Variable vs. Fixed Rate Surcharging

woman sitting on a couch with a laptop, holding a credit card near her face, looking intently at her screen

Most merchants exploring surcharging are unaware that variable-rate surcharging is an option. It’s understandable. Credit card surcharging regulations are numerous and complex. In short, two key rules determine much you can surcharge: 1) you can never profit from a credit card surcharge; 2) 4% is the maximum surcharge rate. How do you comply with those rules AND maximize recovery of credit card processing fees? In this article, we’ll discuss how variable-rate surcharging accomplishes that goal. We’ll outline the differences between fixed-rate and variable-rate surcharging and offer guidance on which type is best for your business and customers. 

What are fixed rate and variable rate surcharging?

Surcharging is the act of sharing all or part of your credit card processing fees with your credit-card paying customer. Many assume that surcharging is as easy as slapping on a fixed percent increase to your customer’s order amount. Unfortunately, it’s not that simple. First, compliance is paramount. At least 67 jurisdictions govern U.S. surcharging rules, including the states, federal government, and card brands. In short, two key rules determine much you can surcharge: 1) you can never profit from a credit card surcharge; 2) 4% is the maximum surcharge rate. Second, you should choose a surcharge strategy that recovers the most fees and ensures a smooth customer journey. Variable-rate surcharging is compliant and maximizes fee recovery for some merchants.

Fixed vs. Variable surcharging 

fixed-rate surcharge seems pretty straightforward – at first. You apply a static, predetermined percentage, such as 1.5% or 4%, to all credit card payments. This is the only option for merchants on fixed-rate processing terms (i.e. all cards are charged the same rate).

What if you have interchange plus processing terms? Does the flat rate apply to all credit cards? How do you maximize surcharge recoveries given every card has a different fee? Here, a fixed rate surcharge is imprecise; it’s like using a butcher knife to perform surgery. It will not recover most fees for interchange-plus merchants. You need something more precise.

variable-rate surcharge is the scalpel, or precise tool, you need if you’re on interchange plus terms. Variable-rate surcharging is exactly what it sounds like. The surcharge amount varies according to each card’s unique fee. This works best for interchange-plus merchants. It raises your fee recovery potential towards 100% because you could surcharge each card’s exact fee.

Two Types of Variable Rate Surcharging 

Variable rate surcharging has two flavors: flat percentage and dynamic. 

Flat percentage surcharging is quasi-variable and not the same as fixed-rate surcharging. The difference: the flat percentage is an average of your actual credit card fees over a 1- or 12-month period. That average is then applied across every credit card. You can reset the flat percentage rate however often you like (every day, month, quarter, etc.). 

Dynamic surcharging is 100% variable. You surcharge the exact rate for every credit card. For example, a MasterCard consumer card payer pays her rate on her specific card. The Visa corporate card user pays the exact rate for their card. The difference between cards can be as much as 0.50% or more! In this example, dynamic surcharging would recover an additional $5,000 of savings for every $1 million of credit card volume.  

What are the benefits of variable rate surcharging?

Regardless of whether you choose Flat Percentage or Dynamic surcharging, variable surcharging provides several valuable benefits. 

  1. Highest fee recovery. It is the most accurate surcharging method which has up to 100% fee recovery. 
  2. Customers treated more equally. Your customer is charged the exact cost of her credit card. Higher card fee customers do not subsidize lower card fee customers. This ensures low base prices for all customers. 
  3. Lowest cost to implement. Keep your existing processing providers and maintain your low rates without ripping-and-replacing them for a fixed rate processor. 
  4. Your payment provider isn’t egregiously profiting off you or your customers. Fixed rate surcharging providers set your rates well above your actual fees for accepting credit cards. For example: assume your interchange plus rates average 2.25%. A payment provider who offers you a 3.5% fixed rate surcharging program is doubly profiting. First, they’re marking up your very low debit card rates (which are capped by the federal government roughly between 0.1% – 0.5%) to 3.5%. You’re forced to pay a lot more on debit cards. Second, they force your customer to pay a 3.5% fee on credit cards. This is well above your 2.25% cost to accept cards. They’re taking the difference and making your customer pay.  

Why should I adopt variable surcharging? 

Fixed-rate surcharging applies best for merchants on fixed-rate processing terms and those who have a high share of in-person, physical payments. It may be easier to communicate the surcharge amount to customers when it’s the same fixed rate on every card. For merchants on fixed-rate terms, it recovers the maximum amount. 

Variable surcharging is best for merchants on interchange plus processing rates and those with a high share of card-not-present, phone orders, or online payments. Card-not-present payments have higher costs and variability than physical terminal payments. Variable recovers the most fees while treating all customers more fairly. 

Dynamic surcharging seems hard…how do I do it? 

Fortunately, InterPayments automates your surcharging and takes surcharging compliance and liability off your plate. Our technology auto

Fortunately, InterPayments’ automates both variable and fixed-rate surcharging using your existing payment vendors. We also guarantee your surcharging compliance. 

Our technology works just like sales taxes. We calculate your customized, complaint surcharge on each transaction before the cardholder authorizes it. It works like this. Our API sits behind the scenes wherever you accept payments with your current payment provider. We set up your payment page to automatically send us just 3 pieces of information. We instantly return the exact compliant surcharge amount for each card type and location (under 100 milliseconds). Your customer then chooses whether to pay the surcharge or switch to another payment method that avoids a surcharge – and is cheaper for you. Finally, the transaction completes like any other. 

In addition, InterPayments puts you in charge of customizing when, where, who, and how you surcharge – at the click of a button. Our mission is to help you create a seamless customer payment journey while recovering substantial fees for your business. 

Did you know?

Interchange Plus merchants pay unique fees on each card type

There are 350k+ card types outstanding. Each unique card has different fees. For example, a MasterCard consumer card has a lower rate than a Visa corporate card. That difference can be as much as 0.50%!

Fees change frequently…

There are over 1,000 different fees on different card types. Those fees change at least two times per year. They’re jointly set by the card networks and banks. New credit card types are constantly issued throughout the year by the American Bankers Association.