Considerations for B2B Credit Card Surcharging

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As a B2B merchant, you just want to get paid easily. Easy payments can mean better customer experiences, more sales, and lower administrative costs. However, payment fees can eat up a large share of your net margins (after all, processing fees are a top 3 cost for the average U.S. merchant). With this in mind, many B2Bs are looking to optimize payment costs and surcharging is one avenue. Let‘s explore.

What is surcharging?

Surcharging is the act of sharing credit card processing fees with your credit-card paying customer. If the customer chooses to pay with a credit card, their payment total will increase by the amount of the credit card processing fees you choose to share with them.

United States and Canadian laws allow surcharging only on credit cards; debit and prepaid cards cannot be surcharged. All credit card types are eligible, including consumer cards and commercial cards (such as P Cards, Virtual Cards, and Single Use Account cards).

Ask us about international cards if you’re interested in more details.

Who’s surcharging and why?

According to the National Association of Credit Management, 63% of B2B merchants desire an easy surcharging solution, but only 15% have one. Those B2B companies include wholesale distributors, manufacturers, and suppliers across many industries.

B2Bs are surcharging to:

  • Increase sales, without the cost: offering multiple payment options is proven to increase sales by up to 30%; you don’t miss out on transactions if a customer has many ways to pay for them. Surcharging solves the dilemma for B2Bs that avoid credit cards due to the cost, even though their customers request the option.
  • Offset rising card usage in an ever-automating, digital payments world: as digital payment and accounts payable automation offerings rise, so does credit card usage. This includes P cards, Virtual cards, and SUA cards. On one hand, credit cards speed payment settlement and guarantee funds. On the other hand, 2.5-3.5% card fees erode 25-35% of a typical B2B’s 10% net profit margin. As such, many B2Bs desire a surcharging program to accept multiple payment types, but without all the costs.

How is surcharging different from convenience fees or service fees?

Surcharging is often mistakenly confused with convenience fees or service charges. Visa/MasterCard and state/federal governments impose very different definitions and rules (with fines!) for improperly passing fees to customers. Here’s a quick summary of each:

  • Service Fees: inapplicable to B2Bs. Only allowed for certain Government and Education entities as defined by Visa and MasterCard. Primarily non- or not-for-profit institutions.
  • Convenience Fees: unhelpful for most B2Bs. They’re allowed in an online payment channel to any payment method but only if online payments are the merchant’s non-customary payment acceptance method. For example, you’re prohibited from imposing convenience fees if the majority of your payments are accepted via phone calls and online invoice payments.
  • Surcharging: helpful to all B2Bs. Allowed for any merchant in any payment channel – but only on those costly credit cards. Since ACH and debit card rates are extremely low, surcharging solves B2B’s pain points on high-cost credit cards.

How much can I surcharge?

The U.S. federal government, each state government, and the card networks have all decreed: a merchant must never profit from a surcharge. This means you can surcharge up to the exact amount of the processing fees you pay for each credit card, but never more.

For most B2B merchants – especially those on Interchange Plus or Tiered processing rate plans – imposing a flat “3%” surcharge is likely non-compliant.

Without a 3rd party surcharging provider, compliant surcharging can be difficult to implement. This is because each of the 350,000+ card types outstanding has a different processing rate depending on the credit card type, the merchant, and where the card is used. For example, a Commercial credit card used in a phone order can have a 0.30 – 0.50% higher rate than a Consumer credit card physically presented at a brick-and-mortar store. Moreover, each card’s rate changes nearly every 6 months; and ~30% of all cards churn out every 12 months. Imposing a 3% flat surcharge can mean you over-surcharge on one card, but under-surcharge on another – all while violating federal, state, and card brand rules.

Did you know?

Debit card fees are federally regulated to be roughly 0.1 to 0.5%, much lower than 2.5-3.5% average credit card fees. ACH fees are normally even lower.

How should I start exploring surcharging?

  • Understand your goals. Usually, it’s to recover high costs. But it can be a revenue boosting opportunity. For B2Bs avoiding credit cards because of the fees, surcharging may allow you to offer credit card payment options and increase sales but without the cost.

Goals to keep in mind:

  • You don’t need to rip-and-replace your processing rate terms to surcharge: many payment providers force you to convert to 3.5% or 4.0% fixed rate processing terms to surcharge. You may surcharge and see little to no credit card fees but your customers are now charged much higher rates than warranted. For Interchange Plus rate merchants, fixed rate terms not only increase your total payments costs via higher debit card rates, but also creates administrative costs in replacing your current payment system. Lastly, over time, you may be able to obtain lower processing rates or better payment features from another provider who doesn’t provide surcharging. Choose a surcharging provider who works with any payment provider and grows with you.
  • How much do you care about surcharging compliance? In the US, 67 jurisdictions govern surcharging. State attorney generals and Visa/MasterCard/American Express are the primary law enforcers. Fines can range from $5,000 to upwards of $25,000 for each violation. If you do care, choose a surcharging provider who 24/7 automates, maintains, and offsets your risk of evolving surcharging laws for you.
  • Think of surcharging as a customer’s option, not an obligation. The best practice is promoting surcharging transparency and offering alternative, lower cost payment options which don’t carry a surcharge. If a customer chooses to pay with a credit card, it’ll be because their desire to float credit is worth more than the fees associated with paying with their specific card.
  • Customize surcharging for your business and customers. Not every payment and customer is equal. For example, you may value COD orders and On Account orders differently. Top customers may not deserve a surcharge. One business line should be surcharged while another shouldn’t.

B2Bs often tailor surcharges on the following:

  • COD vs. On Account: COD orders paid with a credit card might not be painful: some B2Bs avoid surcharging COD orders because those transactions get paid at the full invoiced rate on time at delivery. On Account orders paid with credit cards are very painful; they can reduce your net margins by 25-75%. First, you tie up your cash by extending credit; second, you offer early payment discounts to get paid on time; finally, you’re hit with 2.5-3.5% credit card fees on the discounted invoice. If you don’t offer credit card options, you may miss that On Account sale. Surcharging solves this costly dilemma for almost all B2Bs.
  • Premium customers or order values: many B2Bs have customers who account for large shares of revenues – and surcharging them wouldn’t fly. Alternatively, some B2Bs are willing to forgo fees on lower order values, but not higher ones. Your surcharging provider should allow you to avoid surcharging one customer or order versus another and change the surcharge amount at the click of a button.
  • Business lines: some B2Bs have multiple product lines or subsidiaries. Many choose to surcharge certain ones due to margin issues or competitive reasons. Find a surcharging provider who allows you to begin (and end) surcharging wherever and whenever it makes sense, at the click of a button.

In short, your surcharging provider must be flexible to ensure your goals, circumstances, and customers are top of mind. Carefully evaluate your surcharging provider to ensure they allow customizable and compliant surcharging that doesn’t cost you – or your customers – a lot to engage.