As a business owner, you are undoubtedly aware that accepting credit cards is an important part of doing business. So few people carry cash or use checks anymore that a business that does not accept credit or debit cards is likely to lose customers to other businesses that do accept plastic. And it’s not like business owners don’t use credit cards themselves; most small businesses have company credit cards to help manage their own expenses and earn business credit card rewards.
However, opting to accept credit cards for payments costs your business money. With transaction fees as high as 4 percent, you stand to lose as much as $4 for every $100 a customer charges. In a business with a tight profit margin, like a convenience store where most transactions are $10 or less, those fees can add up over the course of a year and take a big bite out of profits.
Many merchants simply accept credit card processing fees as a cost of doing business, and customers are none the wiser as they happily swipe their cards to make their purchases. But a growing number of merchants are unwilling to keep eating credit card processing fees and are looking for ways to pass them on their customers.
Credit Card Fees and the Law
The first question that any business owner needs to consider before charging customers a fee to use their credit cards is whether or not it’s legal.
In 2013, the major credit card issuers ruled that merchants can add a surcharge of up to 4 percent to all purchases made via credit card. The so-called “checkout fee” was designed to help merchants recoup the costs of credit card processing.
In the three years since the rules changed, very few major retailers have chosen to add the fees, noting that it placed an unfair burden on customers. In addition, 10 states — California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas – made the surcharges illegal. It’s also important to note that surcharges on debit card purchases are illegal in every state, since the maximum fee on a debit card purchase is capped at 21 cents per swipe.
Further complicating matters is the fact that a merchant’s ability to add a surcharge to credit card purchases is also governed by their individual relationship with the card issuer. Currently, only Visa and MasterCard allow merchants to pass on fees; American Express and Discover prohibit merchants from doing so as part of their terms of service. As a result, merchants have the option of only accepting MasterCard and Visa, since the laws states that surcharges must be applied to all cards, or not charging a fee to anyone.
In addition to restrictions on which cards can be charged a fee, merchants must also comply with other rules. The card issuers must be notified that you will be adding the fees, and customers must be notified by clear signage at checkout or in documented payment terms on contracts before they use their cards. The fee must also be noted as a separate line item on the receipt.
It’s Legal — But Is It the Right Thing to Do?
As noted previously, many merchants understand that they can add a credit card surcharge, but choose not to to keep their customers happy. But sometimes, slim profit margins dictate tough decisions, and passing on fees is a matter of necessity.
Some companies have found a way around the restrictions on credit card surcharges by offering a discount to those customers who pay with cash or debit card. The most common place to see this is at gas stations, where the pump displays a cash price and a credit price. Other businesses have opted to offer a flat discount to cash customers, usually based on their average transaction fee.
However, the most common way to avoid paying excess transaction fees on credit card purchases is to set a minimum purchase amount for credit card purchases. This is legal in every state, and merchants can set a minimum purchase of up to $10 for credit card users. The rule must be clearly posted, but merchants who enforce minimums report that customers generally either choose a different payment type, or buy more to meet the minimum.
It is up to you as the business owner to determine how you want to handle credit card fees. Some argue that it is unethical to charge customers more for using a particular form of payment, but others note that other costs of doing business are passed on to consumers, so why should these fees be any different? At the end of the day, you need to review how much your business is spending on transaction fees, and make the adjustments that you deem necessary to stay afloat.