For the longest time, credit card processing fees were treated as a nearly unavoidable cost of doing business. Consumer preferences forced business owners to accept the form of payment, and the fees were absorbed into their margins and rarely questioned. Today, that approach is starting to shift.[1]
Credit card payments have become the default form of payment for many consumers[2], and operating costs have continued to rise with no end in sight. While major companies can absorb many of these fluctuations, this isn’t the case for smaller ones, and concessions need to be made.
This has made credit card processing fees an attractive option; a noticeable cost that can be shifted from the business to the consumer. Once a niche or risky practice, it’s a growing trend that is quickly gaining steam across various industries.[1]
“In a lot of cases, card processing is one of the top five expenses a business owner is managing today,” said Bryan Bailey, Merchant Service Advisor at PNC. “Expense management has always been important, but now it’s moved to the top of the list.”
There has been broad change in how businesses approach cost control, transparency, and customer behavior, and it’s important to understand how this one, seemingly simple change, can have a significant impact on your business.
Cost Pressure Is Forcing a Reset
While the core mechanics of payments haven’t changed, an increase in surcharging comes from sustained pressure on the slim margins of many businesses.
Inflation has stayed above the Fed’s target five years in a row and is currently running above 3%.[3] This has been spurred by rising labor costs, increased energy costs, and increased material costs. At the same time, more payments have shifted to digital, meaning more revenue than ever is flowing through card-based transactions.
“If your business is growing and your card volume is increasing, naturally your processing expense is going to go up,” Bailey said. “Surcharging is one of the most direct ways to help offset that.”
While credit card fees may not seem that significant to begin with, for many merchants, they’ll balloon as your business grows. What was once a monthly inconvenience now turns into a glaring problem, and the lack of constant visibility means they’re harder to manage compared to other expenses.
What Was Once Uncommon Is Now Normalizing
Surcharging has taken over many industries in the past few years, to the point it’s almost expected.
It began in industries where margins are tighter and transaction sizes are higher, such as auto repair, contracting, and other service-based businesses. The impact of fees in these types of industries is immediately felt, but what is changing now is surcharging’s spread into industries where consumers are much more sensitive to price increases.
Restaurants and healthcare practices are two of the most prevalent industries to join the surcharging trend, and industries where one is already likely to have experienced the surcharging phenomenon. While this is frustrating for some, and concerning for others, it has the added benefit of repetition: the more common it is, the more used to it consumers will be. Normalization is the key to widespread adoption.
The Biggest Risk Isn’t Adoption, It’s Nonconformance
While widespread surcharging is a new trend, the concept isn’t.
“Many businesses are already doing some version of this, but they’re not always doing it correctly,” Bailey said. “That’s where we see a lot of risk.”
Many businesses will offer a discount for paying with cash and have been doing so for years, while others will charge a flat fee for all card transactions, regardless of whether they’re credit or debit cards. However, merchants often fail to take into consideration the strict laws and network rules applicable to adding fees to a card payment with nuances by card type or merchant’s industry.
It is the merchant’s responsibility to comply with all laws and network rules applicable to surcharging, including:
- Jurisdictions which prohibit or restrict surcharging;
- Maximum surcharge permitted for jurisdictions where surcharging is permitted;
- Debit and prepaid cards cannot be surcharged; and
- Surcharging disclosures required at point of entry and point of sale for both websites and physical locations;
- The consequences for non-compliance with applicable laws and network rules can be material.
“Debit cards cannot be surcharged. That’s a big one,” Bailey said. “At the end of the day, a debit card is still a debit card regardless of if a PIN number is entered or not.”
Some businesses manually add fees, others apply them inconsistently, and still others rely on processors that blur the lines in ways that may seem convenient in the short term, he adds.
“If a business is found to be in noncompliance, network fines can start around $5,000, and in some cases a business could lose the ability to accept cards.”
Customer Behavior Is Shifting, Not Breaking
One of the biggest concerns when a business is deciding whether to surcharge is how it will affect their customer base. This is understandable, as no owner wants to alienate customers, and the most common way of doing that is increasing prices.
“The decision to apply a surcharge really comes down to business impact,” Bailey said. “You have to carefully weigh the cost savings against how it might impact your customers.”
The good news is that customers are often a lot more adaptive and less price-sensitive than many owners think. If they want or need your product, they’ll find ways to make the situation work for them.
“When customers see the [surcharge] fee, they have a choice,” Bailey said. “They can use a debit card or another method and avoid it.”
This dynamic becomes especially clear when looking at transaction size. Adding a 3% fee onto a $4 item isn’t likely to register for many consumers, but that might not be the same case for a $40,000 item. If the surcharge fee is more noticeable, alternative payments like debits and ACH may make more sense.
The good news is that customers will still have a choice, and a properly implemented surcharging system allows them to make that choice for themselves rather than leaving the onus on the business owner. Rather than changing the prices of items to cover the fees, a correctly displayed surcharging option helps create transparency and minimize friction of the transition.
Frequently Asked Questions
What is a credit card surcharge?
A fee added when a customer pays with a credit card, intended to offset the business’s processing costs.
How much can a business charge as a surcharge?
Cannot exceed the lesser of merchant’s actual processing cost of acceptance or the maximum amounts imposed by law or network rules. Exact rules vary by card network and jurisdiction.
Can debit cards be surcharged?
No. Debit and prepaid cards cannot be surcharged under any circumstances, even if processed as credit.
Will customers react negatively to surcharges?
Some may, but acceptance is growing. Customers can use an alternative payment method to avoid the surcharge.
What is the biggest mistake businesses make with surcharging?
Noncompliance. Misapplying fees, failing to disclose properly, or charging on debit transactions can lead to fines or loss of card acceptance.
Looking Ahead
As surcharging expands, how people shop and how business owners run their businesses become more deliberate.
“Surcharging can be an effective tool for offsetting credit card processing fees, but ultimately it depends on the merchant's industry, customer base, and overall business goals,” said Ryan Soto, head of PNC C&IB Merchant Services Sales. “By understanding card network rules, following best practices, and clearly communicating with customers, merchants can successfully incorporate surcharges while minimizing potential drawbacks."
Surcharging is no longer fringe; it’s common. What isn’t common, however, is how a business owner should go about implementing it. To determine what surcharging strategy is right for you, speak with a PNC Relationship Manager today to explore the options available.
