You just started your new business and are finally ready to onboard customers; all you have to do is double-check that your credit card processor is ready to use. But then you see that the credit card processing company you chose is going to charge you a 3% processing fee for each transaction.
You start doing the mental math in your head and realize you don't know whether your customer should pay for this or if this has to be another business cost to hit your bottom line. If you are struggling to decide how to compensate for that credit card processing fee you have come to the right place!
Can you legally apply a credit card surcharge?
Credit card processing fees are an annoying and expensive fee that vendors have to decide how to deal with. It may come as a surprise to you but there are some states that have had strict laws for merchants.
The following states have statutes that have, in the past, made it illegal for merchants or vendors to apply credit card surcharges:
HOWEVER, many federal circuits in the last few years have ruled that the laws in these states are unconstitutional under the First Amendment1.
These circuits have concluded that credit card surcharge laws prevent business owners from communicating prices the way they want to, therefore preventing free speech. Due to these court decisions, the above-listed states are no longer enforcing their credit card surcharge laws. With this in mind, keep an eye out for federal decisions in the future as it would not be a surprise if this issue is brought up to the Supreme Court.
To date (as of June 2022), only Connecticut, Massachusetts, and Puerto Rico still outlaw the use of credit card surcharges. So if you live in these states you cannot apply a credit card surcharge to your clients’ invoices. Below we will walk your through how you can mitigate credit card surcharge costs on the back end.
Should you put a credit card surcharge on your clients?
Unless you live in Connecticut, Massachusetts, or Puerto Rico you do have the option of applying a credit card surcharge when your clients use a credit card. BUT, just because you can apply a credit card surcharge doesn't mean you should!
The Legal Paige’s stance is that credit card surcharges do not equate to good customer service. These days barely anyone carries around checks or cash but rather we live on the plastic in our pockets. As a business owner you should assume every customer will be using a credit card when paying for your services.
When clients see that credit card surcharge on their invoice they will automatically think that you did not prepare properly for credit card payments and are putting another expense onto them. The hard truth is that customers DO NOT like credit card surcharges. You don’t get charged at a gas station, grocery store, department store, or food establishment for the credit card fee because they input that cost into their total… so why would you do the opposite? It doesn't mean you are just out that 3%! Instead, you should be adding part or all of that processing fee to your total package price for your clients.
Your package price should not only account for the cost of your service hours, but it should always cover your business costs and overhead, like processing fees. Thus, instead of asking your clients to pay $1000 for your package and then another $30 for the credit card fee (e.g. 3% processing fee), give them a flat $1050 for your service to cover the processing fee and other business cost incidentals.
Clients are much more receptive to a flat fee that they see right from the start than knowing your package price and then seeing additional fees added to their invoice before paying. It is just bad business and clients hate it!
Another way for you to mitigate credit card processing costs is to give clients discounts for using cash, checks, or online systems like Zelle. A 3-5% discount for clients paying upfront in cash would incentivize them to pay in cash and would help mitigate that processing fee for you on the back end (not to mention you wouldn’t have to deal with potential chargebacks!). Clients always love discounts and many will use cash/checks to help reduce costs, especially if you are in the wedding industry.
Another way for you to mitigate credit card processing fees is to shop around for credit card processors. Like all things, every company charges different rates. Credit card processing fees can range from 1% to 5%. So do some research for a reliable credit card processing company that won't charge an outrageous processing rate.
Credit card processing fees are a necessary evil for running a business and are something every business owner has to navigate.
TLP recommends you prepare for those processing fees and budget them into your packages or find ways to mitigate the costs on the back end.
Clients will be happier if they are not being charged anything on top of already paying you thousands of dollars!