Credit Card Surcharging: It’s Bad for Business

In July, card issuers and banks reached a 7.25 billon dollar settlement with merchants. As a result of the settlement, nearly seven million merchants will receive paid damages and lower processing interchange fees for a period of eight months. The settlement, which is viewed as a major ‘win’ for merchants, also allows merchants to charge a capped fee to the customer when they choose to pay with credit and not cash or check. We could see merchants exercising their right to surcharge or credit purchases as soon as January 2013, but is it a good business decision?

Customers using credit cards will likely view any surcharge as simply a higher price and not a convenience expense for using plastic over cash, leading them to a competitive business or an online retailer for a ‘better deal’. In New Zealand restrictions on surcharging were lifted just two years ago and, in a recent survey, 90 percent of consumers indicated that they would rather leave the store than pay more due to a credit card surcharge. A similar Canadian study found that the introduction of a three percent surcharge would encourage 95 percent of credit card shoppers to switch stores. 

In 2003, the Reserve Bank of Australia (RBA) lifted restrictions on credit card surcharges, allowing merchants to surcharge, without a cap, consumers who pay with credit. Initially only seven percent of merchants enacted credit surcharges, but recently those percentages rose to 20 percent for small merchants and 40 percent for large merchants. In June, the RBA announced that it is now placing restrictions on merchant surcharging.

Consumers also spend more when they use credit. In fact, according to an MIT study, consumers may spend up to 100 percent more when they pay with credit versus cash. According to a recent survey from Rasmussen Reports, 43 percent of American Adults have gone through a full week without paying for anything with cash or coins. Business owners need to look at the bigger picture when making the decision of whether or not to surcharge for credit usage. While the concept may seem appealing at first, it’s sure to yield lower revenues and potential loss of customers if it’s enacted.

Surcharging – it’s bad for business.