New Credit Card Surcharge Rules Mean Big Changes for Small Businesses

For years, merchants have been contractually barred from adding a surcharge for credit and debit card customers, even though they must pay a fee for these purchases themselves.

While credit card processing fees may seem insignificant, accounting for a mere 3-4% of the sale, the addition of a per-transaction fee up to $0.20 can add up quickly, especially for merchants who make a lot of smaller sales.

A new settlement brought by retailers around the United States against banks issuing cards has now given merchants the right to pass on a surcharge to customers paying with plastic, as well as the ability to set a minimum purchase amount to cover overhead.

Still, this leaves a lot of questions and it may not be the huge victory it seems for small business owners. Not all businesses may legally be allowed to add a surcharge, despite the ruling, and it may not be in your best interest to do so.

Can You Legally Add Credit Card Surcharges?

Before you even think about adopting such a surcharge, it’s important to realize that there are still many conflicting laws across the United States as well as varying policies by different card networks.

Some states forbid charging extra for a credit card transaction, including California, Colorado, Massachusetts, New York, Oklahoma, Texas, Connecticut, Florida, Maine and Kansas. This already accounts for about 40% of the population in the country and a handful of other states are considering similar laws.

The issue becomes even more complicated if you have locations in multiple states. If you have even one store location in a state that bans these surcharges, you won’t be able to charge extra at any of your locations thanks to rules set by Mastercard and Visa banning retailers from adopting different payment policies in different locations.

Do you accept American Express? If so, you need to understand that this new settlement bans merchants from discriminating across credit card networks and American Express requires that all payment forms be treated equally. If you accept American Express and want to add a surcharge to Visa and Mastercard transactions, you must apply this same surcharge for debit card transactions.

Given the fact that debit card transactions have lower discount rates and fees, it can be a losing wager to levy the surcharge against customers.

Are Surcharges Even a Good Idea?

Assuming you don’t operate in a state with an outright ban on credit card surcharges, is it even a smart move to pass along these fees to your customers? Small business owners have the most to gain by charging a surcharge as the 3-4% arguably hurts them more than it does large retailers. Still, there are serious consequences to consider.

We are quickly becoming a cashless society. In 2011, only 27% of point-of-sale purchases were made using cash and, by 2017, that number is estimated to be only 23%. A growing number of restaurants and stores won’t even accept cash anymore.

If customers can’t use their debit or credit card at your store without paying a fee, they may simply go elsewhere.

Here’s another often overlooked consideration: customers tend to spend more when they use plastic over cash, which is all the more reason to make it easier for them. This well-known effect has been studied since the 80′s and researchers have found that people using a credit card actually pay less attention to prices when paying with plastic and are less likely to remember how much they spent on their card than if they paid in cash.

A Note About Minimum Payments

Until recently, minimum payments were prohibited by most card networks, forbidding merchants to set a minimum for credit card purchases to help cover their cost for payment processing.

Retailers and small business owners approached Congress, however, and got a small notice placed in the Dodd-Frank Act in 2010, legally allowing merchants to set a minimum purchase up to $10, provided all cards are treated the same.

While this wasn’t part of the settlement, it’s important because that rule was expected to create a big backlash with customers, although this never materialized. It seems most consumers in the United States understand that profit margins can be very slim, especially for small businesses, and business owners risk losing money on a transaction without such a limit.

It also wasn’t adopted on a wide scale, as mostly independent and small businesses turn to this option when necessary.

The parallels between minimum payments and surcharges are there, and adding a surcharge may or may not be the huge deal it seems, depending on how much your customers spend, on average.

The Bottom Line

For most retailers, these new credit card surcharge rules won’t change very much, although small business owners may appreciate the ability to offset their costs. Still, there is a better alternative to adding a surcharge that won’t alienate customers: institute a small price change across the board to cover the cost of credit card processing and offer a discount to customers who pay in cash. In this way, you can appear generous rather than stingy to your customers and avoid losing business to competitors who have adopted the same strategy.

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