Credit Card Surcharging For Canadian Florists
As a merchant you know that you pay for the privilege of processing credit cards. And if you have been reading the news you likely know that, with the exception of Quebec, Canadian merchants can now start passing those fees on to their customers in the form of a surcharge.
This is welcome news for any florist that has ever looked at the numbers and regretted paying a percentage of every credit card sale, especially at a time when they are also struggling with rising costs.
There are some rules that apply. The first is that you have to give your merchant service provider written notice you plan to start surcharging 30 days in advance. It’s reasonable to assume that during that time they will try and convince you to change your mind. The prospect of surcharging is scary to merchant service providers as it will likely lead to fewer credit card transactions and less revenue for them. Expect them to push back at every opportunity.
The next limitation is that you can’t apply a surcharge that exceeds whatever is lower – your maximum processing cost or the mandated 2.4% cap. In Canada it’s very unlikely that a retail florist, with the high percentage of card not-present transactions (phone and web orders) is paying less 2.4% (despite what your wire service might try and convince you!). Florists are almost certainly able to charge the maximum allowable 2.4% without breaking the rules.
The rules also state that you can’t add any other fee or charge that is related to processing credit cards. It was never common, but some merchants would tack on something like a “convenience fee” when taking credit card payments. Such fees cannot be charged in conjunction with the new surcharge. Any fees that stem from taking a credit card payment must be clearly identified as a surcharge and cannot exceed the cap of 2.4% mentioned earlier.
Another important rule covers disclosure – you have to be very clear that you apply a surcharge. You have to display information on surcharges at the entrance of your physical store, at the point of sale (both physical and online) and on receipts. Again it seems possible that merchant service providers may offer to provide these signs, but designed in a way that will discourage you to use them. Be suspicious of any “help” that your merchant service provider offers.
In addition to the specific requirements above the rules also state that “merchants must clearly disclose surcharges and fees to cardholders before a transaction is completed”. That is especially relevant to florists and phone orders – it means that you have to explicitly state the surcharge before you process the sale.
Don’t underestimate how hard that could be – after a Canadian florist has disclosed as much as 15% in sales taxes it won’t be fun bringing up another 2.4% in surcharges on the post-tax total, but you and your employees will have to do it on every single phone order.
Assuming that you can live by those rules and legally meet the requirements of surcharging the next question is: should you?
The most important benefit is the chance to immediately offset an expense and realize higher profits as a result. The 2.4% you are allowed to surcharge might not seem like a lot, and it’s probably less than what you actually pay, but it’s not insignificant.
Imagine a shop that does $1,000,000 in sales annually and pays an average of 2.4% in credit card processing fees.
Likely $700,000 of that total volume is credit card sales but remember, credit card processing fees are paid on the after tax gross sale value. Assuming the shop collects 13% HST that means they actually pay the 2.4% on $791,000 ($700,000 in credit card sales plus $91,000 in HST on those sales).
That means they are currently paying $18,984 in processing fees right now, and they could immediately recoup much of that by surcharging.
The first and biggest problem is that customers generally don’t like the idea of surcharges. Trying to recoup 2.4% through a surcharge might end up costing you an entire sale and cheapen your brand.
Admit it… as you much as you might like the idea of collecting surcharges as a merchant, you probably don’t love the idea of paying surcharges as a customer.
Consumers are feeling the effects of inflation and rising prices, they’re getting asked for tips everywhere, and now they have to deal with surcharges. You can’t expect customers to be enthusiastic about paying an extra 2.4% on the after-tax total.
As always there will be a spectrum of responses. Some customers genuinely won’t care about a surcharge. Others will accept it.
But some customers will decide to shop around. This is a problem because initial polling has indicated that only about 20% of merchants plan to surcharge, meaning the other 80% of florists that don’t will seem more attractive to customers that object to the practice.
And it is exacerbated by the fact that the surcharging rules require that you disclose the surcharge up front – customers will know about the surcharge as soon as they get to your website, as soon as they come through the door… and some will just move on.
Retailers typically use the concept of “progressive disclosure” to avoid this. For example florists generally try to talk about the main item, the arrangement, and collect as much information as possible before getting in to delivery fees, service charges and sales taxes in the hope that the customer won’t be so keen to just walk away after they have already invested time into placing the order.
With credit card surcharging that is not an option. The rules ensure that the first thing potential customers know about you is that you are going to surcharge, and that makes it very easy for flower buyers to just call the next shop, to just click the next listing in their search results.
And that is bad, because we can assume that some of the same deceptive order gatherers that promise free shipping and completely unrealistic value will trumpet “no surcharges!” on their websites. What do they care? They are already keeping all the profit on the orders they gather anyway.
The other thing to consider is that your customers don’t really have a choice when it comes to phone and internet orders. The customer that walks into your store and sees the surcharge sign does – they can choose to use cash or debit and avoid the surcharge, or use a credit card and pay it.
The customer ordering flowers over the phone or on your e-commerce website does not have that option – they have to pay with a credit card, which means they have to pay the surcharge. And people really don’t like not having options.
One last thing… if you are not going to surcharge make sure you take credit for it. Shops that do surcharge have to disclose it, you should disclose that you don’t.
Effects on Brand Positioning
Whatever your decision on surcharging it will send a powerful message about your brand.
Strangely enough if you promote yourself as a value shop surcharging may be more acceptable. Long before grocers were required to charge for plastic bags discount outlets (like No Frills) already did – in part because of the cost, but also because it reinforced their low margin, high value promise: “we simply don’t charge enough to give away bags!!!”. It is a proven and highly effective marketing tactic – by admitting to a negative (we are going to charge you for something our competitors give you for free) they made their central claim (we offer unbeatable value!) more credible.
And this approach appealed to their value focussed customers, who were happy to bring their own bags, or pay a small fee if they so chose. Likewise price sensitive flower buyers may appreciate the savings that come with buying flowers in person and paying with cash or debit.
At the other end of the spectrum it’s different. Even after mandatory bag fees were introduced some premium grocers just ignored the law. Some went even farther and gave away premium branded reusable bags.
This is not a perfect analogy. Giving away a $0.05 bag when somebody buys a high dollar, high margin piece of clothing is very different than giving away 2.4% in processing fees on a $200 sale but if you present your store as a premium brand you need to remember that the customers who gravitate towards that don’t like being nickel and dimed. When you pay for a first class airfare you expect the checked bags and drinks to be included.
By the way – it’s worth noting that the $0.05 bag fee was very effective, reducing the use of plastic bags by 53% over three years after it was introduced. So if you think your customers won't care about an extra 2.4% remember that a nickel was enough to help convince people to change their behaviour.
It’s not an easy choice. On one hand surcharging can seem like a quick and easy way to increase profits, but it definitely comes with the risk of alienating customers, losing sales and, potentially, negatively impacting your brand.