Credit Card Surcharges – The Finance Team’s Playbook

Why Add Credit Card Surcharges?

Credit card processing fees are typically only 2-3% of gross merchandise value.  At first glance these might seem like nominal fees.  However, if the majority of your customer base pays by card, these fees can have a material impact on the bottom line. 

Introducing a credit card surcharge allows your company to recoup part of these fees:

• Improves Margins: This recovered revenue directly bolsters your profit margins, adding another two or three percentage points.
  
• Fueling Growth: Funds can be reinvested in headcount for sales, marketing initiatives, developing new product features, or strengthening cybersecurity.

1.Understanding the Regulatory Issues

Before implementing any surcharge, it is important to understand the regulations governing surcharges for credit card processing fees. The rules vary by geography and payment network.

• Geographic Variations: Be aware that certain US states (e.g., Connecticut, Massachusetts) prohibit surcharges entirely, while others (e.g., Colorado, New York) have specific limitations. Similarly, international regulations differ, with some countries allowing them (e.g., Canada, Australia, with limitations) and others banning them for consumer transactions (e.g., UK).
  
• Card Network Directives: Major networks like Visa and Mastercard also have rules about credit card surcharges. These often mandate that fees appear as distinct line items, require advance notification to customers, and must not exceed the actual processing cost incurred by your business.

2. Designing the Surcharge Program

Identify which customer segments will be subject to fees, in which regions, and at what specific rates.

• Customer Segmentation: Consider categorizing your customers. Some may be exempt due to regional prohibitions or strategic business decisions. Others might always incur a surcharge (e.g., those on autopay with a credit card). A third group might incur a surcharge only when choosing a card at checkout.
  
• Dynamic Rate Cards: Surcharge amounts might need to fluctuate based on the specific card network (Visa, Amex) or card type (corporate, personal). For global SaaS providers, this could necessitate a complex ‘rate card’ to ensure compliance and fairness across diverse markets.

3. Managing Customer Communications and Backlash

The potential for customer dissatisfaction is a primary concern when introducing credit card surcharges. Proactive, transparent, and consistent communication is the best strategy to reduce negative reactions and maintain strong customer relationships.

• Multi-Channel Notification: Inform customers at every relevant touchpoint: during the sales process, at the virtual point of sale (self-service checkout, autopay enrollment, ‘Pay Now’ links), on invoices as a separate line item, and within your billing FAQs.
  
• Educate and Offer Alternatives: Clearly explain *why* the surcharge is applied and, crucially, highlight alternative, lower-cost payment methods (like ACH or bank transfers) that customers can use to avoid the fee. This empowers them with choice.

4. Exception Scenarios to Waive the Fees

Sometimes strategic exceptions are necessary to protect valuable customer relationships. Consider having a policy that exempts certain accounts from the surcharges.  Examples of groups that might be granted an exemption include:

• High-Value Accounts: Consider exempting key enterprise clients or those with significant growth potential. Putting a large account at risk over a relatively small surcharge is not worth the risk.
• “Grandfathering” Existing Clients: You might choose to exempt long-standing customers from new surcharges, especially during the initial rollout, to ease the transition and maintain goodwill. This can significantly reduce churn risk.

5. Automate Surcharge Calculations in the Billing System

Configure the billing system to match the policies and exception scenarios identified above.

• Smart Workflows: Advanced billing systems can be configured with business rules to automatically calculate and apply surcharges based on customer segments, regional regulations, and chosen payment methods.
  
• Standardize across Channels: Whether it’s during a monthly billing run, a self-service checkout, or a ‘Pay Now’ transaction, the software ensures the surcharge is correctly added and displayed as a separate line item, adhering to card network rules.