by Grace Barone
Starting April 15th 2023, there will be a new change to Visa's surcharge rule. The Visa notice has stated that they are capping credit card surcharges to 3%, it was previously set at 4%. This means that business owners can now only put a maximum 3% charge per transaction. Many business owners are not happy about this new rule, because processing payments can become quite costly. Interchange rates, transaction fees, assessment fees, authorization fees are all costs that come along with charging a credit card. Not to mention the cost of processing high-ticket transactions, accepting international payments or dealing with chargebacks. Its likely that some businesses credit card processing fees will exceed the 3% surcharge. This means that business owners will need to start footing more of the bill.
So What is a Surcharge?
A processing fee is paid to the appropriate financial institution each time a merchant accepts and processes a credit card transaction. A credit card surcharge is a fee imposed by the merchant to cover some of the costs associated with payment processing. This fee can only be applied to credit cards—never debit cards, even if they are used like a credit card.
Surcharges were illegal up until 2013. A class action lawsuit allowed businesses in numerous states in the U.S. to adopt surcharges in their operations. This lawsuit prompted a chain reaction in the years that followed, with other states supporting surcharging. Advocates of surcharging argue that anti-surcharging rules raise prices for all goods and services and, in some situations, may violate the First Amendment. Surcharging is now legal in all states accept Connecticut and Massachusetts.
There are steps merchants must take in order to charge this fee. The charge but be clearly stated to your customers. You can't hide it in lengthy text or in the fine print. In the past merchants had to register with Visa, telling them about their intent to have a surcharge fee. With the new change to the rules, merchants only need to notify their merchant acquirer 30 days in advance before they start surcharging.
Credit card surcharges and convenience fees are sometimes confused, yet there are significant differences between them. Convenience fees can be applied for both debit and credit card payments, and they simply indicate that the merchant accepts various payment methods for the convenience of the client. Surcharges are normally calculated as a percentage of the total payment when it comes to determining the cost. However, merchants can charge a fixed price instead. Convenience fees, on the other hand, are always a set rate.
How Does this Affect Small Businesses?
The payment processors are the ones who set up these surcharges for business owners. If you're currently charging more than 3%, you should get in contact with your processor as soon as possible. The penalty for not complying with this new surcharge rule can be a fine anywhere from $5,000 to $25,000. In a worst case scenario, businesses that do not comply may get their credit card processing privilege's revoked completely.
This whole new rule was put in place with consumers best interest in mind. Making the maximum amount merchants are allowed to charge 3% instead of 4%, is to protect customers from being overcharged in unnecessary fees. This is following the trend of the Biden administration's attempts of getting rid of "Junk Fees". The Junk Fee Prevention Act is mainly pointed at ticketing sites but apply to many other businesses as well. Have you recently tried buying a ticket to a concert or sporting event recently? The fees that these sites slap on right before you purchase are outrageous. These fees are typically not disclosed until the end. Between processing fees, delivery fees, facility fees, "just because we can" fees, people are paying more than half the cost of the ticket in fees.
For mega businesses and large chains, these changes in fee rules aren't significant enough to really affect their profitability. But small businesses will have a much harder time adjusting to these new rules.
How Business Owners can Stay Profitable
To manage the new change in Visa's surcharging rules, the question of how to continue being profitable is on the table. One way that merchants can offset the price of processing fees is starting a cash discount program at their business. People sometimes link cash discount programs with surcharging, which has led to much confusion. They are very similar but cash discount programs are legal in every state unlike surcharges.
A "compliant cash discount program" means that a store must show two prices for an item: one price if you pay with cash or a store gift card, and another price if you pay with a credit card. The credit card price includes the extra costs that the store has to pay to process your card. If you pay with cash or a gift card, the price will be lower because the store doesn't have to pay those extra fees.
The store must give you a clear receipt that shows how much the discount is or how much the fee would have been if you paid with a credit card. This is legal as long as the store follows the rules. This is not the same as a credit card surcharge, where the store adds a fee on top of the credit card price. A cash discount program just lowers the price if you pay with cash or a gift card.
Cash discount programs are "non-compliant" when they post cash prices, but then add a fee at the point of sale. Doing that is a surcharge. There is a fine line between cash discount and surcharging but the differences do make a big difference. In many cases, having a cash discount program can increase customer loyalty and create incentive to return to your business.
Setting up a Cash Discount Program at Your Business
If a cash discount program is sounding like the perfect solution to combat Visa's new surcharge rule then you should consider starting one of your own. Having a cash discount program can significantly lower your credit card processing fees and may even eliminate them all together.
At VMS all of our machines have the ability to be programed for a cash discount program. Depending on what POS device you already have, or who your payment processor is, the process of starting a cash discount program can be sort of a hassle. At VMS we do all the work for you!
If you're interested in starting a cash discount program at your business, head to getvms.com or fill out the form below!