Merchants are growing increasingly weary of the credit card processing fees being charged by the likes of Visa and MasterCard. These companies have been steadily raising interchange fees for several years to help cover the cost of their mileage and rewards programs, and it is starting to seriously cut into merchants’ bottom lines. Things have gotten so bad, in fact, that even large chains like Krogers are taking a stand against high credit card processing fees.
So, what can a small business owner do to fight back? Can a business charge a fee to customers who pay by credit card? The short answer is “yes”.
There are actually a few different ways a merchant can pass along the cost of credit card processing fees to their customers; surcharging, convenience fees, and cash discounting.
Here is a quick overview of these three options:
Credit card surcharging is currently legal in 45 out of the 50 states as well as the District of Columbia (DC). As of this writing, the practice is still not legal in Colorado, Connecticut, Massachusetts, Oklahoma, and Kansas. There are also some additional restrictions that apply if you want to implement a surcharge program in New York or Maine.
With surcharging, the merchant adds a fee for all credit card transactions. The fee is typically around 3.5%, but it can be as high as 4%. This fee covers the credit card processing costs, allowing the merchant to keep 100% of the funds received from the transaction.
Visa, MasterCard, American Express, and Discover have strict compliance requirements to implement a surcharge program, among them being that clear signage must be displayed at the point of sale thirty days prior to implementing the program. Another restriction is that surcharges cannot be imposed on debit and prepaid debit card transactions.
This means that merchants still have to cover the cost of debit card transactions. But the good news is that, with most of these types of transactions, the fees are only around 1%, as opposed to the 3% to 4% it can cost a merchant when a customer pays by credit card.
Convenience fees are similar to surcharges, and they are legal in every state. However, they can only be used in very limited circumstances. A convenience fee can be imposed only when the merchant is providing an alternative method of payment from the way most customers purchase their product. The most common example is in the ticket industry.
You may find that, when you try to buy a ticket for an event, there is an extra convenience fee for purchasing the ticket online rather than in person. The fee is there not because the customer is using a credit card, but because they are paying online. If the customer were to buy the tickets at the gate, they would pay the same price, regardless of whether they paid with cash or by credit card.
Like convenience fees, cash discounting is also legal in all 50 states. This has been the case since the passage of the Dodd-Frank Wall Street Reform Act in 2010. The Durbin Amendment within Dodd-Frank permitted businesses to offer a discount to customers who pay with cash.
Since the passage of this law, the rights of businesses to implement a cash discount program have been affirmed by court rulings. And in 2011, Federal Trade Commission spokesman Mitchell Katz said that Dodd-Frank prohibits payment card networks from “inhibiting the ability of anyone to provide a discount for payment by cash, checks, debit cards, or credit cards.”
Cash discounting works similarly to a surcharge program, but there are some key differences. With a cash discount program, the merchant technically offers a discount to customers who pay in cash, rather than charging them extra to pay with another method. Like surcharge programs, clear signage is required at the point of sale.
The merchant does not have to change all of their pricing to implement a cash discount program – the signage just has to inform customers that the prices displayed are for cash purchases, and an additional fee is added when paying by credit card.
Aside from the fact that cash discount programs are legal in all 50 states, the main difference between this type of program and surcharging is that, with cash discounting, there is no distinction made between credit and debit cards. The discount is given only to cash paying customers, and the end result is that an additional fee is charged to all customers who pay by card.
Another important difference is that surcharging can be done in person or online, as long as customers are properly notified. Cash discounting, on the other hand, can only be offered when the customer has the opportunity to pay cash and receive a discount, which can only happen with face-to-face sales.
Finally, the two programs are presented to the customer differently. With surcharging, you are telling the customer that there is an added fee to pay by credit card. With cash discounting, you are telling the customer that they can save money by paying in cash.
This may not seem like a big difference, but psychologically, it can be. Customers don’t like to be charged extra. On the other hand, customers love to save money. By presenting the program as a cash discount, customers might tend to see it more positively.
Is it Right to Charge Customers a Fee to Pay by Card?
This is a question that a lot of merchants wrestle with. Just because you can charge customers extra to pay by credit card, should you? Ultimately, this is for each individual merchant to decide. But in considering this issue, there are a few things you should keep in mind:
It costs you extra to take credit card payments. When the price of goods and services go up, businesses usually pass the cost on to the customer in the form of a price increase. Is it fair to do the same thing with credit card processing fees?
Many customers who pay by card are receiving generous rewards for doing so. And this has been driving the cost of credit card processing higher in recent years. Do you believe it is fair for customers to help cover the cost of their own rewards programs?
With interchange fees continually going up, your business may eventually have to raise prices to cover these fees. Which would be more fair – making all your customers pay for this, or charging only those customers who pay by credit card?
How Will my Customers React to a Surcharge or Cash Discount Program?
This is perhaps the most important question merchants want answered when deciding whether or not to pass the cost of credit card processing fees onto their customers. Understandably, merchants have an inherent fear that if they implement a program like this, customers may get mad and leave them.
Fortunately, cash discounting and surcharging have both been around for several years now, and those who have implemented these programs have found two things to be generally true:
Cash Discounting and Surcharging do not Seem to affect Consumer Behavior: Studies conducted with merchants who implemented either cash discount or surcharge programs found that credit card processing volume did not change significantly after they were implemented.
By and Large, Customers have No issue with these Programs: Studies also found that 99.2% of customers did not bring up the program at the point of sale. In other words, in the vast majority of cases, customers do not have a problem with paying a little extra to use a card.
Of course, this will play out differently for each individual merchant. What usually happens is that a customer or two might mention the extra fee during the first couple weeks after the program is implemented, similarly to when a business implements a price increase. But after another week or two, customers adjust, and those who have an issue with the extra fee just start paying by cash.
There are also ways for merchants to turn the cash discount into a marketing tool. As mentioned earlier, the psychology of saving money by paying in cash can actually bring in new customers. And if you combine this with other positive elements, you can build greater customer loyalty.
For example, at National Franchise Business Solutions, one of our preferred processors gives a portion of the proceeds from the cash discount program to a local charity that is dedicated to feeding poor children in the community. This partnership not only goes a long way toward providing nutritional meals to disadvantaged kids, it is also something our merchants can highlight to their customers with signage at the point of sale. And when customers find out that proceeds from their credit card transactions go to such a great cause, they are motivated to continue doing business with these merchants.
Is Cash Discounting Right for You?
At the end of the day, only you can decide whether or not it is a good idea to pass your credit card processing fees along to your customers. If this is something you think might be right for your business, we are happy to help.
You can try it out with us risk free to see how it goes. Experience has shown us that, once you get past 30 days, you will realize that customers are just fine with the program, and you will never go back to traditional processing again. But in case we’re wrong, there are no contracts or commitments, and you are free to switch back to your old processor at any time.
To learn more about cash discounting or surcharging or to get started with the program, give us a call at 651-202-8636 or email us at franchisecity1(at)gmail.com. We look forward to serving you!