Many eCommerce businesses in the US are struggling. They have been for a while, and for a multitude of reasons. We’re going to discuss one reason in this article: high credit card processing fees.
Credit card processing fees are on the rise. Companies are acutely aware of this and often must raise prices to account for the loss in revenue.
Consumer’s Want Low Prices
Consumers are increasingly price conscious. They have the means to shop around for better offers before making a purchase. This puts pressure on businesses to offer the lowest price possible while still remaining profitable.
To keep prices competitive, a growing number of companies have started surcharging (applying a small fee to payments done by credit card). The fee applied is usually between 1% and 4% of the final transaction amount.
Most people might balk when they hear this. “Ack, not another fee!” However, many experts see surcharging as a necessary evolution of our economy. This is because the cost for businesses to process credit cards has risen more than merchants have anticipated.
Why Credit Card Processing Fees are Rising
One of the main reasons CC processing fees are going up is because premium rewards cards are becoming more accessible. CC companies like Visa and Mastercard have no problem offsetting the massive cost of cash back rewards and travel points to businesses who accept credit cards.
Most people don’t know that if you buy a dress at your favorite retailer with a cash back rewards card, it’s the retailer who pays a fee for your cash back rewards.
CC Companies Are Competing to Provide the Best Rewards Cards
Card companies are constantly trying to offer the best rewards credit cards with the best cost savings to the cardholder. This is great for shoppers but when merchants are the ones paying the bill, processing fees have gone unchecked.
These rising fees are having an adverse effect on our already shaky economy. Businesses are struggling to boost profits. Especially online retailers who are often charged a higher than usual CC processing fee.
Applying a surcharge to recover credit card processing fees is one way businesses are able to mitigate the impact on their business. But some companies are hesitant, fearing they’ll lose customers if they surcharge. This case study gives evidence customers won’t abandon a business because of a surcharge.
Surprising Support from Consumers
Online merchants are not the only ones feeling the pain. Restaurants are taking action by either surcharging credit card payments or offering cash discounts.
In a recent Facebook post, a popular southern seafood restaurant, Uncle T’s Oyster Bar, explains how credit card processing fees were hurting his business and how eliminating those fees has helped him stay in business without having to raise prices.
“To go from paying the amount of credit card fees we were paying each month, to not having any Credit Cards fees at all, is an unbelievable cost savings for our small business”.
Our goal is to provide the same great products across the board and not increase our menu prices. I personally do not believe it’s fair to increase our menu pricing and have our cash paying customers pay for the Credit Card Processing fees…If you are using a credit/debit card, there is a 4% charge added to your bill for Credit Card Processing. Uncle T’s Oyster Bar does not retain any of these fees.”
The response from Uncle T’s followers indicates that customers understand and are willing to support their favorite brands when it comes to surcharging. One commenter said,
“I’m so happy you responded to this issue. I spoke with a small business owner in Scott and she said it had become impossible for her to absorb the fees any more and to raise prices would send her customers elsewhere. She was having problems competing with box store/big business prices as they could afford to absorb the fees. Stay strong! We will be there soon to eat!”
The response to Uncle T’s post
“We back you 100% and you have the best oysters we have ever tasted. You will see my family, friends and I support you and every other business in this area. Thank you!!”
“Uncle T’s is and always will be our favorite place to eat. Always great food, great service and a wonderful atmosphere. As a previous business owner myself I completely stand behind their business decision. Especially after paying the amount of credit card fees I had when in business. If you don’t want to pay the few extra dollars then pay cash for your meal.”
“Good food, good restaurant and let me tell you… wonderful people!!! Don’t complain about something that barely shows on your bill! This is a local business deserving of its community’s support!!! I support you … keep doing a great job!!! I’ll keep enjoying what you do! Good food, good fun, good people!❤️🙏🏻😘”
“Don’t want to pay the fee….bring cash….it’s that simple!! I’ll pay the fee cause most all of the time I don’t have cash!! Proud to support my local small businesses!!”
“We will continue to support you!! Our friends, hometown businesses and local restaurants are treasures to Scott!”
“We dined at Uncle T’s last night. And, YES, we HAPPILY paid the 4% non-cash charge. Yes, we are supporting our friends, fellow business I’m so happy you responded to this issue. I spoke with a small business owner in Scott and she said it had become impossible for her to absorb the fees any more and to raise prices would send her customers elsewhere. She was having problems competing with box store/big business prices as they could afford to absorb the fees. Stay strong! We will be there soon to eat!”
Uncle T’s is Doing It Right…And Wrong
Uncle T’s Oyster Bar did a great job informing his customers of the surcharge and explaining the reason for it. It’s wonderful to see that Uncle T’s did not lose customers due to the surcharge.
Unfortunately, Uncle T’s may be doing it wrong by surcharging a flat rate of 4% while also surcharging debit cards.
Don’t Flat Fee Surcharge
Calculating the correct surcharge on any given transaction can be complicated due to a myriad of federal, state, and card issuer regulations. There are over 60 jurisdictions governing the rules and regulations of Surcharging. And if you don’t get it right, you can be slapped with heavy fines, or worse, lose your ability to accept credit cards altogether.
However, be wary of resorting to a flat-fee surcharge.
One of the many surcharging regulations states that no business can make a profit off of surcharging. When a flat-fee is involved, businesses are more likely than not to accidentally accumulate a profit from surcharging, which puts them out of compliance, big time. It’s only a matter of time before CC companies start cracking down on merchants who don’t follow the rules.
You Cannot Surcharge a Debit Card
The other reason Uncle T’s might be out of compliance is, according to his statement, he also adds a surcharge to debit cards. In accordance with Visa and Mastercard’s compliance rules, debit cards are exempt from being surcharged. Adding a surcharge to a debit card puts you out of compliance and therefore at risk of losing your ability to process credit cards altogether.
Per Visa: The ability to surcharge only applies to credit card purchases. U.S. merchants cannot surcharge debit card or prepaid card purchases.
Surcharge the Right Way
Without passing credit card processing fees onto the customer, it can be difficult for a company to turn a profit. If you’re looking to implement a surcharge, you should consider if you have the kind of customer who doesn’t mind paying a little extra to use their credit card as payment. Customers who want their CC rewards, usually don’t.
If you’re worried about losing customers, don’t. We have done extensive testing to ensure business won’t lose customers due to surcharging. Even if there is a small drop in conversions, the ROI more than makes up for it. Check out our latest case study.
- Only credit cards can be legally surcharged. Debit cards, prepared cards, and certain government-issued cards cannot be surcharged.
- A surcharge must be between 1% and 4% of the total transaction value before taxes and other charges.
- A surcharge must be displayed as a separate line item on the customer’s receipt, usually labeled a transaction fee.
- You must give CC companies 30 days’ notice before you implement the surcharge:
- You must post appropriate notice inside your store or on your website.
There are many more regulations involved with surcharging, so it may be intimidating to get started. We walk our clients through all the legalities and will submit all the paperwork on your behalf. On top of that, we guarantee 100% compliance at all times.
What is the Maximum Surcharge Allowed?
You can apply a surcharge fee up to 4%. However, if your processing effective rate (the total average percentage you pay to process a single credit card) is above 4%, you are not allowed to charge anything above that. This is another reason why flat-fees are often out of compliance with card companies’ regulations.
The average effective rate for credit card processing varies by provider. In general, merchant processors will likely offer you an effective rate somewhere between 2% to 3%.
You also cannot apply a higher surcharge for one card over another—ie: surcharging more for Amex than Visa.
Should Your Company Start Surcharging?
It all depends on your business, average price point, and clientele. We make the process as easy as possible so there is no disruption to your day-to-day operations. Our product integrates seamlessly with your current eCommerce platform and swiftly enables you to pass credit card processing fees on to your customers with no hassle.
With no up-front cost, Surcharging with SurchX increases net margins by an average of 30%. We recover every dollar you are legally entitled to while keeping you 100% compliant with the more than 60 regulatory bodies that govern surcharging in the U.S.
If you’re interested in surcharging but aren’t ready to commit, we can walk you through a test phase. Try us for a week and if you are not happy with the results, you can simply turn it off.