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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: 4 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 illegal to add surcharges in the following five states: Colorado, Connecticut, Kansas, Maine, and Massachusetts.

*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.
  • Harder to reconcile statements: if you add surcharges, your statements won’t show which transactions have been surcharged and which haven’t. This can place a burden on you or your accountant.

Here are some rules and regulations to review.

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 flat fee slapped on to a “non-standard” payment method. 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.

While convenience fees can help you recoup transaction fees, the fact that they have to be a flat fee is a problem for many businesses – as your transaction fees may be charged on a percentage basis. 

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 convenience fees are different between card brands. Mastercard, for example, only permits convenience fees in special circumstances like government, education, and tax-related payments.

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.

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

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