What is a credit card surcharge?

A credit card surcharge is an added fee businesses might charge when customers pay with a credit card. This fee can help companies cover the costs of processing credit card payments, which are typically a percentage of the transaction amount and can be quite expensive. The surcharges come from a 2021 class action lawsuit where Canadian merchants sued Visa, Mastercard and several banks, saying credit card processing fees were too burdensome for their businesses. The settlement allowed companies to add surcharges to cover some of these costs, with a limit of 2.4 percent. The court ruling stated that as of October 6, 2022, merchants would have to give Visa, Mastercard, and their bank at least 30 days’ notice before adding surcharges. This meant that from November 2022, some shoppers started seeing these fees at checkout.

Surcharge vs convenience fee

A merchant adds a surcharge to cover processing costs. A convenience fee applies for using specific payment methods, like online or phone payments. Credit card surcharges are extra fees when paying with a credit card, unlike a convenience fee that can apply regardless of the payment method.

Why surcharging matters

Credit card processing charges can be difficult to manage and can add up quickly. Over time, these fees have increased, especially for smaller businesses, which often pay more than larger companies, making it more challenging for them to compete. Business owners now have the option to explain to their customers why prices are going up and decide if they’ll pass these costs on to them. Businesses typically add credit card surcharges to cover the costs of processing credit card payments. When consumers pay with a credit card, the organization pays fees to their bank or payment processor, which can be a percentage of the transaction amount plus a fixed charge for every transaction. Passing surcharges onto customers can help businesses recover these costs, which is especially important for small businesses or those with tight profit margins.

Besides processing fees, there may be other expenses when accepting credit cards. These can include costs for maintaining the required hardware and software and ensuring compliance with security standards to protect customer data. Fraud is also a concern, where businesses may have to cover the cost of chargebacks from fraudulent transactions. Adding surcharges can be a strategic move, encouraging customers to use payment methods with lower or no fees, like cash or debit cards.

Factors to consider before applying surcharges

There are various factors to consider before you start applying credit card surcharges, such as:

Customer transparency

Being upfront with customers about extra charges shows transparency. Businesses can do this using visible signs, posting information on their websites or letting customers know verbally during transactions.

Legal compliance

In Canada, it’s legal for businesses to add credit card surcharges in all provinces and territories, except in Quebec.  

Know the rules

Credit card organizations like Visa and Mastercard set various rules, including limits on how much businesses can charge as a surcharge and requirements for informing customers about these charges.

Administrative overhead

Adding and managing surcharges might mean updating billing systems and handling extra paperwork.

Impact on customer behaviour

Consider how surcharges could affect customer decisions and bring about potential loss of business. Customers who disagree with surcharges could switch to other payment methods or take their business elsewhere.

Competition and market position

Watch how your competitors deal with credit card fees. Adding a surcharge might make your business less competitive if they’re not charging the same fees.

Transaction frequency

Businesses with many credit card transactions might find that surcharges help cover processing fees, but those with fewer purchases might not benefit significantly.

Customer satisfaction

Clients may view surcharges negatively, so consider a balance between making extra money and keeping your customers happy.

Perform regular reviews

Adjust your surcharge rates regularly, especially if your processing costs change. This strategy can keep your surcharges aligned with actual costs and legal rules.

Offer multiple payment options

Offer customers different payment options, including ones without surcharges, such as cash and debit cards. Some businesses offer customer discounts even if they’re not using credit cards.

Educate staff

Train your staff to explain your surcharge policy clearly. Giving your team the knowledge to answer questions and explain why the surcharge exists and how they calculate it can help maintain a positive customer experience.

Credit card surcharge pros and cons

While surcharges can help cover transaction costs, it’s also important to consider how they might affect customer relationships and spending habits. Here are some of the benefits and drawbacks of credit card surcharges:

Pros

Below are some pros of adding a credit card surcharge:

• Recover costs: Surcharges can help cover expenses, such as processing credit card payments, including per-transaction fees, percentage-based fees and monthly charges from payment processors.
• Reduce overhead: By adding a surcharge, you can lower the costs linked to credit card transactions. This might help keep products or services more affordable without increasing prices for everyone.
• Encourage alternative payment options: Surcharges can encourage customers to use cheaper payment methods like cash or debit cards, lowering overall business transaction fees.

Cons 

Below are some cons of passing on credit card surcharges to customers:

• Negative customer reaction: Customers might see surcharges as a penalty for using their preferred method of payment, which can cause dissatisfaction or make them choose competitors who don’t have these charges.
• Reluctance to spend: Some customers might change their spending habits to avoid credit card fees, which could lead to businesses missing out on bigger sales.
• Complex pricing: Adding surcharges can complicate pricing and confuse customers at checkout, especially if they don’t know about the extra cost until the end of the transaction.

Credit card surcharge alternatives

There are a few ways to go about avoiding credit card surcharges for customers, such as:

Selecting an optimal point-of-sale system

Some point-of-sale (POS) systems suit business transactions better and offer more attractive rates. A POS system that fits well with your operations can speed up processing and lower costs.

Shop around

Many payment processors offer competitive rates that can lower transaction costs. By comparing different processors and selecting one with lower fees, you may not need to add surcharges.

Incentivize other payment methods

Offering discounts for using cash, debit, cheques or electronic money transfers can encourage customers to use cheaper payment methods. This strategy can help minimize the number of credit card transactions and reduce related fees.

Negotiate with merchant services

Businesses can negotiate with their merchant services provider for better terms. Some providers might offer lower rates if you have a high volume of transactions or are a long-time loyal customer.

Implement a service fee

Instead of charging a specific fee for credit card payments, some businesses add a small service fee to all transactions. This strategy can make it easier for consumers to accept and avoid the negative feelings associated with credit card surcharges.

Batch transactions

By handling transactions in batches rather than one at a time, you can lower the fees charged by credit card processors for each transaction.

Limit card payment acceptance

Some businesses limit credit card use for small transactions because the fees can overtake a large portion of the revenue.

Offer loyalty programs

Offering programs that include a membership fee in the processing charges can spread these costs out over many people, so they have less effect on each transaction.

Improve operational efficiency

Making your business operations more efficient can help cover payment processing fees. This might mean improving inventory management, cutting waste, or enhancing customer service to keep more customers.

Cost absorption

Some organizations might cover the fees and make up for it by slightly raising prices on their products and services.

Whether you implement a credit card surcharge or opt for an alternative, your choice should align with your business’s dedication to customer service and match its operations. The aim is to stay profitable while making transactions fair and easy for customers.