Most organizations factor in the cost of doing business when pricing their products or services. However, the costs of credit card acceptance have been a sticking point with many merchants for years, prompting some to tack on a surcharge when their customers use a card.
Although this line of thinking may be understandable, as Craig Lancaster, Payments Analyst at Javelin Strategy & Research, found in Surcharging on Card Transactions: In Search of Balance, substantial risks come into play when a business decides to surcharge, and there are often better ways to pass on costs without alienating customers.
Scaling the Conversation
Most businesses don’t itemize their overhead or supplier costs when presenting the price of their product or service because it immediately invites questions from customers.
“I recently bought a car, and if they had put in front of me that here’s what we’re going to pay the salesperson for having brokered this deal, I would have said, ‘What, you weren’t willing to negotiate with me on price? I see exactly where you could give me a little bit of a break,’” Lancaster said. “Not just in commission, but things like, ‘Do you really need a facility fee?’ or whatever.
“There’s a reason that they don’t line all that stuff out—because they don’t want to put the cost of doing business in the face of the people who come in and buy their products.”
Although it is often not the best practice to single out credit card card acceptance fees as the expense to pass on to customers, there are instances when it is appropriate.
Lancaster examined the case of a small, independent Montana bookstore whose owner took to social media to inform her customers that card acceptance fees were becoming a burden.
The bookstore owner understood that card acceptance was a necessary part of business and did not want to surcharge the full 2.6% interchange fee. Instead, the business owner instituted a 15-cent transaction fee on card payments, a cost imposed by the payment processor. Most of her patrons were sympathetic.
“She said she has seen more cash payments since making the announcement,” Lancaster said. “Cash has its own risks—not the least of which is that it’s sitting there in the till—but a small merchant like that doesn’t have a lot of options. She can accept checks and all that goes with that, and she could guide her customers to cash, and that’s pretty much it.”
Although there are digital options like ACH or even real-time payments, small businesses don’t yet have the tools to implement these payment types for everyday operations.
Additionally, a bookstore owner’s options are limited by the fact that most barcodes on the back of a book are embedded with a price.
“It’s not like she can raise her prices 3% across the board,” Lancaster said. “The customer will ask why the bookstore is charging $18-plus on a $16.95 paperback. I think she probably did the most responsible thing she can do. She’s going to offset her per-transaction cost because that’s locked in, and she has a personal relationship with her patrons where she can guide them toward cash. You can scale that conversation if you own an independent bookstore.”
Penalties and Pushback
Although the bookstore owner took the right tack, many other businesses aren’t surcharging appropriately.
“I stumbled across this one by accident,” Lancaster said. “It was a restaurant in Montana that I hadn’t been to before, and I wanted to try it out. I got up to the front and there’s a sign that declared, ‘We’re going to surcharge 3.5% on all card payments, both credit and debit.’ But surcharging debit cards is in violation of their card network agreements—you can’t do that.”
A small restaurant or merchant may get away with surcharging on debit cards for some time, but the card networks have increasingly begun to crack down on these infractions. Visa and Mastercard have even utilized mystery shoppers to investigate if a business is compliant with these rules.
If they aren’t, the merchant could face thousands of dollars in penalties, just on the first offense.
“If you persist, you can end up on a blacklist where you cannot accept card payments anymore, and that’s not a place a merchant wants to be if you accepted them in the first place,” Lancaster said. “It’s not an abstract risk; it’s a real one. This restaurant might get away with it for a long time, but it absolutely should not be doing it. It’s in violation of its card network agreements.”
Beyond repercussions from the card companies, there is a substantial possibility that the restaurant’s policies will drive business away. Even if some customers aren’t aware that they can’t be surcharged for debit card transactions, many will resent the extra fee.
If they are aware, it puts the customers in the tough position of having to stand up for themselves over what some may view as a nominal charge.
“Do you want to have this fight with a beleaguered restaurant owner while everybody else is sitting around trying to have their breakfast?” Lancaster said. “I glancingly asked the guy—he wasn’t the owner—who was ringing up my sale, ‘What do you think of the surcharge?’ He goes, ‘I wish we didn’t do it; we get too much pushback.’”
Merchant Dependent
Resistance from customers who are simply using their preferred method of payment—which happens to be the predominant payment type in the United States—isn’t likely to diminish. However, some consumers may endure a surcharge in certain scenarios.
“If they like your restaurant or they like your product, they’ll suck it up,” Lancaster said. “If you’re a coffee shop owner and you’ve got a lot of competitors, you have to be mindful of the cost you’re presenting them for what you deliver. If you’re a specialty person like an RV upholsterer and you’ve got very few competitors, you can pretty much tell people, ‘Hey, this is what it costs to do what I do. Take it or leave it.’”
Although some merchants may be able to surcharge with near impunity, the more that fees mount up, the more likely it is that customers will be deterred. For example, during the recent egg shortage, some restaurants decided to institute a per-egg surcharge.
Much like credit card surcharges, most customers probably understood that the price of their meal was higher because of circumstances outside the business owner’s control. This increased transparency would even allow the customer to choose an item that didn’t include eggs to avoid the fee.
However, the more that customers must be selective about the items they order or the types of payment they use, the greater the chance that the customer experience will be diminished. This could have a significant impact on a local retailer.
“It’s the smaller merchants who are the ones that are most likely to surcharge because the Walmarts and the Targets and the big-box stores of the world can erase it with volume,” Lancaster said. “The smaller merchants are the ones that are more likely to surcharge, but they’re also the ones that are in the most tenuous position with their customers.”
Off the Receipt
There are several factors that small businesses should consider as they seek a balance between offsetting interchange fees and pleasing their customers. First off, they must understand their role.
“Do you know your customers?” Lancaster said. “I don’t mean that in the authentication way. I mean that when a guy walks through the door, do you say, ‘Hey, Wesley, how’s it going? it’s good to see you again.’ If you’ve got that relationship, you can leverage that for, ‘Hey, man, listen, I got to tell you, these card processing fees eat me up. I love having you in the store; I love catering to your tastes. Is there any chance you could bring cash?’”
Most consumers are reasonable, and they understand the concepts of card acceptance. If they have a personal relationship with a merchant, the customer will likely be amenable to shifting from their norm.
Beyond steering customers to other payment types, the cost of card acceptance—like other business expenses—should be folded into the price whenever possible.
If a business must charge a fee, it is often best to itemize the charge by another name. For example, if a bar has bouncers, it could list the charge as a security fee. If a theater troupe rents performance space, it could call the surcharge a facility fee.
Regardless of the approach a business takes, card acceptance costs are best kept off the receipt.
“I call surcharging a perfectly understandable bad idea because that’s what it is,” Lancaster said. “My own personal view is that it’s too risky in any number of ways, but mostly in the customer relationship. If I show up somewhere and I want a product or a service and I can’t pay the way I want to pay, that’s the quickest way to drive my business somewhere else.”
