Customer paying with credit card at a cafe

Credit Card Surcharges Hurt Your Business—Do This Instead

Profit margins are tight right now, and as operating costs increase, many businesses wonder if they should surcharge credit cards. While there are pros and cons to surcharging, most businesses are better off avoiding it. Here’s why credit card surcharges hurt your business—and what you should do instead to raise revenue and keep customer loyalty.

What is a Credit Card Surcharge?

A surcharge on a credit card transaction is an additional fee that businesses can assess to cover processing costs. It’s typically a percentage of the sale rather than a fixed amount. For example, if you have a 3% surcharge, a customer’s $10 purchase becomes $10.30 ($10 + the $0.30 surcharge).

Surcharges are technically different from “service fees” or “convenience fees,” which businesses can charge regardless of how the customer pays, but customers often think of them in the same way. Just like there’s nothing “convenient” about paying an extra $15 per concert ticket just to have them electronically delivered, surcharges often carry a similar negative connotation.

Why Surcharges Can Hurt Your Business

Surcharges do help cover costs, but they often harm more than they help. Here’s why.

They alienate customers. Customers don’t receive anything from paying a surcharge, so they often think of it as a business just taking money from them, as if you are imposing an extra tax. When you surcharge your customers for using a credit card, but not other payment methods, customers often view this as unfair. It’s generally good for small businesses to accept credit cards, but it leaves a sour taste to add a surcharge to that service.
They’re bad for PR. Surcharges can damage your business’s reputation. In the age of social media, it only takes one surcharged customer to post about their bad experience online, and suddenly your whole pricing structure seems dishonest.
They may cause legal trouble. While credit card surcharge laws vary by state, they are legal in most places. Only Massachusetts and Connecticut don’t allow them, but many other states have attempted laws that were later found unenforceable. Still, it’s best to avoid a potential legal battle, especially since there are easy ways around it.
They’re unnecessary. There are other, better ways to increase profits without surcharging your customers. We’ll discuss some of those methods below.

The Pros and Cons of Surcharging

There are two sides to every coin, and surcharging is no different. If you’re wondering if you should surcharge credit cards at your business, it’s worth weighing the pros and cons.

PRO: You Can Make More Money. If you surcharge your customers on credit card transactions, you will cover the interchange cost and other processing fees. Recovering these fees on every transaction raises your bottom line.
CON: You Run the Risk of Losing Customers. As mentioned, surcharges can alienate customers and lead them to take their business elsewhere. Even if you do make more money from surcharges, it could be offset by the loss of customers.
PRO: You Can Keep Prices Lower. Instead of “baking in” a processing fee to your item cost, by surcharging, you pass the credit card fee onto the customer. You can advertise lower prices for your items and services, which can be an effective marketing tactic.
CON: You May Damage Your Reputation. Of course, when the customer pays with a credit card, the item won’t seem cheaper. If you do charge a surcharge on credit card transactions, make sure to clearly post this information so customers are not surprised—and angered—at the checkout counter.

What To Do Instead

Surcharges on credit cards generally do more reputation harm than good. The best way to increase profits is to find other ways to cut costs or increase revenue, rather than surcharging your customers. Here are some of the best alternatives to surcharging:

Offer discounts for cash. It’s the same net effect, but instead of charging more for credit card payments, you can charge less for cash payments. Many customers will still pay by credit card anyway, but they will no longer feel that they’re being penalized for it.
Increase prices. Assuming your customer base isn’t too price-sensitive, you can increase prices across the board to compensate for the costs of credit card processing fees. This is a simple way to cover your costs without surcharging customers.
Implement a minimum purchase amount. You can require customers to spend a certain amount of money to use a credit card (up to $10). If you’re concerned about the laws in your state and if this is truly a legal way to get around credit card surcharges, know that this is protected under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as long as you hold the same minimum for every type of credit card. (For example, the minimum amount can’t be different for Visa and Discover.) This is a gentle way to discourage costly retail transactions, and it may even encourage customers to spend an extra few bucks to get over the minimum.
Switch to a better payment solutions provider. Not all payment processors work the same way. While most charge based on volume or number of transactions, some processors, like Synapse, charge using a subscription-based model with no hidden fees. By switching processors, you might not need to add a surcharge on credit card transactions because your overall processing costs would be lower.

Choosing the right alternative will depend on your business, so consider all your options before making a decision. Surcharging customers should always be a last resort.

Final Thoughts on Credit Card Surcharges

While surcharges might seem like an easy way to increase profits, they typically do more harm than good in the long run.

There are many other ways to increase profits without surcharging your customers. Be sure to explore your options and choose the one that makes the most sense for your business.

Need help? We’re happy to look at your most recent merchant statement and calculate exactly how much you could save with a few changes to your processing pricing structure. There’s no reason for surcharges when simply switching processors could save your business thousands per year. Fill out the form on our website for a no-obligation chat to see how Synapse can help you save, or give us a call at 800-925-5191. We look forward to speaking with you.