Ever since merchants won the class-action lawsuit in 2013 filed against Visa and Mastercard, demanding the freedom to recoup the excessive cost of credit card processing fees, the practice of surcharging has expanded in the United States.
Merchants in most states are now able to legally recover these ever-increasing credit card processing fees without repercussion. This comes as much-needed relief to so many merchants with already tight margins, especially when credit card processing fees are expected to consistently rise over the upcoming years.
A surcharge is a small fee that is added at check out to an order paid for by credit card to cover the merchant’s cost of processing that credit card.
As of the publishing of this article in 2019, only six states still prohibit the practice of surcharging. Although, experts predict these states will soon turn over those laws.
Even if your business resides in one of these states, that doesn’t mean surcharging isn’t an option. For instance, online merchants sell goods all over the United States. In certain circumstances, merchants who cannot surcharge in their own state may apply a surcharge on out-of-state purchases.
Surcharging Equipment, POS terminals, and Platforms
There’s no shortage of surcharging options out there, but do your research. Most companies require you to make some big changes to the way you do business. In fact, most require you to use only their hardware, switch processors, or even change your e-commerce platform. These companies may even lock you in with a multi-year contract that you can’t get out of.
With InterPayments, you don’t have to worry about any of that. That’s because InterPayments requires no PCI compliance, and is a completely infrastructure agnostic credit card surcharging solution (requiring no change to any infrastructure) that seamlessly integrates with shopping carts and payment processors.
In other words, the InterPayments software plugin/extension that integrates with the InterPayments SaaS Dynamic Surcharging Solution. InterPayments is NOT a processor. We integrate with your current platform to offer a fully compliant and dynamic surcharging solution that helps merchants recover credit card processing fees.
How Much Can Merchants Recover from Surcharging?
A lot of factors go into calculating exactly how much a business can recover from implementing a surcharge. Much of it is based on your credit card processing volume, interchange rates, and your individual merchant account agreement. That said, several InterPayments case studies indicate the recoverable amount can be substantial.
If you’d like a rough estimate based on your company’s credit card volume, plug your number into the calculator below to see how much you could potentially recover.
Ready to get started? Contact InterPayments to help you navigate the surcharging landscape.
With surcharging, companies can choose to lower the price of their products while still recovering the cost of processing credit cards.
Getting Started Surcharging
After seeing the amount of money you’re leaving on the table, you may be eager to start surcharging now, but current laws and restrictions instituted by card issuers such as Visa and Mastercard make implementing a surcharge somewhat complicated.
Here are the 2-steps required in order to start surcharging:
- Notification: First, you must disclose your intention to surcharge to your merchant providers at least 30-days before implementing a surcharge. This is not an approval process but rather simply a notification.
- Integration: The transaction fee must be added as a separate line item on the customer’s receipt.
Here are the surcharging compliance regulations that you must adhere to:
- You cannot surcharge over 4%, even if the processing fee amounts to a larger percentage.
- You cannot surcharge more on a transaction than the baseline cost of the processing fee; each surcharge is unique to each transaction as well as the credit card type. There are currently more than 600,000 card types active in the United States.
- You cannot make a profit from a surcharge; a flat fee surcharge will often put you out of compliance as the actual processing fee may be less than the flat fee you add on — that delta is profit which is against rules and regulations. This opens you up to hefty fines and other penalties including the possibility of having your right to take credit cards as payment revoked completely.
- If you have a physical location and are surcharging walk-in clients, you must post appropriate notification signage at all entryways and at the point of sale. For online businesses, the disclaimer needs only be on the checkout page.
- The transaction fee must be added as a separate line item on the customer’s receipt.
- You cannot add a surcharge to cash or debit card transactions.
- If a merchant provides a refund for an item and a surcharge was applied to the purchase, the transaction fee must also be refunded.
You might be thinking this sounds like a lot, and you’d be right, which is why merchants prefer to integrate with third-party surcharging specialists such as InterPayments. The InterPayments dynamic surcharging experts walk merchants through the process, submit the 30-day notice on their behalf, and provide not only the ability to compliantly surcharge but the technical assistance, consistent support, and ongoing reporting.
How does surcharging work?
A surcharge, also known as a transaction fee, is a fee that is applied to a credit card transaction to cover the cost that the merchant pays to process that individual credit card transaction.
Customers have a choice.
This fee is passed on to the customer who chooses to use a credit card to make their purchase. At any time during the checkout process, customers have the choice to switch payment methods to either a different credit card that charges a smaller processing fee, paying by cash (in the case of POS), use a debit card or an ACH transfer if available. Thus, customers are not locked into paying this fee.
Why you shouldn’t DIY surcharging.
With over 600,000 different cards being used on a daily basis, it would require superhuman attention to detail to make sure you are charging each customer the correct processing fee to remain compliant without the help of a third-party agent. For instance, the processing fee for a Mastercard Platinum Rewards Card differs from a Mastercard Gold Card, which differs from a Visa Gold Card. In addition to the Mastercard and Visa issued cards, government-issued credit cards are not permitted to be surcharged.
Some businesses try to sweep the board with a flat fee to cover the gambit, such as charging 4% across the board, but this is a risky move because it is not compliant. The moment a business makes a profit from a flat fee surcharge, they open themselves up because they are out of compliance and can incur penalties and fines. As mentioned earlier, Visa and Mastercard could even revoke a company’s privilege to accept credit cards altogether.
If your company charges a flat fee surcharge, be warned.
When a company fails to follow the surcharging rules, customers can easily report the business to the credit card companies by simply calling the number on their card.
Or they can report a business to Mastercard or Visa online:
If Visa or Mastercard determine you to be out of compliance, they can then serve you with hefty fines or revoke your ability to accept credit cards as a form of payment.
This is why it is so important to apply the correct fee of a particular card in association with the individual merchant agreement and interchange rates.
Why would a company want to Surcharge?
The overwhelming benefit of surcharging is that businesses no longer have to bear the burden of high credit card processing fees which increase year after year. By passing the fees on to customers–spreading them out across those who choose to pay by credit card–a merchant can reduce expenses while still allowing customers their choice of payment type. In addition, it allows for price transparency so that customers can see how much each payment option actually costs.
Before the legalization of surcharging, merchants would often “mark up” their retail prices for all consumers by enough to recoup the merchant fees from credit card sales. This is called a “baked-in” fee.
Unfortunately, this not only means higher prices in a competitive economy, but it’s unjust in the sense that “everyone” pays a surcharge—even cash and debit card users. In other words, non-credit-card-users are subsidizing people who choose to pay via credit cards.
In a 2010 study, the Federal Reserve Bank of Boston referred to this as an implicit monetary transfer to credit card users from non-card (or “cash”) users, because with “baked in” fees, cash and debit card users are essentially paying for the points acquired by credit card users with each purchase. The publication goes on to say:
“The typical consumer is largely unaware of the full ramifications of paying for goods and services by credit card. On average, each cash-using household pays $149 to card-using households and each card-using household receives $1,133 from cash users every year. Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general.”
Surcharging would not only balance this unfair monetary transfer, but it is socially responsible for businesses to adopt the practice of surcharging.
Another reason why merchants would want to implement surcharging is the financial boost to a company’s bottom line. InterPayments clients have been able to recover, on average, an increase of 30% of their net margin back to their business.
For example, if your net margin is 10% (meaning for every $100 of revenue your company brings in, you keep $10 as profit) and you implement surcharging that averages 3%, you then increase your net margin to 13%, which is an increase of just over 30% to your overall net margin.
A better way of putting it: you make more money!
Does Surcharging Scare Away Customers?
The “fear of losing clients” is really the main reason why a merchant might be hesitant to start surcharging. There’s really is no other obvious argument; the financial benefits to business and the economy are substantial.
However, the customer is king, and keeping the king happy is key.
This is why InterPayments has done extensive market research and published several surcharging case studies showing that merchants are successfully surcharging without a material change in conversion rate or customer retention.
Companies who are currently surcharging with InterPayments are delighted to find their fear of losing customers was unfounded. They are able to raise their net margins beyond that of their competition without losing customers. The money recovered can be funneled back into their business to increase sales by either adding sales staff, increasing their marketing budget, improving research and development, the possibilities are endless.
Not All Credit Cards Can Be Surcharged
As mentioned above, there are over 600,000 different card types in circulation, each with its own associated base-processing-fee percentage. Some of these include:
- Rewards Cards
- Standard Cards
- Government Issue Cards (Cannot Be Surcharged)
- Prepaid Cards (Cannot Be Surcharged)
- Debit Cards (Cannot Be Surcharged)
Certain Government Issued credit cards cannot be surcharged. Neither can Prepaid cards or debit cards. If you are charging a flat fee surcharge, it is difficult to decipher between each of these off-limits card types. You may be surcharging these restricted cards without even knowing it, immediately putting you out of compliance and opening your business to penalties and fines.
Can I Surcharge Outside the U.S.?
According to Visa, “surcharging remains prohibited outside the U.S., with certain limited exceptions“. Surcharging has been legal in Australia and India for several years. However, the infrastructure for surcharging in these foreign territories is an ambitious undertaking that requires further scrutiny.
Ready to Get Started?
For more information on how you or your organization can begin surcharging with InterPayments, contact us here or call: 602-374-1600
We make surcharging easy for businesses.