaving little to no room for misinterpretation.
Does Surcharging Really Work?
The short answer is yes. But, the more accurate answer is: it depends on the business.
If your industry is a “race to the bottom” where the lowest price wins, then surcharging is likely to hurt more than it helps. This is especially true in B2B industries with corporate contracts. If the difference between winning and losing a contract is the price you can offer, then eating the increased fees from company P-Cards may offset the revenue lost from losing bids.
Ultimately, there’s a tradeoff when surcharging. On the one hand, it can vastly improve the sustainability of your business, depending on the processing fees you have to pay. Merchants can save a lot of money by surcharging, which can sometimes be the difference between a month in the green and a month in the red. On the other hand, surcharging is, at the end of the day, passing business expenses onto your customers.
Surcharging vs. Cash Discounting: What's the Difference?
Both surcharging and cash discounting have the same goal in mind: to offset the processing fees incurred from a customer paying with credit. However, there are a couple of key differences:
Surcharging adds a fee on top of the purchase price if the customer pays with a credit card, while cash discounting reduces (discounts) the price if the customer pays with anything other than a credit card.
Often, surcharging will allow the original price of a product to remain the same, while cash discounting is often accompanied by markups to accommodate the price deduction at the register.
Surcharging is heavily regulated and isn’t legal in every U.S. state, while cash discounting is legal in all 50 U.S. states.
Deciding between surcharging and cash discounting depends on your industry and the attitudes of your customers:
If you rely on competitive prices to stay relevant and keep customers, surcharging is likely the best option. This is because the sticker price remains unchanged, and you maintain price parity with your competitors.
If you depend more on maintaining a high-quality customer experience, cash discounting will prevent an ugly fee from appearing on your sales receipt.
Take Charge of Your Surcharging
Surcharging is a polarizing topic. Critics often claim that it’s unethical and likens it to hidden fees that obscure the price and mislead customers. Hidden fees are unethical; it’s true. However, surcharging is not a hidden fee. Surcharging rules prioritize transparency and disclosure, and customers have to be aware of an upcoming surcharge by law. Another key difference is that a merchant will never “make money” off surcharging because they pass the fee on to the payment processor.
In part II of our surcharging guide, we’ll continue the conversation by taking a deeper dive into surcharging. Topics include looking at the rules and regulations, setting up and operating a surcharging program, and what to expect in the future. If you’re more of a “hands-on” learner, send the Evolve Payment team a message. We’d love to hear from you and answer any questions you may have, surcharging or otherwise!