By now you may have heard that Visa and MasterCard have changed the rules to give businesses the option to recover fees related to the expense of accepting credit cards. These rule changes stem from a court settlement after a long legal battle between retailers and the payment brands. In its most simplistic form, the rule says that merchants can add a “surcharge” to credit card transactions to help offset processing fees.
But should you?
As the New York Times recently pointed out, retailers are expected to approach this surcharge very cautiously – and with good reason. The actual rules are more convoluted than they appear on the surface, and in today’s economy, surcharging may not be worth the competitive risk.
Before getting mired down in the details of the rules, and before deciding whether to assess the “check out” fee, you might consider these two important questions.
How will my customers react?
Customer reaction will in part be based on price sensitivity, alternative options, and competitor strategies. Some business owners already crossed the “surcharge threshold” back in the day of sky-rocketing fuel costs, when a “fuel surcharge” was implemented. What was customer reaction at the time and how has it changed? What lessons did business learn from this experience? Another strong consideration should be given to how surcharging fits into your overall pricing strategy and client value proposition.
What is the financial implication if I do charge a fee?
When determining the financial implication of check out fees, you must include both revenue and expense projections. Revenue considerations would be the new fee collected less profit on lost sale (if they cannot pay with an alternative payment method.) What business process do you need to put in place to get an accurate assessment of this lost sales opportunities? Incremental expense would include the cost of technology upgrade, training and satisfying the notification requirements (which are substantial). Some of these costs are difficult to estimate because the rules are still being understood by the industry. This can be summarized as follow:
(Effective rate x Credit Card Volume) – Profit on lost sales – (technology upgrade + training + notification costs)
From a strictly financial point of view, unless you process at least $100,000 in credit card volume annually (based on reasonable assumptions), it will probably cost you more to surcharge than you will save. Of course, each situation varies and we would be happy to help you with this analysis.
Please tell us your questions. We are pleased to help you understand the new rules, as well as considering the customer and financial implications of the change.