Small business owners know that accepting card payments is essential to staying competitive, but how satisfied are they with their payment processors? A recent J.D. Power study, based on responses from 3,841 small business customers of merchant services providers, gives us info about this topic. It reveals a growing reliance on card payments, increasing service fees, and the rise of credit card surcharges as a response to processing costs.
Increase of Credit Card Surcharging at Small Businesses
One of the most eye-opening takeaways from the study is the growing trend of small businesses adding surcharges to credit card transactions. According to J.D. Power’s research:
- 34% of small businesses now add a surcharge for credit card transactions.
- Pricing structure affects surcharging decisions. Businesses using flat-rate pricing models are significantly more likely to add surcharges.
- Smaller and newer businesses are more likely to pass these fees onto customers.
So, why is this happening? The simple answer is cost. Payment processing fees can eat into profit margins, particularly for businesses with lower transaction volumes. By adding a surcharge, merchants aim to recoup some of these costs rather than absorbing them entirely.
How Surcharging Works
Surcharging is when a business adds an extra fee to a customer’s bill when they pay with a credit card. The idea is to offset the processing fees that card networks and banks charge businesses for each transaction. However, surcharging isn’t as straightforward as it seems—especially in certain states like California.
Is Surcharging Legal in California?
California has historically had a complicated relationship with surcharging. For years, a law prohibited merchants from adding extra fees to credit card transactions. However, this law was challenged in court, and in 2018, the U.S. Supreme Court ruled that California businesses could impose surcharges as long as they disclose them clearly to customers.
California Surcharge Rules:
If you operate a business in California and are considering adding a credit card surcharge, keep the following in mind:
- Clear Disclosure: You must inform customers of the surcharge before they complete their transaction. Signage at the point of sale is typically required.
- Limits on Surcharges: The surcharge cannot exceed the actual cost of processing the transaction (usually around 2% to 4%).
- No Surcharges on Debit Cards: Federal law prohibits adding surcharges to debit card transactions, even if the customer selects “credit” at checkout.
What This Means for Small Businesses
For many small businesses, surcharging may seem like a practical way to reduce expenses, but it’s not the right fit for everyone. Business owners should weigh the pros and cons before implementing a surcharge policy.
Pros of Surcharging:
- Helps offset credit card processing fees
- Can encourage customers to use cash or debit payments
- Can improve profit margins for businesses with thin margins
Cons of Surcharging:
- May discourage customers from using credit cards, leading to lost sales
- Requires compliance with disclosure laws and card network rules
- Can create a negative customer experience if not communicated properly
Alternatives to Surcharging
If surcharging doesn’t seem like the right move for your business, there are other ways to manage payment processing costs:
- Negotiate Better Rates with Your Payment Processor – Some merchant service providers offer lower rates for businesses with higher transaction volumes.
- Offer Discounts for Cash Payments – Instead of charging extra for credit cards, you can encourage cash payments by offering small discounts.
- Explore Different Pricing Models – Some processors offer interchange-plus pricing, which can be more cost-effective than flat-rate models.
- Invest in an Integrated POS System – Some modern point-of-sale (POS) systems come with features that help track and reduce transaction costs.
Contact Us for Information About Surcharge for Using a Credit Card
J.D. Power’s study highlights a growing concern for small businesses: managing payment processing costs while keeping customers happy. With more small businesses adopting surcharging, it’s important to understand the legal landscape, particularly in states like California.
Whether you decide to add surcharges or explore alternative cost-saving measures, being proactive in managing payment processing fees can help your business remain competitive and profitable. Contact Dynamic Merchant Solutions about questions you have about surcharging.
