Handling credit card fees is often a challenge for small businesses. The overall cost of these fees can add up quickly, affecting profits. Passing on credit card fees to customers potentially is one way to reduce these expenses, but it’s important to know the rules and understand customer reactions. This guide will help you decide if this is the right approach and explain the different methods available to charge these fees fairly.

Why Consider Passing on Credit Card Fees to Customers?

Non-cash processing fees are a necessary cost of doing business, but they can be expensive. On average, businesses pay between 1.5% and 4% of each sale as credit card merchant charges. For small businesses, absorbing these costs can impact overall profits. To manage these expenses, some businesses choose to pass the cost on to buyers. This approach is common, especially for small stores, since it helps them cover the average credit card processing fees without raising prices.

Is It Illegal to Charge a Fee?

One question often asked by business owners is that, is it illegal to charge a credit card fee? In most places, it is legal to pass these charges on to buyers, but some states have specific rules. For example, certain states restrict or prohibit adding charges for non-cash payments. Additionally, companies like Visa and Mastercard also have guidelines on how fees can be charged. Knowing the rules is key to staying compliant and avoiding potential fines.

Different Ways to Pass Credit Card Fees to Customers

If you’re considering passing on these charges to customers, there are a few ways to do it. The main options include surcharges, convenience fees, minimum purchase requirements, and cash discounts. Here’s a breakdown of each approach:

1. Adding a Surcharge

A surcharge is a straightforward way to charge customers. It involves adding a specific charge to these transactions to cover the processing cost. For example, if your surcharge is 3%, the buyer will see an additional 3% added to their total when they pay by card. However, surcharges are often capped at 4%, and some states may restrict them, so make sure you follow local regulations.

Pros and Cons of Surcharges

Pros:

• Allows you to cover merchant charges directly.
• Provides transparency by showing the fee to the buyer at checkout.

Cons:

• Buyers might be unhappy with the extra fee, which could impact customer loyalty.
• You must follow state laws and bank network rules carefully.

2. Charging a Convenience Fee

Another option is a convenience fee. This fee is different from a surcharge because it only applies in certain cases, like online or phone sales, instead of in-store purchases. If you primarily operate in-person, a convenience fee may be a helpful way to cover what is the extra fees put on a credit card without adding it to every transaction.

Pros and Cons of Convenience Fees

Pros:

• Legal in most states and may feel more acceptable to buyers, as it’s only added in specific cases.
• Can cover average credit card processing fees effectively without being applied to every sale.

Cons:

• Only works in certain sales channels, so it’s not a solution for all transactions.

3. Setting a Minimum Purchase Amount

Another approach is to set a minimum purchase requirement for credit card payments. This method doesn’t directly pass on the fee but reduces your processing costs by making sure each non-cash sale is worth the added expense. For example, you could set a $5 minimum for non-cash payments, which can help keep your merchant charges under control.

4. Offering Cash Discounts

A cash discount works by giving customers a slight price reduction if they pay with cash instead of adding a fee for card use. For instance, you could display a slightly lower price for cash payments to reduce credit costs. This way, buyers feel rewarded for using a cheaper payment method, and you avoid directly passing non-cash charges to customers.

Best Practices for Implementing Non-cash Charges

If you decide to pass non-cash charges to customers, it’s important to do it carefully to avoid upsetting them. Here are some best practices to make the process smoother:

Be Transparent About the Fees

Make sure customers know about the fees before they pay. Display a clear sign at checkout or on your website so customers understand they will be charged an extra fee for card use. Transparency is key to building trust, and customers will appreciate knowing the fees upfront.

Offer Payment Alternatives

When you charge customers non-cash charges, giving other payment options can help customers feel they have a choice. For example, offering debit or cash options can encourage customers to avoid the fee if they prefer. Debit cards usually have lower processing costs, so it may be worth promoting debit payments if possible.

Understand Local Regulations and Guidelines

Different states have different rules about credit charges, so make sure you’re following them. For example, some states require specific wording on signs, and others may limit the maximum fee. Check local laws or work with a compliance specialist to ensure you’re following all regulations, as penalties for non-compliance can be costly.

Choosing a POS System that Supports Non-cash Charges

Using a POS system that allows you to apply these fees easily can simplify the process. Here are some things to look for when selecting a POS system to support passing on non-cash charges to customers:

• Surcharge and Convenience Fee Options: A good POS system will let you add surcharges or convenience fees without hassle.
• Debit Card Discounts: Debit cards are often cheaper to process, so a POS that offers low debit fees can help reduce costs further.
• Customer Display Features:Some POS systems have customer-facing screens that display added fees, making it easier for customers to understand the costs.

Final Thoughts

Passing on credit card fees to customers helps businesses cover merchant charges without hurting profits. By using methods like surcharges, convenience fees, or minimum purchase amounts, you can effectively manage these costs. Just remember to check your state’s regulations to make sure you’re complying with the law.

With a well-chosen POS system, clear communication with customers, and a focus on offering payment options, you can cover average credit card processing fees in a way that works for both your business and your customers.