Here’s an obvious statement: accepting payments is a necessary part of bringing in revenue.
Here’s a less obvious one: the ability to accept credit card payments comes at a cost to your subscription business.
This cost is known as an interchange fee, and it’s charged to you, the merchant, as a percentage of every card transaction.
According to a definition from BigCommerce:
“Interchange fees are transaction fees that the merchant’s bank account must pay whenever a customer uses a credit/debit card to make a purchase from their store. The fees are paid to the card-issuing bank to cover handling costs, fraud and bad debt costs, and the risk involved in approving the payment.”
Online credit card spending was in the neighborhood of $500 billion in 2022. With the average interchange fee hovering somewhere between 1.4% and 3.5%, businesses like yours would’ve lost a big chunk of their monthly recurring revenue (MRR) to credit card processing fees.
But what if you didn’t have to pay those fees? What if your customers paid them, instead?
Enter: credit card surcharges.
Here’s everything your subscription business needs to know about surcharging credit cards in 2023 to keep more of its revenue in its coffers.
Check out our rundown on the different payment processing fees businesses pay. Learn which ones are legit and which should send you running immediately: How to Choose the Best Payment Gateway for Your Recurring Revenue Business
What is Credit Card Surcharging?
Adding a credit card surcharge allows your business to pass off the interchange fee on credit card transactions to your customer. This is usually calculated as a percentage of the total transaction. You may have seen something similar in action on your own invoices as a ‘surcharge fee’ or ‘convenience fee’.
- If you aren’t surcharging credit card purchases, your business is on the hook for paying those fees
- But when you implement surcharges, your customers are helping you recoup that cost of doing business.
An extra line item is put on the customer’s invoice detailing the extra charge as a dollar amount specific to that transaction.
What are Credit Card Surcharging Laws Like?
In the U.S., credit card surcharging is legal in 48 states, though some state laws vary and may impose additional restrictions. In October of 2022, surcharging became legal across Canada, as well.
While specific requirements vary from region to region, there are some minimum requirements you must follow:
- Notify the major credit card brands of your intent to surcharge
- Make your surcharging policy explicitly clear to customers
- Not charge more than a 3% surcharge
- List surcharge fees as separate line items on invoices
- Limit surcharging to credit transactions only—other forms of payment like debit cards or ACH payments should be exempt
It’s a good idea to find a surcharging solution that is fully compliant with different state laws. That way, you won’t have to worry about legal nuances—someone else is there to make sure you’re getting it right.
How Does Credit Card Surcharging Work for Subscription Businesses?
Credit card surcharging is most impactful for B2B subscription businesses that charge high recurring subscription fees—and therefore have high payment processing costs.
As per most credit card surcharge laws, your business can’t impose a surcharge fee of more than 3% of the transaction total. So, if your customers’ subscription costs are low, a 3% surcharge is unlikely to cover the credit card processing fees you’ll incur.
To get started with surcharging, sign on with a credit card processing company that has compliant surcharging capabilities and inform your customers and the major credit card companies that you intend to begin surcharging.
How Much Can a Business Save by Surcharging Credit Cards?
The answer to this one, unsurprisingly, varies from one business to another. Consider:
- Your business’s overall volume of transactions
- Average transaction value
- The percentage of transactions that are paid with credit cards
- The credit card fees the business incurs
Your current payment processor likely sends you a monthly or annual statement that, among other things, outlines the amount you paid in interchange fees in the previous period.
One way to estimate the potential savings from credit card surcharging is to calculate your business’s total credit card processing fees and compare this to the cost of accepting cash or checks.
Will Credit Card Surcharges Scare Customers Away?
For businesses, the possibility of saving thousands of dollars each month by implementing credit card surcharges is incredibly exciting. But you’d be correct in assuming some consumers would have hesitations.
Scott Blakely, Esq, Principal at Blakely LLP, advises businesses on laws surrounding credit card acceptance. On customer reaction to his clients’ surcharging programs, he says, “For what it’s worth, we have not seen a loss in business for our clients. Instead, there has sometimes been a change in payment form, and the customer may pay by ACH instead, for example.”
58% of consumers who had never been faced with a surcharging fee reported that they wouldn’t pay the fee if asked. However, 85% of consumers reported that they had ultimately paid a surcharging fee when presented with one.
“The surcharge forces the buyer to reconsider their strategy and ROI,” continues Blakely. “At the company level, there may be a reassessment, but there are still many factors that still favor [sic] continued use of the card despite the surcharge.”
Should Your Business Surcharge Credit Cards?
If your subscription business is processing credit card transactions at a high volume, adding a credit card surcharge might be worth considering—provided it’s legal in your region.
Charging convenience fees for credit card payments is a great way for SaaS businesses to:
- Reduce the costs of doing business during a recession
- Hold on to more of their hard-earned MRR
If your business is hoping to continue growing, credit card surcharging may be the secret weapon that allows it to scale with ease.
