When a customer purchases with a credit card, you can probably assume they have no idea the kind of cost merchants have to pay to accept the customer’s form of payment. For the customer, they just swipe, insert, or tap, and then call it a day. For the merchant, there are merchant service fees and all sorts of other charges that rack up behind the scenes and cost the merchant money. This is where surcharging comes into play. 

But what is a surcharge? What’s the purpose of it, and when can it be used? Not to mention, is there a limit to how much a merchant can surcharge? And what are the benefits and drawbacks of surcharging? To answer these questions, it’s worth outlining all the ins and outs of surcharging as it relates to credit card processing and payments. 

Surcharging Defined

First and foremost, what is a surcharge? In short, it’s a word used to describe an additional fee, an added charge, or an extra tax that gets added to the total cost of a good or service. In most cases, a surcharge is something added on top of a pre-existing tax or fee and is not included in the original advertised cost. This results in a final total that goes above what the price on the tag, the menu, or the listing says.

Surcharges are not specific to any one industry — From the medical industry to the tobacco industry to simply making a transaction at an ATM, surcharges play a major role in purchases across the board. They aren’t there to be a pain, though: Surcharges serve an important purpose for merchants, and many would likely struggle without them.

What Is the Purpose of Surcharging?

You see, surcharging isn’t there to simply increase a merchant’s bottom line — surcharges, sometimes referred to as checkout fees, are there to make up for the additional charges merchants face when accepting credit cards as a form of payment. Merchants can set their surcharges at a dollar amount or opt to make each surcharge a unique total that comes from a pre-determined percentage of the customer’s total cost. However, regardless of how the cost of the surcharge is decided, they always exist for the specific purpose of covering merchant service fees put on the merchant by the credit card companies.

Of course, some surcharges exist for other purposes such as covering fuel costs to deliver the goods or service, paying for utilities associated with the goods or service, or even covering regulatory fees put in place by the government. No matter what the purpose ultimately may be, it’s clear that there is always a purpose behind surcharging.

When Does Surcharging Occur?

As you might have been able to discern from the nickname “checkout fee,” surcharging occurs when the customer makes a payment to the merchant. They don’t come after the fact, and they don’t come before — surcharges aren’t down payments, and they aren’t bills issued after the goods or services have been received. Surcharges always appear concurrently with the bill.

Another thing that remains constant about surcharges is the fact that, when surcharging does occur, the merchant makes sure it’s stated plainly to the customer before they pay. This can be in the form of a line item on the receipt, a mention in a contract, or even as a printed sign next to the payment terminal or cash register. Surcharges are never done behind the customer’s back — the merchant must make sure to directly define it for the customer before they check out.

Are There Limits to Surcharging?

Naturally, there are limits to surcharging. For example, a merchant can’t add an astronomical surcharge that far exceeds a customer’s total — as a ground rule, a merchant’s surcharge can’t surpass the respective credit card’s discount rate. This rate will vary depending on the card, but there’s always a set rate to abide by and not exceed.

Beyond this, merchants also need to place strategic surcharge limits on themselves based on several considerations. These include the possible effect the surcharge might have on the customer’s experience, the rates of your competitors, and how carious other associated fees might need to factor into the equation.

Benefits and Drawbacks of Surcharging

At the end of the day, surcharges benefit merchants because they allow you to cover the added costs associated with accepting and processing credit card payments. Without surcharges, these fees would have to come out of the business’s pocket. However, surcharges can sometimes be off-putting to customers who would prefer to pay the listed price and don’t have the patience or the capacity to understand why they’re being charged more than what was advertised on the tag, the menu, or the list. Some states have even gone as far as to prohibit surcharges because of this, making the act of surcharging illegal.

Additionally, another drawback is the fact that only credit cards can be surcharged — debit and prepaid cards can’t. If you have more debit and prepaid card users, then surcharging might not even be worth looking into. When all is said and done, it’s ultimately up to you, the merchant, to weigh these pros and cons and find a safe and happy middle ground that keeps both you and your customer happy.

The Bottom Line: What Is a Surcharge?

So: What is a surcharge? As you can see, it can be a huge help for merchants needing to cover service fees from credit card companies and the like, but it can also be just as big of a hassle for customers who frequent your business. There’s a middle ground between protecting your bottom line and keeping your customers satisfied, and it might take some experimenting to find the right level of surcharge for you and your respective business. Don’t be afraid to ask for feedback from the customer, and make sure to actually turn their feedback into direct action so that they feel like you value them and their opinion on the matter.

For more on surcharges, consider enrolling in the National Merchants Association surcharge program.

About NMA

NMA is a merchant advocacy group dedicated to reducing or eliminating the unnecessary fees associated with accepting credit card payments. Since 2004, NMA’s payment processing solutions have been delivering tailored solutions, best-in-class customer service, and high-quality service offerings for businesses across multiple industries. Whether it’s high-risk or low-risk, brick-and-mortar or e-commerce, NMA will create the best processing experience for your company. For more information, visit us at our website or by calling (866) 509-7199.