What Is Surcharging? A Complete Guide for Business Owners

If you’re a business owner, you’ve probably noticed that credit card processing fees are eating into your profits. Every time a customer pays with a credit card, your business absorbs a percentage of that sale as a processing fee – costs that can add up quickly.

To offset these fees, some businesses have turned to a practice known as surcharging – a way to pass on some or all of the credit card processing fees to the customer. But what exactly is surcharging? How does it work, and is it the right choice for your business?

Whether you run a small healthcare practice, a nonprofit organization, or a subscription-based service, understanding surcharging can help you make more informed financial decisions. In this article, we’ll break down everything you need to know about surcharging, from its purpose to common myths and real-world examples of businesses successfully implementing it.

What Is Surcharging?

A Simple Definition

Surcharging is when a business adds a small fee to a customer’s bill when they pay with a credit card. This fee helps the business recover the cost of credit card processing, which typically ranges between 1.5% and 3.5% per transaction, depending on the card network and type of card used.

For example, if a customer purchases a $100 service and the credit card processing fee is 3%, the business might add a 3% surcharge, making the total charge $103. The extra $3 helps cover the cost that would otherwise be absorbed by the business.

How Surcharging Differs from Other Pricing Strategies

Surcharging is just one way businesses can manage credit card processing fees. Here are some alternatives:

• Cash Discounts: Instead of adding a surcharge for credit card payments, businesses offer a discount to customers who pay with cash. This encourages cash payments while keeping credit card fees at bay.
• Convenience Fees: These are additional charges applied when a customer uses a specific payment method for added convenience, such as paying online rather than in person.
• Minimum Purchase Amounts: Some businesses require a minimum purchase for credit card payments to ensure that small transactions don’t result in disproportionate processing fees.

While each approach has its benefits, surcharging is particularly useful for businesses looking for a straightforward way to offset costs without discouraging card payments. For a simpler overview of what surcharging is and how it works, see this introductory article: [Credit Card Surcharging 101].

Why Surcharging Exists

The Rise of Credit Card Fees

Credit card processing fees have been a growing concern for businesses for decades. As payment networks and banks look to cover their operating costs, they pass along interchange fees to businesses. These fees can quickly eat into profit margins, especially for small businesses with thin margins.

A Brief History of Surcharging

For many years, businesses had little choice but to absorb credit card fees, but legal battles and regulatory changes eventually led to surcharging becoming a permitted practice in certain regions. In 2013, a major legal settlement between merchants and credit card companies allowed businesses in the U.S. to begin implementing surcharges under specific conditions.

Today, surcharging is legal in many states and countries, provided businesses comply with transparency and disclosure requirements. This means businesses can pass on processing costs to customers while maintaining compliance with industry regulations.

Why More Businesses Are Adopting Surcharging

As payment processing fees continue to rise, more businesses – beyond just retail – are looking at surcharging as a way to remain profitable. Industries such as healthcare, professional services, and even nonprofits have started exploring surcharging to mitigate costs while continuing to offer the convenience of credit card payments.

Debunking Myths About Surcharging

Despite its benefits, surcharging is often misunderstood. Let’s clear up some common misconceptions.

Myth #1: “Surcharging Is Illegal Everywhere”

While surcharging is restricted in some locations, it is legal in many U.S. states and countries. Businesses just need to ensure they follow local regulations, such as disclosing the surcharge amount to customers before they pay.

Myth #2: “Customers Will Refuse to Pay the Extra Fee”

While some customers may not appreciate additional fees, studies show that 85% of consumers accept surcharges without issue, especially if they are informed about why the fee exists. Being transparent about why you’re adding a surcharge – such as to cover processing costs – can help customers understand and accept the charge.

Myth #3: “Only Retail Businesses Use Surcharging”

Surcharging isn’t just for brick-and-mortar retailers. Industries like healthcare, legal services, nonprofits, and subscription-based businesses are leveraging surcharging to reduce costs while still offering credit card payment options.

Myth #4: “Surcharging Is Too Complicated to Implement”

While there are rules to follow, setting up surcharging is easier than many businesses think. With the right payment processing solution, businesses can automate surcharge calculations and ensure compliance with applicable laws.

Surcharging in Practice: Real-World Use Cases

Surcharging is being adopted across various industries, beyond just traditional retail. Here are some examples of how different businesses are benefiting from this practice:

Healthcare Providers

Doctors, dentists, and other healthcare providers are increasingly adding surcharges to credit card payments. Since insurance reimbursements often take time, collecting full payments via credit cards is convenient – but costly. Surcharging helps healthcare businesses reduce their financial burden without sacrificing payment options for patients.

Nonprofit Organizations

Nonprofits rely on donations, and many supporters prefer to donate via credit card. However, processing fees can take a cut from each contribution. Some nonprofits now offer donors the option to cover the transaction fee as a surcharge, ensuring that 100% of the intended donation goes toward the cause.

Subscription-Based Businesses

From software companies to membership programs, subscription-based businesses often process recurring payments via credit cards. Over time, processing fees accumulate. By implementing surcharging, these businesses can minimize their cost burden while maintaining pricing transparency with their customers.

Professional Services

Law firms, consultants, and accounting firms that accept credit card payments are also turning to surcharging. Given that their transactions are often high in value, even small processing fees add up. Surcharging allows them to keep their service rates competitive while recovering processing costs.

The Complexity of Surcharging

Implementing surcharging isn’t as simple as just adding an extra fee to transactions. Businesses must navigate a range of regulatory, legal, and technical requirements to ensure compliance. Different states and countries have varying laws regarding surcharging, including caps on surcharge percentages and mandatory customer disclosures. Additionally, major credit card networks like Visa and Mastercard have their own rules that merchants must adhere to. Companies must also ensure their point-of-sale (POS) systems and online payment gateways can handle surcharge calculations and properly display them to customers. Failure to comply with regulations can lead to penalties, customer dissatisfaction, or even loss of the ability to process credit cards. These complexities make surcharging a challenging but manageable strategy for businesses willing to invest in the right tools and expertise.

How Chargent Can Help

If you’re considering surcharging but don’t know where to start, Chargent can help simplify the process. Through our partnership with InterPayments, a trusted managed surcharge provider, we offer a comprehensive solution:

• Automated surcharge calculation to ensure compliance with regulations.
• Transparent disclosure tools to keep customers informed about any added fees.
• Seamless integration with popular billing and invoicing platforms.
• Expert management of all surcharging compliance requirements by InterPayments.

By leveraging Chargent and InterPayments, businesses can implement surcharging with confidence, ensuring they offset credit card fees while maintaining customer trust and compliance.

Get started today

Surcharging is a powerful tool that helps businesses of all sizes manage credit card processing fees without compromising on payment options. Whether you’re running a healthcare practice, nonprofit, subscription service, or professional firm, surcharging can be a practical way to protect your bottom line.

By understanding the fundamentals of surcharging, debunking common myths, and exploring real-world applications, businesses can make informed decisions about whether surcharging is right for them.

Want to learn more about how to implement surcharging seamlessly? Explore solutions like Chargent that simplify compliance and automation, allowing you to focus on what matters most – growing your business.