Subscription Billing

How to Keep More Subscription MRR with Credit Card Surcharging

Serge Frigon | January 19, 2023

If this title caught your eye, you’re probably all too familiar with the costs of doing business, and how they can eat away at your monthly recurring revenue (MRR).

You probably put those costs into one of two buckets:

  • negotiables; costs that can easily be raised or lowered as needed—such as departmental budgets or software spend,
  • and non-negotiables; costs that just are what they are—like office rent or credit card processing fees.

But what if I told you there was a way your subscription business could pass off some of those ‘non-negotiable’ costs to customers and ultimately hold on to more of its monthly revenue?

Well, here’s some good news: a process called credit card surcharging allows you to pass your credit card processing fees along to your customer.

Here’s the lowdown on surcharging and how your Stax Bill platform enables you to leverage the process to increase the average revenue you hold onto each month.

How credit card surcharging works

Most payment gateways make money through interchange fees—a percentage of each transaction they process for your business. These fees come out of the money your customers pay, and they cover some of the costs that the card-issuing bank faces, like:

  • handling costs,
  • fraud and bad debt costs, and
  • the risk involved in approving the payment.

But, enabling a surcharging solution allows you to hold onto additional revenue without needing to spend additional resources trying to nail down expansion MRR or sign net new MRR.

“Businesses operating with tight profit margins often really benefit from surcharging because their alternative for taking cards when [credit card processing] rates go up, as they have in the past, is to raise prices on their products,” says Jonathan Razi, founder of leading surcharging compliance solution CardX.

“[S]uch a scenario results in cash and debit payers paying more because someone else is using credit cards.”

When you implement a surcharge program, a fee of no more than 4% of the transaction total is added to the customer’s bill as a separate line item at the time of payment. The customer then pays that surcharge fee along with the rest of their invoice, and the surcharge is remitted to the card-issuing bank.

While there are certainly legal nuances your business must pay attention to in order to surcharge compliantly (more on that later), when done right, it’s a simple way for subscription businesses like yours to retain more revenue.

Read more: Everything Your Subscription Business Needs to Know about Credit Card Surcharging

How much more recurring revenue can you keep with surcharging?

Every month, your payment processor sends you a statement, detailing how much money it collected from your existing customers on your behalf and how much will be kept in the form of interchange fees.

Simply checking your next statement can give you a good idea of exactly how much your business could recoup.

Average credit card interchange fees hover somewhere between 1.4% and 3.5% of the transaction total. So, depending on the specific gateway used, a business with $5 million in annual recurring revenue generated exclusively through credit card transactions would be able to recover between $70,000 and $175,000 every year.

Credit card surcharging in Stax Bill

Setting up surcharging in Stax Bill is simple, but you’ll need to be using our built-in Stax gateway to access the functionality. We recommend notifying existing customers in advance via email that you will be implementing a surcharge program and outlining what they can do if they’d like to avoid paying those fees.

Once surcharging is enabled in your system, you’ll see new items in your customer self-service portal, registration pages, and invoice templates:

  • our default surcharging notification message—which is completely editable—and
  • an extra line item to display a transaction’s surcharge fee.

[Image: surcharge message in the self-service portal]

Stax Bill will automatically add a surcharge to customers’ payments if it detects that:

  1. a credit card number has been entered and
  2. the billing address associated with the credit card is in a U.S. state that permits surcharging.

If you’d like to see how much your business has recovered through surcharging, you can find a breakdown in your Gateway Details Report. The CSV export of this report shows you, on a per-transaction basis, how much you paid in gateway fees compared to how much you’ve collected in surcharge fees.

How Stax Bill’s surcharging solution complies with surcharging laws

As I mentioned earlier, there are plenty of regulations around surcharging that your business has to comply with. Our system was built to ensure your surcharging program is in line with best practices and relevant laws.

  1. Your intent to surcharge must be communicated to the card brands. Our team leverages its industry relationships to cover this communication for you.
  2. You must inform your customers of the surcharge with appropriate signage. Stax Bill provides a surcharge notification that is automatically displayed to your customers prior to purchase. You can edit this message in your settings.
  3. The amount of the surcharge must not exceed 4%, and you cannot profit from the fee. Our solution is programmed to keep surcharge fees below 4% of the total transaction price and to ensure it doesn’t exceed the amount you pay in gateway fees.
  4. The surcharge and the price of the product must be processed together. The credit card fee and the purchase amount are combined into one charge.
  5. The customer’s invoice must display the surcharge as a separate line item. Just like tax, the credit card fee is broken out from the invoice total.
  6. Surcharges cannot be applied to debit cards. Our platform automatically detects when a debit card number has been entered and does not apply a fee.

Types of subscription businesses that should consider surcharging

Surcharging is a great way for you to retain more of your monthly recurring revenue. Your business may be a great fit if:

  • it processes a high volume of credit card payments,
  • its average transaction tends to be high, and
  • surcharging is legal in the regions where you do business.

If you’re worried about the implementation of surcharging causing customers to churn and damaging your customer lifetime value stats, it’s a fair concern, but not a necessary one.

“Many of our merchants adopt surcharges […] as a way of avoiding an across-the-board price increase, which just means that someone paying with cash or a debit card is going to pay more for someone else’s rewards,” explains Razi. “[Adding a surcharge] means there is additional choice for consumers.”

Remember, to remain compliant with surcharging laws, your customers must have the option to pay with an alternate payment method that doesn’t incur surcharges—i.e., anything besides credit cards. If a customer does not wish to pay the surcharge fee, it’s easier for them to switch payment methods than it is to find a new vendor. They can switch to ACH, debit, or check payments, instead.

In this case, the customer gets to save the surcharge fee, and your business incurs lower (or no) gateway fees.

Keep more predictable revenue on monthly subscriptions

Let’s be real, with the ‘macroeconomic factors’ at play right now, revenue growth through traditional channels like aggressive sales targets may not be as successful as in recent years.

So, for the savvy subscription business, it’s the perfect time to try out a non-traditional method. Simply holding onto more of your monthly recurring revenue by reducing costs—or, in this case, passing them off to your customers—may be enough of a step in the right direction.

With surcharging, the next time you calculate MRR, you’ll know that more of it actually stays with your business.

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Written by:

Serge Frigon
Serge Frigon
Director of Product, Stax Bill

Serge Frigon is Stax Bill’s Director of Product. He is passionate about improving billing processes for SaaS companies. With 20+ years in SaaS and billing software systems, Serge has a first-hand view of how important financial insights can be to the health of a company.