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The Differences Between Surcharging, Convenience Fees, and Cash Discounting

Learn about surcharging, convenience fees, and cash discounting - and how to decide which practice is right for your small business.

 Reading Time: 7 minutes

As a small business owner, your margins are likely tight – there are many successful small businesses that have margins between 7% and 10%.

According to NPD’s “Checkout Receipt Data,” credit cards account for over 80% of all retail (in-store) transactions in the United States – and you may be paying close to 3% in fees on each transaction.

So, your small business is likely losing a nice chunk of profits to credit card processing fees.

While there’s no way around paying those fees – consumers aren’t going to suddenly stop paying via credit card – you can cut credit card processing costs with surcharging, convenience fees, or cash discounting.

Below, you’ll learn about:

  • Definitions of surcharging, convenience fees, and cash discounting
  • Laws for each practice from state to state
  • How to decide which practice is right for your small business

What is Surcharging?

Surcharging is adding a percentage fee to all transactions to cover credit card fees. You can add surcharges with credit card transactions, but not debit or prepaid card transactions.

It’s prohibited to add surcharges in the following four states: Connecticut, Maine, Massachusetts, and Oklahoma.

Surcharging is legal in Colorado, however, you can only surcharge up to 2% as opposed to 3% in other states.

*Before implementing surcharges, check the current legality of the practice in your state.

You can retain between 20% and 90% of your processing fees through the use of a surcharging program.

But there are a few downsides:

  • Have to use specific equipment: many terminals and point-of-sale (POS) systems are unable to handle surcharging.
  • Risk upsetting customers: your customers may feel like they’re being nickel and dimed, which may drive some of them to competitors.
  • Doesn’t cover all the costs of processing: You will still be responsible for debit card fees along with any additional processing expenses

As a merchant, here are some rules and regulations to review:

  • You must sign surcharge addendum paperwork with processor of intent to surcharge
  • You and your processor must both register with Mastercard 30 days prior to surcharging.
  • You must notify customers of surcharging by posting signage at the entrance of business and near the POS/register. The signage must present the percentage the customer will pay if they use a credit card and let the customer know that debit cards will not be surcharged
  • If you are doing a card-not-present transaction, you must notify your customer of the surcharge amount before running the transaction.
  • You must display the surcharging amount on the customer receipt (your device will do this automatically).
  • You cannot combine surcharging with any other offer, like a cash discount.
  • You may only add a surcharge to credit cards, not debit or prepaid cards.
  • You must report surcharge amount collected to all card brands.

If you want to get started with surcharging, Gravity Payments can help – give us a call at 866-701-4700.

What are Convenience Fees?

Convenience fees are a fixed flat fee amount added to a “non-standard” payment method for your business. So, if your standard payment channel is in-person payments, you may be able to charge a convenience fee for online payments.

It’s illegal to add convenience fees in the same states that it’s illegal to add surcharges. As with surcharges, make sure you research the current legal status in your state before implementing convenience fees.

Since convenience fees have to to be a fixed flat fee, the amount you can recoup for processing fees is limited.

So, if your small business has some goods or services that are sold for 20x more than others, you may not be able to settle on a flat fee that makes sense. On the other hand, a small business with a small number of similarly priced offerings might benefit from the use of convenience fees.

The rules for a merchant to charge a convenience fee are:

  • The fee must be disclosed to the cardholder at the time of checkout but prior to the completion of the sale. The cardholder must always be asked before the sales is ran if they approve of the added convenience fee
  • The fee must be a flat fixed amount and must be the same fee regardless of the transaction size/amount
  • The fee is applicable to all card types and all forms of payment accepted
  • The fee needs to be part of the total amount due at the time of the transaction and is not reportable on processing statements

Your POS likely has instructions on how to set up a convenience fee for certain sales.

If you want to get started with convenience fees, Gravity Payments can help – give us a call at 866-701-4700.

What is Cash Discounting?

Cash discounting is the practice of charging less when a customer pays in cash.

Unlike surcharges and convenience fees, cash discounting is legal in all 50 states.

Visa, Mastercard, and American Express require merchants to post a Standard Price in their POS or Management Software, representing the cost of their goods if the customer pays via credit card. From there, a discount can be applied for those who pay with cash.

With cash discounting, you can raise your prices by your average credit card processing fee (say 3%) across the board… but you don’t have to. 

Let’s say your best-selling item is listed at $99 and the profit margin is outstanding. You believe that raising the price by 3% to around $102 would result in a drop in sales. In this case, you can choose to keep the price at $99 and “eat” the cash discount. This flexibility is one advantage of using cash discounts.

Here’s another possible advantage: the same credit card customers who may have been bothered by a surcharge may not be bothered by a discount. Instead of feeling like they’re being charged more, they may feel like they’re simply passing on a discount – even if the price would be the same either way.

In any case, you should strategically price your items to account for buyer psychology and the impact of cash discounts on your small business. After you settle on the new prices, post signs that show the amount of cash savings and what qualifies as a cash payment (some customers may think that the cash discount applies to debit card purchases).

If you want to get started with cash discounting, Gravity Payments can help – give us a call at 866-701-4700.

Surcharging vs. Convenience Fees vs. Cash Discounting

So, is surcharging, convenience fees, or cash discounting right for your business?

The answer is… it depends.

Are you okay with raising your posted prices? If so, cash discounting may be right for your business.

Do you live in a state where it’s legal to add surcharges, and you found equipment that works for your small business and allows you to handle surcharging? Maybe surcharging is the way to go.

And what if you have a small number of similarly priced offerings? In this case, convenience fees might make sense.

Choosing between surcharging, convenience fees, and cash discounting is sometimes a clear-cut decision. But sometimes, it isn’t.

What are the differences?

  Surcharging Cash Discounting Convenience Fees Service Fees
(managed Conv fee)
Registration Required icon_check-light icon_check-light
State Restrictions icon_check-light
Eligible Merchants All merchant segments & types All merchant segments + types Merchant must offer an alternative non-face-to-face payment method; primary face to face must not apply the fee Available for gov’t and education merchants only
Eligible Transactions Card-present & card-not-present Cash transactions Card-not-present only Card-present + card-not-present 
Eligible Card Types Credit only Cash transactions Credit + signature debit Credit + signature debit
Program Limitations                    
Fee Applied Fee is a % amount and must be the lesser of 3% or your effective processing rate Cash discount must be a reduction from advertised/displayed price Fee can be a flat or fixed amount; cannot be a % or tiered amount Fee can be a flat, % or tiered amount
Cardholder Disclosure Surcharge fees must be disclosed at the POS, point-of-entry and separately on every receipt – full amount must be combined into one transaction Signage must be posted at POS, clearly stating cash discount is available – ‘shelf’ price must reflect credit card price Applied to a non-face-to-face transaction – must be combined into one transaction, and cannot be assessed to recurring transactions eComm merchants using a 3rd party must process two separate transactions: Sale 1 – gov’t/edu transactions; Sale 2 – service fee transactions


If you are unsure, Gravity Payments can help – give us a call at 866-701-4700.

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