Retail Surcharging 101: What You Need to Know About Checkout Fees

With prices increasing across all areas of the retail industry due to factors like inflation and rising supply chain costs, store owners are always on the lookout for ways to reduce costs. More retailers are adopting surcharging as a way to counter payment processing fees. Surcharging regulations vary from city to city, and while it might not be the right choice for every retailer, surcharging can be a great option if you're looking for ways to reduce payment processing expenses.

In this blog we'll cover some of the essentials of surcharging, including:

• What is retail surcharging?
• How much do credit card fees cost?
• What are the benefits of surcharging?
• What are the drawbacks of surcharging?
• How to inform customers of surcharging
• Alternatives to surcharging

What is retail surcharging?

Surcharging is the practice of adding a checkout fee or an extra charge to a customer's transaction when they pay by credit card. When customers pay by card, there is a fee to process the payment. Retailers choose surcharging to pass on the card fees-usually absorbed by the business-to customers who choose to pay by card. Customers are notified at checkout about the surcharge and can choose to pay by credit card, cancel the transaction or choose a different payment method.

How much do credit card fees cost?

Card fees add up and can present a sizable cost to retailers. These fees are entirely dependent on the credit card type and the payment provider(whether integratedwith your point of sale system or not). Overall, card fees can range from 1.5%-4%.

This sitedetails state by state information for surcharging limits.

Card fees are made up of several components, like a card brand fee and an interchange fee. An interchange fee is the fee the retailer's bank has to pay when a customer uses their card. This fee is charged by the credit card issuer's bank.

Card brand fees are charged by different card companies like Visa, Mastercard, American Express and Discover.

The payment processor and the payment hardware also charge fees. Together, all of these different players make up the credit card fees.

Benefits of surcharging

Why do retailers surcharge customers?

Whether surcharging is right for your store will depend on your existing card fees, the regulations surrounding surcharging in your region, and how you feel about passing costs on to customers. While there is some debate as to how retailers should approach surcharging, there are benefits to adding this option to your payments strategy.

Some benefits include:

• Lowering processing costs
• Keeping product prices competitive-instead of trying to offset payment processing costs by increasing prices, you can maintain lower base prices across the board
• Encouraging customers to use more cost-effective payment methods like debit cards or cash
• Reducing overhead costs and freeing up budget for hiring, purchasing, employee benefits, etc.

It's important to note that surcharging is illegal in some states and provinces, so consult your local laws before adding this to your payments strategy.

Drawbacks of surcharging

Surcharging might be great for some retail businesses but cause issues for others. With some areas allowing surcharging and others having very strict laws around it, there can be some negatives to adding surcharging to your payments strategy.

One of the biggest drawbacks is the reaction customers might have. Some shoppers may not feel that surcharging should apply to them or that it's their responsibility to pay for it. This can create friction in the customer experience and, if communicated incorrectly, could even cause them to consider shopping at other stores that don't add a surcharge. Customers may also leave negative reviews, causing further damage to your reputation.

Another drawback is the risk of fines. Surcharging is regulated in Canadaand the US. If you add surcharges and don't follow the local regulations of your region, you could face fines, closures or other consequences. Adding surcharging means an extra layer of due diligence for your retail business to make sure you comply with your local legislation.

How to inform customers of surcharging

Surcharging information can be a tricky subject since it will depend entirely on your store's location and the laws around it. Some laws will clearly state how customers need to be notified about the surcharge, with strict requirements like how it needs to show up on their receipt. Other regions might have no laws around it or might be more flexible in how this information is presented.

Modern POS companies communicate at the register that surcharging applies when paying by credit card.

While how you communicate will depend on your local laws, here are some ways retailers inform customers about surcharging:

• Adding a sign at the entrance, product displays and near the checkout counter
• Specifying the exact percentage for complete transparency
• Adding surcharging as an item on the final receipt

The best rule of thumb is to always be transparent with your customers about which charges apply to their payment method. If customers choose to pay by card, make it clear that there will be an added charge. This will help reduce potential friction in their customer experience and avoid surprises once they're presented with their bill.

Alternatives to surcharging

If adding a surcharge fee isn't the right solution for your retail business, but you're still looking to counter and manage payment processing fees, there are other options you can consider.

Increasing product prices

If credit card fees are a big concern, and most of your customers use cards to pay, adjusting your product pricing could be a good option. Consider factoring processing fees into your product prices if you're able to stay competitive.

Setting a minimum for paying with a credit card

Many shops and convenience stores also use this method to avoid paying high fees for small purchases. Let customers know with signage that explains they'll need to spend a certain amount to pay by card.

Offer a cash discount

A cash discount is essentially a discount applied to customers who pay with cash. This motivates shoppers to use cash, with the incentive of saving money, while removing payment processing fees for your business. It's also an option that carries less legal risk, since surcharging requires more due diligence. However, it's important to ensure this option is also communicated to customers clearly to avoid confusion.

Implement a loyalty or membership program

By focusing on customer retention through loyalty perks and discounts, you can potentially offset transaction costs. You're providing value in exchange for customer commitment and could see greater returns with loyal customers. Make sure you're using the right softwarefor your business so you can easily manage a loyalty program.

Find out if surcharging is right for your retail business

Surcharging can be a great option for retailers looking to reduce costs, but it's not the only option. Before making any decisions, consult your local laws and weigh the benefits and costs of adopting this model.

Lightspeed Paymentsoffers surcharging as an option for select retailers to offset payment processing costs. We reduce legal risk and take the guesswork out of surcharging with features like automatic rate caps. Plus, you can enable or disable it easily to adapt to market conditions or customer feedback.

Looking for a more streamlined way to process sales and get paid? Talk to one of our experts to learn about Lightspeed Payments.

Editor's note: The content in this post is intended for informational purposes only and should not be considered legal, financial, or tax advice. We recommend consulting with a qualified legal or accounting professional for personalised guidance. Where available, we have included primary sources to support our information. We strive to ensure accuracy however, we cannot be held liable for any actions taken based on this content. Please note that Lightspeed does not commit to updating or verifying any new changes to the information in this blog post after its publication.