Until recently North American merchants were not allowed to impose a surcharge on people who paid by credit card. Since the merchant has to pay the credit card company between 2% and 4% of the total after-tax transaction value some wanted to charge this back to the customer. Florists were particularly sensitive to this because so many sales are charged to credit cards in the retail flower business.
This kind of surcharge (also referred to as a checkout fee) was always forbidden in the agreement between the merchant and the credit card companies (Visa, Mastercard, American Express, etc.). If a merchant wanted to be able to process credit cards they had to agree that they would not impose surcharges for credit card payments.
From the point of view of the credit card companies this makes perfect sense. If a merchant penalizes customers who pay by credit card by charging them an extra fee they are casting the credit card company in a negative light (using the credit card suddenly costs the customer more). And, by disincentivizing people to use credit cards, surcharging would reduce credit card transaction volumes. The credit card companies didn't want to deal with merchants that were going to stigmatize their product and encourage people to use any other payment method.
But some merchants, florists included, wanted to be able to offset their credit card processing costs by passing them along to the customer in the form of surcharges or checkout fees. They started initiating lawsuits against the credit card companies.
In time these lawsuits would bring about real change. In 2003 the rules were changed in Australia, allowing merchants to introduce checkout fees. About ten years later North America, the only place where checkout fees were still forbidden, also changed the rules, paving the way for North American merchants, including florists, to surcharge.
So now that merchants can surcharge credit card payments the question becomes should they surcharge credit card payments?
One thing to consider is the rules regarding surcharges. They generally state something like this...
If retailers intend to impose a surcharge on credit card purchases, they are required to notify customers before customers make an actual purchase at the store entrance and at the point of sale – or in an online environment, on the first page that references credit card brands.
Retailers must disclose surcharge fees on every receipt – both in store and online. Carefully review receipts where checkout fees should appear.
That is a lot of signs and warnings. It also means that the payment process, already the least pleasant part of things for the customer, is also going to involve explaining that you are going to charge them extra for using their favorite credit card. Is that really how you want the interaction to end?
People rarely appreciate extra fees, especially when they cannot be avoided. Think about the flower business – typically 70% or more of the sales in retail floral are done over the phone and credit cards are the only real payment option. It's a hidden charge, the kind that can't be avoided. The kind of charge everyone hates to see when they are a consumer. Think about how you feel when you look at your cable or mobile phone bill. If you are a florist think about how you feel when you look at your wire service statements! Is that how you want to make your customers feel?
Checkout fees are also something people don't see most other places. If you are one of only a few merchants applying surcharges to credit card payments it can hurt your standing, and encourage people to explore the competition.
There is also a rule about the maximum that can be charged and it makes things more complicated:
Retailers must limit the amount of the surcharge to the applicable merchant discount rate for the credit card transaction surcharged. In cases where the applicable merchant discount rate exceeds 4% of the underlying transaction amount, in no event can the merchant assess a surcharge above 4%.
Some merchants talk about a fixed checkout fee rather than a percentage. If that fixed was even one dollar it would mean that any sale under $25 would break the rule – the florist would effectively be charging a checkout fee of more than 4%,
It is also a huge red flag for tax agencies. Most small businesses, including florists, love cash – partly because there are no credit card fees on cash sales, but also because cash can... disappear. It's mush easier to hide cash sales than credit card sales. So, when a merchant is aggressively discouraging customers from using a payment method that has a paper trail (credit cards) to one that is almost untraceable (cash) it's suspicious. Sure – they might only be trying to save the processing fees, but they might also be trying to avoid sales taxes and not reporting income.
Also – surcharging credit card sales doesn't address the real problem. There is an obvious cost to credit card sales (because of the percentage the credit card companies take) but there are also high hidden costs to any remaining options. Checks are "free", at least until you get a bad one, and there is the hassle of hold periods, etc.
House accounts, settled with checks or cash, might seem cheaper but most experts would argue that these are the most expensive forms of payment in terms of time (generating statements, pursuing payment, etc.) risk (bad debt) and cash flow. The real cost of charge accounts might be less obvious than the cost of credit card payments, but it is there and it is substantial.
The payment method that comes closest to free is cash. There are still costs – the more cash business you do the more likely you are to experience internal theft (almost impossible with credit card payment). There is a real cost there. You are also exposed to getting hit with counterfeit currency.
Even then cash is the preferred payment for many merchants, with a lower cost than any alternative. So if cash is what you really want why disincentivize people from using credit cards? Why not incentivize them to use cash instead?
Many merchants offer small cash discounts. This lets them drive customers towards precisely the payment method they do want (cash) rather than just away from credit cards (to potentially other costly forms of payment like charge account).
And no signs are required – you don't have to post a notice on the door or at the point of sale. You don't have to warn customers.
Instead you would only suggest the discount when it was practical. In the flower business that means on an in-store purchase, when the customer is standing there with the potential to pay cash. No longer are you going to annoy every single customer placing a phone order by telling them you are going to penalize them for using the only payment option available to them. Instead, you are going to offer a discount to a person that might actually be able to take advantage of it.
This is a huge difference. Nobody likes being penalized with a higher fee in the form of a credit card surcharge or checkout fee – especially when they are placing an order by phone and have no alternative. On the other hand almost everyone would be happy to hear about a discount.
There is a however a downside to customers that pay with cash, and more effectively pushing people towards cash only magnifies it. There is a lot of research that shows people spend more when using credit cards – as much as 12-18% more.
Is a 2% surcharge worth seeing average order values drop 12-18%? This is particularly important in the retail flower business when money spent is so tied in with satisfaction. Imagine customer pays cash at one flower shop (to avoid the credit card surcharge) and spends $50. Able to use their credit card at a competing flower shop they spend $59. Which arrangement is going to look nicer? And which shop was easier to work with?
It's tempting to try and recover transaction costs through surcharges and checkout fees, especially in the retail flower business, but it is sometinng that must be approached very carefully.