This is the second part of a two-part guide for merchants who are interested in setting up a surcharging program. In the first part of our guide, we introduced surcharging as a concept, explained the different types of surcharging programs, and outlined key questions to ask when considering if your business should surcharge. If you’re unsure about surcharging and haven’t read the part one, we highly recommend you check it out.
In part one of our guide, we described a surcharge as a fee applied to a customer’s transaction to offset the credit card processing costs. In its most basic form, surcharging passes processing expenses to the customer. From the customer’s perspective this will be a few cents to a couple dollars, depending on the transaction, but can save businesses thousands of dollars over the medium to long term. Surcharges are only applicable for credit card transactions, so merchant’s are unable to add a surcharge to cash, check, or debit card purchases.
You can apply surcharges that target either the brand level or product level, but not both:
Before surcharging, it’s important to consider the impact this will have on your customers. When deciding whether or not to surcharge, merchant’s should look at the industry and their competition, while also gauging the price tolerance of their customers. We took a deeper look at this topic in the first part of this guide.
In the first blog, we also talked about the rules of disclosure that accompany a surcharging program. In addition to transparency requirements, there are other restrictions that merchants need to be aware of before setting up their program. Surcharges are heavily regulated, and the law varies by state and industry.
Surcharge regulations vary by state and change regularly. In some states, anti-surcharge laws are in effect but are actively challenged in the courts, while some are unenforceable as a result of a court decision. Regardless, merchants should always check the laws of their state for the most updated laws and guidelines.
As of 2021, only Colorado, Connecticut, Maine and Massachusetts outlaw surcharges, with the Colorado state legislature recently passing a bill legalizing surcharging. If signed, merchants in Colorado will be able to surcharge starting July 1, 2022. Again, this list is constantly changing, so it’s best to check for yourself to be safe. Keep in mind that these laws only apply to surcharging. Cash discounting is legal in every state, offering an alternative to merchants who still want to address credit card processing fees.
Surcharging caps are in place to prevent merchants from profiting off of surcharges. Merchants can only apply surcharges at their effective rate for credit card transactions or at the surcharge cap, whichever is lower. The cap amount also varies by state, but a very common figure is 4%. Here is an example, to better understand this concept:
Suppose a merchant’s effective rate is 3.2%. As a result, the merchant can charge at most 3.2% since it’s limited by their effective rate, even though it’s below the surcharge cap of 4%.
Now suppose a merchant’s effective rate is 5.6%. In this case, the merchant can charge at most 4% (the surcharge cap), even though their effective rate is higher.
Although the surcharge program process may seem overwhelming, it’s easier than it looks. In a few short steps (and with the help of your payment processor or merchant advocate), you can register, get certified, and start surcharging in around 30 days. Before contacting your payment network and completing forms, decide if you want to surcharge at the brand level or product level. Then, confirm with your provider that your Point-of-Sale (POS) system and payment terminal can support surcharging. After these steps, you’re ready to get started!
Before adding surcharges to your transactions, you’ll need to contact the card brands you plan to surcharge and notify them of your intent at least 30 days in advance. Visa and Mastercard require merchants to register by submitting a form, while American Express doesn’t require notification prior to surcharging. Check the websites of the card brands you intend to surcharge to get a full understanding of their registration process.
Your payment processor will often help you set up a surcharging program, and sometimes will even register you with the card brands. Contact your processor’s support team to see how they can help you during this process. EVO Payments, as an example, has a registration form that will walk you through the steps necessary to implement your surcharging program. The Evolve Payment team also has resources for merchants, and we’re happy to guide you through the process while answering any questions you may have about it.
Depending on if you’re operating a brick & mortar store or ecommerce store, the setup process may vary. This also includes the rules of disclosure we discussed in the first part of this guide. Regardless, you’ll need to display a clear intent to surcharge at the point of entry, point of sale, and receipt. Whether this is in your store or on your website, it’s important to get these notices sorted immediately, as they’re required by law. The major card brands and some payment processors have pre-built and ready to use signage for you on their websites. If you can’t find it, contact their support team.
As long as you follow best practices, rules and regulations, surcharging is an ethical and legal opportunity for you to cut down on processing costs. Although surcharges have been proven effective, they won’t work for everyone. Customers and industries will interact differently with surcharges, so keep in mind the potential negative impact surcharges may have on your customer experience. Follow what your competitors are doing, get advice from advisors and advocates, and listen to your customers. Just because you implement a surcharging program doesn’t mean you have to stick with it, and more often than not, your customers will be forgiving if your program had a negative reception.
If your processing costs are astronomically high and you’re worried about surcharging, examine your interchange rates. See if your payment processor has more affordable pricing plans for your business, and if not, this could be a great opportunity to shop for a new payment processor instead of surcharging. Our support team has negotiated new rates for merchants of all sizes, protecting their business from high fees while preserving their customer experience. If this interests you, don’t hesitate to reach out. We’ll help you compare plans and decide on the best course of action, whether that be transitioning to a new processor or implementing a surcharging plan.