by Grace Barone
Credit card processing fees. Arguably the worst part about accepting credit cards at your business. In today's increasingly cashless environment, credit card transactions have become the norm for businesses of all kinds. However, with the convenience of accepting credit cards comes the unavoidable cost of credit card processing fees. This dilemma arises when business owners debate this idea of: Should these fees be passed on to the customers? The option to pass or absorb credit card processing fees can have repercussions for both the business's bottom line and its customer relationships. We will examine the benefits and drawbacks of charging clients for credit card processing, taking into account things like financial concerns, standard practices in the industry, and customer expectations.
Processing Fees, What are They?
A charge made by payment processors or merchant service providers in exchange for processing credit card transactions is known as a credit card processing fee. The owner of the business must use a payment processor, like a bank or third-party provider, to handle credit card payments when a customer makes a transaction. The processing fee, which enables businesses to accept credit card payments, pays for the expenses related to this service.
How can Business Owners Avoid these Fees?
Well, if you want to be able to accept credit cards at your business, you can't really avoid them. There will always be processing fees that need to be paid. But, there are ways to lower or get rid of them all together if business owners don't want to be the ones to pay them. This is where business owners need to contemplate whether or not they want to make their customers pay them. This is what's known as a surcharge.
What is a Surcharge?
A surcharge is a fee added to the price of goods or services to cover the cost of processing a credit card transaction. The displayed price within your business is the price when customers pay with cash or debit. Surcharges can only be applied on credit card transactions, not debit. It's actually illegal to put a surcharge on a debit card even if its ran as credit.
Sometimes people confuse a convenience fee with a surcharge. It's important to know the difference if you're considering adding these fees to your card transactions. A convenience fee is manually added by a merchant. Surcharges are pre-programmed on your POS machine. Convenience fees can be added to both credit and debit transactions unlike surcharges. Also, a convenience fee is only allowed to be added for "alternative payments". An example of this, a business having a convenience fee for customers placing orders over the phone. In this example, the business owner would not be able to have a convenience fee for in-person card transactions.
Should you Pass Credit Card Processing Fees onto Customers?
So there's really no right answer to this. The decision is up to each specific business owner and their values. Cash makes up less than 20% of all spending as of 2023. And even when it is being used, its typically for purchases under $25. If you're a business owner, you're going to have to take the leap and start accepting credit cards if you haven't already. Processing fees can add up fast and some small business owners may be finding it hard to make a real profit with the increased popularity of credit card payments. There are definitely pro's and con's to adding surcharges and having your customers pay them. Business owners should really think hard about whether or not they want to pay the processing fees or pass them on.
There is flexibility with the fee amount. You can decide exactly how much you want to charge your customers. It's typically a percentage of each transaction. Visa just changed their surcharges rules so there are limitations on how high of a percentage you're able to charge.
Another pro is that everything is pre-programmed. It's automatic and hassle free. If you set it up right and are transparent with your customers about the charge, you shouldn't run into many issues with it. Obviously the biggest pro to having a surcharge, is business owners don't have to pay them. Your business is saving large amounts of money by not paying processing fees.
The only real con to having a surcharge is lower customer satisfaction. Customers may be annoyed or unhappy about the extra fee. If your competition isn't charging a fee, you may lose customers to them. But, surcharges are becoming more and more common within businesses. Also, as of 2023, things are getting a lot more expensive. Customers are more understanding of change, 88% of consumers agree that with inflation and the rising costs of goods - they would understand if their local businesses raised their prices. This is why it's important to be straight up and honest with your customers if you do want to start adding a surcharge fee.
Adding a surcharge isn't cut and dry. There are a lot of different things to be mindful of if you want to start implementing the charge. First of all, there are state and federal laws to navigate. Credit card networks enforce disclosure to customers. Merchants need to make sure they are properly notifying customers of the charge. Also, surcharging is illegal in Massachusetts and Connecticut. Other states have certain laws that limit how business owners add these charges. Make sure you're knowledgeable of your states rules revolving around surcharging.
Different Businesses and their Processing Fees
Surcharging works better with certain businesses more than others. For example, a small niche boutique with a low profit margin may benefit from surcharging. Or, a business that has high transactions regularly may use surcharging because of the significant fees. Non-profits usually don't have surcharges because it could discourage people from donating. Schools and universities usually don't impose surcharges either because it adds unnecessary financial stress on families and students.
The Processing Fee Loophole
Wouldn't it be great if there was a way to pass processing fees onto your customers but still maintain loyal customers? Well, there is and its legal in every state! Having a cash discount program at your business is the easiest way to lower or get rid of your processing fees. This is how you do it. The displayed prices of all your goods and services take into account the processing fees. So the posted price is what customers pay if they're paying with a credit. If they want to pay with cash, they get a discount because there are no processing fees that need to get paid.
Having a cash discount program not only easily lowers your processing fees, but it gives customers incentive to pay with cash. Increasing your businesses cash flow and giving your customers more of a reason to keep coming back. At VMS or machines have the ability to be pre-programmed for either a cash discount program or surcharges. If you're interested in lowering your processing fees with either a cash discount program or by surcharging, visit getvms.com or fill out the form below.