Any time a merchant or company accepts a credit card, they must pay a percentage of the total transaction to the associated credit card company, referred to as a credit card processing fee.
“A cost of doing business,” some say. But in a recent poll, 91% of merchants said processing fees have risen in the last 5 years and that they are paying much more than they planned—due in part to consumers opting to use their rewards cards, which are producing higher and higher fees for merchants to process.
For margin-sensitive companies, this is particularly alarming. The good news is, there’s now something companies can do about it.
In 2013, a federal court settlement ruled that merchants in the United States had the right to surcharge, meaning they could pass credit card processing fees onto credit card users, and since then it has been legalized at the state level in 44 states.
Should your business get in on the action? If you are having trouble deciding, here are 7 benefits of implementing a credit card surcharge fee.
1) Surcharging Increases Net Margins by up to 30%
If you approached any business owner or merchant and told them that you had a magic wand that would increase their net margin in a completely legal way without making any cuts, a conservative guess would say that 99% of them would be eager to hear more. While no such wand exists, credit card surcharging is the next best thing.
For many small-to-medium sized merchants, profit margins are the best measure of the overall health and profitability of a business. Two ways to increase your net margin is a) to cut costs or b) increase revenue. Usually this means increasing sales, but if that was so easy, no company would be struggling financially.
Implementing a credit card surcharging solution can raise a company’s net margin up to 30% without changing anything else about current day-to-day operations.
To find out just how much money you could recover by surcharging, plug in your merchant’s information into this handy calculator.
2) Surcharging Enables Merchants to Lower Prices and Show up on Search Engines
If you have ever searched for a product online and filtered by “low to high price” or even added the word “cheapest” to the end of your query, you aren’t alone. In a survey of American’s online consumer habits, a whopping 80 percent of people responded that price was important to them, making it the most important factor for online shoppers. That means merchants that can price their products down have an inherent advantage over their competitors because when consumers filter by price the merchant with lower prices will get more online traffic and conversions.
One of the best ways to offer lower prices than a competitor is by surcharging to recover credit card processing fees. A majority of merchants who don’t surcharge instead fix the price of credit card processing fees into the price of the product, causing the price to be needlessly higher (essentially this means even cash-paying customers pay a credit card processing fee).
Merchants that do apply a surcharge have the freedom to offer the product at a lower price with no loss to net profits.
To illustrate that, let’s look at two hypothetical online car part merchants that sell the same tire worth $100. Car Part Merchant #2 doesn’t utilize credit card surcharging. Instead, he adds 4% to the price of the tire to cover the processing fee, making the cost $104 for all customers no matter how they pay.
Car Part Merchant #1 does apply a credit card surcharge which means he can keep his tires priced at $100 and implement SurchX’s sophisticated surcharging system to figure the exact right surcharge to apply to the sale so that nothing is lost to processing fees. The surcharge is displayed on the customer’s receipt as an additional line item labeled “Transaction Fee.”
Additionally, the tires sold by Car Part Merchant #1 are listed on Google as costing $100, undercutting the competition.
Data shows that the most important thing for consumers when online shopping is price, giving Cart Par Merchant #1 a huge advantage over Car Part Merchant #2 in terms of both traffic and sales.
3) Surcharging Enables Merchants to Compete with the Big Guys
Larger online marketplaces currently dominate the eCommerce market with over 49.1% of all online retail dollars going to bigger companies who are able to negotiate lower credit card processing fees, leaving them with greater net margins so they can provide lower prices. A leading 64% of Americans say the reason they shop online is for lower prices.
In a recent poll, 81% of shoppers said they would be willing to switch from their preferred online store if the prices were comparable or lower.
With credit card surcharging, merchants would be able to lower their prices in order to better compete with larger merchants.
4) Surcharging is Fairer to Non-Credit Card Paying Customers
When merchants bake credit card processing fees into the price of a product, cash and debit card paying customers end up covering the cost of fees produced by credit card users even though they aren’t responsible for it. That means the fees incurred by credit card paying customers are essentially being subsidized by everyone else.
Put another way, cash and debit card users are paying for the rewards granted to those who use reweds credit cards.
A 2010 study conducted by the Federal Reserve Bank of Boston showed that the average credit-card paying household receives $1,133 per year from the average cash-paying household. A section of the research document states,
“What most consumers do not know is that their decision to pay by credit card involves merchant fees, retail price increases, a nontrivial transfer of income from cash to card payers, and consequently a transfer from low-income to high-income consumers.”
Wealthier Americans use rewards cards far more than both middle and lower-class Americans do, and the credit cards that carry the highest processing fees are rewards cards. Without surcharging, merchants are settled with the responsibility of paying for their customer’s rewards, and when companies bake in the fee to cover credit card processing fees, the burden ultimately falls on cash and debit card payers.
Credit card surcharging doesn’t only help merchants. It is the fairest way to deal with credit card processing fees for American consumers.
5) Surcharging Enables Struggling Merchants to Avoid Layoffs
No boss likes layoffs. They are devastating not only to employees and their families but to moral and a company’s cultural atmosphere.
Businesses are about making money, and sometimes the only way to do that is to cut down on staff and expenses. Some businesses choose to eliminate benefits like bonuses or overtime instead, but for merchants that are really struggling, layoffs are not always avoidable.
Or are they? Credit card surcharging provides merchants with the opportunity to increase their net profit margin. With employees feeling secure in their positions, morale and productivity can surge higher than ever.
6) Surcharging Gives Customers a Choice
According to research done by Insights, American culture is predicated on individualism and the concept of choice. The American people crave options and hate being restricted. Even American children as young as 4-years old do exponentially better on puzzles when they think they chose the puzzle versus when they think their mom chose it for them.
It’s important for businesses to know their customers, and American customers love having options. That’s why merchants should give their customers the choice of paying the credit card processing fee instead of just baking it into the cost of the good.
When merchants apply a surcharge to credit card transactions, customers aren’t forced to accept the fee. They can choose to bypass the fee by using another payment method. They can use debit cards, cash, AHCA, PayPal, or any other non-credit card payment method to avoid the fee. Some customers will decide to use credit cards anyway for their reward points or for the convenience. That’s fine. The point is, they have the choice.
When merchants just raise the price of their products to cover the processing fees, that choice is taken away. There is no longer an option for customers to avoid paying extra.
7) Credit Card Processing Fees Are Crippling to Margin-Sensitive Companies
Over the last 20 years, credit card processing fees applied by the Mount Rushmore of American Credit Card companies—Visa, Mastercard, Discover Card, and American Express—have risen steadily and are predicted to continue in an upward trajectory. High rewards cards are becoming more elaborate with a multitude of benefits for the card-user, enticing them to use credit cards for every-day purchases and creating higher fees for merchants.
Those fees are slowly crippling businesses with tight margins, but despite a myriad of lawsuits and complaints by merchants, the credit card companies don’t appear to be slowing down the rise of their fee rates.
With customers absorbing the direct burden of the fees instead of the merchant, businesses can increase their net margins and reinvest that money back into their company.
Credit Card Processing Fees Are One of the Few “Costs” That Merchants Can Control.
A variety of different tests and data from both the United States and Australia has shown the surcharge fees don’t drive customers away. So if there is no material effect on conversion rates, why shouldn’t a merchant be surcharging? The money recouped could be the difference between laying off an employee and providing raises. The money could go towards marketing, drumming up even more business, or towards much-needed equipment. The possibilities are endless.
Think about it: if you could recover your credit card processing fees, what would you use that extra money for?