The Surprising Nuances of Surcharging

Hands Of Woman Shopping In Internet Making Instant Payment Transaction

Surcharging is a legal and optimal way for merchants to cover the significant costs associated with credit card acceptance. But, with a multitude of state, federal and industry regulations creating a web of compliance hurdles, major complexity lies just beneath the surface. Maximizing savings and minimizing risk requires expertise, complex algorithmic features like Product-Level Surcharging, and, at best, indemnification guarantees. But the immense cost recovery is worth finding the right solution.

Basic Compliance is Non-Compliance

When looking into what’s needed to build a surcharging program that the major credit card networks will accept, three key rules stand out:

  • Surcharges must be disclosed in multiple locations before the transaction occurs.
  • Surcharges cannot exceed 3% of the cost of the bill or invoice and the merchant must never profit from a surcharge.
  • The customer must have payment options, like debit or ACH, that allow them to avoid the surcharge.

While these major rules lay the foundation for surcharge compliance, they obscure the answers to difficult questions. For example, if you always surcharge 3%, how do you avoid making a profit when the credit card’s swipe fee is less than that? How do you comply with states who limit the surcharge to the unique cost of each of the millions of cards outstanding? They also hide many lesser-known rules that conflict between different card brands, and a web of federal, state, and provincial laws that also come into conflict with the rules.

The card networks have recently clarified that “basic compliance” – following just the major rules – is not compliance at all. With recent enforcement increases, merchants who weren’t following all the rules have seen fines of $15,000 or higher per infraction – which doesn’t even include the fines that state attorney generals levy for non-compliance.

To avoid this risk, merchants have been turning to solutions that mirror what they use for sales tax, and are implementing compliant technology built to contractually prevent and indemnify them against card network AND state government enforcement actions. This indemnification is a critical requirement for protecting their businesses.

Replacing Payment Providers Isn’t Required or Recommended

When looking into surcharge providers, many merchants run into vendors that offer the feature but only if you migrate to their broader payments system. This changes the project scope exponentially, adding new challenges that compound each other.

Suddenly you’re looking at the brand-new cost of a system migration effort and significantly extending the amount of time until you start seeing savings from surcharging. When you rip out your existing payment systems and processes, you’re adding new workflow development and training tasks for your business to handle. But the biggest problem is that your new vendor has a built-in conflict of interest: they make money from fees you pay and make more money when your fees go up. Surcharging is always an add-on feature for these vendors and not their exclusive focus. So, they have no incentive to reduce your fees with better and less risky surcharging functionality – they only make money when your fees go up.

To maximize return on investment, merchants have found it’s better to go with a partner whose sole offering and expertise is surcharging and is not a payment provider. They offer technology that integrates with your existing system and payment provider, avoiding a costly rip-and-replace project. Most importantly, they only make money when your fees go down so they’re incentivized to align with your interests and goals.

Customers Accept Surcharging Done Fairly, Like Product-Level Surcharging

It’s not a surprise to anyone that customers don’t like paying more and can’t stand extra charges that seem to come out of nowhere. But this doesn’t mean they won’t accept a surcharge that is correctly calculated and presented, especially in a B2B transaction. Surcharging is the customer’s choice when the surcharge is fair and clearly communicated, and customers have payment options to avoid it.

Customers need to know about the surcharge well before the transaction, so they’re never caught off guard by it. They also tend to be reasonable if a merchant explains the honest reasons for a surcharge – that it covers only the fee associated with accepting the card, and the alternative is to raise prices for everybody, including people who don’t pay with a card. When given the option to avoid the surcharge, they can choose for themselves if the value of paying with a card is worth the fee. On average, only 20%-30% move to debit or ACH to avoid it.

Surcharging solutions can offer features to make fees even more fair for customers. Precise surcharging ensures merchants charge no more than what is required to cover the cost of accepting credit cards. More fair ways of surcharging include Product-Level surcharging, which changes the surcharge rate based on whether the card is a low-fee value card or a high-fee rewards card. This ensures that low-fee customers aren’t subsidizing high-fee ones. And, if you don’t want surcharging to be all-or-nothing, Selective surcharging lets you only surcharge the payment channels, customer types, or business units you choose.

Questions to ask a Surcharging Provider

To maximize the effectiveness of your surcharge provider, it’s important to know exactly what they offer. Using the following questions as a guide, merchants can make an informed decision on the surcharge solution that is best for their business.

  • Is the provider following all rules and regulations from card networks and federal and state regulators?
  • What does the provider do when rules and regulations conflict with each other?
  • Does the provider keep strict records? Will they step in when a regulator requests an audit?
  • Does the provider offer contractual indemnification against compliance risk for card network rules and federal and state/provincial regulations?
  • Does the provider require you to replace your current payment providers and technology?
  • Does the provider make more money when your fees increase?
  • Will the provider act as a consultant to keep your customers satisfied when the surcharge program rolls out and beyond?
  • Can the provider offer Precise Surcharging, keeping your surcharge rate up to date with your true cost of credit card acceptance?
  • Can the provider offer Selective Surcharging, so you can choose how and when surcharges appear while remaining compliant?
  • Does the provider support Brand-Level and Product-Level surcharging so you can maximize your return while treating customers fairly?

Want to learn more? Talk to an expert.