Cash is no longer king — a reality merchants must accept as they manage fees accrued by accepting credit cards.
For any merchant, regardless of size, credit card fees have become the cost of doing business. No entrepreneur likes to shoulder the costs associated with accepting credit cards, but the benefits of doing so almost always far outweigh the alternative.
Still, the million-dollar merchant question remains: Can I pass credit card fees on to my customers? There are both simple and complex answers to this question.
The Nitty-Gritty of Credit Card Fees
Any merchant who accepts credit cards knows they must abide by the contract agreements with card networks (Visa, MasterCard, American Express, Discover), which outlines what they can and cannot do. Today’s financial ecosystem gives card networks the power to control many aspects of how a merchant accepts credit cards, and what fees they can pass off to the customer. These policies differ by card network.
Within each of the fee structures, there are some key differences to be aware of. These include a convenience charge and a credit card surcharge. Although they sound similar, the application of each differs.
- Convenience Charges: These can be passed off to a customer only if it is not a standard service the merchant typically provides. For example, if a theater is offering the option to pay by phone or online, a surcharge may be applied since the buyer has the added convenience of buying outside the merchant’s physical location. These fees must be flat or fixed and must be included in the total transaction amount.
Across the credit card networks, however, these fees vary, and merchants must only charge with what each of their payment partners allows.
- Surcharge: This fee is more cut and dry. Surcharges apply to retailers who choose to build a fee into the cost of the purchase when a customer uses a credit card for payment. In some cases, it’s common to see merchants offer a discount for customers willing to pay in cash.
Merchant’s Rights: The Legal Grounds Behind Credit Card Fees
The history between merchants and credit card networks is filled with tension and a slew of antitrust court cases. Business owners know they must accept credit cards to attract and retain customers, but the power of credit card networks to dictate the fees has created a strained relationship between the two parties.
“Most of what retailers can and cannot do involving credit and debit cards is governed by their contracts with the card companies, not by state or federal law,” J. Craig Shearman, vice president of government affairs and public relations for the National Retail Federation told CreditCards.com. “So the question is not ‘Is it legal?’ but rather, ‘Do the card companies allow it?’”
On the legal side, the most recent example dates back to 2005 when a group of seven million retailers took on the card networks in an antitrust lawsuit. The merchant group accused the card networks and banks of conspiring to fix the interchange fees businesses were forced to pay for processing credit and debit transactions.
Fast forward to 2012 when this historic class-action case between Visa, MasterCard, major banks and the merchant group led to merchants gaining the right to apply a surcharge of up to 4 percent of credit card purchases. No surcharge can be applied to debit card transactions.
A court settlement in January 2013 ruled merchants can impose a surcharge (outside of the states that don’t allow credit card surcharges). Merchants can pass the same fee onto customers that they pay the card network per transaction. This battle, however, is an ongoing fight among merchant groups and credit card networks so these rules may change in the future.
Another interesting point about the settlement is that if a merchant adds surcharges for Visa and MasterCard transactions, they must apply it to American Express cards, too. But that may also put some merchants in violation with their agreements with Amex, which complicates the equation.
These policies, however, don’t apply to all states. Credit card surcharges are illegal in California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, Maine and Texas. Merchants should be aware of their state laws before applying convenience fees or surcharges to transactions.
The Customer Impact Of Credit Card Fees
To combat merchants from not accepting credit cards, Visa has recently added incentives for merchants who stop accepting cash. This may be the next trend among payment networks as a way to smooth over the interchange fee battle with merchants. This is a push from Visa for merchants to accept both credit cards and digital payments within the network.
Outside the contractual agreement and legal nuances over adding credit card fees to individual transactions, businesses must take into account how adding specific fees could impact customer satisfaction.
There’s no clear cut answer to the question, but business owners must ask themselves: Will adding a credit card surcharge or convenience fee turn away customers?
For many customers, the addition of a fee may create a negative experience and prevent them from coming back to that business. It may also give the perception the business owners value their bottom line more than their customers, which can lead to additional customer churn! Instead of adding a fee for certain types of transactions, a better practice would be to build in the cost of credit card processing by raising your prices across the board.
As mentioned above, another approach could be to offer a discount for customers who want to pay in cash. That way, you’ve created an incentive for one method, instead of a punishment for paying with credit card. Some merchants also set minimum credit card purchase amount to avoid high fees for low price transactions. In the end, it all comes down to perception and the type of experience you want to provide to your customers.
A negative payment experience can have long-term effects on customer retention, while a positive payment experience can boost customer satisfaction and impact the growth of your business forever.