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March 13, 2019

Passing on the Cost of Accepting Credit Cards to Customers

We get a lot of questions about whether merchants should pass on credit card processing fees to customers. Is it legal? How much should I charge? Should I charge at all?

We wish that there was one single answer that would fit every Chosen Payments merchant. But the truth is, this decision is complicated and merchants must make choices based on their individual businesses. In many cases, passing charges on just doesn’t sit well with customers. If your favorite local grocery store implemented a surcharge for using a credit card, would you continue to shop there?

Here are some general guidelines to help make your decision a sound one.

Surcharge or Discount?

In the past, the credit card brands such as American Express, Visa, and MasterCard specifically prohibited charging a customer extra for using their branded card. It was a logical business decision: customers who have to decide between writing a check for free or paying surcharge for a credit card will leave the Visa card in their wallets, and that’s not good for Visa. Additionally, in many states it was against the law because surcharging was the same as adding a “convenience fee” or charging a customer an additional fee simply because he or she chose a convenient way to pay. Only eleven states still carry laws on their books (scroll to see list below) that prohibit charging a customer more for using a credit card. That isn’t to say that you won’t find merchants doing it in these states, but often they do it because they are not educated on the law.

As an alternative, all states allow merchants to offer a cash discount even if the customer is using a debit card, because the cost of processing a debit card transaction is much less than a credit card transaction. However, in general, consumers don’t like to see two different prices displayed such as “Cash Price” in one place and “Credit Price” in another.

While the ban on surcharging has largely been lifted by the card brands and state laws, some credit card processors prohibit their merchants from surcharging. Why? So they can make more money, of course.

The bottom line is that in most states you can charge either a surcharge or offer a cash discount, as long as your processor allows it. Just beware of the bad feelings it might create in your customer if you choose to do so.

Surcharging Could Cost You Big Time

Operating a business entails many expenses that are uncontrollable and unpredictable, such as electricity, fuel, and janitorial supplies. It costs money to accept and process credit cards, so why not just price your merchandise or services with the expectation that they will be purchased with a credit card? Using this technique, you can offer a cash discount without diminishing your intended profit or, better yet, just throw a little more profit in your pocket when someone pays cash.

Customers who realize they are penalized for trying to earn rewards on their Capital One Visa will likely find a merchant who doesn’t treat them badly for trying to earn rewards. And yes, customers will feel that they were treated badly when they have to pay more while earning points. Let’s say a customer makes a $100 purchase and it costs you 4% of the transaction, or $4, to process the card. If your gross profit was $30, it is now reduced to $26. Your customer vows to never return and instead goes to another merchant who keeps the $26 profit and enjoys eleven more sales in the same year. That merchant now has an annual profit increase of $286 that didn’t exist before, and you will likely never see it again.

Weighing Risk vs. Processing Fees

There is an inherent risk in playing with your pricing, whether it is raising prices, offering cash discounts, or charging a surcharge for using a credit card. While most merchants fear implementing price increases out of fear of losing a customer, when they implement a surcharge for credit card transactions, they are in fact increasing that same customer’s price at the cash register.

We don’t recommend it. Instead, we recommend that you set your pricing assuming that everyone who purchases products or services from you will use a credit card for their transaction. If you think you are paying too much for processing credit cards, shop around and get a comparison quote from another credit card processor before you risk losing a customer forever. If you are not currently a Chosen Payments merchant, contact us for a free rate analysis, and make sure you are paying the lowest rates available.

States that prohibit surcharging for credit card transactions:

California

Colorado

Connecticut

Florida

Kansas

Maine

Massachusetts

New York

Oklahoma

Texas

Puerto Rico

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