Whether you’re transacting online or in-person, surcharging is an important consideration that can affect your customer experience and your bottom line. But what makes it more complicated than you’d think? Read on to find out more and how to calculate what’s best for your business.
Surcharging. It’s not as simple as it seems. Deciding whether to pass on certain costs for processing payment types to your customers or absorb them yourself and knowing what you can and can’t include in a surcharge can be a challenge in itself. Read on for our guide to the most common questions we get asked about surcharging and the rules around what you can include.
What is a card surcharge?
A card surcharge is an additional fee merchants charge a customer when they pay using a credit, debit or EFTPOS card in order to cover or offset the cost associated with accepting card payments.
There are three main ways to surcharge customers:
Absorb the Cost
Absorb all costs associated with processing card payments by factoring this into your price.
Pass on your Merchant Service Fee (MSF)
Charge customers the same rate that you’re charged.
Calculate your Full Cost of Acceptance
Charge customers a rate that covers all costs associated with accepting card payments.
Do I have to apply a surcharge for customers?
This is entirely up to you. Some businesses choose to pass on this cost to customers, while others choose to absorb this cost.
What is generally accepted may depend on your industry. For example, while it is commonplace for restaurants to add a surcharge for customers paying by card, retail businesses will often absorb the cost of acceptance.
What are the rules about surcharging?
The most recent update to the rules is set out in the Competition and Consumer Amendment (Payment Surcharges) Act 2016. The Act states that merchants must not charge a payment surcharge that is “excessive”. A surcharge will be excessive if it exceeds the permitted surcharge referred to in the Reserve Bank of Australia standards or regulations, i.e. it should be limited to the amount it costs you to accept that type of card transaction and cannot exceed your average annual cost of acceptance.
Are there other costs that can be factored into my surcharge?
There are a number of costs related to the acceptance of card payments that can be factored into your cost of acceptance. It is important to remember that these costs need to be directly related to your business being able to accept card payments.
- Fees for the rental and maintenance of payment card terminals
- Fixed fees paid to your payments provider (e.g. monthly or annual fees)
- Line rental and communications charges directly related to the use of payment card terminals
- Fixed equipment, systems or development costs that are directly associated with how you accept payments – these costs need to be apportioned over a period of five years from the date the cost was incurred
- Fraud costs related to card acceptance including fraud mitigation procedures
- Transaction value of any fraud-related chargebacks or chargeback fees – provided you have adopted generally available fraud mitigation procedures
If you choose to surcharge different rates for each card type, you will need to apportion any monthly fees or fixed costs based on the amount that each card type is used for your business. i.e. if 35% of your transactions are Visa, then 35% of your monthly terminal rental fee would be factored into your cost of acceptance for Visa cards.
There are a few things that you cannot include when calculating your cost of acceptance, these include but are not limited to any fines received for non-compliance with rules or standards, and general business costs including staff & staff training, electricity, rent etc.
How do I calculate my cost of acceptance?
We will be looking at the three main ways to surcharge; absorbing the cost (scenario 1), charging only your MSF (scenario 2), and calculating and charging your full cost of acceptance (scenario 3).
EXAMPLE – Mike’s T-Shirts
What would this look like building on the example above. Let’s assume our Merchant (Mike) wants to surcharge his total cost of acceptance, what would be an appropriate surcharge % if we include his other allowable costs…
Mike’s T-shirts typically completes 750 transactions per month in his bricks & mortar via one terminal from Mint costing $35. He is on an MSF of 1.8% of total transaction value with no transaction fee. Mike also completes a further 125 transactions through his online platform and is using Mint’s 3DSecure technology (at 30c per transaction) helping protect against fraudulent payments. He also has a flat monthly fee of $25. Across both his physical and online stores, the average sale price is $250. What can Mike reasonably surcharge his customers?
As you can see, Mike can surcharge 1.86% for card-present, and 1.96% for online transactions.
If Mike would prefer to charge one rate across both online and in-person transactions, he can charge 1.87%.
What options do I have for surcharging with Mint?
Mint’s platform and all our solutions provide full flexibility and enable merchants to easily select options for a full or partial surcharge or no surcharge at all.
If you choose to add a surcharge for your customers, you can choose the rate that will be charged, but note that to comply with Australian laws, this should be limited to the permitted cost of acceptance as outlined by the RBA.
If your cost of acceptance differs between card types (e.g. VISA vs MasterCard vs Amex), you have the option to apply different surcharge rates to each card type for online payments or with your Move5000 commensurate with the relevant transaction costs for that card type. Alternatively, if you have a blended rate, then you can apply one rate across all card types – but do bear in mind that it is the merchant’s responsibility to ensure this is in line with what the RBA deems permissible. This should be reviewed every 12 months to ensure accuracy.
For further information:
RBA – Guidance Note: Interpretation of the Surcharging Standards
ACCC – Q&A on Payment Surcharges