As we get closer to a cashless society, as more and more people stray away from using cash on an everyday basis and pulling out the plastic is commonplace, merchants have had to keep up with the times. If you don’t accept credit your customer will look at you like your crazy. Having the newest and coolest hardware and software for payment options is almost expected of you. On top of all the new and ever changing equipment upgrades and POS systems, you have also had to keep up with changing compliance rules. And of course you understand why. Merchants themselves like to be able to use their company credit cards to manage their own finances and hopefully reap some of the business credit card rewards. Still, with credit use becoming the norm, merchants can end up feeling like more and more of their bottom line is going right out the window.
Consumers love to use their rewards cards to maximize their miles, points or get cash back. But who is funding these rewards? Do consumers actually realize that these types of cards cost merchants more money than “regular” credit card transactions. I’m sure that many of them don’t. Rewards cards have flooded the market, accounting for more than 60 percent of accounts and 85 percent of transactions, according to the U.S. Consumer Financial Protection Bureau’s 2015 Consumer Credit Market Report.
This in turn led to a class-action lawsuit that merchants filed against Visa and MasterCard for charging exorbitant fees. Merchants argued that Visa and MasterCard created guidelines kept them from adding a credit card surcharge or pointing customers at less expensive options, while at the same time they, themselves, were being charged excessively high fees with no way to try to offset any of the cost. They won.
They won the right to be able to add a “surcharge” to a purchase if someone is using a credit card to pay for it. When laying the groundwork to allow merchants to impose a surcharge for the use of credit they wanted to make sure that the merchant was not going out of their way to discourage a consumer from using their preferred form of payment, whether that form was a card or cash. They set some strict guidelines that a merchant has to follow if they want to add a surcharge.
First of all, there are some states that currently have bans on credit card surcharging. The general opinion is that it is unfair to the consumer. The eleven states that ban surcharging include: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas, and Puerto Rico. Each of these states have laws that prohibit merchants from charging consumers with surcharges on credit card transactions. Minnesota has a similar law but it applies to a proprietary credit card. For example, if Home Depot issues a consumer a Home Depot credit card, they are prohibited from imposing a surcharge on a purchaser who elects to use that credit card in lieu of payment by cash, check, or similar means. California and New York are currently challenging the laws in appeals court. Hawaii, Illinois, New Jersey, and Rhode Island all have legislation pending that will ban surcharging if passed.
It’s also important to note that both Square and PayPal have listed in their terms of agreements that use of surcharges is strictly prohibited.
If you live in a state where it is legal, there are some important considerations to make, not only pertaining to how you run your business, but also who your customer base is. You will have to weigh the pros and cons to decide if it will actually be of benefit to your company as a whole.
Now keep in mind that this only applies to actual credit cards. You cannot apply a surcharge to a gift card or a debit card, even if that debit card is being “run as credit”.
Visa and MasterCard have set some specific rules to assessing a surcharge but each card company has their own guidelines for setting up surcharges.
- There are limits on the surcharge amount.
You are prohibited from assessing a higher surcharge for one card network over another. That means that even though American Express is more expensive for you to accept, you cannot charge 3% surcharge for Amex, and charge a 2% surcharge for Visa. It has to be one flat fee across the board and there is no circumstance where it can exceed a maximum of 4% even if your fees are higher.
- You must make sure your customers are fully aware and post appropriate notice inside your store.
You are required to post a notice at both your entry and right next to your POS system that you will be charging a fee. You need to have clearly posted the exact amount of the fee and include a statement that it will not exceed your own processing fees.
- You need to include the surcharge amount on the receipt.
This must be in a separate line item in the network authorization request as well as in the settlement.
- You will be required to report these fees to the card processor and the card issuing networks.
- You will need a POS capable of supporting these features.
You will likely need to have your merchant service provider reprogram your terminal in order to meet these requirements.
- You must notify the card company in writing that you intend to begin charging a surcharge at least 30 days in advance. Visa and Mastercard have a form on their websites for you to fill out.
- Notify your credit card processor/acquiring bank that you will be adding a surcharge to your processing. Most require 30 days notice as well.
- You can choose to apply surcharges to card brands or specific product-level cards (ie. miles or cash back cards), but you can’t do both.
Would a merchant want to charge a surcharge for credit card use?
Creditcards.com says ”The ability to impose a surcharge rather than offer a discount is important, however, because shoppers are more likely to avoid a surcharge than take advantage of a discount, even if the amount of money involved is identical”. The theory is that if a merchant were allowed to add a surcharge for credit use they would then effectively be able to convince a larger majority of their customers to pay with cash. Thereby saving them money and allowing them to keep more of their profits. Where as if they simply offer a discount for paying cash, and most people are not likely to take advantage of that and still decide to use credit, than they have done nothing to lower their fees. Offering a discount when paying cash is a common practice that we think nothing of when we see it at gas stations however, who have been employing this practice for a long time.
Merchants are required to give the discount off the regular price of the item effectively putting everything in the store on sale. In this way the merchant is giving the discount to the people who do take advantage, and giving it to people who possibly would have paid cash anyway, in this scenario the store is actually losing profit.
To Surcharge or Not to Surcharge.
First of all it is important to consider what type of business you have and whether the credit use outweighs debit. Studies show that in certain types of business debit use actually greatly outweighs credit. Debit usage is much higher at supermarkets, discount stores, dine-in restaurants, and pay-at-the-pump gas stations. While cash leads at coffee shops and fast food restaurants, debit usage still outweighs credit card usage. So, if this is the case for you, the money you could recoup may not be significant enough to make a difference in your actual expenses.
It may be counter intuitive.
When surveyed, 64.5% of people said they would NOT be willing to pay an extra fee in order to use their credit card or would not use their card if they had to. So that is definitely something to keep in mind and plays into what we were talking about earlier. It may be a way to encourage your customer to pay with cash but it may also upset them. Molly Faust, a spokeswoman for American Express believes that a merchant’s decision to apply a surcharge is “harmful to the customer.” And that “It is not a customer-friendly practice for a merchant to first attract a customer to its store or website to shop, and then to penalize the customer for using a charge or credit card that the merchant accepts.”
The larger big box department stores (think Walmart and Home Depot) have decided that they will not be adding surcharges and have gone “on record” saying that they feel it would help to drive customers away.
Another thing you may want to consider: How easy is it for your customer to find what they need nearby? If it is off putting to them to pay a fee and they can find that same item elsewhere relatively easy they probably will.
You may also want to take into account the actual dollar amount of your average ticket. If it is very small a customer may not balk at a few percent added to their bill, but if you are selling very large ticket items that surcharge can end up being quite significant for the customer turning them sour and possibly sending them to another place of business.
Next you want to calculate exactly how much of your total sales are through credit cards. IF a large percentage of your customers use credit, and the theory is that people who use credit spend more on average than those who rely on the cash on hand, then could you actually be costing yourself sales? Is that worth offsetting the cost of your fees in this way?
Lastly, is your POS system capable of adhering to the guidelines for printing the charge as a separate line item in both the network authorization request as well as in the settlement as required? Is reprogramming and or purchasing a whole new POS, which means incurring significant costs, going to be worth it in the long run?
If you feel that your processing fees are too high the first place to start is with your credit card processor. You might want to start by looking for a new processor, one who will be able to offer you an interchange-plus option, which is more affordable and more transparent. At Bankcard Brokers we care about your success. We pride ourselves in being a trusted resource for honest, transparent and affordable merchant services. Give us a call today and let our successful long term business relationship begin.