The most familiar example of surcharging might be the cash-or-credit pricing at gas stations, but more businesses are following that lead. While it’s becoming common for customers to pay for the right to use a credit card at restaurants and retailers, credit card surcharging hasn’t been a common practice in the healthcare industry.
In a recent PaymentsJournal podcast, Ali Badawy, Director of Enterprise Healthcare Payments Solutions at U.S. Bank, and Don Apgar, Director of Merchant Payments at Javelin Strategy & Research, discussed how healthcare providers can leverage credit card surcharging to cut costs significantly while keeping their customers engaged.
Consumer Conditioning
Credit card surcharging has been permitted in most states since 2013, and it allows businesses to offset the credit card processing fees charged by card brands like Visa®, Mastercard®, and Discover®. The fees are instead passed to the customer when they use a credit card at the point of sale.
The surcharge amount is often a percentage of the overall purchase and can range from 1% – 4% and can be applied in any environment where a cardholder makes a payment—in-store, online, and even in text-to-pay. Surcharges are only allowed for credit card transactions, so consumers can avoid them if they pay by debit card, check, ACH, or cash.
“When surcharging was launched, business customers were skeptical, and understandably so,” Badawy said. “However, as it has developed over the years, consumers are more conditioned to it. If a customer’s transaction is in the government space, or with an online retailer or service business, those environments have adopted surcharging to where now consumers expect it.”
The Proliferation of Surcharging
The normalization of surcharging has expanded its use cases, which now covers industries across the spectrum. As businesses have shifted online, surcharging has evolved to become a factor in e-commerce.
The driving force behind the proliferation of surcharging is cost savings. Even though credit card fees of 1% to 4% might seem relatively nominal, the aggregate can quickly become a significant amount. Reducing those costs is what makes surcharging attractive to business owners, especially for enterprise-scale businesses.
“For example, a large healthcare franchise in the ambulatory space was exploring options to help their franchisees reduce their overall costs,” Badawy said. “After they researched surcharging, they found out they could save over $1 million each year based on their volume numbers.”
A Safe Strategy
The main concern about surcharging is that it could alienate customers, but that is rarely the case. Once a business starts a surcharge program, they are highly unlikely to terminate it.
“There are often apprehensions when an organization’s average ticket size is large, ranging from $5,000 to $20,000,” Badawy said. “The business owner might be concerned that if they apply a surcharge, they will lose the customer, but that’s usually the farthest thing from the truth.
Healthcare providers might still be reluctant to surcharge because it isn’t a common practice in the industry yet, but those concerns are likely unfounded.
“Most consumers aren’t shopping for a healthcare provider based on cost,” Apgar said. “They go to a doctor or a dentist because they have a connection with that provider and they’re receiving good care. Especially in industries like healthcare, where there can be substantial inelasticity in pricing, a nominal credit card surcharge isn’t enough to alienate a customer. From a business perspective, it’s an increasingly safe strategy to use.”
Every Endpoint
When researching banks or processors that offer both credit card processing and surcharging, business owners should also look for a processor that specializes in healthcare. In addition, the business owner should understand if the platform allows surcharging at every endpoint where the provider collects payments.
“If the software only allows surcharging in the front office of a healthcare entity, for example, but the majority of its collections are in the back office or online, then that service is not likely to help the business achieve its goal,” Badawy said. “A business that’s considering credit card surcharging will have to evaluate every end point where they’re collecting payments and verify if the process can support their needs.”
Partnering with the right processor before shifting into surcharging is key because there are compliance requirements. Regulations don’t allow surcharges on debit cards, so the card acceptance technology must be able to discern a credit card from a debit card and only apply the surcharge to credit cards.
A business is also required to advise customers that it will apply a surcharge to credit card transactions. There should be clear signage in the front office, but also everywhere a provider accepts payments, including online check-out. Another best practice is to detail surcharges on billing statements and invoices.
“A business has to apply a surcharge correctly and compliantly, but it should also generate a consistent user experience,” Apgar said. “As the customer does business with the organization across a variety of channels, whether it’s paying in an office or paying on a bill pay site, it’s important to find a process that that can support all those aspects.”
Getting Relief
Surcharging at the point of service will continue to gain momentum. Though some regulators have strived to reduce or eliminate credit card fees, there is no immediate shift on the horizon.
“The $30 billion settlement between Visa and Mastercard and merchants has been tabled, so who knows when businesses will see relief from interchange fees?” Apgar said. “Surcharging is a tool that merchants and healthcare providers can use today to offset some of the costs of credit card acceptance and still keep compliant and customer friendly.”
Particularly in healthcare, where many healthcare entities and systems have had lingering financial difficulties that were exacerbated by the pandemic, surcharging will pick up steam.
“As rewards cards, which often have higher processing fees, become more popular, surcharging is a means to offset those fees and keep business owners’ margins intact,” Badawy said. “Surcharging will grow within all verticals, but especially in healthcare, because it can substantially reduce costs. Healthcare providers can use those resources to serve their patients and scale their businesses.”
