Merchant Surcharging Solutions To Increase Business Profitability
Accepting credit cards means paying processing fees, which is usually considered as just part of everyday business. However, for some types of organizations and merchants, where funds are limited or profits are small, the costs of accepting cards can seem prohibitive, and cash payments might seem like a better alternative.
Nevertheless, as so many buyers depend on credit cards for purchasing, not accepting them can impact on profits, which is why some retailers introduce surcharges to cover the cost of card processing.
Surcharging Customers – Is It Legal?
It was once prohibited to surcharge credit card customers in the United States, but the practice was commonplace in other countries.
However, in 2012, merchants won a legal challenge against Visa and MasterCard, which led to a $6 billion settlement for the merchants, and with the exception of ten states – and under strict guidelines and conditions – surcharges are now legal.
Following the change in law, Visa introduced a set of guidelines detailing what a retailer must do if they want to introduce surcharges. This includes informing Visa 30 days ahead of implementing the charges, only applying the surcharges to credit cards, providing clear signage that surcharges apply, and the surcharges mustn’t exceed 4 percent.
MasterCard also allow merchants to apply product level or brand level surcharges to credit card purchases. Like Visa, MasterCard has extensive guidelines and surcharge caps in place. The guidelines for surcharging can be downloaded from the MasterCard website.
Other credit companies not impacted by the court case have their own guidelines. Details of the American Express merchant regulations can be found here, and merchants who accept Discover credit cards must also give 30 days’ notification of surcharges.
However, the 2012 ruling wasn’t quite a complex one, and as the National Retail Federation told The New York Times, most merchants still can’t implement surcharges, and it is not over yet. Years after the original settlement, the legal dispute goes on.
Surcharges vs. Cash Discounts
To further complicate matters, in 10 U. S states, including New York, it is illegal to apply surcharges to credit card payments, but legal to apply cash discounts.
Currently, the matter is the subject of a Supreme Court debate brought by merchants, who argue that as the situation currently stands it is a violation of freedom of speech. As Mallory Duncan, NRF Senior Vice President and General Counsel explains:
“Retailers have no interest in surcharging their customers for using credit cards,”
“That would be the opposite of our goal to bring credit card swipe fees under control. But merchants do want to be able to show customers the cost of using a credit card without running afoul of the law.”
“This case isn’t about surcharging,”
“It’s about giving retailers freedom of speech when they try to give their customers a break for paying by cash. Some states allow cash discounts but prohibit credit card surcharges. A gas station owner shouldn’t be hauled into court for saying gas is $2.90 a gallon cash and $3 credit rather than saying $3 credit and $2.90 cash.”
Ultimately, according to USA Today, the retailers are campaigning for the right to be entitled to advise shoppers that they’ll be charged more for credit card payments because of the swipe fees passed down from the credit card companies.
However, as the case stands, it looks as though it will get passed back to state courts and the legal debate regarding cash discounts and surcharges will go on.
Are Retailers Surcharging?
Despite the change in the law, many American retailers remained reluctant to start adding surcharges. However, as an article on Nasdaq notes, there is some evidence to suggest that the practice is becoming more common, especially among smaller retailers.
Research by Nasdaq also shows that some retailers were also charging more than they should, with fees of up to 6 percent. Some merchants were also charging more for smaller purchases made by credit card.
However, while there have been several reported incidents of merchants introducing surcharges, it’s thought the practice isn’t likely to become widespread due to the constraints put in place by the credit card industry.
Should You Implement a Surcharge?
For convenience stores, non-profits, or businesses and organizations working on slim profit margins, adding surcharges might seem like good business sense. However, most businesses have chosen not to implement them because of the potential impact on their company, and because of the complexities involved with surcharging.
However, if you are considering introducing surcharges:
- Do some research to see what other similar organizations/merchants are doing.
- Think about the percentage of credit card payments you take to determine if a surcharge would be worthwhile.
- Work with a payment processing company to ensure you are in full compliance with the rules for surcharges.
A More Profitable Organization and Business
With surcharging now legal, many types of organizations/merchants can benefit from using a merchant surcharging solution. These include:
- Small businesses.
- Convenience stores.
Merchant surcharging solutions allow you to be open with customers about charges for accepting credit card fees.
However, if you are going to introduce surcharges, make sure you have a full understanding of all the guidelines, and ensure the solution you chose has the features you need to apply surcharges while complying with the law applicable to your state.
While retailers welcomed the victory in the 2012 legal battle, the right to introduce surcharging has led to a dilemma for retailers. With the exception of 10 states, the 2012 legal ruling made it acceptable to pass on surcharges to customers: should merchants pass these costs on to consumers or offer discounts for paying cash?
Although there are signs that some retailers are starting to pass these costs on to the consumer, for the most part merchants have chosen not to as they are wary of being accused of unfair practices.
However, merchants that wish to implement these fees should understand that surcharging can be a complicated process, and it is imperative they stay the right side of the law if they want to avoid legal problems and potential fines.