Should a Merchant Surcharge?

In the early days of Merchant Services, before the deregulation (the emergence of ISO’s who are now able to offer competitive services) merchant’s simply had their services, both terminal and processing, taken care of directly by their bank.  We know that the banks themselves do not process credit card services directly but, they chose exactly who would do that for their merchants.  Both the banks and the credit card companies stood to benefit.  The credit card companies had no reason to offer lower fee’s and better costs to merchants because the merchant simply did not have a choice.

In the early 90’s when deregulation of Merchant Services initiated, it led way to a surge of young new processing companies, who also utilized the credit card companies services through it’s member banks to profit from the millions of consumer’s using their electronic forms of payment!   So, these young new companies had to be competitive and offer the same level of comfort and security that merchant’s already had with their banks.  The ISO’s and independents had to start from the bottom up to gain the respect and reputation to be able to grow and service merchants.  They came in generally with lower more competitive rates.  They offered the merchants a choice to purchase or lease equipment, unlike the endless rental fee’s from their banks.  They offered complete customer service and speed of transaction and, also tons of features and benefits not previously available, like: Surcharges and the ability for the merchant themselves to share in the potential profit!!

We have all been shopping and been exposed to surcharges.  Not every business has a surcharge but, the ISO’s made the option available to merchants with a percentage of the profits going directly back into their pockets.  You can recognize a surcharge as the machine has a prompt, right before the completion of your transaction where a note pops up saying “there will be a $_.__ fee to continue this transaction do you accept?” The customer then has a choice to refuse the transaction or accept it hence paying the extra amount to complete the purchase.

The ISO’s offered the merchants a steak in this profit, anywhere from 20 to 100% of this fee can end back up with the merchant.  It is by no means a major money maker, but rather a good sales tactic for the new companies trying to compete for processing business as it helps the merchant to subsidize their fee’s, and make a little something off the charges.

For example: let’s say the merchant charges .25 cent surcharge to every transaction.  At the same time, the merchant is spending .9 cents to the processor to accept debit.  So let’s say the processor will offer a 50% share in this surcharge – this means of the .25 cents per transaction fee, the merchant get’s about .12 cents. Now minus the .9 cents they are paying for the debit, at the end of the transaction, the merchant makes .3 cents on every transaction.

It is not a huge profit; however look at a very basic example of 100 debit transactions per day, open 6 days a week for business, in thirty days, that merchant has just made a profit of 72.00!  After a year, that is an addition income to the business of 864.00 dollars or creates some income to off-set merchant account fees.  This is the “pitch” that a lot of merchant sales people will present.

Warning: We are not fans of surcharging.  The reason being is it only alienates your customers.  How do you feel when you go to buy something and you are ready to pay then, to able to pay you are charged a surcharge fee…?  Not good business.  A better solution to covering your costs is… to mark up your pricing for 15 cents or more and then your customers never know the difference.   Everyone is happy.

Being able to go to a merchant and negotiate this kind of term has helped ISO processor’s entice merchants to sign up with them.  By being able to implement these kinds of “sales tactics” to obtain business just shows the potential profits in this industry as a whole.  This is only one example of the kind of profit there is to make for more than one party involved with Merchant Services.

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Matthew Hunt has been helping small businesses get set-up with Canadian Merchant Account Services since 2007 and helped 1000's do so. Join Matthew on Google+.

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