Credit Card Surcharges: Allowed But Not Always Advisable
Until recently merchants were not allowed to impose a surcharge (also known as a checkout fee) when taking a credit card payment. That recently changed, and merchants can now try and cover their processing costs by charging customers that pay with credit cards an additional fee.
But "can" doesn't mean "should". Should a florist consider implement surcharges to try and recoup the costs of processing credit card payments?
There Are a Lot of Rules
If a florist does decide to introduce surcharges on credit cards their processing agreements still have a lot to say about it. First they talk about notifying the customer before the sale:
If retailers intend to impose a surcharge on credit card purchases, they are required to notify customers before customers make an actual purchase at the store entrance and at the point of sale – or in an online environment, on the first page that references credit card brands.
Then they talk about reminding them again after the sale:
Retailers must disclose surcharge fees on every receipt – both in store and online. Carefully review receipts where checkout fees should appear.
There are even special rules regarding the amounts:
Retailers must limit the amount of the surcharge to the applicable merchant discount rate for the credit card transaction surcharged. In cases where the applicable merchant discount rate exceeds 4% of the underlying transaction amount, in no event can the merchant assess a surcharge above 4%.
That last rule creates a real problem for florists that want to introduce a fixed checkout fee. If for example you had a fixed credit card surcharge of $1.00 you would be breaking the rules any time you applied to a sale lower than $25.
Credit Card Surcharges Don't Really Do What You Want
Retailers generally introduce surcharges or checkout fees because they want to steer customers towards a different payment method that they consider less costly. The problem is that surcharges really just drive customers away from credit cards, often to payment methods that are even more expensive.
It is probably more effective to incentivize your customers to use the payment method(s) you prefer rather than simply penalizing them for using the payment methods you don't like.
If for example you want customers to pay with cash rather than plastic is is more effective to offer a cash discount. This also gets around all of the rules, and gives you the ability to only present the option when relevant. If it is a phone order there is no point even bringing it up – cash is not an option. If however the customer is standing in your store cash is a possibility.
Alternate Form of Payment Almost Always Cost More
Credit cards seem like an expensive because merchants see the cost right there on their statement. A flower shop that process $500,000 in credit card payments every year would spend at least $12,000 annually just on processing fees.
It's a big number, and it does make one think "wow, if I could just get all of those customers to pay using any other method I would save that money". The problem is that there is a very real cost to all those other methods, and that cost is almost always higher than credit card processing. The difference is that the cost is hidden.
Checks? They might seem free, right up until you get a bad one – then you get hit with both the loss and a charge. And some banks do charge even for depositing good checks. There is also a tremendous increase in transaction cost for you and the customer – checks just take more time and work.
What about house accounts? The practice of charging the sale to the customers account and invoicing them, at which point they send a check (incurring the costs mentioned above) or come in and pay by cash.
Most experts would argue that this is the most expensive possible way of accepting payment. You won't see the cost all at once the way you do with credit cards, but it is there, and it's huge.
First – the expense of bad debt. The average is about 4%. That means that on average you will never collect 4% of the sales that are charged to house accounts. That already exceeds the amount you are paying in credit card processing.
The 96% you should collect you have to wait for. With credit cards you generally get paid within days. If you have your own debt, and are paying interest on it while waiting for other people to pay off their debt with you, there is an additional cost.
There is also the administrative cost of preparing and mailing statements, depositing checks, pursuing collection, etc. In small business we tend to undervalue our time but the experts say the real cost is (on top of the costs described above) of over $8 per invoice.
Even cash, the payment method most often considered as "free" has a cost. First there is the risk of accepting counterfeit currency.
A second and bigger risk involves internal theft. It is almost impossible for employees to steal from you when customers pay by credit card, but it is very easy for them to steal cash. Large chain retailers love credit cards for this very reason – they help reduce losses due to internal theft.
The Hidden Cost of Cash – Reduced Spending
There is another hidden cost when people pay with cash. They spend less.
Research suggests that when people are spending real cash they spend less than if they were charging to credit card. Estimates suggest that they spend 12-18% more when they pay be credit card. This is why experts encourage consumers, even those that are debt free and pay off their full credit card balances every month, to pay with cash. There is something about parting with those bills that makes us spend less.
As a retailer that is bad – you want people to spend more! Yes - it would be great to recoup the 2-3% that you pay out in transaction fees. But if customers spend 12-18% less? That doesn't seem like a good tradeoff.
This is even more acute in the flower business. A customer goes to one flower shop and, knowing they will be penalized for paying with a credit card, pay by cash. They spend $50.
One day they try a competing flower shop that happily takes their credit card. Following the pattern they spend more – just under $60.
Which arrangement is going to look better?
It's The Kind Of Charge People Hate
People don't like extra charges. They hate extra charges that can't be avoided.
In floral retail the average florist does about 70% of their volume over the phone. Cash is simply not an option. Telling that customer that they have to pay a surcharge for making payment by credit card is not going to make them happy.
It's frustrating because it can't be avoided. It would be like a gas station adding a "pump" fee. Since you can't buy gas without the pump shouldn't you expect the use of the pump to be included? This is the kind of charge that makes people so frustrated when they look at the extra charges on their cable or mobile phone bills.
If you belong to a wire service think about those statements and all those charges. Is that how you want your customers to feel about you?
Most Retailers Don't Charge Them
So far most merchants are not charging checkout fees or applying surcharges. There is very little to be gained by being an early adopter here.
It's Red Flag For Tax Authorities
Some small businesses like cash sales only because they eliminate the transaction fees that come with credit card payments. There are also some that like cash sales because it is easy to make cash... disappear. It never gets reported, sales tax never gets reported, etc.
Tax authorities really don't like that. And if a merchant is aggressively trying to steer people away from a payment method that does leave a trail (credit cards) towards a payment method that doesn't leave a trail (cash) they tend to get suspicious.
When you look at the cost of processing credit cards on a monthly (bad) or yearly (worse) basis it hurts. It's natural to look at that big number and want to claw some of it back through checkout fees.
Be careful. Think about the real cost of alternate payment methods. Think about the implications of lower order values, and orders lost to the competition. Think about your customers and your relationship with them. Eventually processing costs start to seem like a small price to pay.