What is surcharging? — Surcharging is the process of passing the cost of processing credit card transactions through to the consumer. Just like sales tax is added on to every transaction, surcharging allows the merchant to add a percentage fee to certain transactions to cover the cost of processing fees.
What cards can be surcharged? — A merchant is not currently allowed to surcharge a bank card, surcharges can only be applied to “credit cards”. This means that a card run as credit or debit that is linked to a bank account cannot be surcharged. Only credit cards can be surcharged. This might change if the Durbin Amendment is repealed but I don’t anticipate this change any time soon. Some merchants have started surcharging because they heard it was allowed but they are still in violation of the rules because they are surcharging every transaction.
I think this restriction is a good thing for the merchant, because it makes surcharging a better pitch. Rather than the merchant telling their customers, “We add a surcharge to every transaction to pay for the processing fees.” They can say, “As long as you use your bank card, we don’t have a surcharge on those, it is just the credit cards with their higher fees that we pass through to our customers.”
What states allow surcharging? — This is the biggest issue with surcharging currently. There are only 10 states that don’t allow surcharging, but the 10 states are, New York, Texas, Florida, Colorado, California, Kansas, Maine, Connecticut, Oklahoma, and Massachusetts. As you can see, many of the largest states don’t allow it. This is primarily due to pressure from consumer watch dog groups that believe allowing surcharging would hurt the consumer and it would dis-proportionality effect poor consumers who are more likely to use credit cards, rather than cash or cash equivalent like a bank card.
How do some processors surcharge in all 50 states? — There are several processing companies who are telling merchants to surcharge in all 50 states. This is because they have worked with the office of the Attorney General in each of the banned states to come up with verbiage that works. They may have to call it a convenience fee or something else. Some of these companies are reputable and some are not, so be careful. You would be wise to do your own research and contact the office of your Attorney General to confirm that what you are telling merchants is legal. Even if it is legal, it would be very simple for a state legislature to outlaw it. 2017 will be a year when surcharging changes rapidly, so you need to stay well informed.
Why haven’t the big box retailers started surcharging? — The consumer advocacy groups will literally light their hair on fire when Walmart adds a surcharge to their transactions and they simply don’t want the bad publicity. Also, whoever moves first, stands at a huge disadvantage, because one of their competitors will immediately move to position themselves as the “honest Abe” of retailing that is fighting against the money grubbing competitor who adds a credit card surcharge to every receipt.
The only way surcharging goes main stream is when a group of large retailers in an association of sorts gets together. In order to have publicity cover, a large retailer needs 5 other large retailers to implement surcharging on the same weekend. Better to be one of 5 retailers under attack than the only one. I do believe this will happen, because it will be retaliation by the retailers for the increase in interchange costs after the Durbin Amendment is repealed. If this does happen, it will be a land grab to get as many small merchants as possible because they will all switch when you say, “Target is doing surcharging, why aren’t you when you can cut your processing costs by 70%?
Those are the most frequently asked questions about surcharging, so how should you approach it and what should you do in 2017?
First, you should simply be aware of it and informed about it. Talk to your processor or, if you are an executive at a processing company, talk to your team about it. Understand that if large businesses really do implement surcharging and you don’t have the capability to do so, you will be in a bad position and your portfolio will be at risk.
Second, if and when you do offer surcharging, you should make sure your existing customers are aware of it. Even if you are in one of the states where this practice is not allowed, you need to tell your clients that. Let them know that there are some companies offering it in all 50 states but you are not comfortable with it yet. Give them a timeline of when this feature will become available. Worst case scenario for you is that they get a phone call or visit from a competitor offering to cut their fees by 70% and they think this is something you don’t offer.
Whether you hate surcharging, love surcharging or you are watching and waiting to see what happens, it is time that your customers were educated about this so that you can retain that relationship no matter what.
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