Small Businesses Turn to Customers to Shoulder the Load of Credit Card Processing Services

• Many merchants have added surcharges to credit card transactions to pass on processing fees to customers.
• Businesses must review applicable laws before adding new fees — it’s illegal to add surcharge fees to credit card transactions in several states.
• Retail customers are sensitive to surcharge fees, so merchants should carefully consider whether adding them will drive customers away.

Many small businesses are adding a surcharge fee to transactions in which customers pay with a credit card, according to a recent J.D. Power study examining merchant services in the U.S. 

Shoppers who frequent in-person businesses have likely come across notices posted near the point-of-sale in certain stores stipulating that any transactions conducted via credit card will have an additional fee added to the cost of the purchase. The fee — often expressed as a percentage of the sale amount — covers the costs merchants pay to process credit card transactions.

On average, businesses pay credit card processing fees that range from 1.5% to 3.5% of a transaction amount.

Though the charge is nominal compared to an item’s sale price, credit card processing fees can quickly add up to significant amounts for merchants that process numerous credit card transactions.

J.D. Power’s study reports that slightly more than one-third of merchants have resorted to adding surcharges to credit card purchases. Merchants who apply a card surcharge fee are less satisfied with the total cost of payment processing services than those who don’t, according to the study.

“Small business owners are under pressure from both technological and economic perspectives, and as they continue to expand the number and type of payment options they accept, many are seeking more support and guidance from their merchant service providers and passing along their processing costs to customers,” said John Cabell, J.D. Power’s Managing Director of Payments Intelligence, in a press release announcing the study.

Passing along card processing costs to customers may seem like the perfect solution for merchants struggling to maintain profitability while managing the rising costs of operating a business. But, depending on which state a business operates in, adding a surcharge to a credit card transaction can come with its own set of problems. 

We caught up with Phillip Parker, Founder of CardPaymentOptions.com, to get his take on the factors merchants must weigh when considering adding surcharges to credit card purchases.

“Many states have their own law regarding the practice,” Parker told us. “Some limit the fee, some dictate how it must be disclosed, and others ban it altogether. Just complying with the law, which can change without notice, adds another layer of complexity.”

It’s illegal to add a surcharge to credit card payments in California, Connecticut, Maine, and Massachusetts. A handful of other states only allow the practice if merchants follow specific guidelines, including how they communicate the fee to customers.

In Kansas, government officials recently announced that businesses can add a surcharge to credit card transactions, provided they clearly notify the customer of the charge before processing a sale. But business owners in the state have already expressed skepticism about whether customers will welcome the surcharge.

Credit cards extend convenience to customers who’d rather not carry around large sums of cash or resort to rifling through their pockets or purses for enough money to pay for a purchase. Many consumers can grab their credit card as they leave the house for a shopping excursion and not worry about whether they’ll have enough funds with them to buy everything they need on their trip.

But shoppers may begin to think twice about paying with their credit cards if they’ll be assessed extra fees for doing so, and that hesitation could lead to fewer sales for merchants. Though card surcharge fees make up just a fraction of a transaction’s total cost, consumers who don’t understand the economics behind card processing fees may feel a merchant is unfairly extracting more money from them due to their preferred method of payment.

Charging fees which fuel consumer reluctance to buy an item is something many small businesses may seek to avoid, particularly in an era of heightened inflation and sagging consumer confidence.  

“Many retail customers — specifically, 41% of credit card users — say they decided not to use a card payment method at a large or small business because of a surcharge,” Cabell said.

J.D. Power’s survey revealed that only 45% of small business owners believe their company is in a better financial position than it was one year ago.

In a vacuum, recouping expenses for processing card transactions may be one way for merchants to feel better about their business’s finances. But they must consider the impact of harming customer relationships, especially in an environment where 81% of shoppers prefer to use their credit cards over cash for payments.

“It’s understandable why some business owners would want to add a surcharge — many feel that the processing fees are too expensive,” Parker told us. “In their view, if the customer wants to use a card, they should pay the processing fees; however, such a standpoint is shortsighted and ill-advised. A wiser choice is to bake the cost of card processing into your pricing like you do with all your other expenses.”