February 16, 2023

Industry Trends

What is a Surcharge?

Industry Trends

Using a credit card is convenient. It helps track spending, reduces the need to carry cash, and many credit cards have rewards connected with them. However, it is common for such cards to have a surcharge attached to them too. This is a fee your customers get charged for the convenience of using a credit card for a purchase.  If you don't have a surcharge in place, your business is taking a hit every single time a customer pays with a credit card. That charge is coming out of your business funds. You may not want to rock the boat, but adding a surcharge can be a necessary change. Customers understand this and they already deal with it when they buy from other merchants. A surcharge has many benefits for your business and it isn't difficult to get it in place through your merchant account.

How does a Surcharge Benefit your Business?

Many businesses attach a surcharge to help offset the cost of accepting credit cards for payment. Those fees can add up day after day, month after month. Most customers don't realize the business gets charged a percentage of the purchase when a credit card is used. The amount varies based on the credit card processing agreement. The annual fees a business pays for these credit card fees eat away at profits. The surcharge allows them to offset it a bit. They get to keep more of the money customers pay to them. It can make a huge difference at the end of the year for their finances. This is especially true for small businesses. With a surcharge in place, the customers pay that transaction fee for the convenience of using a credit card, not the business. Credit cards are a convenient way for consumers to get what they want now. They pay for it later according to the terms with their card issuer. Accepting credit cards can increase cash flow for your business. Adding the surcharge also helps you keep more money in your own pocket rather than paying it to your card processing merchant account provider. This gives the business owner more value overall when they accept credit cards.

What is the Average Cost to Accept Credit Card Payments?

As a business, it is important to understand the average cost of accepting credit card payments. Those fees can be from 1% to around 3.5% for every single transaction! It depends on the type of business, total of annual sales, and who you process your payments through. As a merchant, you can impose a surcharge to recoup such fees.  However, you can't make a profit from the surcharge. By law, your surcharge can't exceed what you pay for those fees. This process is to help offset the fees you encounter by accepting credit cards - nothing beyond that.

Laws Surrounding Surcharges

It is vital to comply with laws surrounding surcharges. They can be added to the total cost of the transaction. However, you have to follow the legal guidelines. They can vary from state to state and there are also federal laws. The amount has to be fully disclosed to customers. This can be a flat rate or it can be a percentage of the total purchase price.  By law, the transaction amount of a surcharge can't exceed 4% of the total purchase price. Of course, this can add up quickly on big ticket items. Most customers don't mind a small surcharge with smaller purchases, but they are going to be upset when it adds a huge amount to a larger purchase.  Customers have the right to decline the surcharge and not use a credit card as payment. They can opt to pay for that purchase with cash, check, or a debit card. If they choose one of those payment methods, a surcharge can't be added to the final bill. A few states don't allow surcharges for credit card purchases. They include:

  • Colorado
  • Connecticut
  • Massachusetts

How to Set up a Surcharge for Credit Card use in your Business

You may be hesitant to set up a surcharge for credit card use in your business. You may worry it is going to upset customers or cause them to spend less than they did before. Customers understand surcharges, and you aren't the only business they buy from that has them in place. For those that don't want the fee, they will change the payment method they use to avoid it.  Properly setting up a surcharge for credit card use in your business is essential. Find out the laws surrounding it where you reside. If you offer online transactions, remember you can't charge a surcharge in the states listed above. Customers from those locations would be exempt from it. Work with your merchant account provider about getting the surcharge set up correctly.  If you don't have the best merchant provider at this time, it could be the perfect time to change. Do your homework to ensure the provider offers everything you need and the lowest possible fees you qualify for. Talk to them directly about surcharges and the process to implement it for your business.  Contacting the major credit card entities is required. Written documentation to them about the surcharge you plan to add, how much or the percentage, and when it goes into effect is required for all but American Express. Your merchant account provider should assist you with this part of the process.  Full disclosure to customers about this surcharge is mandatory. Any business charging a surcharge has to share the terms and cost of it upfront. Your customer has to be aware of it and given the option to use other payment methods if they don't want to pay it. The surcharge has to be itemized and identified on the receipt.  With the surcharge in place, you can stop paying extra costs when customers pay with a credit card. That extra money staying in your business can help with cash flow, help pay off debts, or increase your profits. Don't be afraid to make this powerful change for the future of your business! Contact Treati today to set up a merchant account with surcharging.

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