When it comes to shopping, one of the easiest and most convenient ways to pay is with a credit card. In fact, in 2022, the U.S. exceeded $1 trillion spent in online retail. This is a 21% increase year-over-year. However, without surcharging, your business may have to cover a processing fee for each transaction. Knowing what credit card surcharging is, how to use it, and whether it’s right for your business will go a long way to improving customer experience and maximizing your margins.

What is credit card surcharging?

When businesses accept credit cards as payment, the credit card company charges a small fee to process that payment. Rather than covering the cost on their own, merchants can add a surcharge fee to the transaction.

Credit card surcharging allows customers to split or completely cover the merchant’s credit card processing fee. Surcharging will alleviate the business’s responsibility to pay the processing fee, maximizing returns. However, it will also increase the overall price for customers, which could cause discontent.

Rules and regulations around surcharging

Businesses that use credit card surcharging must follow various rules that have been put in place to protect the consumer. State and federal governing bodies oversee businesses to ensure they meet appropriate credit card surcharging laws. Credit card networks also employ specific rules of use that companies must follow.

Rules and regulations around surcharging may vary depending on the state and card network, with some states banning the practice entirely. Some of the more common rules include:

  • Merchants cannot use surcharging for profit.
  • Merchants must inform shoppers of the surcharge before it takes place.
  • Merchants must abide by surcharge limits set by state and card networks.
  • Merchants must allow shoppers to cancel their transactions if they are unwilling to pay the surcharge fee.
  • All surcharge fees must remain the same regardless of the shopper’s card network.
  • Some states have strict surcharging restrictions, including California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas.

Pros and cons of surcharging

Incorporating surcharging into your business may seem like an obvious choice. However, there are disadvantages just as there are advantages. Considering both sides of surcharging before using it in your stores is a good idea. Some of the benefits of credit card surcharging include:

  • Higher margins: The main advantage of surcharging is that you can recover costs from processing credit cards. When customers accept the responsibility of paying the processing fee, it reduces business expenses and adds to your profits.
  • Flexibility: Businesses that use surcharging can lower product costs as they won’t need to account for additional fees. 
  • Convenience: Businesses unwilling to pay credit card processing fees can implement surcharging to provide more payment options to customers.

Additionally, there are drawbacks to using surcharging fees. Some of the main disadvantages include:

  • Complexity: With numerous rules and regulations at various levels, implementing a surcharging system to your pricing structure may be complicated. Violations of credit card surcharge laws have harsh punishments that will damage your bottom line and reputation.
  • Customer dissatisfaction: When a shopper selects an item, they often just expect to pay the listed price plus the tax. Being informed that they’ll have to pay an extra fee to use their payment method of choice can be unpleasant and lead them to cancel the transaction or choose alternative stores in the future.
  • Administrative burden: Implementing a surcharge fee requires extra work. Businesses must train employees on when and how to use surcharging. Human error can also lead to miscalculations, failure to add surcharge fees, or forgetting to alert customers about the additional cost.

How to calculate surcharging

To calculate a surcharge fee, the merchant needs to know the cost of the product and the surcharge rate. For example, if the item costs $50 and the surcharge rate is 3%, you could calculate the final transaction cost like this:

  • Step 1: Product cost X surcharge rate (50 X 0.03 = 1.50)
  • Step 2: Sum + product cost (1.50 + 50 = 51.50)

In this example, the total the merchant would charge on the customer’s credit card is $51.50.

Depending on the specific rules and regulations of the region of your business, you may need to add the sales tax to the product before the surcharge fee or to the total sum of the product and the fee. To reduce the chance of human error when adding a surcharge fee, businesses can use a payment solution like Chargent to automate calculations and verify accuracy.

Alternatives to credit card surcharging

Not every business implements surcharging fees to cover their credit card processing fees. Some companies employ other strategies to offset the fees and keep customers happy. Some of these tactics include:

  • Cover the expense: The most obvious but also most expensive choice is for the business to cover the processing fee expense completely. This will reduce profits but may increase customer satisfaction and loyalty.
  • Increase prices: By increasing product prices across the board, merchants can eliminate the effect of a processing fee and gain more profits when customers use other payment methods. However, raising prices may make the business less competitive. 
  • Cash discounts: Rather than implementing a surcharge fee, consider offering cash discounts to customers, encouraging them to use a payment method that doesn’t incur a credit card processing fee. Keep in mind that some customers may view cash discounts as unfair or inconvenient if they don’t pay in cash.
  • Minimum purchase requirement: If merchants choose to cover the cost of the credit card processing fee, they can maximize their sales by implementing a minimum purchase requirement. In this strategy, customers cannot use their credit cards unless they spend over a certain amount.
  • Convenience fees: Convenience fees are similar to surcharge fees as they both offset credit card processing fees. However, unlike surcharge fees, which may change depending on the cost of the product, convenience fees are a fixed amount a customer pays for the benefit of using certain payment methods.

What to consider when thinking about implementing surcharging

When you decide whether to implement a surcharge fee, there are various factors to consider.

First, make sure that your state allows surcharging. Then, consider seeking legal counsel so you clearly understand what the federal and state governing bodies expect of you. Confirm you can meet all regulations and rules, including those of the card networks you deal with. When taking payments in Salesforce, Chargent helps you lower the scope of your PCI compliance.  Chargent has partnered with the surcharging managed service provider InterPayments, who handles all your surcharging compliance requirements.

Weigh the pros and cons of implementing a surcharge fee to your payment system. Determine if the fee will drive off customers, if there are possible alternatives, and how large of an impact paying the processing fee out of pocket would have. You should also evaluate if your business is better suited for alternative strategies, such as selective surcharging, which allows businesses to choose which customer segments to surcharge.

Adding surcharging is one way to make the payment process more convenient for your business. If you’re looking for other ways to streamline your business’s payment process and improve your profitability, get started with Chargent today!

FAQs

Can businesses surcharge debit cards?

Businesses that add surcharging fees can do so for credit card transactions. However, even if a merchant processes a debit card as a credit card without using a PIN, the merchant cannot add a surcharge fee.

Is surcharging legal in every state?

Surcharging rules and regulations vary by state and card network. In certain states, it is illegal to implement surcharging into your business. As surcharging rules and regulations are subject to change, it’s essential to seek legal counsel to fully understand the policies and procedures required for your business. 

Do surcharge fees need to be refunded with refunded purchases?

Yes, most major card networks and legal requirements require merchants to refund the full cost of a transaction, including surcharges. Businesses that don’t comply with these rules will face strict consequences.