Due to the proliferation of payment options, most customers today expect to be able to pay for goods and services in many different ways, such as cash, check, credit card, debit card, and automatic bank draft, and via many different channels, such as point of sale, online, telephone, mobile phone, and so on.
While offering a variety of payment options is a great way to provide more flexibility to your customers, there are additional costs involved in accepting some types of payment that can eat into your profit margin. Credit and debit cards are the best example: Businesses that accept plastic for payment pay a percentage of each sale to the processing company, a fee that’s known as the discount rate, in addition to transaction, monthly statement, and chargeback fees.
To offset payment and transaction costs, some businesses assess convenience or service fees on top of original purchase amounts for payments made via certain methods. The idea is to try to shift customers’ payment habits away from methods that cost the business extra money and toward methods that cost little or nothing.
However, there are specific rules and regulations that address when such fees can and cannot be assessed. According to the Merchant Council, convenience fees cannot be used to pass credit and debit card processing charges on to customers; the major credit card companies consider this payment discrimination. Convenience fees can only be charged if you are offering a payment method that is a bona fide convenience outside of your normal business practices.
Ticket buying is a good example. Companies that enable customers to buy tickets for events online or over the phone are allowed to charge a convenience fee for their services because they provide customers with the convenience of receiving a ticket without having to leave the comfort of their homes. These fees are not being assessed to cover the processing costs incurred by the ticket company for accepting credit or debit cards.
Utilities, insurance, and health clubs are other examples of companies that may assess convenience fees to customers based on the payment method chosen. Allowing customers to pay automatically via credit or debit card or automatic bank draft is a value-added benefit compared to customers mailing in a check each month.
The rules differ by payment network and card type. For example, neither MasterCard nor Visa allows businesses to assess “surcharges” on transactions paid with their cards. But they do allow businesses to offer discounts to customers who use another form of payment if it is clearly disclosed to customers and the cash price is presented as a discount from the standard charge for other forms of payment.
Therefore, the key to recouping processing costs associated with accepting credit and debit cards is to charge customers less for paying with cash or a check rather than charge them more for paying with plastic. Doing so requires creating a pricing model in which you first raise all prices to offset processing fees and then go back and discount cash and check purchases by the amount of the price increase.
Whether such a pricing strategy is worthwhile often depends on your competitive environment and who has the most leverage: your business or your customers. In some industries, customers may expect to pay a little more for the convenience of paying with plastic and may be more accepting of the practice.
In industries where the practice is less common, however, customers may simply leave and do business with competitors instead. In the end, you could lose more in lost sales than the cost of the processing fees.
Don Sadler is a freelance writer and editor specializing in business and finance.