Surcharging Considerations for Merchants
End-user organizations are increasingly encountering suppliers that add a surcharge to card payments. This has certainly been the case for me as I have been working on a long-term project with a nonprofit organization that is new to using cards. Their initial response was to pivot back to check payments in these cases. How do you respond?
For more insight on surcharging, I spoke with Diane Merrigan, who is an expert at working with suppliers on card acceptance processes. She shared an article she recently wrote that is directed at suppliers to help them weigh the pros and cons of surcharging. I think it is an excellent resource for end-users, too. Check it out below and, if you have questions, there is a link to Diane’s LinkedIn profile at the end. She would love to hear from you or your suppliers.
To Surcharge or Not to Surcharge—That is the Question
By Diane Merrigan, Business-to-Business (B2B) Card Payments Specialist
The B2B space has been grappling with the dilemma of implementing surcharging for quite some time, always circling back to the same questions. How will our customers respond? Is surcharging worth the effort? Should we still offer early pay discounts (e.g., 2% 10 net 30)? These are questions worth asking. While an unconsidered approach to surcharging can certainly backfire, a well-considered, well-executed solution can maximize returns, minimize risk, and keep customer satisfaction high. It pays to weigh the pros and cons first.
To help you decide what is best for your company, this article shares elements to consider before surcharging and, if you decide to pursue it, how to do so in the best way for you and your customers.
What’s in a Name?
First, it is important to understand the terminology. A surcharge and a convenience fee are not the same thing, at least not in the eyes of the card networks (e.g., Visa, Mastercard, American Express)—also known as the card brands—that set the rules for card acceptance. Here are the simplest definitions:
A surcharge is a percentage that a merchant adds to the total transaction amount to help cover its cost for accepting credit cards. That means the fee only applies to credit card payments.
Conversely, a convenience fee is a fixed percentage or dollar amount that a merchant adds to transactions in an alternative payment channel – for example, buying tickets from a company’s website instead of the company’s main method of acceptance through their box office. To be compliant, the customer must always have a way to avoid the fee through at least one payment channel.
As a merchant, you might impose either of these depending on your goals. While a surcharge is meant to help cover the cost of accepting credit cards, a convenience fee is meant to help cover the cost of maintaining multiple payment channels. However, if assessing a surcharge, you are not allowed to assess another fee, such as a convenience fee, at the same time for the same transaction.
Considerations Before Pursuing Surcharging
Assess your company’s current situation; any of the following three factors could sway your decision to surcharge one way or the other.
Opportunity to lower card acceptance costs
Ability to write off credit card fees as a tax-deductible business expense
Your competitors and their approach to surcharging
First, your B2B acquiring partner should proactively inform you about ways to lower your card acceptance costs. If they have not done so, initiate a conversation. Your company might be paying more than it should for card acceptance. For example, your current process and/or technology might be outdated and costly. Maybe the volume and/or types of card payments your company accepts today look vastly different than when you initially started accepting cards. Maybe your card acceptance contract terms are not optimal for your business.
It’s always a good idea to check on the efficiency of your payment channels, but none of these changes are able to eliminate credit card fees entirely. Taking these steps can, however, lower the amounts you need to recover via surcharging.
Another consideration is whether you are claiming credit card fees as a deductible business expense. For most merchants, payment processing fees are a necessary cost of doing business and, as such, can be deducted. Be sure to consult with your accountant or tax advisor on this. It’s again important to recognize that the tax benefit will not cover the cost of credit card fees nearly as much as surcharging would.
Speaking of your customers, is surcharging common in your industry? Surcharging is becoming increasingly prevalent in many B2B industries, especially distribution and manufacturing. Customers rarely change their vendors over surcharging because it’s always easier to change a payment method than onboard an entirely new vendor. This makes the risk much lower than most people think. The returns are high and the risk to your customer base is low. But it’s still important to go about surcharging the right way.
Surcharging Requirements
As of this publication, only Connecticut, Massachusetts, and Puerto Rico still prohibit surcharging. However, each state may have additional laws that must be adhered to when surcharging. State laws take precedence over card brand rules and both are subject to change. The content presented herein is based on the requirements as of September 2024. The card brand rules are very specific in nature and include, but are not limited to, the following.
A merchant must notify its acquirer in writing at least 30 calendar days before publicly announcing its intention to impose a credit card surcharge. If you surcharge, you must do it for all card brands (Visa, MC, Amex and Discover) and you cannot apply a surcharge to payments made via debit cards or prepaid cards.
The maximum amount allowed is 3.00%, which is different than in the past, so many merchants are still charging more. It is also important to note that you cannot profit from surcharging.
A merchant must, at both the point of entry into the merchant location whether physical, virtual and the point of sale (POS), clearly and prominently disclose any credit card surcharge that will be assessed.
For any non-face-to-face transactions, the cardholder must have the opportunity to cancel the transaction.
The surcharge must be included in the total transaction amount and be disclosed as a separate line item on the receipt.
The cardholder’s zip code must be read from the card or key-entered to ensure they do not live in a state that prohibits surcharging. As applicable, the POS system should not charge these cardholders. This requirement can be a real challenge for merchants that sell to B2B customers all over the country, as most processors’ gateway systems are not sophisticated enough to handle this.
Nagendra Jayanty, CEO of the Managed Surcharge Provider InterPayments, explained the challenges. “Card rules and state laws can conflict, so it’s important to understand the nuances of both. For example, there are some states where the law lets you surcharge more than 3% if you still don’t profit, potentially increasing your savings.”
Potential Consequences for Surcharging Violations
Do not underestimate your B2B customers, as they are often savvy and aware of the rules. If you think your company is too small to be caught, all it takes is one cardholder to complain to their issuer. This can set in motion an investigative process whereby if a merchant is found to be in violation of the rules, as published by the card brands, it can be subject to a fine.
“We’ve seen card issuers greatly increase enforcement resources in the last year,” Jayanty said. “More merchants are surcharging, and the card brands have noticed. This makes compliance especially critical to avoiding fines.”
Final Advice
Because of the complexity and ever-changing surcharging rules, the best thing your company can do is work with an experienced partner that will manage every aspect of your surcharging program. This partner will help you keep customers happy, eliminate risk and lower your card acceptance costs, too.
On a related note, you can use surcharging to incentivize purchase-to-pay processes that benefit both you and your B2B customers. For example, they should not require you to provide an invoice and then pay you with a credit card 30 days later. Instead, consider waiving a surcharge for credit card payments that occur no later than 10 days from order delivery, only surcharging payments that come later.
This is just one example of how to use surcharging to your benefit, beyond simple savings. Used correctly, surcharging can be a powerful tool that can help you manage your business.
About the Author
Diane Merrigan has spent 25+ years in the payments industry, helping improve suppliers’ card acceptance processes. She has successfully instigated process changes for more than 3,000 suppliers, ranging from startups to Fortune 50 companies. However, much of her career focus has been on large, multi-location complex merchants specifically in the B2B space. She is passionate about proposing ways suppliers can protect their company through PCI, lower DSO, and minimize manual efforts for accounts receivable (AR). Currently, Diane represents two different fintech organizations, including Run Payments, in the realm of business strategies/B2B consulting.
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