Cash might have been king for a long time, but a Forbes study found that less than 10% of modern consumers pay with cash.
But credit cards come with a huge drawback for small retailers: processing fees. According to a Nilson Report, merchants paid $126 billion in credit card fees in 2022, which is 20% higher than in 2021. With an average fee of 1.5% and 3.5% of the total transaction, small businesses are losing out.
How can you offer customers the convenience they expect without drowning in fees and surcharges?
One way to combat this problem is by passing on credit card fees to customers. In this blog, we’ll explain how credit card fees are calculated, the legalities of passing fees to customers, and how you can successfully implement a dual pricing strategy to combat fees.
Let’s dig in.
Understanding Credit Card Processing Fees
Businesses are charged a credit card processing fee, also known as a merchant fee, every time a customer pays with a credit card. Retailers are required to pay this fee, typically ranging between 1.5% and 3.5% per transaction.
However, not all credit card fees are created equal — there are different types, and they’re calculated differently.
Related Read: 7 Top Credit Card Machine Solutions for This Year
Interchange fees are fees charged between banks for processing credit and debit card payments. If a customer completes a purchase using a card, your business’ acquiring bank pays the interchange fee to the cardholder’s issuing bank. This is typically a percentage of the purchase plus a fixed fee. The way these fees are calculated depends on the type of card and type of transaction.
Assessment fees are negotiated percentages charged by credit card companies like Visa and Mastercard to cover the operating costs of their networks. The fees are decided by the credit card networks and vary depending on several factors.
Payment processor fees are charges made to your business for processing credit card and online payments from customers. The fee will depend on the payment processor’s pricing model and the purchase’s risk level. High-risk purchases include orders taken over the phone or e-commerce, while low-risk purchases are made at your terminals.
The best way to find your fee is to calculate the effective rate, which is the amount your credit card company charges you for accepting credit card payments.
Effective rate percentage = (Total amount deducted for processing / Total monthly sales) x 100
This is a lot to take in, but passing credit card fees to your customers will help avoid overcharging and make this less of a headache.
Legal and Regulatory Considerations
Before charging credit card fees to customers, research the legalities in your area. Some states cap surcharges at a certain percentage and fine you if you exceed it.
A surcharge adds an additional fee, tax, or cost to the transaction when customers pay with a card. You can add fees of up to 3% for Visa and 4% of the transaction for Mastercard. Surcharging is not legal in Connecticut, Oklahoma, Massachusetts, and Maine, and some states cap surcharge fees, like Colorado at 2%.
An important note: Small retailers cannot surcharge debit cards, even when they are run as credit. Additionally, before implementing surcharges, check the rules of the credit card networks you accept. Some credit card companies require a notification in writing at least 30 days before you begin surcharging.
Just make sure you do research to find out any legal implications of passing on credit card fees to customers in your state.
Related read: POS Debit and Point of Sale Charges: Basics for Retailers
Pros and Cons of Passing On Credit Card Fees
Passing on credit card fees to customers has several benefits for small retailers. However, it also comes with disadvantages that may not be pleasing to your customers.
Advantages for small retailers:
- Cost savings
- Improved cash flow
- Improved bottom line due to reducing the amount you pay to the processor
- Transparency with customers
- You can compete with larger businesses that may be able to negotiate lower fees
Disadvantages and potential risks:
- Customer dissatisfaction, lost sales, and confusion at checkout
- Administrative burden
- Competitive implications
- Not legal in all states
- Legal issues or customer disputes if implemented incorrectly
- Possible random audits by credit card networks
There are other ways to pass credit card fees onto customers that limit confusion and customer dissatisfaction while still saving you money. We’ll explore those in the next section.
Related read: 5 Best POS Systems With Retail Credit Card Processing
Implementing Credit Card Surcharges Effectively
When it comes to passing on credit card fees to customers, you have a few options. Here are four choices, including their pros and cons.
1. Surcharging: As mentioned above, a surcharge adds an additional fee, tax, or cost to the purchase when customers pay with a card.
Pros
- Helps offset credit card fees
- Improves your bottom line because you’re not paying fees
- Provides customer convenience without the extra cost
- Accelerates cash flow if customers are turned off by surcharge fee
Cons
- Causes unhappy customers
- Creates higher prices
- It’s illegal in some areas of the U.S.
- Not allowed on debit cards
2. Dual pricing/cash discounting: This method offers customers a discount at the register when they pay with cash, helping avoid credit card fees altogether.
Pros
- Legal in all 50 states
- Improves cash flow
- Reduced risk of credit card fraud
- Can be automated with a point of sale system
- Get paid sooner
- Encourages cash payments
Cons
- Not all customers carry cash
- More cash deposits
- At risk for register money theft
- Customers annoyed they have to pay more using a card
Related Read: Dual Pricing Guide
3. Convenience fees are charges a business adds to customers' bills when they pay with a method that is not the business' standard. For example, your retail store may accept cash and low-cost credit processing. If you have an online shop, you may tack on a convenience fee to cover website and processing fees.
Pros
- Payment flexibility for customers
- May increase sales
- Offsets credit card fees
Cons
- Each credit card company has strict rules to adhere to
- May deter customers who want to pay another way
- Competitors who don’t charge convenience fees will appear more affordable
4. Minimum purchase amounts: This is the smallest amount a customer can spend using a credit card. This helps retailers offset the cost of interchange fees. Under the 2010 Dodd-Frank law, you are allowed to set a credit card minimum of up to $10 as long as you set the same minimum for all cards you accept. This minimum only applies to credit cards, not debit cards.
Pros
- Alleviate processing fees
- Increase transaction sizes
- May encourage more cash sales
Cons
- Customer frustration when they have to add more to a transaction
- Lose out to competitors who don’t have minimum purchase amounts
- May not be useful if you sell high-priced items
No matter which option you choose, you need to be clear and intentional with your signage so customers are not shocked at the register.
Practical Tips for Implementing Surcharges Without Alienating Customers
Not informing customers about additional charges they may incur at the register will only hurt your reputation. To avoid sticker shock, make it clear that there will be extra charges with signage at entry and checkout. These signs could inform your customers of charges, but they can also promote the benefits of using alternative payment methods.
For example, near your credit card terminal, place a sign that states your surcharge/convenience fee and/or minimum purchase amount, and implement dual pricing by encouraging your customers to save by paying with cash.
Alternative Strategies for Passing Credit Card Fees to Customers
Not all credit card processing fees are set in stone. Try calling your provider to negotiate a lower processing rate. If that doesn’t work or doesn’t sound like something you want to try, invest in a point of sale (POS) software system that minimizes cost altogether.
What does a POS system have to do with credit card fees? POS Nation’s credit card processing streamlines the customer checkout experience by speeding up transactions, ensuring transactions are accurate, and reducing processing fees. There are no long-term contracts, which means you aren’t locked into another processor’s rates or rate increases.
Our dual pricing feature allows you to accept all forms of payment — including credit cards — without incurring any of the costs to your business. Plus, customers who integrate POS Nation’s payment processing and POS system enjoy free 24/7 support and reliable solutions during outages.
Related read: Processing Credit Cards with a POS System
Pass Credit Card Fees to Customers and Improve Revenue With POS Nation
Credit card processing fees can have a significant impact on a small retailer’s bottom line, especially if your customers aren’t helping you offset the cost. Keep more money in your account by investing in a POS system that encourages cash payments by displaying dual pricing on credit card terminals.
When you integrate credit card processing with POS Nation’s POS system, you can house all your business information in one place, which means easy access to inventory, reordering, and more.
Schedule a demo to see our dual pricing feature in action.
